<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
REGISTRATION NO. 333-75195
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CARRIER1 INTERNATIONAL S.A.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
LUXEMBOURG 4813 98-0199626
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
ROUTE D'ARLON 3
L-8009 STRASSEN, LUXEMBOURG
(011) (41-1) 297-2600
(Address, including ZIP code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------------
KEES VAN OPHEM
VICE PRESIDENT, PURCHASE AND GENERAL COUNSEL
CARRIER1 INTERNATIONAL GMBH
MILITARSTRASSE 36
CH-8004 ZURICH, SWITZERLAND
(011) (41-1) 297-2600
(Name, address, including ZIP code, and telephone number,
including area code, of Registrant's agent for service)
------------------------------
WITH COPY TO:
DAVID A. BRITTENHAM, ESQ.
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 909-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
OFFERING PROPOSED AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) FEE(3)
<S> <C> <C> <C> <C>
13 1/4% Senior Dollar Notes Due 2009.............. $160,000,000 100% $160,000,000 $44,480.00
[Euro]85,000,000
13 1/4% Senior Euro Notes Due 2009................ ($92,803,000)(2) 100% $92,803,000 $25,800.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Euro amounts have been translated into U.S. Dollars at [Euro]1=$1.0918,
which was the noon buying rate in New York City for cable transfers in Euro
as certified for customs purposes by the Federal Reserve Bank of New York on
March 23, 1999.
(3) Paid with the initial filing of the Registration Statement.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 17, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE FOR ALL OUTSTANDING
13 1/4% SENIOR DOLLAR NOTES DUE 2009 AND
13 1/4% SENIOR EURO NOTES DUE 2009
CARRIER1 INTERNATIONAL S.A.
We are offering to exchange (the "Exchange Offer")
- all of our outstanding 13 1/4% Senior Dollar Notes Due 2009 (the "Old
Dollar Notes") for our registered 13 1/4% Senior Dollar Notes Due 2009
(the "New Dollar Notes") and
- all of our outstanding 13 1/4% Senior Euro Notes Due 2009 (the "Old Euro
Notes" and, together with the Old Dollar Notes, the "Old Notes") for our
registered 13 1/4% Senior Euro Notes Due 2009 (the "New Euro Notes" and,
together with the New Dollar Notes, the "New Notes"). The Old Notes and
New Notes are collectively referred to as the "Notes."
THE NEW NOTES:
The terms of the New Notes are identical to the terms of the relevant Old
Notes except that the New Notes
- are registered under the Securities Act of 1933, and therefore will not
contain restrictions on transfer,
- will not contain certain provisions relating to additional interest and
- will contain terms of an administrative nature that differ from those of
the Old Notes.
INVESTING IN THE NEW NOTES INVOLVES RISKS. YOU SHOULD CAREFULLY REVIEW THE
RISK FACTORS BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
THE EXCHANGE OFFER:
- Our offer to exchange Old Notes for New Notes will be open until 5:00
p.m., New York City time, on , 1999, unless we extend the offer
with respect to one or both series.
- You should carefully review the procedures for tendering the Old Notes
beginning on page 26 of this prospectus.
- The Exchange Offer is subject to customary conditions for both series of
Notes. We may waive these conditions.
- If you fail to tender your Old Notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- No public market currently exists for the Notes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
-----
<S> <C>
Certain Regulatory Issues.................................................................................. 3
Presentation of Financial Information...................................................................... 4
Summary.................................................................................................... 5
Risk Factors............................................................................................... 13
Where You Can Find More Information........................................................................ 25
The Exchange Offer......................................................................................... 26
Use of Proceeds............................................................................................ 34
Dividend Policy............................................................................................ 35
Capitalization............................................................................................. 36
Unaudited Pro Forma Consolidated Financial Information..................................................... 37
Selected Consolidated Financial Data....................................................................... 40
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 42
Business................................................................................................... 50
Management................................................................................................. 77
Certain Relationships and Related Transactions............................................................. 85
Principal Security Holders................................................................................. 88
Description of the Notes................................................................................... 90
Taxation................................................................................................... 134
Plan of Distribution....................................................................................... 138
Legal Matters.............................................................................................. 138
Experts.................................................................................................... 138
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
------------------------
The Indentures pursuant to which the Notes are issued (the "Indentures")
require us to distribute to the holders of the Notes annual reports containing
our financial statements audited by our independent auditors and quarterly
reports containing unaudited condensed consolidated financial statements for the
first three quarters of each fiscal year. When we refer to "Carrier1
International," we are referring to the holding company Carrier1 International
S.A., the issuer of the Notes. When we refer to ourselves generally or to
"Carrier1," we are referring to Carrier1 International and its subsidiaries and
their predecessors, except where the context otherwise requires.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT THE TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS OTHER THAN
THOSE CONTAINED HEREIN. IF YOU ARE GIVEN ANY INFORMATION OR REPRESENTATIONS
ABOUT THESE MATTERS THAT IS NOT DISCUSSED, YOU MUST NOT RELY ON THAT
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR TO WHOM WE ARE NOT
PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW. THE DELIVERY OF THIS
PROSPECTUS OR THE NOTES OFFERED HEREBY DOES NOT, UNDER ANY CIRCUMSTANCES, MEAN
THAT THERE HAS NOT BEEN A CHANGE IN OUR AFFAIRS SINCE THE DATE HEREOF. IT ALSO
DOES NOT MEAN THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AFTER THIS
DATE.
CERTAIN REGULATORY ISSUES
Persons in the United Kingdom will be eligible to receive New Notes to be
issued in the Exchange Offer only if the ordinary activities of such persons
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which do not constitute an offer to the public in the United
Kingdom for purposes of the U.K. Public Offers of Securities Regulation 1995.
This prospectus is being distributed on the basis that each person in the
United Kingdom to whom this prospectus is issued is reasonably believed to be a
person falling within an exemption to section 57 of the
3
<PAGE>
Financial Services Act 1986, as amended, as set out in the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended by the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997)
and, accordingly, by accepting delivery of this prospectus the recipient
warrants and acknowledges that it is a person falling within any such exemption.
PRESENTATION OF FINANCIAL INFORMATION
We report our financial statements in U.S. dollars and prepare our financial
statements in accordance with generally accepted accounting principles in the
United States. Carrier1 has adopted a fiscal year end of December 31.
In this prospectus, except where otherwise indicated, references to
(1) "$" or "U.S. dollars" are to the lawful currency of the United
States,
(2) "[Euro]" or "Euro" are to the single currency at the start of the
third stage of European economic and monetary union on January 1, 1999,
pursuant to the treaty establishing the European Economic Community, as
amended by the treaty on European Union, signed at Maastricht on February
7, 1992, and
(3) "DM" are to the lawful currency of Germany.
Given its recent introduction, there is insufficient historical exchange
rate data concerning the Euro for inclusion in this prospectus. The ECU,
predecessor to the Euro, is a composite currency, consisting of specified
amounts of currencies of certain European Union member states. The ECU basket is
composed of specified amounts of the German mark, the British pound sterling,
the French franc, the Italian lira, the Dutch guilder, the Belgian franc, the
Luxembourg franc, the Danish kroner, the Irish punt, the Greek drachma, the
Spanish peseta and the Portuguese escudo. Changes in exchange rates of the
currencies of the member states of these European Communities, including
revaluations and devaluations, do not affect the fixed composition of the ECU
but may change the exchange rate of the ECU in subsequent trading.
Stage III of the European Economic and Monetary Union ("EMU") began on
January 1, 1999, and on that date the value of the ECU as against the currencies
of the member states participating in Stage III was irrevocably fixed and the
ECU became a currency in its own right. On June 17, 1997, the Council of the
European Union adopted Council Regulation (European Communities) No. 1103/97,
establishing the Euro and providing for the substitution of the Euro for the ECU
at the rate of one Euro for one ECU. On January 1, 1999, 11 of the 15 member
countries of the European Union established fixed conversion rates between their
then existing sovereign currencies and the Euro and adopted the Euro as their
common legal currency on that date. These legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the Euro
until January 1, 2002. During the transition period, public and private parties
may pay for goods and services using either the Euro or the participating
countries' legacy currency.
4
<PAGE>
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY, THE SECURITIES BEING SOLD AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
Carrier1 is a rapidly expanding European facilities-based provider of long
distance voice and Internet Protocol ("IP") telecommunications services. We
offer these services on a wholesale basis primarily to competitive fixed-line
operators, other carriers, wireless operators, Internet Service Providers
("ISPs"), resellers and multi-national corporations. In March 1998, our
experienced management team and Providence Equity Partners formed Carrier1 to
capitalize on the significant voice and IP opportunities that are emerging for
facilities-based carriers in Europe's rapidly liberalizing telecommunications
markets. By September 1998, we had deployed our initial network and commenced
selling wholesale services. As of December 31, 1998, we had executed 48
contracts with voice customers and 17 contracts with IP customers. As of March
31, 1999, we had executed an additional 31 contracts with voice customers and an
additional 18 contracts with IP customers.
We are developing an extensive city-to-city European network linking key
population centers. We intend to continue rapidly expanding this network in a
cost-effective manner to serve the needs of our existing and potential
customers.
To rapidly deploy our network and offer services we are initially leasing
our European transmission capacity. However, we have entered into a development
agreement to build a 2,300 kilometer fiber network in Germany with Viatel Inc.
and Metromedia Fiber Network, Inc. This network will connect 14 principal cities
and pass a number of other major cities. It will also provide fiber capacity in
regions we believe are not covered or are underserved by existing and announced
fiber networks. The important advantages of the German Network are direct
ownership, cost reduction, and flexibility.
EUROPEAN VOICE AND IP MARKET
We expect that, as occurred in the United States long distance market,
liberalization of the European telecommunications markets will attract new
entrants, whose competition will significantly erode the market share of the
incumbent telephone operators over time. Decreasing prices caused by competition
generated by new entrants, combined with the introduction of new products, are
resulting in increased volumes of telecommunications traffic and increased
demand for transmission capacity and services. We believe there is an
insufficient supply of cost-effective, cross-border voice and IP
telecommunications services to meet this increasing demand. As a
facilities-based provider of city-to-city wholesale network services, we believe
we are well positioned to capitalize on the opportunities these circumstances
present.
COMPETITIVE STRENGTHS
We believe that a number of factors give us a competitive advantage in the
European long distance voice and IP telecommunications markets. We describe
these factors elsewhere in this prospectus under "Business--Competitive
Strengths." These factors include:
- EXPERIENCED EUROPEAN MANAGEMENT.
- A FOCUSED WHOLESALE MARKETING STRATEGY.
- PRICING THAT DISREGARDS THE EXISTENCE OF NATIONAL BORDERS.
- ADVANCED INFORMATION AND CONTROL SYSTEMS.
- PROVISION OF HIGH-QUALITY VOICE AND IP SERVICES.
- DELIVERY OF SUPERIOR CUSTOMER SUPPORT.
- LACK OF AFFILIATION WITH AN INCUMBENT TELEPHONE OPERATOR.
5
<PAGE>
BUSINESS STRATEGY
Our objective is to become a leading European wholesale provider of high
quality long distance voice and IP services, by capitalizing on the rapidly
increasing demand for city-to-city European voice and IP services. We describe
the key elements of our strategy elsewhere in this prospectus under "Business--
Strategy." These elements include:
- TARGET WHOLESALE MARKETS.
- FOCUS ON CUSTOMER NEEDS.
- RAPID, COST-EFFECTIVE CITY-TO-CITY NETWORK DEPLOYMENT.
- REDUCE TRANSMISSION COSTS.
- INTRODUCE NEW VALUE-ADDED SERVICES.
- REDUCE COSTS THROUGH INTERCONNECTION AGREEMENTS AND PEERING.
NETWORK
We carry traffic to any destination in the world. Voice traffic is carried
either directly or through "refile" or "resale" agreements with other carriers
who have access to the relevant local network and an interconnection agreement
with the relevant incumbent telephone operator. IP traffic is terminated either
through exchanging traffic for no charge with a "peer" company or by paying a
transit fee. The focus of our network strategy is to own key components and to
minimize resources required to develop and deploy our network. These key
components consist of voice switches and multiplexers, and IP routers. These
devices direct and control the flow of voice and IP signals. We describe our
existing network and planned network expansion in more detail elsewhere in this
prospectus under "Business--Network."
EQUITY SPONSORS
Funds managed by Providence Equity Partners Inc. ("Providence") and Primus
Venture Partners, Inc. ("Primus") have invested $60 million to finance the
deployment of our network and to fund start-up operations (the "Equity
Investment"). The final installment of this investment was made at the time of
the offering of the Old Notes. After giving effect to this investment, the
Providence funds indirectly hold approximately 71%, and the Primus funds
indirectly hold approximately 14%, of the common stock of Carrier1
International, on a fully diluted basis. Providence is a private investment firm
that specializes in equity investments in telecommunications and media companies
in the United States and abroad. Primus is a private investment firm that
focuses on equity investments in telecommunications and other high-technology
industries.
* * *
Carrier1 International is a holding company and renders its services
indirectly through subsidiaries primarily located in various Western European
countries. Its registered office is located at L-8009, Strassen, Route d'Arlon
3, Luxembourg. Executive offices of Carrier1 International GmbH, its principal
management services subsidiary, are located at Militarstrasse 36, CH-8004
Zurich, Switzerland. Its phone number is 011-41-1-297-2600.
6
<PAGE>
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
We completed on February 19, 1999 the private offering (the "Original
Offering") of (i) $160,000,000 representing 160,000 Units, each such Dollar Unit
(a "Dollar Unit") consisting of one 13 1/4% Senior Dollar Note due 2009 and one
Dollar Warrant to purchase shares of common stock and (ii) [Euro]85,000,000
representing 85,000 Units, each such Euro Unit (a "Euro Unit") consisting of one
13 1/4% Senior Euro Note due 2009 and one Euro Warrant to purchase shares of
common stock. Such offering of Dollar Units and Euro Units is referred to herein
as the "Original Offering."
<TABLE>
<S> <C>
The Exchange Offer........... You are entitled to exchange in this exchange offer (the
"Exchange Offer") Old Dollar Notes for New Dollar Notes and
Old Euro Notes for New Euro Notes.
Resale of New Notes.......... We believe that the New Notes that will be issued in this
Exchange Offer may be resold by most investors without
compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to certain
conditions. You should read the discussion under the heading
"The Exchange Offer" for further information regarding the
Exchange Offer and resale of the New Notes.
Registration Rights
Agreement.................. In connection with the sale of the Old Notes to the initial
purchasers, we entered into a Registration Rights Agreement
with the initial purchasers (the "Registration Rights
Agreement") requiring us to use our best efforts to make the
Exchange Offer. See "Description of the Notes--Registration
Rights."
Consequence of Failure to
Exchange Old Notes......... You will continue to hold Old Notes which will remain
subject to their existing transfer restrictions if
- you do not tender your Old Notes or
- you tender your Old Notes and they are not accepted for
exchange.
Subject to certain limited exceptions, the Company will have
no obligation to register the Old Notes after we consummate
the Exchange Offer. See "The Exchange Offer--Terms of the
Exchange Offer" and "--Consequences of Failure to Exchange."
Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1999, unless we extend it, in which
case "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Interest on the New Notes.... The New Notes will accrue interest at a rate of 13 1/4% per
annum from February 19, 1999, the issue date of the Old
Notes (the "Issue Date"), or from the most recent date to
which interest has been paid or provided for on the Old
Notes. No additional interest will be paid on Old Notes
tendered and accepted for exchange.
Condition to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, which may be waived by us. See "The Exchange
Offer--Conditions."
Procedures for Tendering Old
Notes...................... If you wish to accept the Exchange Offer, you must submit a
Letter of Transmittal, and any other required documentation
and effect a tender of Old Notes pursuant to the procedures
for book-entry transfer (or other applicable procedures),
all in accordance with the instructions described in this
prospectus and in the Letter of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Transmittal. See "The Exchange Offer--Procedures for
Tendering," "--Book-Entry Transfer," and "--Guaranteed
Delivery Procedures." Certain other procedures may apply
with respect to certain book-entry transfers. See "The
Exchange Offer--Exchanging Book-Entry Notes."
Guaranteed Delivery
Procedures................. If you wish to tender your Old Notes, but cannot properly do
so prior to the Expiration Date, you may tender your Old
Notes according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights............ Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes, a written or facsimile
transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein under "The
Exchange Offer--Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes...... Subject to certain conditions, any and all Old Notes that
are validly tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date will be
accepted for exchange. The New Notes issued pursuant to the
Exchange Offer will be delivered as soon as practicable
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain U.S. Tax
Consequences............... We believe that the exchange of Old Notes for New Notes will
not constitute a taxable exchange for U.S. federal income
tax purposes. See "Taxation."
Exchange Agent............... The Chase Manhattan Bank is serving as Exchange Agent.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
SUMMARY OF THE TERMS OF THE NEW NOTES
</TABLE>
The terms of the New Notes are identical to the terms of the relevant series
of Old Notes EXCEPT that the New Notes:
- are registered under the Securities Act, and therefore will not contain
restrictions on transfer,
- will not contain certain provisions relating to additional interest, and
- will contain terms of an administrative nature that differ from those of
the Old Notes.
<TABLE>
<S> <C>
Maturity..................... February 15, 2009.
Interest..................... Interest will be payable in cash on February 15 and August
15 of each year, beginning August 15, 1999.
Optional Redemption.......... We may redeem any of the Notes beginning on February 15,
2004 at the declining redemption prices described in
"Description of the Notes--Optional Redemption."
In addition, before February 15, 2002, we may redeem up to
35% of the aggregate amount of either series of Notes with
the proceeds of sales of certain kinds of our capital stock
at 113.25% of their principal amount.
Additional Amounts........... All payments on the Notes will be made without withholding
or deduction for taxes unless required by law. If required
by law, we will pay, subject to certain exceptions, the
additional amounts necessary so that the net amount received
by holders will not be less than the amount that they would
have received in the absence of any withholding or
deduction.
Tax Redemption............... In the event that we are obligated to pay any additional
amounts as a result of certain changes affecting withholding
tax laws and cannot reasonably arrange (without other
material adverse consequences to us) for another obligor to
make such payment to avoid paying such additional amounts,
then we may redeem all the Notes at 100% of their principal
amount, plus accrued interest.
Security..................... We have purchased portfolios of government securities and
pledged them for the benefit of the holders of the relevant
series of Notes to secure and fund the first five interest
payments on such Notes.
Change of Control............ Upon a change of control (as defined under "Description of
the Notes"), we will be required to make an offer to
purchase the Notes. The purchase price will equal 101% of
their principal amount plus accrued interest. We may not
have sufficient funds available at the time of any change of
control to make any required debt payment, including
repurchases of the Notes.
Ranking...................... The Notes will rank equally with all Carrier1
International's other unsubordinated unsecured indebtedness
and will be junior to all Carrier1 International's secured
indebtedness except as described above under "--Security".
The Notes also will be junior to all liabilities of Carrier1
International's subsidiaries. See Carrier1's consolidated
balance sheet included elsewhere in this prospectus.
Certain Covenants............ The terms of the Notes will restrict our ability and the
ability of certain of our subsidiaries (as described in
"Description of the Notes") to:
- incur additional indebtedness,
- create liens,
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
- engage in sale-leaseback transactions,
- pay dividends or make distributions in respect of
capital stock,
- redeem capital stock,
- make investments or certain other restricted payments,
- sell assets,
- issue or sell stock of restricted subsidiaries,
- enter into transactions with stockholders or
affiliates, or
- effect a consolidation or merger.
However, these limitations are subject to a number of
important qualifications and exceptions.
</TABLE>
RISK FACTORS
See "Risk Factors," immediately following this Summary, for a discussion of
certain factors relating to us, our business and an investment in the Notes.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data of
Carrier1 as of and for the period from February 20, 1998 ("Inception") to
December 31, 1998 and as of and for the three months ended March 31, 1999. The
summary consolidated financial data as of and for the period from Inception to
December 31, 1998, were derived from the consolidated financial statements of
the Company which were audited by Deloitte & Touche Experta AG, independent
auditors. The summary consolidated financial data as of and for the three months
ended March 31, 1999, were derived from the unaudited consolidated financial
statements of Carrier1 and include, in the opinion of Carrier1's management, all
adjustments, consisting solely of normal recurring adjustments, necessary to
present fairly the data for such period. The information set forth below is not
necessarily indicative of the results of future operations and should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Amounts are presented in thousands, except per share data.
<TABLE>
<CAPTION>
THREE MONTHS INCEPTION TO
ENDED DECEMBER 31,
MARCH 31, 1999 1998
---------------- ------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues......................................................................... $ 12,293 $ 2,792
Cost of services................................................................. 17,015 11,669
Selling, general and administrative expenses..................................... 3,318 8,977
Depreciation and amortization.................................................... 1,336 1,409
-------- ------------
Loss from operations............................................................. (9,376) (19,263)
Other income (expense):
Interest income.................................................................. 979 92
Interest expense................................................................. (4,205) (11)
Currency exchange loss, net...................................................... (2,428) (53)
-------- ------------
Loss before income tax benefit................................................... (15,030) (19,235)
Income tax benefit, net of valuation allowance................................... -- --
-------- ------------
Net loss......................................................................... $ (15,030) $ (19,235)
-------- ------------
-------- ------------
Net loss per share (basic)....................................................... $ (0.53) $ (2.61)
Net loss per share (diluted)(1).................................................. (0.53) (2.61)
OTHER FINANCIAL DATA:
EBITDA (as defined)(2)........................................................... $ (8,040) $ (17,907)
Capital expenditures(3).......................................................... 11,609 37,168
Ratio of earnings to fixed charges(4)............................................ -- --
Net cash used in operating activities............................................ (18,910) (14,441)
Net cash used in investing activities............................................ (152,722) (19,866)
Net cash provided by financing activities........................................ 274,141 37,770
</TABLE>
11
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<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
1999 1998
------------------- ----------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 107,960(5) $ 4,184
Restricted cash.................................................. 1,446 1,518
Restricted investments (6)....................................... 143,034(5) --
Total assets (7)................................................. 329,777 51,434
Total debt....................................................... 249,608(5) --
Shareholders' equity............................................. 28,875 19,189
</TABLE>
- ------------------------
(1) Potential dilutive securities have been excluded from the computation for
the period from Inception to December 31, 1998 and for the three months
ended March 31, 1999, as their effect is antidilutive.
(2) EBITDA stands for earnings before interest, taxes, depreciation and
amortization.
EBITDA is used by management and certain investors as an indicator of a
company's historical ability to service debt. Management believes that an
increase in EBITDA is an indicator of our improved 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 presented may not be comparable to other similarly
titled measures of other companies or to Consolidated EBITDA as calculated
under the Indenture.
(3) Consists of purchases of property and equipment and investment in joint
venture.
(4) The ratio of earnings to fixed charges is calculated as the sum of income
before taxes plus interest expense divided by fixed charges. Fixed charges
consist of the total of (i) interest, whether expensed or capitalized, (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized and (iii) that portion of
rental expense considered to represent interest costs. Earnings were
insufficient to cover fixed charges by $15.2 million in the three-month
period ended March 31, 1999, and by $19.5 million in the period from
Inception to December 31, 1998.
(5) Assuming the March 31, 1999 conversion rate of Euro into U.S. dollars of
[Euro]0.92515 per $1.00.
(6) Reflects:
(a) the portion of the net proceeds for the Original Offering used to
purchase government securities to secure and fund the first five
scheduled interest payments on the Notes, see "Description of the
Notes--Security," and
(b) approximately $64.8 million used to collateralize a 109.5 million
Deutsche Mark letter of credit. See the Notes to Unaudited Consolidated
Financial Statements, Note 5, presented elsewhere in this prospectus.
(7) Includes capitalized financing costs of approximately $7.9 million as of
March 31, 1999.
12
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS OR ABILITY TO PAY PRINCIPAL OR INTEREST ON THE
NOTES COULD BE MATERIALLY ADVERSELY AFFECTED. IN THAT EVENT, YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER OLD NOTES WILL BE
ADVERSELY AFFECTED.
We will only issue New Notes in exchange for Old Notes that are timely and
properly tendered. Therefore, you should allow sufficient time to ensure timely
delivery of the Old Notes and you should carefully follow the instructions on
how to tender your Old Notes. Neither we nor the Exchange Agent are required to
tell you of any defects or irregularities with respect to your tender of the Old
Notes. If you do not exchange your Old Notes for New Notes pursuant to the
Exchange Offer, the Old Notes you hold will continue to be subject to the
existing transfer restrictions. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, or exempt from registration
under the Securities Act and applicable state securities laws. We do not
anticipate that we will register Old Notes under the Securities Act.
After the Exchange Offer is consummated, if you continue to hold any Old
Notes of either series, you may have trouble selling them because there will be
fewer Old Notes of such series outstanding. In addition, if a large number of
Old Notes of either series are not tendered or are tendered improperly, the
limited amount of New Notes of such series that would be issued and outstanding
after we consummate the Exchange Offer could lower the market price of such New
Notes.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE.
We formed our business in March 1998, and we commenced commercial operations
on September 1, 1998. Accordingly, you have limited historical operating and
financial information on which to base your evaluation of our performance.
WE EXPECT TO EXPERIENCE NET LOSSES AND NEGATIVE CASH FLOW.
Our continued business development and network deployment will require that
we incur substantial capital expenditures. In general, we expect to incur net
losses and negative cash flow from operating activities through 2000. However,
our net losses and negative cash flow from operating activities are likely to
continue beyond that time if:
- we decide to build extensions to our network because we cannot otherwise
reduce our transmission costs;
- we do not establish a customer base that generates sufficient revenue;
- we do not reduce our termination costs by negotiating competitive
interconnection rates and peering arrangements as we expand our network;
- prices decline faster than we have anticipated;
- we do not attract and retain qualified personnel; or
- we do not obtain necessary governmental approvals and operator licenses.
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Our ability to achieve these objectives is subject to financial,
competitive, regulatory, technical and other factors, many of which are beyond
our control. We cannot assure you that we will achieve profitability or positive
cash flow.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
At least initially, our revenues are dependent upon a relatively small
number of customers and contracts. The loss or addition of one or more customers
or contracts could cause significant fluctuations in our financial performance.
In addition, the significant expenses resulting from the expansion of our
network and services are likely to lead to operating results that vary
significantly from quarter to quarter.
OUR ABILITY TO GENERATE CASH TO SERVICE OUR SUBSTANTIAL CAPITAL NEEDS DEPENDS ON
MANY FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.
As we continue to deploy our network and grow our business, we will require
significant capital to fund our capital expenditures and working capital needs,
as well as our debt service requirements and cash flow deficits.
We expect to incur significant capital expenditures in connection with the
expansion of our network, including building the German Network, and acquiring
additional switches, multiplexers, routers and transmission equipment. We
estimate that our aggregate capital requirements to fund the deployment and
operation of our network will total approximately $200 million through 1999.
The actual amounts and timing of our future capital requirements may vary
significantly from our estimates. The demand for our services, regulatory
developments and the competitive environment of the telecommunications industry
could cause our capital needs to exceed our current expectations. For example,
we may need to seek additional capital sooner than we expect if:
- our development plans or projections change or prove to be inaccurate;
- we do not sell dark fiber on the German Network or enter into an accounts
receivable or equipment financing facility;
- we cannot expand our network at our target cost levels without building
new capacity;
- we cannot achieve a sufficient customer base and level of traffic;
- cost overruns occur in connection with the construction of the German
Network;
- we cannot obtain interconnection agreements as we expand our network;
- we cannot obtain additional peering arrangements, increasing IP
termination costs;
- competition reduces prices faster than we expect; or
- the technology for a single IP-based transmission platform only becomes
available after a significant portion of our network has been deployed.
Such additional financing may not be available on acceptable terms or at
all. Moreover, our substantial indebtedness as a result of the Original Offering
and other possible future debt financings may adversely affect our ability to
raise additional funds. A lack of financing may require us to delay or abandon
plans for deploying parts of our network.
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<PAGE>
OUR SUBSTANTIAL INDEBTEDNESS AND OUR ABILITY TO INCUR MORE INDEBTEDNESS COULD
ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THE NOTES.
We have significant indebtedness. The following table shows certain
important credit statistics.
<TABLE>
<CAPTION>
MARCH 31,
1999
-------------
<S> <C>
(IN MILLIONS)
Total debt.......................................................................................... $ 249.6
Shareholders' equity................................................................................ 28.9
Total debt as a percentage of total capitalization.................................................. 90%
</TABLE>
Our deficiency of earnings to fixed charges for the three-month period ended
March 31, 1999 was $15.2 million.
The Indentures limit, but do not prohibit, our incurrence of additional
indebtedness. Moreover, the Indentures permit us to incur an unlimited amount of
indebtedness to finance the acquisition of equipment, inventory and network
assets.
Our substantial indebtedness will have important consequences to you. For
example:
- The debt service requirements of any additional indebtedness could make it
more difficult for us to make payments on the Notes.
- Our ability to borrow additional money for working capital, capital
expenditures, debt service requirements or other purposes will be limited.
- A substantial portion of our future cash flow from operations, if any,
will be used to pay principal and interest on our indebtedness and other
obligations and will not be available for our business.
- Our flexibility in planning for, or reacting to changes in, our business
and our ability to take advantage of future business opportunities may be
restricted.
- We may have more indebtedness than certain of our competitors, which may
place us at a competitive disadvantage.
- We may be limited in our ability to react to changing market conditions,
changes in our industry, or economic downturns.
Our ability to pay interest on the Notes and meet our other debt service
obligations will depend on our future performance, which in turn depends on
successful implementation of our strategy and on financial, competitive,
regulatory, technical and other factors, many of which are beyond our control.
If we cannot generate sufficient cash flow from operations to meet our debt
service requirements, we may be required to refinance our indebtedness,
including the Notes. Our ability to obtain such financing will depend on our
financial condition at the time, the restrictions in the agreements governing
our indebtedness and other factors, including general market and economic
conditions. If such refinancing were not possible, we could be forced to dispose
of assets at unfavorable prices. In addition, we could default on our debt
obligations, including our obligation to make payments on the Notes.
OUR DEBT AGREEMENTS IMPOSE OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY
PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES.
The Indentures impose significant operating and financial restrictions on
us. The terms of any other financings we may obtain may do so as well. These
restrictions may substantially limit or prohibit us from taking various actions
including incurring additional debt, making investments, paying dividends to our
shareholders, creating liens, selling assets, engaging in mergers and
consolidations, repurchasing or redeeming capital stock and capitalizing on
business opportunities.
15
<PAGE>
Failure to comply with the covenants and restrictions in the Indentures or
other financing agreements could trigger defaults under such agreements even if
we are able to pay our debt. Such defaults could result in a default on the
Notes and could delay or preclude payment of principal of or interest on the
Notes.
IF WE ARE UNABLE TO EXTEND OUR NETWORK IN THE MANNER WE HAVE PLANNED, OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
Our success will depend on our ability to continue to deploy our network on
a timely basis. We have contracted with Nortel Plc for the installation of our
switch system and with Cisco Systems International, B.V. for the installation of
our router system. A failure by either of these parties to continue to comply
with its contractual obligations could cause delays in the continued deployment
of our network. Furthermore, we and our joint venture partners have not yet
received all of the rights-of-way, wayleaves or government approvals for the
construction of the German Network and may not be able to obtain them in a
timely manner.
If the German Network cannot be constructed within the anticipated time
frame or cost and quality specifications, we:
- will not benefit from expected lower transmission and termination costs as
we had planned and may be forced to rely more heavily on higher cost
refiling or reselling for terminating traffic, making it more difficult to
control the quality of our voice service,
- may not have sufficient capital remaining to fund other aspects of our
network expansion plan,
- will attract fewer customers and carry less traffic, and
- may not be able to lower the cost of our network expansion through the
swapping of excess capacity on the German Network for capacity on other
networks in Europe.
A number of other factors could hinder the deployment of our network. These
factors include cost overruns, the unavailability of additional capital,
strikes, shortages, delays in obtaining governmental or other third-party
approvals, natural disasters and other casualties, and other events that we
cannot foresee.
Delays in the continued deployment of our network could:
- limit the geographic scope of our services,
- prevent us from providing services on a cost-effective basis,
- reduce the number of customers we can attract and the volume of traffic we
carry,
- force us to rely more heavily on refiling or reselling for terminating our
traffic, increasing termination costs and making our quality control more
difficult, and
- affect our ability to obtain lower cost capacity on other networks by
swapping excess capacity.
Any one of these results could lower our operating revenues or adversely
impact gross margins.
THE OPERATION OF OUR NETWORK DEPENDS IN PART ON THE ACTIONS OF CERTAIN PARTIES
WHO ARE BEYOND OUR CONTROL, AND IS SUBJECT TO OTHER RISKS.
Our success is dependent on the technical operation of our network and on
the management of traffic volumes and route selections over the network. We have
outsourced, on a turnkey basis, the technical operation and management of our
voice network, including network engineering, certain technical aspects of
providing service and maintenance and repair, to Nortel. If Nortel fails to
perform these functions adequately or in a timely manner, our network and our
operations could be materially adversely affected. Furthermore, we are dependent
on parties from whom we have leased or acquired a right to use transmission
capacity for maintenance of certain of the network's circuits. Shortfalls in
maintenance by any
16
<PAGE>
of these parties could lead to transmission failure. Our network is also subject
to other risks outside our control, such as the risk of damage from fire, power
loss, natural disasters and general transmission failures caused by these or
other factors.
We intend to take over the full operation of our network by mid-1999. We may
not be able to operate and manage our network adequately once the turnkey
contracts have been terminated.
Multiple failures at different points in our network could cause
interruptions of service, and may require us to route traffic to circuits
controlled by other carriers. This alternative routing may be costly. It also
may result in a lower quality service, as we will not be able to control
performance standards. Any of the foregoing could damage our reputation or our
ability to retain or attract customers.
WE ARE DEPENDENT ON OUR HIGHLY TRAINED EXECUTIVE OFFICERS AND EMPLOYEES AND ANY
DIFFICULTY IN MAINTAINING OUR CURRENT EMPLOYEES OR IN HIRING SIMILAR EMPLOYEES
WOULD ADVERSELY AFFECT OUR BUSINESS. LOSS OF KEY PERSONNEL OR INABILITY TO
HIRE OR RETAIN SKILLED EMPLOYEES WOULD ADVERSELY AFFECT US.
Our operations are managed by a small number of key executive officers,
including our Chief Executive Officer, Stig Johansson. The loss of any of these
individuals could have a material adverse effect on us. In addition, our success
depends on our ability to continue to attract, recruit and retain sufficient
qualified personnel as we grow. Competition for qualified personnel in Europe is
intense, and there is generally a limited number of persons with the requisite
experience in the sectors in which we operate. We cannot assure you that we will
be able to retain senior management, integrate new managers or recruit qualified
personnel in the future.
A FAILURE TO ENTER INTO OR MAINTAIN ADEQUATE INTERCONNECTION AGREEMENTS AND
PEERING ARRANGEMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
The most cost-effective way for a wholesale carrier to achieve termination
in a country in which it has a point of presence is to negotiate an
interconnection agreement with the national incumbent telephone operator. To the
extent incumbent telephone operators deny or delay granting us interconnection
or grant us interconnection for insufficient capacity or in undesirable
locations, we will have to terminate such traffic through other carriers that
have interconnection arrangements with those incumbent telephone operators by
using refile or resale agreements. Termination through refile or resale
agreements is significantly more expensive than termination through our own
interconnection. Failure to implement adequate interconnection arrangements
would cause us to continue to incur high termination costs, which could have a
material adverse effect on our ability to compete with carriers that do have
interconnection agreements.
Our ability to obtain peering arrangements with European and United States
ISPs will also affect our costs. The major United States ISPs require almost all
European ISPs and IP backbone providers, including us, to pay a transit fee to
exchange traffic. We also have to pay a transit fee to exchange traffic with
large European IP backbone providers until we have added a critical mass of
customers onto our IP backbone. See "Business--Services--Wholesale IP Service."
We have negotiated peering arrangements with several IP backbone providers and
several European ISPs. However, there can be no assurance we will be able to
negotiate additional "peer" status with nationwide United States ISPs or
European IP backbone providers or that we will be able to terminate traffic on
their networks at favorable prices. Our inability to obtain peering arrangements
would keep our IP termination costs high and could limit our ability to compete
effectively with other European IP backbone providers that have more peering
arrangements than we do.
Recently, the Internet services industry has experienced increased merger
and consolidation activity among ISPs and IP backbone providers. This activity
is likely to increase the concentration of market power of IP backbone
providers, and may adversely affect our ability to obtain peering arrangements.
17
<PAGE>
IF WE LOST ONE OR MORE OF OUR GOVERNMENT LICENSES OR BECAME SUBJECT TO MORE
ONEROUS GOVERNMENT REGULATIONS, WE COULD BE ADVERSELY AFFECTED.
As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide services.
Local laws and regulations, and their interpretation differ significantly among
those jurisdictions. Future regulatory, judicial and legislative changes may
have a material adverse effect on the operation of our business.
National regulatory frameworks that are fully consistent with the policies
and requirements of the European Commission and the World Trade Organization
have only recently been, or are still being, put in place in many European Union
member states. These nations are in the early stages of providing for and
adapting to a liberalized telecommunications market. As a result, in these
markets, we and other new entrants may encounter more protracted and difficult
procedures to obtain licenses and negotiate interconnection agreements.
Our operations are dependent on licenses that we acquire from governmental
authorities in each jurisdiction in which we operate. These licenses and
authorizations generally contain clauses pursuant to which we may be fined or
our license may be revoked in certain circumstances. Such revocation may be on
short notice, at times as short as 30 days' written notice to us. The revocation
of any of our licenses would force us to stop operating in the relevant country.
IF WE DO NOT SUCCESSFULLY COMPETE WITHIN THE HIGHLY COMPETITIVE
TELECOMMUNICATIONS INDUSTRY, WE MAY BE UNABLE TO REPAY THE NOTES.
The European telecommunications market is highly competitive, and
liberalization is rendering it increasingly more so. The opening of the market
to new service providers, combined with technological advances, has resulted in
significant reductions in retail and wholesale prices for voice services. We
expect prices to continue to decline. Decreasing prices are also narrowing gross
profit margins on long distance voice traffic. Our ability to compete
successfully in this environment will significantly depend on our ability to
generate high traffic volumes from our customers while keeping our costs of
services low. We cannot assure you that we will be able to do so.
We expect price decreases in the European IP market over the next few years
as competition increases. We cannot assure you that IP service prices will not
decline more quickly than our IP transmission or termination costs, which could
have a material adverse effect on our gross profit margins.
We compete with a number of incumbent telephone operators, who generally
control access to local networks and have significant operational economies,
including large national networks, and existing operating agreements with other
incumbents. Moreover, national regulatory authorities have, in some instances,
shown reluctance to adopt policies that would result in increased competition
for the local incumbent. In addition, incumbents may be more likely to provide
transmission capacity on favorable terms and direct excess traffic to their
related carriers than to us.
In IP services, our main competitors have an established customer base and
either a significant infrastructure or strong connectivity to the United States
through various peering arrangements. We believe that, if the quality of the
service is consistently high, IP customers will typically renew their contracts
because it is costly and technically burdensome to switch carriers, which could
impede our ability to attract new customers.
We also compete with companies that have announced that they are building
European networks to the extent these companies offer wholesale services. Some
of these companies have more experience operating a network than Carrier1 does.
We may not be able to deploy a European network as quickly or run it as
efficiently as some or all of these competitors, which could impair our ability
to compete with them.
18
<PAGE>
Other competitive factors include the following:
- Certain voice customers may redirect their traffic to another carrier on
the basis of even small differences in price.
- Wholesale carriers that have built their network may lower prices so as to
increase volume and maximize utilization rates.
- Excess capacity being built could create further downward pressure on
prices.
Many of our competitors have greater financial resources and would be in a
better position than we would be to withstand the adverse effect on gross profit
margins caused by price decreases, particularly those competitors that already
own infrastructure and have interconnection or peering arrangements and thus
enjoy a lower cost base than we do. Unless and until we are able to reduce our
cost base, we may not be able to compete on the basis of price if market prices
are reduced below a certain level. Inability to price services competitively may
in turn cause us to lose customers.
See "Business--Competition."
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT COST-EFFECTIVE TRANSMISSION CAPACITY.
We lease or have purchased rights to use our current transmission capacity
from others, and we therefore depend on them for much of our transmission
capacity. We believe that there is a shortage in the supply of cost-effective
transmission capacity. We cannot assure you that we will always be able to
obtain capacity where and when we need it at an acceptable price or at all. Any
failure to obtain such capacity could delay our ability to penetrate certain
markets or to carry a higher volume of traffic in the markets in which we
already operate. Furthermore, to the extent some of our capacity suppliers begin
to compete with us in the provision of wholesale telecommunications services,
those suppliers may no longer be willing to provide us with capacity.
Until the German Network is operational, we will need to lease or purchase
additional capacity as we extend our network. It is unlikely that we will be
able to obtain such capacity at our target cost levels. We will therefore, in
the short term, continue to have transmission costs that are higher than our
target cost levels and higher than the costs of our competitors who own
transmission infrastructure. Although a substantial amount of transmission
capacity construction has been announced in Europe, we cannot assure you that
the cost of obtaining capacity will decrease. In addition, if the German Network
is not completed on a timely basis, we will need to rely to a greater extent
than currently anticipated on leased lines. If we cannot obtain rights to use
the existing capacity at our target cost levels for the future capacity we will
require beyond that capacity we own, we will need to build or purchase that
additional capacity. To build additional capacity, we would need to incur
additional capital expenditures. It is also possible that additional capacity
would not be available for purchase at the time that we need it.
IF ESTIMATES WE HAVE MADE ARE NOT CORRECT, WE MAY HAVE TOO MUCH OR TOO LITTLE
CAPACITY.
We rely on other carriers to provide certain termination services.
Negotiation of refile or resale agreements with such carriers involves making
estimates of the future calling patterns and traffic levels of our customers.
Underestimation of traffic levels or failure to estimate calling patterns
correctly could lead to:
- a shortage of capacity, requiring us to either lease more capacity or
reroute calls to other carriers at a higher termination cost,
- higher termination costs, as we may have to use additional, higher priced,
refilers or resellers, and
- a possibly lower quality of service, as we may not be carrying the traffic
over our own network.
19
<PAGE>
Our leased capacity costs are fixed monthly payments based on the capacity
made available to us. If our traffic volumes decrease, or do not grow as
expected, the resulting idle capacity will increase our per unit costs.
WE MAY HAVE DIFFICULTY INTEGRATING OR ENHANCING OUR SOPHISTICATED BILLING,
CUSTOMER AND INFORMATION SYSTEMS.
Sophisticated information systems are vital to our growth and our ability
to:
- manage and monitor traffic along our network,
- track service provisioning, traffic faults and repairs,
- effect least cost routing,
- achieve operating efficiencies,
- monitor costs,
- bill and receive payments from customers, and
- reduce credit exposure.
We have outsourced to International Computers Limited the running of our
billing system program. Errors or problems with International Computers
Limited's computer systems could delay our ability to send bills to our
customers or to provide billing information on-line. We plan to take over the
full operation of our billing system by June 1999. We cannot assure you that
this transition will not cause delays or interruptions in our monitoring and
billing activities.
The billing and information systems we have acquired will require
enhancements and ongoing investments, particularly as traffic volume increases.
We may encounter difficulties in enhancing our systems or integrating new
technology into our systems in a timely and cost-effective manner. Such
difficulties could have a material adverse effect on our ability to operate
efficiently and to provide adequate customer service.
RAPID CHANGE IN OUR INDUSTRY COULD REQUIRE US TO EXPEND SUBSTANTIAL COSTS TO
IMPLEMENT NEW TECHNOLOGIES. WE COULD LOSE CUSTOMERS IF OUR COMPETITORS
IMPLEMENT NEW TECHNOLOGIES BEFORE WE DO.
The European telecommunications industry is changing rapidly due to, among
other things:
- market liberalization,
- significant technological advancements,
- introductions of new products and services utilizing new technologies,
- increased availability of transmission capacity,
- expansion of telecommunications infrastructure, and
- increased use of the Internet for voice and data transmission.
If the growth we anticipate in the demand for voice and IP services were not
to occur or we were precluded from servicing this demand, we might not be able
to generate sufficient revenues in the next few years to fund our working
capital requirements.
To compete effectively, we must anticipate and adapt to rapid technological
changes and offer, on a timely basis, competitively priced services that meet
evolving industry standards and customer preferences. We may choose new
technologies that prove to be inadequate or incompatible with technologies of
our customers, providers of transmission capacity or other carriers. As new
technologies develop, we may be
20
<PAGE>
forced to implement such new technologies at substantial cost to remain
competitive. In addition, competitors may implement new technologies before we
do, allowing such competitors to provide lower priced or enhanced services and
superior quality compared to those we provide. Such a development could have a
material adverse effect on our ability to compete, particularly because we seek
to distinguish ourselves on the basis of the quality of our services.
WHOLESALE CUSTOMERS ARE PRICE SENSITIVE AND WE RELY ON A SMALL NUMBER OF
SIGNIFICANT CUSTOMERS.
Voice customers often maintain relationships with a number of
telecommunications providers, and our contracts with our wholesale voice
customers generally do not impose on customers minimum or maximum usage
requirements. Furthermore, basic voice services are not highly differentiated.
As a result, most customers are price sensitive and certain customers may divert
their traffic to another carrier based solely on small price changes. These
diversions can result in large and abrupt fluctuations in revenues. The majority
of our IP contracts to date have been usage-based, with no minimum volume
commitment by the customer. There can be no assurance that small variations
between our prices and those of other carriers will not cause our voice
customers to divert their traffic.
We currently depend on a small number of significant customers for our
revenues. From our formation to December 31, 1998, we earned 69% of our revenues
from three major customers, the most significant of which accounted for 46% of
total revenues for the period. One new customer may account for up to 30% of our
revenues in the near term. The loss of any single customer could therefore have
a material adverse effect on us. In addition, certain wholesale customers may be
unprofitable or only marginally profitable, resulting in a higher risk of
delinquency or nonpayment. Recently, the Internet services industry has
experienced increased merger and consolidation activity among ISPs and IP
backbone providers. The consolidation of ISPs may reduce the customer base for
our IP services.
Our contracts with our wholesale customers require us to carry their voice
traffic at a contractually fixed price per minute that can only be changed upon
seven or thirty days' notice. Similarly, we have contracted with some IP
customers to carry their IP traffic at a fixed monthly rate that can only be
changed upon six or twelve months' notice. If we were forced to carry voice or
IP traffic over a higher-cost route due to capacity and quality constraints, our
gross profit margins would be reduced.
IF WE ARE UNABLE TO IMPROVE AND ADAPT OUR OPERATIONS AND SYSTEMS AS WE GROW, WE
COULD LOSE CUSTOMERS AND REVENUES.
We expect our business to continue to grow rapidly, which may significantly
strain our customer support, sales and marketing and administrative resources
and network operation and management and billing systems. Such a strain on our
operational and administrative capabilities could adversely affect the quality
of our services and our ability to collect revenues. To manage our growth
effectively, we will have to further enhance the efficiency of our operational
support and other back office systems, and of our financial systems and
controls. We will also have to expand and train our employee base to handle the
increased volume and complexities of our business. We cannot assure you that we
will maintain adequate internal operating, administrative and financial systems,
procedures and controls, or obtain, train and adequately manage sufficient
personnel to keep pace with our growth.
In addition, if we fail to project traffic volume and routing preferences
correctly, or to determine the optimal means of expanding the network, we could
lose customers, make inefficient use of the network, and have higher costs and
lower profit margins.
OUR OPERATING COMPANIES HAVE NO OBLIGATION TO MAKE PAYMENTS ON THE NOTES. THEY
MAY FACE LEGAL OR OTHER LIMITATIONS ON THEIR ABILITY TO MAKE CASH AVAILABLE
FOR PAYMENT ON THE NOTES.
Carrier1 International is the company obligated to pay amounts due under the
Notes. Carrier1 International is a holding company with few assets of
significance other than the stock of its subsidiaries.
21
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Carrier1 International intends to loan or contribute all or a portion of the
proceeds of the Original Offering to its subsidiaries. The cash flow and
consequent ability of Carrier1 International to service its debt obligations,
including the Notes, are dependent upon the ability of Carrier1 International to
receive cash from its subsidiaries. These subsidiaries are separate legal
entities and have no obligations to pay amounts due under the Notes or to make
funds available for such payment. In addition, applicable law of the
jurisdictions in which these subsidiaries are organized or contractual or other
obligations to which they are subject may limit their ability to pay dividends
or make payments on intercompany loans, including those made with the proceeds
of the Original Offering. Furthermore, the payment of interest and principal on
intercompany loans and advances as well as the payment of dividends by these
subsidiaries may be subject to taxes. Claims of creditors of these subsidiaries
will generally have priority as to the assets of such subsidiaries over the
claims of the holders of Carrier1 International's debt, including the Notes,
except under certain circumstances to the extent that Carrier1 International is
also a creditor of any subsidiary. Accordingly, the Notes will be effectively
subordinated to the liabilities of these subsidiaries.
THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT.
The Notes will not be secured by any of our assets except the pledged
securities as described under "Description of the Notes--Security." We expect to
incur future indebtedness which may be secured, particularly through equipment,
network or working capital financings. If we default on our other secured
indebtedness, or in the event of our bankruptcy, liquidation or reorganization,
our assets would be available to pay our obligations on the Notes only after we
had made all payments on such secured debt. To the extent that the value of such
assets was insufficient to repay our secured debt, holders of such secured debt
would be entitled to share in any of our remaining assets on parity with you and
other unsecured creditors.
WE WILL ENGAGE IN JOINT VENTURES, WHICH ARE ACCOMPANIED BY INHERENT RISKS.
We plan to construct the German Network with Viatel and Metromedia. We may
enter into future joint ventures with other companies. All joint ventures are
accompanied by risks. These risks include:
- the lack of complete control over the relevant project,
- diversion of our resources and management time,
- inconsistent economic, business or legal interests or objectives among
joint venture partners,
- the possibility that a joint venture partner will default in connection
with a capital contribution or other obligation, thereby forcing us to
fulfill such obligation, and
- difficulty maintaining uniform standards, controls, procedures and
policies.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Funds managed by Providence and Primus together indirectly hold
approximately 85%, and the Providence funds alone indirectly hold approximately
71%, of the equity of Carrier1 International. Therefore, the Providence funds
alone, and the Providence and Primus funds together, indirectly control us. Such
ownership may present conflicts of interest between the Providence or Primus
funds and you if we encounter financial difficulties or the Providence and
Primus funds cause us to pursue transactions that could enhance their equity
investment while involving risks to your interests.
Providence and Primus, or their affiliates, currently have significant
investments in other telecommunications companies, including investments by
Providence affiliates in Epoch Networks and Tele1 Europe AB, and may in the
future invest in other entities engaged in the telecommunications business, some
of which may compete with us. Providence and Primus are under no obligation to
bring us any investment or business opportunities of which they are aware, even
if opportunities are within our
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scope and objectives. Conflicts may also arise in the negotiation or enforcement
of arrangements we may enter into with entities in which Providence or Primus,
or their affiliates, have an interest.
WE MAY BE ADVERSELY AFFECTED BY YEAR 2000 ISSUES.
Computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or a major system failure. We cannot assure you that all our
systems will then function adequately. A failure of our computer systems or
other systems could have a material adverse effect on us. We are still
evaluating whether the systems of our vendors, suppliers or customers are or
will be Year 2000 compliant. Any failure of their computer systems could
materially and adversely affect our ability to operate our network and retain
customers and could impose significant costs on us. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Impact of Year
2000."
CONVERSION TO THE EURO MAY RESULT IN INCREASED COSTS AND POSSIBLE ACCOUNTING,
BILLING AND LOGISTICAL DIFFICULTIES IN OPERATING OUR BUSINESS.
From January 1, 1999, until January 1, 2002, the Euro will exist in
electronic form only and the participating countries' individual currencies will
persist in tangible form as legal tender. During the transition period, everyone
must manage transactions in both the Euro and the participating countries'
respective individual currencies. This may cause significant logistical
problems. We may incur increased operational costs and may have to modify or
upgrade our information systems in order to:
- convert individual currencies to Euro,
- convert individual currencies of participating countries into each other,
- execute conversion calculations utilizing six-digit exchange rates and
other prescribed requirements,
- accommodate the new Euro currency symbol, and
- permit pricing, advertising, billing, accounting, internal financial
calculations, sales and other transactions or practices to be effected
simultaneously in Euro and the participating countries' respective
individual currencies.
THE INTERNATIONAL SCOPE OF OUR OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We may face certain risks because we conduct an international business
including:
- regulatory restrictions or prohibitions on the provision of our services,
- tariffs and other trade barriers,
- longer payment cycles,
- problems in collecting accounts receivable,
- political risks, and
- potentially adverse tax consequences of operating in multiple
jurisdictions.
In addition, an adverse change in laws or administrative practices in
countries within which we operate could have a material adverse effect on us.
We are exposed to fluctuations in foreign currencies, as our revenues,
costs, assets and liabilities are denominated in multiple local currencies. Our
payment obligations with respect to the Notes are denominated in U.S. dollars,
but our revenues are denominated in other currencies as well. Any appreciation
in the value of the U.S. dollar relative to such other currencies could have a
material adverse effect on us.
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ENFORCING JUDGMENTS AGAINST US MAY REQUIRE COMPLIANCE WITH NON-U.S. LAW.
Most assets of Carrier1 International and its subsidiaries are located
outside the United States. You will need to comply with foreign laws to enforce
judgments obtained in a U.S. court against our assets, including to foreclose
upon such assets. In addition, it may not be possible for you to effect service
of process within the United States upon us, or to enforce against us U.S. court
judgments predicated upon U.S. federal securities laws.
THERE WILL BE NO PUBLIC TRADING MARKET FOR THE NEW NOTES.
The New Notes are a new issue of securities with no established trading
market. The New Dollar Notes will not be listed on any securities exchange.
Although we expect that application will be made to have the New Euro Notes
included on the Regulated Unofficial Market (Freiverkehr) of the Frankfurt Stock
Exchange, we cannot assure you that the New Euro Notes will be so included. The
liquidity of the trading market in the New Notes, and the market price quoted
for the New Notes, may be adversely affected by changes in the overall market
for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a
result, you cannot be sure that an active trading market will develop for the
New Notes.
EVENTS DESCRIBED BY OUR FORWARD-LOOKING STATEMENTS MAY NOT OCCUR.
This prospectus includes or incorporates forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events and on industry publications. Industry
publications generally state that the information they contain has been obtained
from sources believed to be reliable but that the accuracy and completeness of
such information is not guaranteed. We have not independently verified these
data.
Our forward-looking statements are subject to risks, uncertainties and
assumptions including, among other things, those discussed above as well as
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Examples of forward-looking statements include all statements
that are not historical in nature, including statements regarding:
- operations and prospects,
- technical capabilities,
- funding needs and financing sources,
- network deployment plans,
- scheduled and future regulatory approvals,
- expected financial position,
- business and financial plans,
- markets, including the future growth in the European telecommunications
market,
- expected characteristics of competing systems, and
- expected actions of third parties such as equipment suppliers and joint
venture partners.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. Additional risks, and
uncertainties and assumptions that we may currently deem immaterial or that are
not presently known to us could also cause the forward-looking events discussed
in this prospectus not to occur. We do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES FACING US.
Additional risks and uncertainties not presently known to us or that we may
currently deem immaterial may also impair our business operations.
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WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the Registration Statement of which this prospectus is
a part, we will file annual and quarterly and other information with the
Securities and Exchange Commission (the "Commission"). You may read and copy any
reports, statements and other information we file at the Commission's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call 1-800-SEC-0330 for further information on the public reference
rooms. Our filings will also be available to the public from commercial document
retrieval services and at the web site maintained by the Commission at
http://www.sec.gov.
We have filed a Registration Statement on Form S-4 to register with the
Commission the New Notes to be issued in exchange for the Old Notes. This
prospectus is part of that Registration Statement. As allowed by the
Commission's rules, this prospectus does not contain all of the information you
can find in the Registration Statement or the exhibits to the Registration
Statement.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Where You Can Find More Information."
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the Old Notes pursuant to a Placement
Agreement, dated as of February 12, 1999, between Carrier1 International and the
Placement Agents, the Placement Agents and their respective assignees became
entitled to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, Carrier1 has agreed (1) to use its
best efforts to cause to be filed with the Commission the Registration Statement
of which this prospectus is a part with respect to a registered offer to
exchange the Old Notes for the New Notes and (2) to use its reasonable best
efforts to consummate the Exchange Offer within 60 calendar days after the date
on which the Registration Statement is declared effective. Carrier1 will keep
the Exchange Offer open for not less than 20 business days after the date notice
of the Exchange Offer is mailed to holders of the Old Notes. The Exchange Offer
being made hereby, if consummated within six months after the initial issuance
of the Old Notes, will satisfy those requirements under the Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in this prospectus
and in the Letters of Transmittal, all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes of the relevant series will be issued in
exchange for an equal principal amount of outstanding Old Notes of such series
accepted in the Exchange Offer. Old Notes may be tendered only in integral
multiples of $1,000 or [Euro]1,000, as applicable. This prospectus, together
with the Letters of Transmittal, is being sent to all registered holders as of
, 1999. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain customary conditions as set forth herein under
"--Conditions."
Old Notes shall be deemed to have been accepted as validly tendered when, as
and if Carrier1 has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old Notes for
the purposes of receiving the New Notes and delivering New Notes to such
holders.
Based on interpretations by the Staff of the Commission as set forth in
no-action letters issued to third parties (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), Carrier1 believes that
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is a broker-dealer or an "affiliate" of Carrier1 within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that:
- such New Notes are acquired in the ordinary course of business,
- at the time of the commencement of the Exchange Offer such holder has no
arrangement or understanding with any person to participate in a
distribution of such New Notes, and
- such holder is not engaged in, and does not intend to engage in, a
distribution of such New Notes.
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Carrier1 has not sought, and does not intend to seek, a no-action letter from
the Commission with respect to the effects of the Exchange Offer, and there can
be no assurance that the Staff would make a similar determination with respect
to the New Notes as it has in such no-action letters.
By tendering Old Notes in exchange for New Notes and executing the Letter of
Transmittal, each holder will represent to Carrier1 that:
- any New Notes to be received by it will be acquired in the ordinary course
of business,
- it has no arrangements or understandings with any person to participate in
the distribution of the Old Notes or New Notes within the meaning of the
Securities Act, and
- it is not an "affiliate," as defined in Rule 405 under the Securities Act,
of Carrier1 International.
If such holder is a broker-dealer, it will also be required to represent that
the Old Notes were acquired as a result of market-making activities or other
trading activities and that it will deliver a prospectus in connection with any
resale of New Notes. See "Plan of Distribution." Each holder, whether or not it
is a broker-dealer, shall also represent that it is not acting on behalf of any
person that could not truthfully make any of the foregoing representations
contained in this paragraph. If a holder of Old Notes is unable to make the
foregoing representations, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction unless such sale is made
pursuant to an exemption from such requirements.
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Subject to limited exceptions, Carrier1 will
have no obligation to effect a subsequent registration of the Old Notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean , 1999, unless Carrier1
International, in its sole discretion, extends the Exchange Offer with respect
to one or both series of Old Notes, in which case the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended with respect
to the relevant series.
To extend the Expiration Date, Carrier1 International will notify the
Exchange Agent of any extension by oral or written notice and will notify the
holders of the relevant series of Old Notes by means of a press release or other
public announcement prior to 9:00 A.M., New York City time, on the next business
day after the previously scheduled Expiration Date. Such announcement may state
that Carrier1 International is extending the Exchange Offer for a specified
period of time.
Carrier1 International reserves the right (1) to delay acceptance of any Old
Notes, to extend the Exchange Offer or to terminate the Exchange Offer and not
permit acceptance of Old Notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by Carrier1 International prior to the Expiration Date, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (2) to amend the terms of the Exchange Offer in any manner deemed by
it to be advantageous to the holders of the Old Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the Exchange Agent. If the
Exchange Offer is amended in a manner determined by Carrier1 to constitute a
material change, Carrier1 will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Old Notes of such amendment.
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Without limiting the manner in which Carrier1 may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, Carrier1 shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 13 1/4% per annum from the
last interest payment date on which interest was paid on the Old Note
surrendered in exchange therefor, or, if no interest has been paid on such
Existing Note, from the Issue Date, PROVIDED, that if an Old Note is surrendered
for exchange on or after a record date for an interest payment date that will
occur on or after the date of such exchange and as to which interest will be
paid, interest on the New Note received in exchange therefor will accrue from
the date of such interest payment date. Interest on the New Notes is payable on
February 15 and August 15 of each year, commencing August 15, 1999. No
additional interest will be paid on Old Notes tendered and accepted for
exchange.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
applicable Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
any other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. In addition, either
- certificates of such Old Notes must be received by the Exchange Agent
along with the applicable Letter of Transmittal, or
- a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company, in the case of
Old Dollar Notes, or at Euroclear and Cedel, in the case of Old Euro Notes
(the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange
Agent prior to the Expiration Date with the applicable Letter of
Transmittal, or
- the holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO OLD NOTES, LETTERS OF TRANSMITTAL OR OTHER
REQUIRED DOCUMENTS SHOULD BE SENT TO CARRIER1. Delivery of all Old Notes (if
applicable), Letters of Transmittal and other documents must be made to the
Exchange Agent at its address set forth below. Holders may also request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and Carrier1 in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Old Notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such registered holder to tender on
his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are
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tendered (i) by a registered holder of Old Notes who has not completed the box
entitled "Special Issuance Instructions" or " Special Delivery Instructions" on
the applicable Letter of Transmittal or (ii) for the account of an Eligible
Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by Carrier1, evidence satisfactory to Carrier1
of their authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility, time of receipt and
withdrawal of the tendered Old Notes will be determined by Carrier1 in its sole
discretion, which determination will be final and binding. Carrier1 reserves the
absolute right to reject any and all Old Notes not properly tendered or any Old
Notes which, if accepted, would, in the opinion of counsel for Carrier1, be
unlawful. Carrier1 also reserves the absolute right to waive any irregularities
or conditions of tender as to particular Old Notes. Carrier1's interpretation of
the terms and conditions of the Exchange Offer, including the instructions in
the Letters of Transmittal, will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as Carrier1 shall determine. Neither Carrier1,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes,
nor shall any of them incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that is not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, Carrier1 reserves the right in its sole discretion, subject to
the provisions of the Indenture,
- to purchase or make offers for any Old Notes that remain outstanding
subsequent to the Expiration Date or, as set forth under "--Conditions,"
to terminate the Exchange Offer,
- to redeem Old Notes as a whole or in part at any time and from time to
time, as set forth under "Description of the Notes--Optional Redemption,"
and
- to the extent permitted under applicable law, to purchase Old Notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "--Conditions." For purposes of the Exchange Offer, Old Notes shall
be deemed to have been accepted as validly tendered for exchange when, as and if
Carrier1 has given oral or written notice thereof to the Exchange Agent. For
each Old Note of a series accepted for exchange, the holder of such Old Note
will receive a New Note of the relevant series having a principal amount equal
to that of the surrendered Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of
- certificates for such Old Notes or a timely Book-Entry Confirmation of
such Old Notes into the Exchange Agent's account at the applicable
Book-Entry Transfer Facility,
- a properly completed and duly executed Letter of Transmittal, and
- all other required documents.
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If any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer, such unaccepted or such nonexchanged Old
Notes will be returned without expense to the tendering holder thereof (if in
certificated form) or credited to an account maintained with such Book-Entry
Transfer Facility as promptly as practicable after the expiration or termination
of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the applicable Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this prospectus.
Any financial institution that is a participant in such Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing such
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
applicable Book-Entry Transfer Facility, the applicable Letter of Transmittal or
facsimile thereof with any required signature guarantees and any other required
documents must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book-Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book-Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Old Notes.
Any participant in the applicable Book-Entry Transfer Facility may make
book-entry delivery of Old Notes by causing such Book-Entry Transfer Facility to
transfer such Old Notes into the Exchange Agent's account in accordance with
such Book-Entry Transfer Facility's ATOP procedures for transfer. However, the
exchange for the Old Notes so tendered will only be made after a Book-Entry
Confirmation of such book-entry transfer of Old Notes into the Exchange Agent's
account, and timely receipt by the Exchange Agent of an Agent's Message and any
other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility and
received by the Exchange Agent and forming part of a Book-Entry Confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgment from a participant tendering Old Notes that are the subject of
such Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that Carrier1 may enforce
such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if
- the tender is made through an Eligible Institution,
- prior to the Expiration Date, the Exchange Agent receives by facsimile
transmission, mail or hand delivery from such Eligible Institution a
properly completed and duly executed Letter of Transmittal and Notice of
Guaranteed Delivery, substantially in the form provided by Carrier1, which
(1) sets forth the name and address of the holder of Old Notes and the
amount of Old Notes tendered,
(2) states that the tender is being made thereby, and
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(3) guarantees that within three New York Stock Exchange ("NYSE") trading
days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange
Agent, and
- the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent within three NYSE trading days after the date of execution
of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes of a series may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date with respect to such series.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date with respect to such series at one of the addresses set forth
below under "--Exchange Agent." Any such notice of withdrawal must
- specify the name of the person having tendered the Old Notes to be
withdrawn,
- identify the Old Notes to be withdrawn, including the principal amount of
such Old Notes,
- in the case of Old Notes tendered by book-entry transfer, specify the
number of the account at the Book-Entry Transfer Facility from which the
Old Notes were tendered and specify the name and number of the account at
the Book-Entry Transfer Facility to be credited with the withdrawn Old
Notes and otherwise comply with the procedures of such facility,
- contain a statement that such holder is withdrawing its election to have
such Old Notes exchanged,
- be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Old Notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer to have the trustee with respect to the Old Notes register the
transfer of such Old Notes in the name of the person withdrawing the
tender, and
- specify the name in which such Old Notes are registered, if different from
the person who tendered such Old Notes.
All questions as to the validity, form, eligibility and time of receipt of such
notice will be determined by Carrier1, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the tendering holder therof without cost to such
holder, in the case of physically tendered Old Notes, or credited to an account
maintained with the applicable Book-Entry Transfer Facility for the Old Notes as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "--Procedures for Tendering" and "--Book-Entry
Transfer" above at any time on or prior to 5:00 p.m., New York City time, on the
Expiration Date.
CONDITIONS
Notwithstanding any other provision of the Exchange Offer, Carrier1 shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time prior
to 5:00 p.m., New York City time, on the Expiration Date, Carrier1
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determines that the Exchange Offer violates applicable law, any applicable
interpretation of the staff of the Commission or any order of any governmental
agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of Carrier1 International
and may be asserted by Carrier1 International regardless of the circumstances
giving rise to any such condition or may be waived by Carrier1 International in
whole or in part at any time and from time to time in its sole discretion. The
failure by Carrier1 International at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
In addition, Carrier1 International will not accept for exchange any Old
Notes tendered, and no New Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this prospectus constitutes a
part or the qualification of either Indenture under the Trust Indenture Act of
1939, as amended. Carrier1 International is required to use every reasonable
effort to obtain the withdrawal of any order suspending the effectiveness of the
Registration Statement at the earliest possible moment.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the Letters of Transmittal should be
directed to the Exchange Agent addressed as follows:
If tendering a Dollar Note or requesting information with respect to the
exchange of a Dollar Note:
<TABLE>
<S> <C>
BY MAIL, HAND DELIVERY OR FOR INFORMATION CALL:
OVERNIGHT CARRIER: (212) 946-3172
The Chase Manhattan Bank FACSIMILE TRANSMISSION NUMBER:
Capital Markets Fiduciary Services (212) 946-8177/78
450 West 33rd Street CONFIRM BY TELEPHONE:
15th Floor (212) 946-3172
New York, NY 10001
Attention: William Potes
</TABLE>
If tendering a Euro Note which has been deposited with a custodian for, and
registered in the name of, The Depository Trust Company (a "DTC Euro Note") or
requesting information with respect to the exchange of a DTC Euro Note:
<TABLE>
<S> <C>
BY MAIL, HAND DELIVERY OR FOR INFORMATION CALL:
OVERNIGHT CARRIER: (212) 946-3172
The Chase Manhattan Bank FACSIMILE TRANSMISSION NUMBER
Capital Markets Fiduciary Services (212) 946-8177/78
450 West 33rd Street CONFIRM BY TELEPHONE
15th Floor (212) 946-3172
New York, NY 10001
Attention: William Potes
</TABLE>
32
<PAGE>
If tendering a Euro Note (except a DTC Euro Note) or requesting information
with respect to the exchange of a Euro Note (except a DTC Euro Note):
<TABLE>
<S> <C>
BY MAIL, HAND DELIVERY OR FOR INFORMATION CALL:
OVERNIGHT CARRIER: (44-171) 777-5414
The Chase Manhattan Bank FACSIMILE TRANSMISSION NUMBER:
Capital Markets Fiduciary Services (44-171) 777-5410
9 Thomas Moore Street CONFIRM BY TELEPHONE:
London E19YT (44-171) 777-5414
United Kingdom
Attention: Chris Greene
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Carrier1. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of Carrier1.
Carrier1 will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Carrier1, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. Carrier1 may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred by Carrier1 in connection with the Exchange
Offer will be paid by Carrier1, including fees and expenses of the Exchange
Agent and Trustee and accounting, legal, printing and related fees and expenses.
Carrier1 will pay all transfer taxes, if any, applicable to the exchange of
Old Notes pursuant to the Exchange Offer. If, however, New Notes or Old Notes
for principal amounts not tendered or accepted for exchange are to be registered
or issued in the name of any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes imposed on the
registered holder or any other persons will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Carrier1 International does not currently
anticipate that it will register the Old Notes under the Securities Act. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected.
33
<PAGE>
USE OF PROCEEDS
There will be no proceeds from the issuance of New Notes pursuant to the
Exchange Offer.
The net proceeds from the Original Offering were approximately $245 million
(based on the February 19, 1999, conversion rate of Euro into U.S. dollars of
[Euro]0.90316 per $1.00), after deducting discounts and commissions and
estimated expenses of the Original Offering payable by Carrier1 International.
Carrier1 intends to use the net proceeds from the Original Offering primarily to
finance the construction and start-up costs of the German Network and the
acquisition of transmission capacity, switches, multiplexers, routers and other
equipment. In addition, at the closing of the Original Offering, Carrier1 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 relevant
Trustee will hold the pledged securities pursuant to a pledge agreement pending
disbursement. Pending utilization of the net proceeds of the Original Offering,
Carrier1 has invested such proceeds in short-term investment grade securities
and other financial instruments for the purpose of capital preservation and
liquidity. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
34
<PAGE>
DIVIDEND POLICY
Carrier1 International has never declared or paid any cash dividends on its
shares of common stock and does not expect to do so in the foreseeable future.
Carrier1 International does not expect to generate any net income in the
foreseeable future, but anticipates that future earnings generated from
operations, if any, will be retained to finance the expansion and continued
development of its business. Subject to the declaration of interim dividends by
the Board of Directors, decisions to pay dividends may only be taken by the
shareholders acting at a shareholders' meeting. Any future determination with
respect to the payment of dividends on Carrier1 International's shares will
depend upon, among other things, Carrier1 International's earnings, capital
requirements, the terms of the existing indebtedness, applicable requirements of
Luxembourg corporate law, general economic conditions and such other factors
considered relevant by Carrier1 International's Board of Directors. In addition,
Carrier1 International's ability to pay cash dividends will be restricted under
the terms of the Indentures.
35
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents
and total capitalization of Carrier1 at March 31, 1999.
Amounts are presented in thousands, except per share data.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Cash and cash equivalents.............................................................. $ 107,960(1)
--------------
--------------
Restricted cash........................................................................ 1,446
--------------
--------------
Restricted investments(2).............................................................. 143,034(1)
--------------
--------------
Total long term debt................................................................... 249,608
Shareholders' equity:
Common Stock, $2 par value, 30,000,000 shares issued and outstanding................. 60,000
Additional paid-in capital (Warrants)................................................ 2,304
Accumulated deficit.................................................................. (34,265)
Accumulated other comprehensive income............................................... 836
--------------
Total shareholders' equity....................................................... 28,875
--------------
Total capitalization........................................................... $ 278,483
--------------
--------------
</TABLE>
- ------------------------
(1) Assumes the March 31, 1999 conversion rate of Euro into U.S. dollars of
[Euro]0.92515 per $1.00.
(2) Reflects:
(a) the portion of the net proceeds from the Original Offering used to
purchase government securities to secure and fund the first five
scheduled interest payments on the Notes, see "Description of the
Notes--Security," and
(b) approximately $64.8 million used to collateralize a 109.5 million
Deutsche Mark letter of credit. See the Notes to Unaudited Consolidated
Financial Statements, Note 5, presented elsewhere in this prospectus.
36
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information of the
Company has been derived by the application of pro forma adjustments to the
Company's historical consolidated financial statements for the periods from
January 1, 1999 to March 31, 1999 and from Inception to December 31, 1998. The
pro forma consolidated statements of operations give effect to the issuance of
the Notes and related transactions as if such transactions had been consummated,
respectively, on January 1, 1999 and on February 20, 1998 (Inception). The
adjustments necessary to fairly present this pro forma consolidated financial
information have been made based on available information and in the opinion of
management are reasonable and are described in the accompanying notes. The pro
forma consolidated financial information should not be considered indicative of
actual results that would have been achieved had the issuance of the Notes and
related transactions been consummated on the respective dates indicated and do
not purport to indicate balance sheet data or results of operations as of any
future date or for any future period. You should read the pro forma consolidated
financial statements together with the information set forth in "Use of
Proceeds" and the "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Historical Financial Statements and
the notes thereto, and other financial information included elsewhere in this
prospectus.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect and account for the issuance of the
Notes. As a result, such adjustments will have no impact on the historical basis
of either the Company's assets and liabilities. Accordingly, the issuance of the
Notes has not impacted the historical basis of the Company's assets and
liabilities.
The unaudited consolidated pro forma financial statements do not include pro
forma adjustments relating to the effects of foreign currency exchange gains or
losses resulting from the translation of Euro-denominated amounts into U.S.
dollars. Euro-denominated amounts have been translated into U.S. dollars using
an assumed conversion rate of (1) for the period ended December 31, 1998,
[Euro]0.90316 to $1.00, which was the exchange rate on February 19, 1999, the
closing date of the original issuance of the Notes and (2) for the period ended
March 31, 1999, [Euro]0.92515 to $1.00, which was the exchange rate on March 31,
1999, the end of such period. Potential dilutive securities have been excluded
from the computation of diluted earnings (loss) per share as their effect is
antidilutive.
The pro forma ratio of earnings to fixed charges is calculated as the sum of
income before taxes plus interest expense divided by fixed charges. Fixed
charges is the sum of pro forma interest expense and the portion of rental
expense deemed representative of interest. Pro forma earnings were insufficient
to cover fixed charges in the three-month period ended March 31, 1999 by $19.5
million. Pro forma earnings were insufficient to cover fixed charges in the
period from Inception to December 31, 1998 by $49.3 million.
37
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ----------- -------------
<S> <C> <C> <C>
Revenues.............................................................. $ 12,293 $ 12,293
Operating expenses:
Cost of services.................................................... 17,015 17,015
Selling, general and administrative................................. 3,318 3,318
Depreciation and amortization....................................... 1,336 1,336
Total operating expenses.......................................... 21,669 21,669
------------- -------------
Loss from operations.................................................. (9,376) (9,376)
Other income (expense):
Interest expense.................................................... (4,205) (4,273)(a) (8,478)
Interest income..................................................... 979 979
Other, net.......................................................... (2,428) (2,427)
------------- ----------- -------------
Total other income (expense)...................................... (5,654) (4,273) (9,927)
------------- ----------- -------------
Loss before income tax benefit........................................ (15,030) (4,273) (19,303)
Income tax benefit--net of valuation allowance........................ -- -- --
------------- ----------- -------------
Net loss.............................................................. $ (15,030) $ (4,273) $ (19,303)
------------- ----------- -------------
------------- ----------- -------------
Earnings (loss) per share:
Loss from operations:
Basic............................................................. $ (0.33) $ (0.33)
------------- -------------
------------- -------------
Diluted........................................................... $ (0.33) $ (0.33)
------------- -------------
------------- -------------
Net loss:
Basic............................................................. $ (0.53) $ (0.69)
------------- -------------
------------- -------------
Diluted........................................................... $ (0.53) $ (0.69)
------------- -------------
------------- -------------
Total number of shares used to compute basic earnings
(loss) per share.................................................... 28,145,000 28,145,000
------------- -------------
------------- -------------
</TABLE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) This adjustment represents the recording of interest expense for the
period from January 1, 1999 to February 19, 1999 and reflects the
following:
<TABLE>
<CAPTION>
AMOUNTS IN
THOUSANDS
-----------
<S> <C>
Interest expense on the Notes.................................................... $ 4,172
Amortization of debt issuance costs.............................................. 88
Amortization of debt discount.................................................... 13
-----------
$ 4,273
-----------
-----------
</TABLE>
38
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Revenues................................................................... $ 2,792 $ 2,792
Operating expenses:
Cost of services......................................................... 11,669 11,669
Selling, general and administrative...................................... 8,977 8,977
Depreciation and amortization............................................ 1,409 1,409
---------- ----------- ----------
Total operating expenses............................................... 22,055 -- 22,055
---------- ----------- ----------
Loss from operations....................................................... (19,263) -- (19,263)
Other income (expense):
Interest income.......................................................... 92 92
Interest expense......................................................... (11) (29,882)(a) (29,893)
Other, net............................................................... (53) (53)
---------- ----------- ----------
Total other income (expense)........................................... 28 (29,882) (29,854)
---------- ----------- ----------
Loss before income tax benefit............................................. (19,235) (29,882) (49,117)
Income tax benefit--net of valuation allowance............................. -- -- --
---------- ----------- ----------
Net loss................................................................... $ (19,235) $ (29,882) $ (49,117)
---------- ----------- ----------
---------- ----------- ----------
Earnings (loss) per share
Loss from operations:
Basic.................................................................. $ (2.61) $ (2.61)
---------- ----------
---------- ----------
Diluted................................................................ $ (2.61) $ (2.61)
---------- ----------
---------- ----------
Net loss:
Basic.................................................................. $ (2.61) $ (6.67)
---------- ----------
---------- ----------
Diluted................................................................ $ (2.61) $ (6.67)
---------- ----------
---------- ----------
Total number of shares used to compute basic earnings
(loss) per share......................................................... 7,367,000 7,367,000
---------- ----------
---------- ----------
</TABLE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) This adjustment represents the recording of interest expense for the
period from Inception to December 31, 1998 and reflects the following:
<TABLE>
<CAPTION>
AMOUNTS IN
THOUSANDS
-----------
<S> <C>
Interest expense on the Notes.................................................... $ 28,994
Amortization of debt issuance costs.............................................. 786
Amortization of debt discount.................................................... 102
-----------
$ 29,882
-----------
-----------
</TABLE>
39
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
Carrier1 as of and for the period from Inception to December 31, 1998 and as of
and for the three months ended March 31, 1999. The selected consolidated
financial data as of and for the period from Inception to December 31, 1998,
were derived from the consolidated financial statements of the Company which
were audited by Deloitte & Touche Experta AG, independent auditors. The selected
consolidated financial data as of and for the three months ended March 31, 1999,
were derived from the unaudited consolidated financial statements of Carrier1
and include, in the opinion of Carrier1's management, all adjustments,
consisting solely of normal recurring adjustments, necessary to present fairly
the data for such period. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with the consolidated financial statements and the related notes thereto
included elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Amounts are presented in thousands, except per share data.
<TABLE>
<CAPTION>
THREE MONTHS INCEPTION TO
ENDED MARCH DECEMBER 31,
31, 1999 1998
------------- ------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................................................................ $ 12,293 $ 2,792
Cost of services.................................................................... 17,015 11,669
Selling, general and administrative expenses........................................ 3,318 8,977
Depreciation and amortization....................................................... 1,336 1,409
------------- ------------
Loss from operations................................................................ (9,376) (19,263)
Other income (expense):
Interest income..................................................................... 979 92
Interest expense.................................................................... (4,205) (11)
Currency exchange loss, net......................................................... (2,428) (53)
------------- ------------
Loss before income tax benefit...................................................... (15,030) (19,235)
Income tax benefit, net of valuation allowance...................................... -- --
------------- ------------
Net loss............................................................................ $ (15,030) $ (19,235)
------------- ------------
------------- ------------
Net loss per share (basic).......................................................... $ (0.53) $ (2.61)
Net loss per share (diluted)(1)..................................................... (0.53) (2.61)
OTHER FINANCIAL DATA:
EBITDA (as defined)(2).............................................................. $ (8,040) $ (17,907)
Capital expenditures(3)............................................................. 11,609 37,168
Ratio of earnings to fixed charges(4)............................................... -- --
Net cash used in operating activities............................................... (18,910) (14,441)
Net cash used in investing activities............................................... (152,722) (19,866)
Net cash provided by financing activities........................................... 274,141 37,770
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, AS OF
1999 DECEMBER 31, 1998
----------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 107,960(7) $ 4,184
Restricted cash................................................................ 1,446 1,518
Restricted investments(5)...................................................... 143,034(7) --
Total assets(6)................................................................ 329,777 51,434
Total debt..................................................................... 249,608(7) --
Shareholders' equity........................................................... 28,875 19,189
</TABLE>
- ------------------------
(1) Potential dilutive securities have been excluded from the computation for
the period from Inception to December 31, 1998 and for the three months
ended March 31, 1999 as their effect is antidilutive.
(2) EBITDA stands for earnings before interest, taxes, depreciation and
amortization.
EBITDA is used by management and certain investors as an indicator of a
company's historical ability to service debt. Management believes that an
increase in EBITDA is an indicator of our improved 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 presented may not be comparable to other similarly
titled measures of other companies or to Consolidated EBITDA as calculated
under the Indenture.
(3) Consists of purchases of property and equipment and investment in joint
venture.
(4) The ratio of earnings to fixed charges is calculated as the sum of income
before taxes plus interest expense divided by fixed charges. Fixed charges
consist of the total of (1) interest, whether expensed or capitalized, (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized and (iii) that portion of
rental expense considered to represent interest cost. Earnings were
insufficient to cover fixed charges by $15.2 million in the three-month
period ended March 31, 1999, and by $19.5 million in the period from
Inception to December 31, 1998.
(5) Reflects:
(a) the portion of net proceeds for the Original Offering used to purchase
government securities to secure and fund the first five scheduled
interest payments on the Notes, see "Description of the Notes--Security,"
and
(b) approximately $64.8 million used to collateralize a 109.5 million
Deutsche Mark letter of credit. See the Notes to Unaudited Consolidated
Financial Statements, Note 5, presented elsewhere in this prospectus.
(6) Includes capitalized financing costs of approximately $8.0 million as of
March 31, 1999.
(7) Assuming the March 31, 1999 conversion rate of Euro into U.S. dollars of
[Euro]0.92515 per $1.00.
41
<PAGE>
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
PROSPECTUS. CERTAIN INFORMATION CONTAINED IN THE DISCUSSION AND ANALYSIS OR SET
FORTH ELSEWHERE IN THIS PROSPECTUS, 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. SEE "RISK
FACTORS" FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THE RESULTS DESCRIBED IN OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
Carrier1 is a rapidly expanding European facilities-based provider of long
distance voice and IP 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 IP 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 December 31, 1998, Carrier1 had executed 48 contracts with voice
customers and 17 contracts with IP customers. Also in December 1998, Carrier1
signed a contract with one of the largest telecommunications companies in
Germany, and it expects to carry a substantial portion of this operator's
international traffic. This contract has had a significant impact on Carrier1's
traffic volumes since its recent implementation. As of March 31, 1999, Carrier1
had executed an additional 31 contracts with voice customers and an additional
18 contracts with IP 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 beginning to occur 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 IP 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 cash
flow from operating activities will depend on a number of financial,
competitive, regulatory, technical and other factors. See "Risk Factors--Our
limited operating history makes it dificult for you to evaluate our performance"
and "--We expect to experience net losses and negative cash flow."
Although Carrier1's management is highly experienced in the wholesale
telecommunications business, Carrier1 itself has a limited operating history.
Prospective investors therefore have limited operating and financial information
about Carrier1 upon which to base an evaluation of Carrier1's performance and an
investment in the Carrier1's Securities.
42
<PAGE>
Carrier1's consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles. Carrier1 will be reporting on a
calendar quarterly basis in the future.
FACTORS AFFECTING FUTURE OPERATIONS
REVENUES
Carrier1 expects to generate most of its revenues through the sale of
wholesale long distance voice and IP services to competitive fixed-line
operators, other carriers, wireless operators, ISPs, resellers and
multi-national corporations. Carrier1 expects 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 IP 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 expects to generate a steady stream
of voice traffic by providing high-quality service and superior customer
support. Carrier1's IP 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
IP contracts were usage-based. Since March 31, 1999, Carrier1 has migrated to
offering usage based IP pricing only in combination with IP contracts that have
a fee-based component that guarantees minimum revenue, in order to encourage
usage of its network services by its IP customers. Carrier1's agreements with
its IP 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, IP customers will typically renew their contracts because it
is costly and technically burdensome to switch carriers.
Currently, voice and IP 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 IP customers are subject to change
from time to time. Carrier1 will also vary pricing on its routes as a traffic
management tool. Carrier1 initially priced its IP services at an introductory
discount to its competitors to build rapidly its customer base. Carrier1 expects
to experience declining revenue per billable minute for voice traffic and
declining revenue per Mb for IP traffic, in part as a result of increasing
competition. Carrier1 believes, however, that the impact on its results of
operations from such price decreases will be at least partially offset by
decreases in its cost of providing services and increases in its voice and IP
traffic volumes.
Carrier1's focus on the wholesale international and national long distance
markets will result 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, whose contract was recently implemented, may account for
up to 30% of Carrier1's revenues in the near term. Furthermore, most wholesale
customers of voice services tend to be price sensitive and, assuming the quality
of service is equivalent, certain customers may switch suppliers for certain
routes on the basis of small price differentials. In contrast, IP 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
Cost of services 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 intends to target switchless resellers and, for those
services, Carrier1 will have access costs payable to the originating local
provider, usually the incumbent telephone
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operator. These costs will vary based on calling volume and the distance between
the caller and Carrier1's point of presence.
TRANSMISSION COSTS. Initially, Carrier1's transmission costs for voice and
IP traffic will 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 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 will seek to further minimize
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 IP 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 will 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 terminating a call. If the 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, especially into large markets such as France,
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. See "Risk Factors--A failure to enter into
or maintain adequate interconnection agreements and peering arrangements could
adversely affect our business." Carrier1
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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
daily 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.
IP TERMINATION COSTS. Termination costs represent costs Carrier1 is
required to pay to other IP backbone providers from the point of exit of
Carrier1's network. IP termination is effected through peering and transit
arrangements. Peering arrangements provide for the exchange of IP traffic
free-of-charge. Carrier1 has entered into peering arrangements with several ISPs
in the United States and Europe. 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 favorable 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 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 IP backbone providers, including Carrier1, to pay a
transit fee to exchange traffic. See "Business--Services--Wholesale IP Service."
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 will also include the amortization of
interest capitalized during the construction of the German Network. 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
Because Carrier1 commercially introduced its services in September 1998,
Carrier1's management believes that a comparison of results for the three-month
period ended March 31, 1999 to the period from Inception to March 31, 1998 is
not meaningful.
Revenues for the three-month period ended March 31, 1999 were approximately
$12.3 million, primarily relating to voice services. Cost of services for the
three-month period ended March 31, 1999 was approximately $17.0 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 March 31,
1999 was approximately $1.3 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 $3.3
million for the three-month period ended March 31, 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 March 31, 1999 was
approximately $3.2 million. It consisted during this period of approximately
$4.2 million of interest accrued on the Notes, less interest income of
approximately $1.0 million. Interest income consists of interest earned from
investing the proceeds of the issuance of the Equity Investment and the Original
Offering. Interest expense increased significantly in this period as compared to
the period from Inception to December 31, 1998 as a result of the issuance of
the Notes.
The strengthening of the U.S. dollar to most European currencies in the
first quarter of 1999 resulted in a currency exchange loss of $2.4 million.
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. 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.
LIQUIDITY AND CAPITAL RESOURCES
From Inception through December 31, 1998, Carrier1 financed its operations
through equity contributions. During the three-month period ended March 31,
1999, Carrier1 financed its operations through additional equity contributions
and with the proceeds of the Original 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
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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
$200.0 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 March 31, 1999 Carrier1
had incurred capital expenditures of approximately $11.6 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 $280.0 million
through 1999.
As of December 31, 1998 funds managed by Providence and Primus 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 Original Offering. Net proceeds from the original
offering were approximately $245 million (based on the February 19, 1999,
conversion rate of [Euro] 0.90316 per $1.00), after deducting discounts and
commissions and estimated expenses of the Original 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 is also in the process of negotiating a financing facility with a
major equipment supplier. Carrier1 believes, based on its current business plan,
that the net proceeds from the Original Offering and the Equity Investment,
together with either (1) proceeds of possible sales of dark fiber on the German
Network, (2) proceeds from an accounts receivable facility, if completed, or (3)
proceeds from one or more 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 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.
See "Risk Factors--Our limited operating history makes it dificult for you to
evaluate our performance" and "--We expect to experience net losses and negative
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. See "Risk Factors--Our ability to generate
cash to service our substantial capital needs depends on many factors, some of
which are beyond our control," "--Our substantial indebtedness and our ability
to incur more indebtedness could adversely affect our financial health and
prevent us from fulfilling our obligations under the Notes" and "--We expect to
experience net losses and negative cash flow."
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.
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FOREIGN CURRENCY
Carrier1's reporting currency is the U.S. dollar, and interest and principal
payments on the Notes will be in U.S. dollars and Euro. However, the majority of
Carrier1's revenues and operating costs will be derived from sales and
operations outside the United States and will be 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. Any
reversion from the Euro currency system to a system of individual country
floating currencies could subject us to increased currency exchange risk. We
have selected our computer and operational systems in an attempt to ensure that
our ability to transact business will not be impaired by complications resulting
from the introduction of the Euro. While we believe that our systems have not
been adversely impacted by the Euro conversion, there can be no assurance that
we 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 our third-party suppliers and customers will be able to
successfully implement the necessary protocols. See "Risk Factors--Conversion to
the Euro may result in increased costs and possible accounting, billing and
logistical difficulties in operating our business."
INFLATION
Carrier1 does not believe that inflation will have a material effect on its
results of operations.
NEW ACCOUNTING PRONOUNCEMENT
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, and on the value of the Warrants.
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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 information
technology ("IT") systems and its non-IT systems, such as its network
transmission equipment and the Nortel and Cisco network operating systems, are
Year 2000 compliant. In addition, Carrier1 has received written assurances from
Cisco, Nortel, and International Computers Limited 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 does not know whether the systems of its vendors, service or capacity
suppliers or customers are or will be Year 2000 compliant. Carrier1 is in the
process of contacting its principal vendors, service or capacity suppliers and
customers and evaluating these parties' efforts to prepare for the Year 2000 and
the degree of its corresponding exposure if such efforts are inadequate.
Carrier1 expects to complete such evaluation by September, 1999.
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's ability to operate its network
and retain customers. As noted above, Carrier1 is in the process of contacting
its principal vendors, service or capacity suppliers and customers and
evaluating Carrier1's risks associated with their noncompliance.
CONTINGENCY PLANS AND COSTS TO ADDRESS YEAR 2000 ISSUES
Carrier1 is still in the process of developing plans, including 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. Soon after
it completes its on-going evaluation of the likelihood of such a failure,
Carrier1 expects to substantially complete such plans.
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
In the second quarter of 1999, Carrier1 began negotiating definitive
documentation for a vendor financing with Nortel and paid Nortel $27.9 million
for equipment delivered prior to April 16, 1999. Also in the second quarter,
Carrier1 entered into several agreements for the exchange of fiber on various
routes. See Note 10 to the Unaudited Consolidated Financial Statements presented
elsewhere in this prospectus.
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BUSINESS
OVERVIEW
Carrier1 is a rapidly expanding European facilities-based provider of long
distance voice and IP 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 IP 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 December 31, 1998, Carrier1 had executed 48 contracts with voice
customers and 17 contracts with IP customers. Also in December 1998, Carrier1
signed a contract with one of the largest telecommunications companies in
Germany, and it expects to carry a substantial portion of this operator's
international traffic. This contract has had a significant impact on Carrier1's
traffic volumes since its recent implementation. As of March 31, 1999, we had
executed an additional 31 contracts with voice customers and an additional 18
contracts with IP 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 beginning to occur in the European telecommunications
market away from services and pricing that distinguish between international and
national long distance. As of May 12, 1999, Carrier1 has installed carrier-grade
voice switches and IP routers in Amsterdam, Dusseldorf, Frankfurt, London, New
York, Paris, Vienna and Zurich. Carrier1 has an IP router in Geneva. By the end
of 1999, Carrier1 expects to have installed voice switches or multiplexers and
IP routers and to be providing long distance voice and IP services in 21 cities
in the following countries: Austria, Belgium, Denmark, Germany, Finland, France,
Ireland, Italy, The Netherlands, Norway, Sweden, Switzerland, the United Kingdom
and the United States.
To rapidly deploy its network and offer services Carrier1 is initially
leasing its European transmission capacity. However, Carrier1 has entered into a
development agreement to build a 2,300 kilometer fiber network in Germany with
Viatel and Metromedia. This network will connect 14 principal cities and pass a
number of other major cities. It will also provide fiber capacity in regions
Carrier1 believes, based on its management's experience in the European
telecommunications markets, are not covered or are underserved by existing and
announced fiber networks. The important advantages of the German Network are:
- DIRECT OWNERSHIP. Carrier1 will own its own cable subduct and access
points. Carrier1's subduct will contain 72 fiber strands.
- COST. By building with Viatel and Metromedia, Carrier1 shares the fixed
costs of construction and therefore acquires fiber capacity at a
significantly lower cost than if it constructed the network itself.
- FLEXIBILITY. Carrier1 expects that the demand for fiber capacity in the
regions covered by the German Network will be sufficient to permit it to
swap excess capacity for fiber capacity on other networks in its target
markets. Carrier1 would thereby be able to increase the amount of owned
and controlled capacity at a lower cost.
Carrier1 expects that construction of the German Network will be completed
by the end of 1999 and that some segments will be operational in the third
quarter of 1999. Carrier1's share of the development costs will be up to
approximately $82 million, including the fiber deployed.
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Stig Johansson, Chief Executive Officer, and Carrier1's management team have
extensive experience in European telecommunications markets and longstanding
relationships with European wholesale customers and suppliers. Mr. Johansson was
formerly the President of Unisource Carrier Services AG, a large European
wholesale carrier of international traffic. Unisource Carrier Services carried
over 400 million minutes of voice traffic in 1997, the large majority of which
was carried for wholesale customers in the same markets that Carrier1 is
addressing. Carrier1's senior management comes from Unisource Carrier Services,
ACC Corp., AT&T-Unisource Communications Services, Telia Norge AS, British
Telecom and AT&T. Mr. Johansson and others in management have also had
significant experience with start-up ventures. See "Management." Carrier1
believes that management's experience and long-standing customer relationships
have been key to its launch of operations approximately six months after its
founding and contracting with a total of 65 customers through December 31, 1998.
Carrier1 International is a holding company and renders its services
indirectly through subsidiaries primarily located in various Western European
countries. Its registered office is located at L-8009, Strassen, Route d'Arlon
3, Luxembourg. Executive offices of Carrier1 International GmbH, its principal
management services subsidiary, are located at Militarstrasse 36, CH-8004
Zurich, Switzerland. Its phone number is 011-41-1-297-2600.
EUROPEAN VOICE AND IP MARKET
OVERVIEW
In 1997, according to industry sources, the European international long
distance market for voice services was the largest in the world, with
approximately 35 billion minutes of use. According to industry sources, Europe's
volume of international minutes grew approximately 12% from 1996 to 1997.
Industry sources project that global international telecommunications traffic
volume will grow at a compound annual growth rate of 12% to 18% from 1997 to
2001.
Industry sources estimate the European wholesale and retail market for all
Internet services was $1.9 billion in revenue for 1997 and project that as
demand for these services grows, industry revenues will grow at a compound
annual growth rate of approximately 40% to $7.3 billion in 2001, driven
primarily by rapid growth in the number of European Internet users and
corresponding demand for bandwidth.
Carrier1 believes that key factors fueling the ongoing growth in the
European long distance telecommunications market include
- significant recent regulatory changes in the international and national
long distance market, resulting in the entry of new telecommunications
service providers,
- increasing demand for IP services and
- technological advances, which have substantially increased the
transmission capacity and reduced the cost of fiber optic capacity.
LIBERALIZATION AND NEEDS OF NEW ENTRANTS
The European telecommunications market has historically been dominated by
incumbent telephone operators that have owned and controlled circuits
exclusively within their national boundaries. Cross-border traffic is passed
from one incumbent telephone operator to another at national borders. Tariffs
for this cross-border traffic are determined by a series of bilateral settlement
agreements between incumbent telephone operators known as the accounting rate
mechanism. This system has historically kept the price of cross-border calls in
Europe at levels significantly higher than the underlying cost of transporting
and terminating the calls.
Liberalization of the European market began in the United Kingdom in 1993.
In March 1996, the European Commission adopted the "Full Competition Directive,"
requiring the complete liberalization of
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all telecommunications services in most European Union member states by January
1, 1998. In effect, incumbent telephone operators are now required to provide
interconnection to their network, for both transmission and termination, to all
carriers at certain benchmark prices, and may not discriminate among carriers.
Carrier1 expects that the actual implementation of the Full Competition
Directive in the various European Union member states will be a gradual process.
However, the market liberalization that has taken place thus far (both within
the European Union and in Switzerland and Norway) has permitted the entry of new
competitors seeking to provide a wide array of international and national
telecommunications services. According to industry sources, the number of
authorized international carriers in the United Kingdom was 144 in July 1998,
compared to 35 in July 1995, and the number of authorized international carriers
in Germany was 32 in July 1998, compared to 1 in July 1995. Based on its
management's understanding of events that occurred in the United States after
liberalization of the U.S. telecommunications industry, Carrier1 believes that
the increased competition triggered by European market liberalization will lead
to further decreases in prices, increases in international and national long
distance traffic, a growing number of new entrants in the market, a significant
decrease in the market share of incumbent telephone operators over time, and
increasing demand for the provision of a greater number of services at a higher
level of quality.
Another effect of liberalization has been the deployment of European
networks by certain new entrants such as Carrier1, second and third operators,
and infrastructure providers. Cross-border transmission capacity allows new
entrants to offer European telecommunications services priced on a city-to-city
basis without regard to national borders and more closely based on actual costs.
New entrants' prices are lower than the accounting rate mechanism tariffs to
which the incumbent telephone operators adhere. Although an incumbent telephone
operator has low transmission costs within its own country's borders, it cannot
compete with the lower international prices charged by new entrants without
straining the accounting rate mechanism system which has traditionally been an
important source of revenues for the incumbent telephone operators. Furthermore,
as long as an incumbent telephone operator's counterparts adhere to the
accounting rate mechanism, a reduction by one incumbent telephone operator of
its long distance prices may not be matched by a reduction in its termination
costs with other incumbent telephone operators and would therefore have a
negative impact on its margins. The incumbent telephone operators are also
burdened by high overhead costs which are difficult to reduce as quickly as
prices are declining in competitive markets.
Based on its management's experience in European telecommunications markets,
Carrier1 believes there is an insufficient supply of cost-effective,
cross-border voice services to meet the increasing demand of new entrants, many
of whom do not have network facilities or only have a locally based network.
Carrier1 believes the incumbent telephone operators are not meeting this demand
for a number of reasons:
- they lack cross-border capabilities and charge high access costs, based on
the accounting rate mechanism system,
- their focus has traditionally been on the retail sector,
- they do not consider it in their short term interest to provide
cost-effective wholesale services to competitors, and
- the billing, support and back-office systems of the incumbent telephone
operators are not designed to address adequately the particular needs of
new entrants.
As a result, there is an increasing demand by new entrants for alternative
providers of lower cost, high-quality, European and transatlantic voice
services. Carrier1 believes the deficiencies in the supply of cross-border IP
services are even more pronounced than those in the supply of voice services.
The incumbent telephone operators' networks are oriented towards voice traffic
and are not designed to have the flexibility to provide the amounts of capacity
that an ISP is likely to require given the current and
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projected growth in the volume of European Internet-related traffic. Therefore,
ISPs and other data service providers operating in the European market are
seeking alternative providers of European and transatlantic IP services.
INCREASING DEMAND FOR IP SERVICES
The Internet is a complex, interconnected collection of telecommunications
networks. These networks all use a common suite of protocols, known as TCP/IP,
that facilitate communication with each other. End users connect to the Internet
through dial-up or permanent connections to a network owned by an ISP. ISP
networks are connected to the Internet at network access points or by dedicated
connections to other ISP networks. Each network access point is connected to
other network access points via high capacity telecommunications lines or
backbone facilities. Telecommunications carriers provide the dedicated lines
connecting the ISPs' networks to each other and to the network access points, as
well as the backbone between the network access points. The provision of these
services by these carriers comprises wholesale IP services.
The European Internet market is, according to industry sources, several
years behind the market in the United States in terms of overall penetration of
IP services. Although there can be no assurance that trends in Europe will
follow those in the United States, Carrier1's management believes that the
historical trends in Internet growth in the United States market with respect to
web-users, the number of Internet host computers through which IP services are
provided ("hosts") and backbone capabilities are broadly indicative of what can
be expected to occur in Europe.
Industry sources estimate that the penetration rate of web users in the
United States was approximately 12% of the U.S. population in 1997 and is
expected to increase to 38% of the population by 2001. The penetration rate of
web users in Western Europe varies across the region but was estimated on
average to be 4% of the population of Western Europe in 1997. Industry sources
forecast that this will more than triple to 15% by 2001. From June 1992 to June
1998, according to RIPE NCC (the Official Europe Internet Registry), the number
of hosts in Europe increased from approximately 200,000 to 6.8 million,
representing a compound annual growth rate of 80%.
As the number of Internet web users and hosts increases, demand for backbone
capacity to support growing Internet use is expected to increase
correspondingly. Carrier1 expects European capacity will need to be expanded
significantly over the next few years as European IP traffic continues to grow.
As the supply of backbone capacity in Europe increases, the prices of
transmission capacity are expected to decrease significantly. Carrier1 expects
such price decreases will in turn fuel further increases in IP service demand.
TECHNOLOGICAL ADVANCES
Advances in technology are greatly increasing the transmission carrying
capacity, or bandwidth, of fiber optic cables, while significantly reducing the
incremental cost of this increased capacity. Although building infrastructure
still requires substantial capital expenditures, this increased capacity at
reduced cost made possible by new technology, together with the market
opportunities created by liberalization and growth in IP demand, are encouraging
non-incumbent telecommunications companies to build high-quality European
networks. Carrier1 expects that completion of these alternative cross-border
networks will result in increased amounts of high-quality, lower cost network
capacity becoming available through indefeasible rights of use or long-term
leases.
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COMPETITIVE STRENGTHS
Carrier1 believes that a number of factors give it a competitive advantage
in the European long distance voice and IP telecommunications markets:
- EXPERIENCED EUROPEAN MANAGEMENT with many years' experience in the largest
European telecommunications markets and with strong wholesale customer
relationships. Carrier1 has a European perspective and, it believes, a
strong understanding of the European telecommunications markets.
- A FOCUSED WHOLESALE MARKETING STRATEGY, which allows Carrier1 to service
new entrants without competing for their retail customers and to operate
with less overhead than carriers with retail operations.
- PRICING that disregards the existence of national borders and gives
Carrier1 more flexibility than the incumbent telephone operators to
compete on the basis of price.
- ADVANCED INFORMATION AND CONTROL SYSTEMS that allow Carrier1 to optimize
pricing and network use on a real-time basis.
- PROVISION OF HIGH-QUALITY VOICE AND IP SERVICES expected by European
customers. Carrier1 believes that its guarantees of high performance
levels distinguish it from its competitors.
- DELIVERY OF SUPERIOR CUSTOMER SUPPORT exceeding that provided in Europe
today. Carrier1 offers rapid implementation and response times and locally
based customer-oriented sales and support personnel.
- LACK OF AFFILIATION WITH AN INCUMBENT TELEPHONE OPERATOR, which allows
Carrier1 complete flexibility to market its services broadly to its target
customers, including carriers who compete with incumbent telephone
operators.
BUSINESS STRATEGY
Carrier1's objective is to become a leading European wholesale provider of
high quality long distance voice and IP services, by capitalizing on the rapidly
increasing demand for city-to-city European voice and IP services. The key
elements of Carrier1's strategy are:
- TARGET WHOLESALE MARKETS. Carrier1 offers wholesale services primarily to
competitive fixed-line operators, other carriers, wireless operators,
ISPs, resellers and multi-national corporations. In particular, Carrier1
focuses its marketing efforts on competitive retail operators who lack
international infrastructure. Based on its management's experience in
European telecommunications markets, Carrier1 believes these new entrants
prefer an independent supplier of wholesale services to an incumbent
telephone operator or other supplier with which they compete directly.
Concentrating on the wholesale market allows Carrier1 to operate with less
overhead than other carriers with mass retail operations and to implement
operational support systems tailored to meet the needs of wholesale
customers. By focusing on the wholesale sector and making its main
business the selling of voice and IP services, Carrier1 will take
advantage of its management's strong market-oriented skills, first-hand
understanding of the European telecommunications markets and long-standing
wholesale customer relationships.
- FOCUS ON CUSTOMER NEEDS. Carrier1 believes that both high quality of
service and strong customer support are essential to capitalize
successfully on market opportunities.
QUALITY OF SERVICE: Carrier1 believes that quality of service is critical
to obtaining and retaining customers. Carrier1's technologically advanced
voice and IP network and network management and information systems allow
it to offer its services at guaranteed minimum levels of order
implementation, response and repair time, and at a 99.9% network
availability level. Based on its
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management's experience in telecommunications markets, Carrier1 believes
no other carrier in Europe offers a better minimum service level for
voice or IP services. Because it owns its switches, multiplexers and
routers, which are key components of its network, Carrier1 can control
the quality and breadth of its service offerings.
SUPERIOR CUSTOMER SUPPORT: Based on its management's experience in
telecommunications markets, Carrier1 believes that customer support
levels in the wholesale telecommunications market in Europe are generally
lower than those in the United States. Carrier1 has designed its systems
to provide a level of customer support significantly higher than that
generally offered in the wholesale market in Europe. Key features of
these systems include: (1) decentralized sales, installation and basic
support, facilitating quick response to customer needs, (2) a help desk
operating 24 hours a day, 365 days a year, (3) on-line order management
and provisioning, traffic reports, fault reports and repair information
and (4) on-line customized billing.
- RAPID, COST-EFFECTIVE CITY-TO-CITY NETWORK DEPLOYMENT. Carrier1 has
developed a cross-border network linking principal cities of Western
Europe and will continue to broaden the range of countries covered by the
network and deepen the extent of the network within particular countries.
To capitalize on its early entry into the market and to rapidly expand its
presence, Carrier1 is pursuing an aggressive timetable for extending the
scope of its network, in part by leasing capacity and outsourcing certain
functions. Carrier1's longer term goal is to own or control key elements
of its network and to assume control of key outsourced functions. To
establish points of presence rapidly and cost-effectively in selected new
markets, Carrier1 is initially using multiplexers. Multiplexers are less
costly and easier to install than switches, enhance Carrier1's flexibility
and service quality and help to reduce its termination costs. As traffic
increases, Carrier1 may replace multiplexers with switches and redeploy
these multiplexers in new markets. Carrier1's city-to-city network will
(1) allow it to price its services within Western Europe without regard to
national borders, (2) bring it closer to a greater number of customers and
(3) reduce its termination costs.
- REDUCE TRANSMISSION COSTS. A key part of Carrier1's strategy is to reduce
the costs of its transmission platform. Carrier1 intends to reduce its
transmission costs by continually evaluating whether to build, buy or
lease capacity or swap excess capacity. While Carrier1 currently holds two
transatlantic indefeasible rights of use, Carrier1 is currently leasing
the rest of its transmission capacity because doing so enabled Carrier1 to
commence offering services in its target markets rapidly. In addition,
construction of new capacity has been announced in many of Carrier1's
target markets and, based on its management's knowledge of the European
telecommunications markets, Carrier1 believes the cost of acquiring
capacity in those regions is decreasing and will continue to decrease. The
German Network illustrates an opportunity where Carrier1's management
believes it is more cost effective to build capacity. As demand for voice
and IP services in Europe increases and new networks are constructed,
Carrier1 believes there will be significant opportunities to add new and
replace existing transmission capacity at lower unit cost. Carrier1 also
intends, as soon as proven technology is commercially available, to
migrate to a single, IP-based transmission platform for both voice and IP
services. This platform would permit Carrier1 to increase the cost
effectiveness of its operations through more efficient use of its
transmission capacity.
- INTRODUCE NEW VALUE-ADDED SERVICES. Carrier1 intends to expand its
addressable market to include additional wholesale customers, such as
switchless resellers, by offering the value-added services they require.
These services include capabilities for switched access, toll-free
services and prepaid phone cards. Carrier1 plans to offer these wholesale
capabilities in selected countries as early as mid-1999.
- REDUCE COSTS THROUGH INTERCONNECTION AGREEMENTS AND PEERING. By
establishing interconnection arrangements with incumbent telephone
operators in liberalized markets and direct operating agreements with
incumbent telephone operators in emerging markets, Carrier1 can keep its
costs of
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terminating calls lower and exercise greater control over quality and
transmission capacity than it can using refile or resale agreements.
Similarly, entering into additional peering agreements will minimize the
cost of terminating Carrier1's IP traffic.
SERVICES
Carrier1 is focusing on providing long distance voice and IP services on a
wholesale basis at the high level of quality expected by European customers. It
provides these services primarily to competitive fixed-line operators, other
carriers, wireless network operators, ISPs, resellers and multi-national
corporations. In September 1998, Carrier1 launched its European and
transatlantic international long distance voice and IP services. It expects to
begin providing national long distance services in the first half of 1999 inside
the United Kingdom and Germany. Carrier1 intends, by the end of 1999, to be a
broadly based European provider of voice and IP services, able to provide and
price its services on a city-to-city basis without regard to national borders.
Carrier1 intends to provide in the future other wholesale telecommunications
services, such as managed bandwidth and voice-over-IP services.
WHOLESALE VOICE SERVICE
Carrier1's wholesale voice service involves city-to-city transport from
Carrier1's network points of presence located in strategic European cities and
New York for termination anywhere in the world. Carrier1 terminates calls either
through interconnection or direct operating agreements with the relevant
national incumbent telephone operator or through refile or resale agreements
with other carriers that have interconnection agreements in place with that
incumbent. When Carrier1 does use refile or resale agreements to terminate
traffic it seeks to do so with carriers who provide voice service comparable in
quality to Carrier1's. Carrier1's customers generally will arrange for
transmission of their traffic to one of Carrier1's points of presence at their
own cost, although Carrier1 may provide service from the customer's site if
traffic volume is sufficient. Carrier1's voice service contracts guarantee 99.9%
availability on the network and certain minimum connection response and repair
times.
WHOLESALE IP SERVICE
Carrier1 seeks to be a major European IP backbone provider. It offers two
types of wholesale IP transport service, "Global Transit Services" and "Internet
Exchange Connect Services."
GLOBAL TRANSIT SERVICE. Carrier1's Global Transit Service provides
customers with high-speed, high-quality IP connectivity to IP domain addresses
world-wide. This backbone service interconnects Carrier1's customers with
selected IP exchanges and other international IP backbone providers. Customers
connected to the Global Transit Service backbone have any-to-any IP connectivity
geared to providing the best IP reach and connectivity. Although Carrier1
anticipates that most of its IP customers will bring their traffic to Carrier1's
routers, Carrier1 will consider, on a case by case basis, alternative
arrangements.
Carrier1 offers two levels of Global Transit Service: "Premium" and "Basic."
Both packages guarantee certain minimum connection, response and repair times.
The Premium Transit package guarantees certain additional performance parameters
and will be given priority within the network. A Premium Transit user's
guaranteed service levels include round trip packet delay of less than 100
milliseconds, packet loss of less than 0.2%, 99.9% availability on Carrier1's
network and the highest level of traffic prioritization. At peak traffic hours,
the Premium user's traffic has priority over the Basic user's traffic. Carrier1
has designed its network, however, to minimize the likelihood of congestion
requiring such prioritization of traffic. Both the Basic and Premium packages
offer customers newsfeed services and a backup to the customer's primary
Internet address.
Carrier1's Global Transit Service is interconnected in Europe to Ebone, a
subsidiary of Hermes Europe RailTel B.V. ("Hermes"), that has what Carrier1's
management believes is a large European customer base. Carrier1 initially will
pay a transit fee for access to the Ebone IP backbone. Carrier1 will
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also actively seek to enter into peering arrangements with smaller European
backbone providers. As its volume of IP traffic increases, Carrier1 expects it
will be in a position to negotiate peering with Ebone and other major European
backbone providers. In the United States, where almost all European backbone
providers must pay to access the backbones of the major United States IP
backbone providers, Carrier1 has transit agreements with UUNet Technologies,
Inc., an MCI WorldCom subsidiary ("UUNet"), and GTE Internetworking, a unit of
GTE Corporation. See "Risk Factors--A failure to enter into or maintain adequate
interconnection agreements and peering arrangements could adversely affect our
business" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Factors Affecting Future Operations--Cost of Services--IP
Termination Costs." In the United States, Carrier1 has peering arrangements with
Epoch Networks and PSINet. In Europe, Carrier1 has peering arrangements with a
number of ISPs. Based on its management's knowledge of the European Internet
market, Carrier1 believes its Global Transit Service offers connectivity to a
greater number of United States IP backbone providers than other European IP
services. Carrier1 will also interconnect Global Transit Service customers to
each other, which, as the customer base of its backbone grows, will increase the
attractiveness to customers of Carrier1's IP backbone.
INTERNET EXCHANGE CONNECT SERVICE. Carrier1's Internet Exchange Connect
Service (the "IX Connect") is a point-to-point option for customers who want to
transit solely to a specific IP exchange or to a specific partner. It offers
one-to-one connectivity to a select number of destinations through main IP
exchanges in Europe and the United States. Carrier1 currently offers IX Connect
connectivity to LINX in London, AMS-IX in Amsterdam, DE-CIX in Frankfurt, CIPX
in Geneva, PARIX in Paris and several IP backbone providers in New York. As its
network expands, Carrier1 expects to offer connectivity to additional network
access points. Based on its management's knowledge of the European Internet
market, Carrier1 believes it is the only European IP service provider currently
offering this type of service. The service is targeted to large ISPs who prefer
to organize their own presence and peerings in the key IP exchanges for
technical or commercial reasons. The principal guaranteed parameters of IX
Connect are dedicated reserved capacity, access speed ranging from 2 Mb to 155
Mb and the announcement of the customer's Internet domain at the remote
location. Carrier1 will also guarantee certain minimum connection, response and
repair times.
A large number of customers are significant to Carrier1's IP backbone
because (1) it increases the cost-efficient use of the network by lowering per
unit costs, (2) it facilitates obtaining lower per unit transit fees or peering
with other ISPs and (3) it augments the value of the backbone which, in turn,
draws more customers.
Both types of IP services include a centralized help desk and network
management on a 24-hours-a-day, 365-days-a-year basis, Web site reporting and
service information, on-line statistics per customer on a secure basis and Web
site diagnostic tools.
OTHER SERVICES
Carrier1 has started to introduce managed bandwidth and data services.
Carrier1 intends to introduce other new value-added services, as described above
under "--Business Strategy."
Carrier1 also intends to offer Voice-over-IP ("VoIP"), or voice traffic
transmitted over an IP-based network. Carrier1 plans, after a trial phase
expected to be completed by mid-1999, to offer VoIP to IP customers that, for
example, wish to offer personal computer-to-phone connectivity to their end
users. Carrier1 also plans to offer other value-added IP services, such as
server co-location facilities for its current and future customers.
As Carrier1 extends its network and adds transmission capacity, it expects
that it will be able to sell excess bandwidth.
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NETWORK
Carrier1 believes it is critical to own or control key elements of its
network in order to become a high-quality, low-cost provider. Carrier1 is
following a flexible, phased approach to deploying its network that will permit
it to optimize the use of its network and take advantage of low-cost
opportunities for expanding the network. Carrier1 has commenced operations
primarily on a leased fiber optic transmission platform to enable its early
entry into the market. Over time, Carrier1 will expand its network in a phased
approach, adding capacity to meet expected increases in demand. To reduce its
cost base, however, Carrier1 will seek to obtain additional transmission
capacity at dark fiber cost levels, either through building new capacity,
acquiring capacity through purchases or swaps of excess capacity or leasing
capacity. In all cases, Carrier1 intends to own its switches and routers.
The table below sets forth as of May 12, 1999, the location of each switch,
multiplexer and router owned by Carrier1 and in service, and the location and
currently expected in-service dates of switches, multiplexers and routers
planned to be installed through the end of 1999. However, the timing, location
and number of switches, multiplexers and routers may change depending on changes
in customer demand or regulatory conditions in any particular jurisdiction, or
the availability of a single IP-based transmission platform.
<TABLE>
<CAPTION>
INSTALLED NETWORK COMPONENTS (AS OF MAY 12, 1999)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VOICE IP
- ------------------------------------------------------- ---------------------------
<CAPTION>
SWITCHES MULTIPLEXERS ROUTERS
- -------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Amsterdam Geneva Amsterdam
Dusseldorf Dusseldorf
Frankfurt Frankfurt
London Geneva
New York London
Paris New York
Vienna Paris
Zurich Vienna
Zurich
<CAPTION>
PLANNED NETWORK INSTALLATIONS BY YEAR END 1999 (AS OF MAY 12, 1999)
- ------------------------------------------------------------------------------------
VOICE IP
- ------------------------------------------------------- ---------------------------
SWITCHES MULTIPLEXERS ROUTERS
- -------------------------- --------------------------- ---------------------------
EXPECTED EXPECTED EXPECTED
IN-SERVICE IN-SERVICE IN-SERVICE
LOCATION DATE LOCATION DATE LOCATION DATE
- ------------- ----------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Berlin 2Q '99 Cologne 3Q '99 Berlin 2Q '99
Hamburg 2Q '99 Copenhagen 3Q '99 Brussels 2Q '99
Brussels 3Q '99 Dublin 3Q '99 Hamburg 2Q '99
Manchester 3Q '99 Stuttgart 3Q '99 Milan 3Q '99
Milan 3Q '99 Helsinki 4Q '99 Cologne 3Q '99
Stockholm 3Q '99 Leipzig 4Q '99 Copenhagen 3Q '99
Munich 4Q '99 Dublin 3Q '99
Oslo 4Q '99 Manchester 3Q '99
Stockholm 3Q '99
Stuttgart 3Q '99
Helsinki 4Q '99
Leipzig 4Q '99
Munich 4Q '99
Oslo 4Q '99
</TABLE>
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EXISTING NETWORK
Carrier1's management believes that entering the liberalizing European
international and national long distance markets early and establishing its
position quickly with a technologically advanced voice and IP network will give
Carrier1 a competitive advantage in such markets. To begin operations in
September 1998, approximately six months after being founded, and to keep its
overhead costs as low as possible, Carrier1 outsourced to Nortel and Cisco, on a
turnkey basis, the design, installation, technical operation and maintenance of
its initial network. Carrier1 has assumed operation of the functions that were
outsourced to Cisco. Carrier1 expects to assume control from Nortel of technical
operations of the network by mid-1999. By applying its operational knowledge and
expertise to the deployment process, management believes it has succeeded in
putting in place one of the most advanced voice and IP networks in Europe.
TRANSMISSION CAPACITY. Carrier1's traffic is transmitted over: (1) an STM 1
(155Mb) circuit on the Gemini fiber optic cable, acquired from Telemonde under
an indefeasible right of use, linking London and New York, (2) an STM-1 (155Mb
equivalent) circuit leased from Hermes (the "Hermes Ring") connecting Amsterdam,
Frankfurt, Geneva, London and Paris, (3) a 155Mb leased circuit linking
Frankfurt to Vienna, (4) a 155Mb leased circuit linking Frankfurt to Dusseldorf,
(5) a 155Mb leased circuit linking Frankfurt and Zurich, and (6) an STM-1
circuit on the AC-1 fiber optic cable, acquired under an indefeasible right of
use, linking Frankfurt and New York.
NETWORK MANAGEMENT CAPABILITIES. Carrier1 has installed Synchronous Digital
Hierarchy ("SDH") equipment at each network point of presence that will provide
it with information relating to the status and performance of all elements of
its network, including the transmission capacity provided to it by various third
parties. This SDH layer will also provide Carrier1 with flexibility to connect
new providers of transmission capacity and to configure this capacity in a
flexible manner.
VOICE TRAFFIC. Carrier1 had, as of March 31, 1999, five Nortel
international gateway GSP switches in Frankfurt, London, New York, Vienna and
Zurich. Carrier1 selected these cities because the United States, Germany and
the United Kingdom represented either the source or termination points for 20 of
the top 25 traffic routes in the world in 1996. Carrier1's switches and
switching system are the most advanced Nortel currently supplies and its main
transmission lines are redundant. In addition, as of March 31, 1999, Carrier1
had installed multiplexers in Amsterdam, Geneva and Paris. Carrier1 has, as of
May 12, 1999, added switches in Amsterdam, Dusseldorf and Paris.
IP TRAFFIC. Carrier1 had, as of May 12, 1999, high-capacity Cisco routers
in Amsterdam, Dusseldorf, Frankfurt, Geneva, London, New York, Paris, Vienna and
Zurich. Carrier1 selected these cities because they represent important sites of
European IP traffic origination or termination.
Carrier1 has configured its routers and leased circuits into a ring and
believes, based on its management's knowledge of IP services markets, it is one
of the first carriers in Europe to provide IP services on a ring structure. This
technologically advanced ring architecture, enhanced by SDH equipment, provides
inherent redundancy. Upon any single failure on the ring, traffic will
automatically be re-routed to another part of the ring, avoiding transmission
failure. Based on its management's knowledge of the European Internet market,
Carrier1 believes it has one of the most advanced IP networks in Europe.
PLANNED NETWORK DEPLOYMENT
Carrier1 is continuing to pursue an aggressive timetable for extending the
scope of its network, thereby rapidly expanding its presence in its target
markets. Carrier1 is installing a cross-border network linking the principal
cities of several Western European countries and will continue to broaden the
range of countries covered by the network and deepen the extent of the network
within particular countries. With a city-to-city cross-border network in place,
Carrier1 will be able to provide and price its services without regard to
national boundaries.
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VOICE TRAFFIC. Carrier1's deployment schedule through the end of 1999
contemplates the acquisition and installation of multiplexers or Nortel GSP
switches in Berlin, Brussels, Cologne, Copenhagen, Dublin, Hamburg, Helsinki,
Leipzig, Manchester, Milan, Munich, Oslo, Stockholm and Stuttgart. Since March
31, 1999, Carrier1 has replaced multiplexers in Amsterdam, Dusseldorf and Paris
with Nortel GSP switches. These sites, together with Carrier1's existing sites,
serve large population centers and points of traffic concentration in France,
Germany and the United Kingdom. By expanding the range of its network within
these countries Carrier1 will gain closer access to a larger number of customers
and will reduce its interconnection and other termination-related costs. In
considering similar network penetration levels in other European countries,
Carrier1 will weigh the benefits of increased access to customers and lower
termination costs against the increased transmission costs incurred.
The timing of installation and location of each of the switches above may
change in response to changes in customer demand, the availability of a single
IP-based transmission platform, or changes in regulatory conditions in any
particular jurisdiction. See "Risk Factors--If we lost one or more of our
government licenses or became subject to more onerous government regulations, we
could be adversely affected."
IP TRAFFIC. Carrier1's deployment schedule through the end of 1999
contemplates the installation of routers in Berlin, Brussels, Cologne,
Copenhagen, Dublin, Hamburg, Helsinki, Leipzig, Manchester, Milan, Munich, Oslo,
Stockholm and Stuttgart.
The timing of installation and location of each of the routers listed above
may change in response to changes in customer demand or the availability of a
single IP-based transmission platform.
THE GERMAN NETWORK. Carrier1 has entered into a Development Agreement to
build the German Network with affiliates of Viatel and Metromedia, targeting
routes it believes are currently underserved by existing and announced fiber
networks. The German Network will be an advanced, high-capacity, bi-directional
self-healing 2,300 kilometer fiber optic ring utilizing advanced SDH and dense
wave division multiplexing technologies. The German Network will initially
connect Berlin, Bremen, Cologne, Dortmund, Dresden, Dusseldorf, Essen,
Frankfurt, Hamburg, Leipzig, Mannheim, Munich, Nuremberg, and Stuttgart. The
German Network will also pass a number of other major cities. When the German
Network is completed, Carrier1 will own its own cable subduct and access points.
Carrier1's cable subduct will contain 72 strands of fiber. Carrier1 expects that
construction of the German Network will be completed by the end of 1999 and that
some segments will be operational in the third quarter of 1999. Carrier1's share
of the development costs will be up to approximately $82 million, including the
fiber deployed.
Carrier1 has decided to commence building an extension of its network in
Germany because
- Germany is the largest telecommunications market in Europe and a major
center for traffic within Europe,
- there is limited availability of cost-effective transmission capacity in
Germany,
- leased transmission costs are currently very high in Germany and Carrier1
desires to lower its cost base in such a large market,
- Germany's population is widely and relatively evenly dispersed among many
cities, requiring the installation of a number of switches and routers
throughout the country to effectively access the full range of potential
customers,
- installing multiple points of presence in Germany will reduce Carrier1's
termination costs, and
- Germany's central location within Europe provides a good base from which
to connect the German Network to other parts of Europe.
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The German Network will also provide fiber capacity in regions Carrier1 believes
are not covered or are underserved by existing and announced fiber networks.
Carrier1 also believes that excess capacity on the German Network will be useful
as a valuable "currency" to swap for capacity on other networks.
Pursuant to the Development Agreement, Carrier1 and Metromedia each have a
24.995% interest and Viatel has a 50.01% interest in the development company.
Viatel, as a result of its majority interest, will control all but certain major
decisions relating to the development of the German Network which will require
unanimous consent. Costs of construction will be borne pro rata by Viatel,
Carrier1 and Metromedia, and the development company will be indemnified for
certain liabilities, costs and expenses by each of the parties. In addition,
Viatel will receive a developer's fee of 3% of certain construction costs, 25%
of which will be paid by Carrier1.
Viatel and Metromedia are each required to provide the development company
with a letter of credit. The development company may draw on the letter of
credit of a party that does not meet its funding obligations. Carrier1 has
provided a letter of credit in the amount of approximately DM 110 million (or
approximately $64.8 million).
OTHER PLANNED TRANSMISSION CAPACITY. During the year 2000 Carrier1 also
expects TAT-14, a transatlantic cable connecting Amsterdam, London and New York
in which it has arranged to purchase a multiple investment unit, to become
operational. By that time, Carrier1 also expects to have replaced some leased
capacity with owned capacity and to have leased or purchased additional capacity
for geographic and volume expansions. By the third quarter of 1999, Carrier1
expects to have in operation additional transmission capacity which it has
acquired on rings connecting (1) Frankfurt, Amsterdam, London and Paris (dark
fiber), (2) Hamburg, Copenhagen, and Malmo (wavelength) and (3) Frankfurt,
Amsterdam, London, Paris and Brussels (wavelength).
FURTHER NETWORK EXTENSIONS AND DEVELOPMENTS
Carrier1 will consider extending its network within Europe beyond its
current deployment plans through 1999. Due to the rapidly evolving dynamics of
the European telecommunications market, Carrier1 will continually reassess the
most cost-effective means of network expansion. Future increases in the supply
of fiber optic cable may make variable or fixed-rate lease arrangements, the
purchase of transmission rights or the swapping of transmission capacity more
favorable options, in economic terms, than building new capacity.
Carrier1 has worked closely with Nortel and Cisco to create a
technologically advanced network system that is flexible and will facilitate
Carrier1's migration to a single integrated IP-based transmission platform for
both voice and IP traffic when proven technology becomes commercially available.
EXISTING AND PLANNED TRAFFIC TERMINATION ARRANGEMENTS
VOICE TRAFFIC. Carrier1 carries voice traffic to any destination in the
world, either directly or through "refile" or "resale" agreements with other
carriers who have a local point of presence and an interconnection agreement
with the relevant incumbent telephone operator.
As of March 31, 1999, Carrier1 had entered into interconnection arrangements
to provide for the local termination of its voice traffic with carriers in
Austria, Denmark, Germany, The Netherlands, Sweden, Switzerland, the United
Kingdom, and the United States. As of March 31, 1999, Carrier1 has implemented
interconnection arrangements in Austria, Germany, Switzerland, the United
Kingdom and the United States and is in the process of implementing these
arrangements in these other countries. Since March 31, 1999, Carrier1 has signed
interconnection agreements with Tele Danmark in Denmark, Telecom Italia in Italy
and Telia in Sweden and has implemented its interconnection agreements in The
Netherlands. Carrier1 initiated interconnection negotiations with Belgacom in
Belgium, France Telecom in France and Telecom Eireann in Ireland in early 1999.
By December 1999, Carrier1 intends to have
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implemented direct operating agreements with local carriers for termination of
voice traffic in a number of emerging markets.
Most refilers currently operate out of London or New York, so that
Carrier1's refiled traffic is rerouted to London or New York and from there is
carried to its termination point. As of March 31, 1999, Carrier1 had resale
agreements in Austria, France, Germany, The Netherlands and Switzerland.
IP TERMINATION. IP termination is effected free-of-charge through peering
and for a fee through transit arrangements. As of March 31, 1999, in the United
States, Carrier1 has peering arrangements with Epoch Networks and PSINet, and
has, transit agreements with UUNet and GTE Internetworking. In Europe, Carrier1
has, peering arrangements with a number of ISPs and a transit agreement with
Ebone. Carrier1 will continue to seek additional peering arrangements.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Factors Affecting Future Operations--Cost of Services--IP
Termination Costs," and "Risk Factors--A failure to enter into or maintain
adequate interconnection agreements and peering arrangements could adversely
affect our business."
OPERATIONS
NETWORK IMPLEMENTATION AND OPERATION
Network engineering, technical operation and maintenance and repair have
been handled exclusively by Nortel in connection with the voice overlay of the
network, and were handled exclusively by Cisco in connection with the IP overlay
of the network. Carrier1 will continue to work closely with Nortel and Cisco to
ensure future implementation milestones are met, and that the quality and
performance of the network meet certain Carrier1-established benchmarks. The
initial outsourcing of the design, installation and technical operation of its
network allowed Carrier1 to maintain low overhead costs during its initial
operations period.
The voice and IP network operating systems allow Carrier1 to use advanced
software to maximize the efficient operation of the network, including managing
the flow of voice and IP traffic on a daily basis and identifying the precise
location of faults. These systems are also sufficiently flexible to allow
Carrier1 to migrate to more advanced technological applications as they become
commercially feasible.
Carrier1 has assumed the technical operation of the network (other than
basic equipment servicing) from Cisco, and intends to do so from Nortel by
mid-1999, so that Carrier1 can control all the customer-related functions of the
business. Until then, Carrier1's personnel will work side by side with Nortel
personnel to receive on-site training. Carrier1 expects that this training will
permit a smooth transition from outsourcing to insourcing of the network's
operational functions and reduce the risks of disruption due to the shift in
responsibilities. Carrier1 expects to continue to contract with Nortel and Cisco
for the design and installation of switches and routers. A small team of
operations staff will manage the future planning and architecture of the
network.
Carrier1 has a network operations center in London from which it operates
the voice and IP network. Carrier1 believes that a centralized network
operations center enables it to identify overloaded or malfunctioning circuits
and reroute traffic much more quickly than if the network were controlled by
separate network operations centers from different countries.
Recently, Carrier1 has bought the "Qualiview" system from ECI, which is
designed to allow it to measure call answer rate, post dial delay and echo on a
per destination basis for each party that terminates traffic for Carrier1.
Carrier1 has implemented the first part of this system and expects the rest of
this system to be implemented in the second quarter of 1999.
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THIRD-PARTY TURNKEY CONTRACTS
THE NORTEL CONTRACT. Carrier1 entered into a turnkey agreement with Nortel
in May 1998, under which Nortel has responsibility for the design, installation,
technical operation, maintenance and repair of its voice network switches,
including the provisioning of equipment, software and services. Nortel has
committed to a 12-month warranty of any defective equipment or software it may
provide. Nortel has also agreed to supply replacement parts for equipment and
software support (including upgrades) for a period of ten years following the
date of delivery of such equipment or software. Carrier1, in turn, has agreed to
purchase a certain volume of services and equipment from Nortel, and is subject
to surcharges if it fails to meet such volume thresholds for reasons other than
Nortel's material breach. Carrier1 has agreed to continue to use Nortel's
network operation and management services up to July 1999, by which time
Carrier1 will assume full operational control of these functions. The turnkey
contract contains limitations on Nortel's total liability.
THE CISCO CONTRACT. Carrier1 entered into a turnkey agreement with Cisco
(the "Cisco Agreement") in June 1998, for the design, installation, operation,
maintenance and repair of its IP network routers. Cisco has provided a 90-day
warranty on the software and hardware it provides to Carrier1. Cisco will
provide technical support for its standard software for a period of three years
following the latest revision of that software. Cisco's liability under the
agreement (other than for personal injury) is limited to the amounts paid under
the agreement to Cisco in the six-month period prior to the event giving rise to
the liability.
CUSTOMER SUPPORT
An essential component of Carrier1's business strategy is to provide a level
of customer support above that which is currently available in the wholesale
telecommunications markets of Europe.
All customer service orders received by the local sales forces are reported
to the central order desk at Carrier1's network operations center which then
logs the order into Carrier1's computer system and directs the order to the
voice or IP team, as applicable. The central order desk also tracks the status
of an order during implementation. Carrier1 has automated its operational
workflows so that the status of customer order implementation, traffic faults,
repair histories and other customer-related information is accessible, on-line,
by any employee of Carrier1 at any time. Carrier1 believes that the internal
visibility created by the on-line availability to any Carrier1 employee of all
customer-related information enhances the general monitoring and management of
the customer relationship and facilitates informed and timely responses to
customers' service needs or problems. Furthermore, by tracking on-line all
aspects of a customer's history from the customer's first call through the term
of the relationship, Carrier1 optimizes its ability to provide follow-up and
proactive advice to its customers.
The voice and IP operations teams at Carrier1's network operations center
and the in-country operations support team manage the local point of presence
locations, local installation and local support, and work together to implement
a customer's order. The in-country operations and sales teams provide a customer
with local language support and quick access and response to customer orders and
other service needs. A help desk in London serves as the first place to which
customer inquiries are directed. The help desk is open 24 hours a day, 365 days
a year. It not only manages customer inquiries but is the first place to which
customer problems are reported and, from there, internally directed for
resolution. Customers may call the help desk at any time to receive a status
report regarding their request or problem.
In addition to the minimum service level guarantees contained in Carrier1's
voice and IP service contracts, Carrier1 also guarantees response times to
customer requests within hours, and repair times within one day of the fault
being reported.
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INFORMATION AND BILLING SYSTEMS
Unburdened by legacy systems, Carrier1 has obtained and installed advanced
IT systems tailored to providing wholesale voice and IP services. Carrier1 has
developed its own system to enable it to determine least cost routing on a
real-time basis, allowing it to maximize margins within the constraints of the
network. In order to identify the least cost route for voice traffic at any
given time, the system takes into account all costs on a given route, refile or
resale possibilities and their constraints, transmission costs and constraints
per route, as well as other cost elements. Routing information is updated daily
and takes into account the prior day's actual costs rather than hypothetical
forward costs. Among other things Carrier1's systems are designed to facilitate
on a real-time basis
- swift and efficient order management,
- service provisioning,
- customer-responsive traffic fault management,
- billing,
- general management of the customer service process and
- compliance with Carrier1's performance level guarantees.
Carrier1 currently uses software programs developed by third parties as its
primary office and information management systems. These programs have been
tailored, however, to Carrier1's particular specifications.
As part of its strategy of focusing on the specific needs of new entrants
into the European telecommunications market, Carrier1's billing system
emphasizes flexibility and customization. Customers may be billed in the
currency of their choice, and may have their bills broken down by country, site,
or other call detail records. Carrier1 uses International Computers Limited's
("ICL") SIMS and Prospero billing systems software. Carrier1 initially
outsourced the running of such billing programs to ICL, but expects to bring the
running of such programs in-house by June 1999. Carrier1's billing system
analyzes Carrier1's traffic, revenues and margins by customer and by route,
which is an important cost management tool for Carrier1. Carrier1 expects that
by April 1999 its customers will be able to obtain call detail records and other
information through an on-line billing information inquiry function. Carrier1
plans to maintain separate billing modules for voice and IP services, although
customers utilizing both services may be billed on one invoice if desired.
CUSTOMERS
Focusing primarily on European customers and North American customers with
European connectivity needs, Carrier1 targets the following categories of
customers:
- COMPETITIVE FIXED-LINE OPERATORS. This category includes fixed-line
operators that compete with the incumbent telephone operators. These
operators typically desire to outsource their international and, from time
to time, their national long distance traffic.
- OTHER NON-INCUMBENT CARRIERS. This category includes operators with
international infrastructure, who select Carrier1 to carry overflow excess
traffic and to carry traffic to select, low-price destinations.
- WIRELESS OPERATORS. Wireless operators frequently outsource much of their
international and national long distance traffic.
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- ISPS AND REGIONAL AND SPECIALIST PROVIDERS. As demand for Internet
services grows in Europe, ISPs are increasingly requiring low-cost
transmission and interconnection capabilities from wholesale carriers.
Many ISPs do not own or operate their own transmission capacity. Cable
television companies, satellite resellers and metropolitan area network
providers are also demanding increasing amounts of low-cost IP services.
- RESELLERS. This category includes switchless resellers, a group that has
been rapidly growing in the United Kingdom and Germany in recent years.
Resellers generally outsource their international and, from time to time,
national long distance traffic.
- CONSORTIA. A number of groups have formed buying consortia to pool traffic
volume in order to obtain higher discounts from carriers. For example, a
group of European multinational entities have combined to form the
European VPN Users Association's Ventures Group to acquire voice services
and currently split their traffic among incumbent telephone operators and
incumbents' alliances. Carrier1 will target buying consortia and will also
seek to provide its services to research consortia. The research consortia
represent an important part of the IP market.
- MULTI-NATIONAL CORPORATIONS. Increasingly, multi-national corporations are
seeking wholesale telecommunications services to reduce their costs or as
a component of their own value-added services such as frame relay.
Although multi-national corporations are not a primary customer group for
Carrier1 due to their relatively high customer service demands, Carrier1
offers capacity to multi-national corporations on a wholesale basis.
- INCUMBENTS AND THEIR ALLIANCES. A number of incumbent telephone operators
and their affiliated alliances use wholesale carriers to carry excess
traffic generated by bottlenecks in their network or to terminate traffic
to certain locations at lower rates than their negotiated settlement
rates.
Carrier1 uses a credit screening process to evaluate potential new
customers. In performing its credit analysis, Carrier1 relies primarily on
internal assessments of its exposure, based on the costs of terminating
international traffic in certain countries and the capacity requested by the
proposed carrier or service provider, as well as references provided by the
potential customer. Carrier1 currently depends on a small number of significant
customers for its revenues. During the period from Inception to December 31,
1998, Carrier1 earned 69% of its revenues from three major customers. These
three customers, Interoute Telecommunications (UK) Limited, WorldCom
Telecommunications Services GmbH and STAR Telecommunications Deutschland GmbH,
accounted for 46%, 13% and 10%, respectively, of Carrier1's total revenues
during that period. One new customer, Mobilcom AG, may account for up to 30% of
Carrier1's revenues in the near term. Carrier1's agreement with MobilCom is for
an initial term of twelve months, ending December 2, 1999, and will be renewed
automatically unless cancelled. The agreement employs usage-based pricing and
does not provide for minimum volume commitments by MobilCom. See "Risk
Factors--Wholesale customers are price sensitive and we rely on a small number
of significant customers."
SALES
Carrier1 has an internal sales force focused on marketing services to
wholesale customers. Carrier1 currently has sales representatives in Amsterdam,
Frankfurt, London, New York, Milan, Paris, Stockholm and Zurich. The heads of
these sales offices have extensive telecommunications-related marketing and
sales experience, as well as strong customer relationships, in the geographic
markets in which they are located. Carrier1 intends to hire additional sales
executives as it increases the number of its offices and expands its existing
sales efforts. Carrier1 will continue to seek personnel with a high degree of
experience in and knowledge of the local telecommunications markets in which
they will be working.
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Currently, the Frankfurt sales office functions as the regional head office
covering German-speaking Europe and Eastern Europe; the Paris sales office
functions as the regional head office for France; New York functions as the
regional sales center for North America; Stockholm functions as the regional
sales center for Denmark, Finland, Norway and Sweden; Milan functions as the
regional sales center for Italy; the London sales office functions as the
regional head office for all English-speaking countries in Europe; and the
Amsterdam sales office functions as the regional head office for the Benelux
countries. Customers who do not, for one reason or another, fit within a
particular region are covered by the Zurich sales office. Carrier1 expects its
regional strategy will permit it to keep operating costs down until traffic
volumes in various other locations in Europe are large enough to justify
establishing sales offices in such locations.
Carrier1 also has sales people specializing in IP who work out of the
London, Frankfurt, Paris and Amsterdam sales offices. These IP specialists focus
on marketing to ISPs and other customers whose needs are primarily or
exclusively IP-oriented. They also work with other members of the sales force in
marketing a package of voice and IP services as required by customer demand.
Carrier1 currently has a limited number of customers, enabling it to provide
each prospective or actual customer with personalized account management.
Furthermore, in comparison to the mass retail market, the wholesale
telecommunications market has a relatively small number of customers. Carrier1
expects that this market characteristic will permit it to continue to provide
personalized account management even as the number of its customers continues to
grow.
PRICING
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 expects to generate a steady stream of voice traffic by
providing high-quality service and superior customer support. Carrier1's IP
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 IP contracts
were usage-based. Since March 31, 1999, Carrier1 has migrated to offering
usage-based IP pricing only in combination with IP contracts that have a
fee-based component that guarantees minimum revenue, in order to encourage usage
of its network services by its IP customers. Carrier1's agreements with its IP
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.
Currently, voice and IP 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 IP customers are subject to change
from time to time. Carrier1 will also vary pricing on its routes as a traffic
management tool. Carrier1 initially priced its IP services at a discount to its
competitors to build rapidly its customer base. Carrier1 expects to experience
declining revenue per billable minute for voice traffic and declining revenue
per Mb for IP traffic, in part as a result of increasing competition. Carrier1
believes, however, that the impact on its results of operations from such price
decreases will be at least partially offset by decreases in its cost of
providing services and increases in its voice and IP traffic volumes.
COMPETITION
The European telecommunications industry is highly competitive, and the
liberalization it is currently undergoing is rendering it increasingly more so.
The opening of the market to new telecommunications service providers, combined
with technological advances that greatly augment the transmission capacity of
circuits at a relatively small incremental cost, has resulted in significant
reductions in retail and wholesale prices for voice services. Prices declined
significantly during 1998, and Carrier1 expects prices to continue to decline.
While decreasing prices are fueling growing demand for bandwidth, they are also
narrowing
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gross profit margins on long distance voice traffic. Carrier1's ability to
compete successfully in this environment will be highly dependent on its ability
to generate high traffic volumes from its customers while keeping its costs of
services low. Prices for IP services remain relatively high in Europe. However,
the United States market for IP services has been experiencing downward pressure
on prices, and Carrier1 expects comparable price decreases in the European IP
market over the next few years as competition increases. As prices for IP
services decline, Carrier1's ability to compete successfully in the IP market
will be highly dependent on its ability to attract and retain enough customers
and keep its cost base low.
In voice services, Carrier1 has two main categories of competitors. The
first is the group of large established carriers, consisting of incumbent
telephone operators and affiliated companies, that offer a wide range of
wholesale services in addition to their retail services. This group includes
AT&T, British Telecom, the KPN Telecom/Qwest Communications International Inc.
alliance, Cable & Wireless, Global One (a joint venture of Deutsche Telekom,
France Telecom and Sprint Corp.), MCI WorldCom, Inc., Tele Danmark A/S,
Teleglobe Inc., Unisource N.V. and Telecom Italia S.P.A. The second category
comprises new entrants to the telecommunications market that provide wholesale
services. This group includes Pacific Gateway Exchange Inc., FaciliCom
International, Inc., Hermes, STAR Telecommunications, Inc., Viatel, Telegroup
Inc., and RSL Communications Ltd. Hermes owns 75% of Ebone, a large European
backbone provider.
In IP services, Carrier1's main competitors are Ebone, UUNet and Qwest
Communications International Inc., all of which have an established customer
base and either a significant European infrastructure or strong connectivity to
the United States through various peering arrangements. Carrier1 believes that,
if the quality of the service is consistently high, IP customers will typically
renew their contracts because it is costly and technically burdensome to switch
carriers.
Carrier1 is a wholesale carrier and, while it does not compete directly with
the incumbent telephone operators or other carriers for end-users, it is
entering a rapidly developing market in which companies traditionally focused on
the retail sector are beginning to sell to the wholesale market and owners of
infrastructure are beginning to provide services as well as capacity at both the
retail and wholesale level. In addition, many of Carrier1's competitors are
larger enterprises with greater financial resources than Carrier1, and
accordingly may be able to deploy more extensive networks or may be better able
to withstand pricing and other market pressures.
A number of Carrier1's competitors are devoting significant resources to the
provision of European telecommunications services to carriers and other service
providers, including through the construction of their own networks. Those
wholesale providers that own a European infrastructure will benefit from a lower
cost base than Carrier1, at least initially, and it will be essential for
Carrier1 to lower its cost base as quickly as possible to compete effectively
with them. Furthermore, those wholesale carriers that have successfully
negotiated interconnection agreements with the relevant incumbent telephone
operators or peering arrangements with other IP backbone providers, as
applicable, will also have a lower cost structure than Carrier1 and will,
therefore, be in a better position to compete on the basis of price than
Carrier1, until Carrier1 enters into such agreements. See "--Services--Wholesale
IP Service--Global Transit Service" and "Risk Factors--A failure to enter into
or maintain adequate interconnection agreements and peering arrangements could
adversely affect our business."
Carrier1 competes with a number of incumbent telephone operators. In many
European countries, the incumbent telephone operator controls access to local
networks and has significant operational economies, including a large national
network, and existing operating agreements with other incumbent telephone
operators. Moreover, incumbent telephone operators generally have close ties
with national regulatory authorities, which have, in some instances, shown
reluctance to adopt policies and grant regulatory approvals that would result in
increased competition for the local incumbent telephone operator. In addition,
many of Carrier1's non-incumbent competitors are associated with incumbent
telephone operators and such incumbents may be more likely to provide
transmission capacity on
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favorable terms and direct excess traffic to their related carriers than to
Carrier1. However, Carrier1 believes that such affiliations may be more of a
hindrance than a benefit. The incumbent telephone operators are more focused and
dependent on traditionally structured retail services, and are less responsive
to the dynamics of the wholesale market and the growth of the IP market.
Furthermore, the incumbent telephone operators are resisting the new pricing and
services rationales created by low cost alternative infrastructure and European
Commission mandated changes in interconnection tariffs as these threaten to
accelerate the collapse of traditional ARM based services which have
historically been a major source of profitability for the incumbent telephone
operators. Therefore, while the incumbent telephone operators cannot afford to
completely ignore the development of new service markets, they may perceive a
short term interest in slowing the pace of their growth, with the result of
incumbent telephone operators treating their affiliates more as competitors than
as partners.
Other factors contributing to the competitiveness of the wholesale carrier
market are:
- Basic voice carrier services are not highly differentiated, and switching
carriers is not costly. Voice customers can easily redirect their traffic
to another carrier, and certain customers may do so on the basis of even
small differences in price.
- Network buildout costs are high, creating an incentive for wholesale
carriers that have built their network to lower prices so as to increase
volume and maximize utilization rates.
- New networks are being built to provide significant additional capacity,
creating further downward pressure on prices.
Many of Carrier1's competitors, however, are also potential customers. For
example, carriers with their own infrastructure may have excess traffic that
wholesale carriers such as Carrier1 can carry. Furthermore, Carrier1 may, in
certain instances, be able to provide less expensive routing for certain
destinations and may therefore carry traffic over those particular routes. It is
customary industry practice for carriers and other telecommunications service
providers to use a number of wholesale voice service providers. Accordingly,
Carrier1 need not be a customer's sole wholesale voice carrier but may be one of
three or four selected.
GOVERNMENT REGULATION
The following discussion summarizes the material aspects of the regulatory
frameworks in certain regions in which Carrier1 currently operates or plans to
operate in the near future. This discussion is intended to provide a general
overview of the more relevant regulations and Carrier1's current regulatory
posture in the most significant jurisdictions in which Carrier1 operates and
expects to operate. It is not intended as a detailed description of the entire
regulatory framework applicable to Carrier1.
OVERVIEW
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way Carrier1 can provide
infrastructure and services to its customers. The recent steps of the European
Union to implement full liberalization, as well as the World Trade Organization
(the "WTO") Basic Telecom Agreement (the "WTO Agreement"), have significantly
reduced most if not all regulatory barriers to entry in the markets in which
Carrier1 intends to operate. However, national regulatory frameworks within the
European Union that are fully consistent with the policies and requirements of
the European Union and the WTO have only recently been, or are still being, put
in place in many member states.
Various directorates of the European Commission, including Directorate
General ("DG") XIII (telecommunications and information services) and DG IV
(competition), have had an active role in overseeing the implementation of
recently adopted European Union directives. These directorates have, on their
own initiative or upon formal or informal complaint by interested parties,
sought to ensure consistent implementation and interpretation of various key
European Union directives, including in particular those relating to licensing
and interconnection.
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The principal telecommunications operators in many European Union member
states, including in particular the United Kingdom and most Scandinavian
countries, have generally accepted market liberalization and have acted
accordingly in their dealings with new entrants. In other markets, Carrier1 and
other new entrants face less open and independent regulatory environments and
hence more protracted and difficult procedures to obtain licenses and negotiate
interconnection agreements. Carrier1 believes that the current overall
regulatory climate in the European Union is favorable to development of new
infrastructure and services by new entrants, and that potential restrictions on
its operations will become less onerous as national regulatory frameworks within
the European Union become more uniform and begin to converge with those in the
countries with fully liberalized regulatory policies such as the United States.
However, Carrier1 is unable to predict with certainty the precise impact of
regulatory requirements and restrictions on its implementation of its business
strategy or on its financial performance.
WTO AGREEMENT
The regulation of the European Union telecommunications industry is subject
to certain multilateral trade rules and regulations. Under the WTO Agreement,
concluded on February 15, 1997, 69 countries comprising more than 90% of the
global market for basic telecommunications services agreed to permit competition
from foreign carriers and adopt regulatory measures designed to protect
telecommunications providers against anticompetitive behavior by incumbent
telephone operators. In addition, 59 of these countries have subscribed to
specific pro-competitive regulatory principles.
The WTO Agreement became effective on February 5, 1997 and for most
signatory countries (including ten European Union member states) the commitments
took effect on January 1, 1998. Although there may be substantial implementation
delays, Carrier1 believes that the WTO Agreement will increase opportunities for
Carrier1 and its competitors. However, the precise scope and timing of the
implementations of the WTO Agreement remain uncertain and there can be no
assurance that the WTO Agreement will result in beneficial regulatory
liberalization.
EUROPEAN UNION
In an effort to promote competition and efficiency in the European Union
telecommunications market, the European Commission and the European Council have
in recent years issued a series of directives establishing basic principles for
the liberalization of such market. The general framework for this liberalized
environment has been set out in the European Commission's Services Directive,
adopted in 1990, and its subsequent amendments, including the Full Competition
Directive, adopted in March 1996. These directives require most European Union
member states to permit competition in all telecommunications services, and had
set January 1, 1998 as the date by which all restrictions on the provision of
telecommunications services and telecommunications infrastructure were to be
removed. These directives have been supplemented by various harmonizing
directives, including primarily the Licensing Directive and the Interconnection
Directive, adopted in 1997.
The Licensing Directive established a common framework for the granting of
authorizations and licenses related to telecommunications services. It permits
European Union member states to establish different categories of licenses for
providers of infrastructure and services, but requires the overall scheme to be
transparent and non-discriminatory. The Interconnection Directive requires
European Union member states to remove restrictions preventing negotiation of
interconnection agreements, ensure that interconnection requirements are
non-discriminatory and transparent, and ensure adequate and efficient
interconnection for public telecommunications networks and publicly available
telecommunications services. It also requires that interconnection be cost-based
and supported by a cost accounting system that telecommunications operators with
significant market power are expected to put in place under the supervision of
national regulatory agencies.
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In October 1997, the European Commission issued a consultative document
supporting the imple-
mentation of long run incremental cost ("LRIC") principles as a basis for
interconnection pricing. This document also sets forth interconnection pricing
benchmarks reflecting current interconnection agreements in European Union
member states. The European Commission believes such benchmarks should be relied
upon pending the adoption of accounting systems and interconnection rates based
on LRIC principles. These guidelines have become an important reference point in
commercial negotiations between new entrants and incumbent telephone operators.
The European Commission's consultative paper also proposes that European
Union member states permit cross-border interconnection between a national
telecommunications operator and an operator that does not have a local point of
presence and that is established and licensed in another member state on the
basis of interconnection arrangements that do not discriminate between
cross-border and national operators. Carrier1 believes that the European
Commission's stance with respect to cross-border interconnection may not be
sufficiently supported by some national regulatory agencies as it is not yet set
forth in a binding directive. Nevertheless, Carrier1 may seek cross-border
interconnection in those countries in which it does not have a point of
presence. However, there can be no assurance as to when or if Carrier1 will be
successful as no operational arrangements have been made or other steps taken to
implement cross-border interconnection.
Several European Union member states have chosen to apply the provisions of
the Interconnection Directive within their jurisdictions in such ways as to give
more favorable treatment to infrastructure providers and network operators than
to carriers and resellers that have made no infrastructure investment. Such
distinctions must be objectively justified on the grounds of the type of
interconnection provided or because of relevant licensing conditions. The
Licensing Directive does not provide a clear definition of an infrastructure
investment, and many European Union member states have adopted inconsistent
approaches with respect to the level and type of infrastructure investment
required to justify differences in interconnection charges. While Carrier1
believes that the European Commission will seek to minimize these disparities in
national interconnection policies, there can be no assurance that these
disparities can be eliminated or significantly reduced or that any such
differences in regulatory treatment will not have a material adverse effect on
Carrier1. To the extent incumbent telephone operators deny or delay granting
Carrier1 interconnection, even if only for a limited period of time, in any of
the countries in which Carrier1 has or will have points of presence, Carrier1
will be forced to terminate traffic through refile or resale agreements with
other carriers, resulting in higher costs. Furthermore, if interconnection is
not granted at the most competitive rate (i.e., the rate for operators and
infrastructure providers), Carrier1's termination costs will be higher than
those of competitors which have implemented such interconnect agreements. See
"Risk Factors--A failure to enter into or maintain adequate interconnection
agreements and peering arrangements could adversely affect our business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Operations-- Cost of Services--Voice
Termination Costs."
REGULATORY STATUS
The following discussion summarizes Carrier1's assessment of the regulatory
situation in the major markets in which it expects to operate in the next
several years.
UNITED KINGDOM. The Telecommunications Act 1984 provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The United Kingdom has already liberalized its market to meet or even exceed the
requirements of the Full Competition Directive, and most restrictions on
competition have been removed in practice as well as in law.
Carrier1 currently has been granted an international simple voice services
resale license and an international facilities license that allows it to own
indefeasible rights of use and to lay cable for international services. Carrier1
will not need any additional licenses as long as it does not connect
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end-users systems directly to its network. Carrier1 has obtained a switched
access number which has been implemented with British Telecom. This access
number enables Carrier1 to allow switchless resellers to offer switched access
services directly to their customers in the United Kingdom.
In the United Kingdom, entities with "relevant connectable systems" status
are entitled to request and receive interconnection from those operators that
have been determined to be "well established operators." British Telecom and
Kingston Communications International Ltd. have been so determined for all
services and Cable & Wireless has been so determined in respect of international
services on virtually all routes. Carrier1 currently has implemented
interconnection agreements with Cable & Wireless and British Telecom. In
addition, Carrier1 has entered into interconnection agreements with other
telecommunications operators in the United Kingdom to route traffic to locations
not directly served by Carrier1.
The current liberal regulatory climate in the United Kingdom has encouraged
the rapid development of new operators that are available to interconnect with
Carrier1 or to be served by Carrier1 as customers for its wholesale service
offerings. London, along with New York, has become one of the major
international centers for refiling of traffic among international
telecommunications service providers. Overall, Carrier1 has not encountered
significant interconnection barriers in the United Kingdom.
UNITED STATES. In June 1998, Carrier1 obtained a Section 214 authorization
to provide international telecommunications services to all locations around the
world. Carrier1 will be subject only to various reporting obligations with
respect to its current operations in the United States.
Under the terms of recent Federal Communications Commission (the "FCC")
orders relating to international settlement rates, the terms of its Section 214
authorization and the WTO Agreement, Carrier1 will be expected to settle its
international switched traffic at or below the level of the international rate
benchmarks prescribed by the FCC. It would also have to obtain prior FCC
approval to resell leased lines in any country in which it might operate with an
affiliated carrier with market power. However, Carrier1 does not expect that any
current or currently anticipated FCC regulatory requirement would materially
limit its commercial or operational flexibility.
The FCC has taken an active role in opening competition on an international
basis and has been involved in a longstanding effort to lower international
accounting rates on a world-wide basis. Although the FCC has implemented the WTO
Agreement and no longer bases its international licensing determinations
specifically on whether international markets are open on a fully reciprocal and
comparable basis to U.S. telecommunications operators, it continues to monitor
competitive developments in international markets in order to assess whether any
restrictive practices with respect to international service arrangements or
rates might have an adverse or distorting impact on competition in the U.S.
domestic telecommunications market. In addition, the FCC as well as various
executive branch agencies of the U.S. government have taken an active posture
with respect to the full implementation of market-opening commitments made in
connection with the WTO Agreement, and have from time to time taken positions
against potential restrictive regulatory practices by national regulators or
operators in the European countries in which Carrier1 intends to operate.
Carrier1 has experienced no difficulties in negotiating interconnection
agreements with U.S.-based telecommunications operators. These arrangements
permit Carrier1 to extend its services into the U.S. domestic market as well as
to terminate traffic worldwide. In addition, refiling arrangements available in
the United States can often be a very cost-effective basis for terminating
traffic in European Union markets that are not directly served by Carrier1's own
infrastructure. Depending on market conditions, such arrangements represent a
viable alternative to refiling through the United Kingdom.
GERMANY. The German Telecommunications Act of July 25, 1996 provided for
the liberalization of all telecommunications activities by January 1, 1998. The
German Telecommunications Act has been complemented by several ordinances
concerning, among other things, license fees, rate regulation,
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interconnection, universal service, frequencies and customer protection. The
German telecommunications sector is currently overseen by a new Regulatory
Authority for Telecommunications and Post that operates under the aegis of the
Ministry of Economics and has taken over the regulatory responsibilities of the
now disbanded Ministry of Post and Telecommunications.
Under the German Telecommunications Act, licenses can be issued for
different types of infrastructure as well as for the provision of services based
on transmission lines provided by other service providers. Carrier1 has been
issued a nationwide Class 4 license for the provision of voice telephony
services and a Class 3 infrastructure license to construct fiber optic cables.
Carrier1 has obtained amendments to its infrastructure licenses to authorize the
geographic extension of its network. Carrier1 does not anticipate any difficulty
in obtaining any further required amendments. On October 30, 1998, the German
regulator ruled, in a case filed by Carrier1 against Deutsche Telekom, that
Deutsche Telekom had to interconnect with Carrier1 at the two points of
interconnect requested by Carrier1 within three months after the ruling. This
ruling is currently being implemented by both parties and is based on a
condition that Carrier1 will be installing an additional 11 points of
interconnection with Deutsche Telekom when it deploys its German Network by the
end of 1999. Carrier1 recently signed an interconnection agreement with Deutsche
Telekom that adds ten points of interconnection to the 13 points that Carrier1
has already arranged. Both parties are working to implement this interconnection
agreement by the first quarter of 2000. See "--Network--Planned Network
Deployment--The German Network." In the event that Carrier1 does not install
such additional points of interconnection anticipated by the ruling and
Carrier1's business plans, the pricing of its interconnection arrangements with
Deutsche Telekom may have to be renegotiated. There can be no assurance that any
new pricing terms would be as favorable to Carrier1 as those provided by the
ruling. Furthermore, the German regulator recently concluded a public
consultation indicating that Deutsche Telekom may charge a higher interconnect
rate to those operators who only interconnect at one point of interconnect. This
conclusion, however, still needs to be implemented into law.
Carrier1 has initiated discussions with Deutsche Telekom relating to the
installments of its points of interconnection. Though Carrier1 believes that
these discussions are generally proceeding in a satisfactory fashion, there have
been a number of disputes over the availability, and timing of delivery, of
interconnection capabilities requested by Carrier1. Though Carrier1 intends to
pursue such disputes with Deutsche Telekom and the German regulator, it does not
currently anticipate that there is likely to be any significant adverse impact
on its plans to provide service in Germany in accordance with its business
plans. Carrier1 has obtained a switched access number and has implemented it
with Deutsche Telekom. This access number enables Carrier1 to allow switchless
resellers to offer switched access services directly to their customers in
Germany.
FRANCE. In July 1996, legislation was enacted providing for the
liberalization of all telecommunications activities in France by January 1,
1998. The establishment and operation of public telecommunications networks and
the provision of voice telephony services are subject to individual licenses
granted by the Minister in charge of telecommunications upon recommendation of
the Autorite de Regulation des Telecommunications ("ART"), France's new
independent regulatory agency.
Carrier1 has been confirmed to receive an L-33.1 license (governing public
telecommunications network operators) and an L-34.1 license (governing voice
telephony providers). The interconnection tariffs of France Telecom, which have
been officially approved by the ART, provide substantially more favorable
interconnection rates for public telecommunications network operators than for
voice telephony providers. Telephony providers are charged interconnection rates
that can be as much as 30% higher than rates charged to public
telecommunications network operators. An L-34.1 license allows an operator to
terminate traffic nationwide via interconnect only if it connects in all 18
interconnect regions, whereas an L-33.1 license allows an operator to terminate
traffic nationwide via interconnect at only one point.
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The ART and other French regulatory authorities have not published precise
guidelines concerning what type of infrastructure investment is required as a
basis for grant of an L-33.1 infrastructure license. In recent decisions L-33.1
licenses have been granted to operators that owned or planned to own switches
and to acquire dark fiber, without laying down cables themselves. Carrier1 plans
to make a comparable investment in France, and thus it expects to be granted
both L-33.1 and L-34.1 licenses. Failure by Carrier1 to obtain an L-33.1 license
could impede its ability to achieve a reasonable, cost-efficient interconnection
arrangement with France Telecom, which in turn could have a material adverse
effect on Carrier1's ability to provide terminating services into and through
France on a cost-effective basis.
Carrier1 believes that the dual pricing system engaged in by France Telecom
is discriminatory and not founded on a cost-based differentiation and thus
violates the terms of the WTO Agreement as well as provisions of various
relevant European Union directives. Nevertheless, any process initiated by
Carrier1 against France Telecom's practices with the European Union or the WTO,
even if successful, might well be costly and time consuming, and Carrier1 is not
able to predict with certainty the timing and eventual resolution of any legal
challenge over interconnection rates.
Carrier1 initiated interconnection negotiations with France Telecom in early
1999. In a recent decision, ART has ruled that interconnection agreements have
to be implemented within nine months after start of negotiations and that
negotiations can start after the application for a license has been submitted,
but before a license has been granted. The interconnection agreement, however,
can only be implemented after grant of the license.
In France, the ART implements an extra charge (cost per minute) to finance
the cost of a universal service fund. The total amount of this universal service
fund was $1 billion for 1998 and has been challenged by new entrants in the
French market, who have filed a complaint with DG IV, the European Union's
competition directorate. Carrier1 is unable to estimate at this time the impact
of the proposed universal service program if implemented on its operating
margins. Carrier1 intends to apply to the French regulator to obtain a switched
access number in order to enable Carrier1 to allow switchless resellers to offer
switched access services directly to their customers in France.
BELGIUM. In December 1997, the Belgian parliament provided for full
liberalization of the provision of telecommunications services. The
Telecommunications Act and secondary legislation are not yet complete.
Under the current licensing scheme, applicants for a telecommunications
network operator license such as Carrier1 must agree to make a minimum amount of
infrastructure investment or install a minimum amount of fiber optic capacity
within three years, as well as make a contribution to the advancement of
technological processes by investing an amount equal to 1% of net revenue to
fund research and development activities. Carrier1 has filed an application to
become a network operator with respect to which regulatory action by the Belgian
national regulator, the Belgian Institute for Postal Services and
Telecommunications ("BIPT"), is expected by July 1999. As Carrier1 plans to
acquire dark fiber in Belgium, it expects to be granted an infrastructure
license.
Carrier1 has initiated interconnection negotiations with Belgacom S.A.,
Belgium's incumbent telephone operator. The interconnection tariffs of Belgacom
provide more favorable rates for infrastructure providers and network operators
than for switch-based carriers and resellers. Carrier1 expects to qualify for
these more favorable rates. However, the outcome of Carrier1's efforts with
respect to its interconnection arrangements may depend in part upon
deliberations concerning the requirements for a network operator license as well
as ongoing Belgian regulatory determinations.
The Belgian telecommunications law also provided for the establishment of a
universal service fund, to be managed by BIPT, to which operators would be
required to contribute in proportion to their revenues from the Belgian market.
However, the fund is not to be activated before the year 2000, by which time the
BIPT is required to determine the aggregate payment to support universal
service. Carrier1 is
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unable to estimate at this time the impact of any potential universal service
payments on the overall cost of terminating its customers' calls in Belgium.
ITALY. In 1997, Italian authorities enacted a legislative framework for the
full liberalization of telecommunications services by January 1, 1998. This
framework has yet to be implemented by a number of necessary decrees. Major
uncertainties remain with regard to the rules applicable to interconnection. No
assurance can be provided as to the timing or manner in which Carrier1 will be
able to benefit from full liberalization in Italy. Carrier1 has obtained both
infrastructure and service licenses.
In August 1998, Telecom Italia published its Reference Interconnect Offer
(the "RIO"), which has been amended recently due to decisions by the Italian
regulator. The RIO now allows interconnection at one point of interconnect and
brought interconnection rates down to a level much closer to the European Union
benchmarks. Carrier1 has signed an interconnection agreement with Telecom
Italia.
In Italy, providers of network infrastructure and switched voice services as
well as national mobile operators must contribute to a universal service fund.
Such a requirement is to take effect in 1999 provided that Telecom Italia can
demonstrate on the basis of audited reports that its universal service
obligations impose on it net losses. Even in these circumstances, the Italian
regulator can exempt new entrants from an obligation to contribute to such a
universal service fund. Both the Italian competition agency and the European
Commission are likely to recommend such an exemption scheme to the Italian
regulator. However, Carrier1 cannot assess at this time any possible impact of
any such universal service obligations on its operating margins.
THE NETHERLANDS. The Netherlands liberalized voice telephony in July 1997.
Legislation to implement the requirements of the Full Competition Directive has
been enacted.
Carrier1 has obtained the necessary authorization to provide in The
Netherlands the services included in its business plans. Though Carrier1 is
entitled under its authorization to acquire existing dark fiber transmission
capacity, it would be required to obtain additional authorization to obtain
rights of way and construct its own infrastructure. In addition, it may also be
required to obtain additional approvals in the event that it were to decide to
market services to end users directly connected to Carrier1's network rather
than provide services on a wholesale basis as currently anticipated. However,
Carrier1 does not expect that there would be any significant difficulty in
obtaining such approvals.
Carrier1 has implemented an interconnection agreement with KPN Telecom and
it has obtained a switched access number from the Dutch regulator.
SWITZERLAND. A new Telecommunications Act went into effect on January 1,
1998, together with ordinances containing more detailed regulations covering
telecommunications services, frequency management, numbering, terminal equipment
and license fees. The new Telecommunications Act provides for liberalization of
the Swiss telecommunication market as of January 1, 1998.
Carrier1 has obtained the necessary authorization to provide services in
Switzerland. Although Switzerland is not a member of the European Union and
accordingly European Union directives do not apply, the Swiss regulatory agency,
Bakom, generally follows European Union policies and directives. Switzerland is
a party to the WTO Agreement as well, and Carrier1 expects that the national
regulatory body will follow the general principles and policies embedded in the
WTO Agreement.
Carrier1 signed an interconnection agreement with Swisscom which has been
implemented, and it has obtained a switched access number.
AUSTRIA. A new Telecommunications Act came into effect on January, 1, 1998,
together with ordinances providing more detailed regulations on
telecommunications services, interconnection and numbering. Carrier1 obtained
the necessary licenses in Austria.
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The interconnection rules provide for cost-based interconnection rates for
every licenseholder, without distinction between infrastructure owners and
resellers. Carrier1 signed an interconnection agreement with PTA (the Austrian
incumbent telephone operator) which has been implemented. It has also obtained a
switched access number from the Austrian regulator.
SPAIN. The Spanish government implemented the full liberalization of public
switched telephone services on December 1, 1998. Prior to full liberalization, a
second telecommunications operator was authorized to compete with Telefonica de
Espana, S.A., and a third national voice telephony license was granted in May
1998. Cable television operators are expected to apply for licenses to provide
voice telephony services. In addition, a third license for a mobile
telecommunications operator was granted in June 1998. Carrier1 expects to be
able to provide services on a wholesale basis to these newly authorized
operators.
Carrier1 expects to file an application to provide infrastructure and
services in Spain in the first half of 1999. It will need a license and an
interconnection agreement by early 2000 when it plans to install a point of
presence in Spain.
SWEDEN, DENMARK, FINLAND, NORWAY, AND IRELAND. Carrier1 is or may be
planning to provide services in a number of countries including Sweden, Denmark,
Finland, Norway, and Ireland which have adopted a liberal approach to
authorizing new service providers.
In Norway, new service providers must register with the national regulator,
and in Finland and Sweden, a similar notification procedure is required to
authorize new service providers. In Denmark, services and infrastructure can be
provided by new entrants on the basis of a class license requiring no
registration, notification, or prior approval procedures involving the national
regulator. Carrier1 has complied with the applicable procedures in each of these
countries.
Carrier1 has entered into interconnection agreements with Tele Danmark in
Denmark and Telia in Sweden, but has not yet opened discussions with the main
national operators in Finland and Norway. In all of the above-mentioned
countries, it expects that interconnection arrangements will be implemented when
its points of presence become operational in these countries. Carrier1 has
obtained a switched access number in Finland, and it has applied for such
numbers in Sweden, Denmark and Norway.
Any new service provider must obtain a license to provide services in
Ireland. Carrier1 has received such a license. Carrier1 expects that an
interconnection agreement with Telecom Eireann will be implemented when its
point of presence in Dublin is operational.
OTHER COUNTRIES. Carrier1 will also be able to provide service through
direct operating agreements with correspondent telecommunications operators in
countries where it has not been directly authorized to provide services. As a
consequence of its having obtained the status of a recognized operator agency
under the rules of the International Telecommunications Union, Carrier1 will
negotiate such correspondent agreements with foreign telecommunications
operators in circumstances where such agreements will result in lower
termination costs than might be possible through refile arrangements. See
"--Network--Existing and Planned Traffic Termination Agreements."
EMPLOYEES
As of December 31, 1998, and March 31, 1999, Carrier1 employed 53 and 73
people, respectively. None of Carrier1's employees is represented by a labor
union or covered by a collective bargaining agreement. Carrier1 believes that
relations with its employees are good.
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PROPERTIES
Carrier1 leases certain office and other space under operating leases and
subleases that expire at various dates, including a lease of Carrier1
International GmbH's 762 square meter headquarters in Zurich, Switzerland, which
expires in 2003.
Carrier1's aggregate rent expense was $1,097,000 for the period from
Inception to December 31, 1998.
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 operations.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
Carrier1 International is a societe anonyme organized under the laws of the
Grand Duchy of Luxembourg. Carrier1 International is a holding company that
conducts its operations primarily through other European companies. In addition,
certain members of Carrier1's board, all of its executive officers and certain
of the experts named herein are residents of countries other than the United
States. A substantial portion of Carrier1's assets and the assets of such
non-resident persons are located outside the United States. As a result, it may
not be possible for investors to:
- effect service of process within the United States upon Carrier1 or such
persons; or
- enforce against Carrier1 or such persons in U.S. courts judgments obtained
in such courts predicated upon civil liability provisions of the federal
securities laws of the United States.
There is doubt as to whether the courts of Luxembourg would recognize
jurisdiction of the U.S. courts in respect of judgments obtained in those courts
in actions against Carrier1 or such directors and officers, as well as certain
of the experts named herein, and as to whether Luxembourg courts would enforce
judgments of U.S. courts predicated upon the civil liability provisions of the
U.S. federal or state securities laws. There is also doubt as to whether
Luxembourg courts would admit original actions brought under the U.S. securities
laws. In addition, certain remedies available under the U.S. federal or state
laws may not be admitted or enforced by Luxembourg courts on the basis of being
contrary to Luxembourg's public policy. Carrier1 cannot assure investors that
they will be able to enforce any judgment against it, certain members of its
board, its executive officers or certain of the experts named herein, including
judgments under the U.S. securities laws.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and other key employees of Carrier1 as of December
31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CARRIER1
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Stig Johansson....................................... 56 Chief Executive Officer, President of Carrier1 and
Director of Carrier1 International
Eugene A. Rizzo...................................... 47 Vice President, Sales and Marketing
Terje Nordahl........................................ 51 Chief Operating Officer
Joachim W. Bauer..................................... 54 Chief Financial Officer
Kees van Ophem....................................... 36 Vice President, Purchase and General Counsel
Neil E. Craven....................................... 30 Vice President, Business Development
Phil Poulter......................................... 48 Managing Director of Sales, United Kingdom and
Ireland
Edward A. Gross...................................... 40 Managing Director of Sales, Germany, Austria and
Switzerland
Isabelle Russier..................................... 34 Managing Director of Sales, France
Marcus J. Gauw....................................... 38 Managing Director of Sales, Internet
Gustav Schaefer...................................... 43 Managing Director of Sales, Benelux
Carlos Colina........................................ 46 Manager, Carrier Sales--North America
Rick Mikolajczuk..................................... 49 Project Director, Network Build
Glenn M. Creamer..................................... 36 Director of Carrier1 International
Jonathan E. Dick..................................... 40 Director of Carrier1 International
Mark A. Pelson....................................... 36 Director of Carrier1 International
Victor A. Pelson..................................... 61 Director of Carrier1 International
Thomas J. Wynne...................................... 58 Director of Carrier1 International
</TABLE>
STIG JOHANSSON has served as a director of Carrier1 International since
August 1998 and as Carrier1's Chief Executive Officer and President since March
1998 and has more than 30 years of experience in the telecommunications
industry. Prior to founding Carrier1, Mr. Johansson was President of Unisource
Carrier Services AG ("Unisource Carrier Services") from September 1996 until
February 1998, where he was responsible for transforming Unisource Carrier
Services from a network development and planning company into a fully
commercial, wholesale carrier of international traffic. Mr. Johansson was a
member of Unisource N.V.'s supervisory board from 1992 until 1996. Prior to
joining Unisource Carrier Services, Mr. Johansson worked for Telia AB ("Telia"),
the Swedish incumbent telephone operator, where he was most recently Executive
Vice President. During his 26 years at Telia, Mr. Johansson held a variety of
positions. He began in 1970 working in engineering operations and rose to head
of strategic network planning (1977), general manager of the Norrkoping Telecom
region (1978), head of CPE-business division (1980), executive vice president
and marketing director of Televerkit/Telia AB (1984) and Executive Vice
President responsible for Telia's start-up operations in the Nordic countries
and the United Kingdom (1995). He was a member of Telia's corporate management
board from 1985 to 1996. Mr. Johansson holds a Master's degree in Business
Economics from Hermods Institut, Sweden and a degree of Engineer of
Telecommunications from Lulea College, and he completed a senior executive
business course at IMD in Lausanne, Switzerland. He is a citizen of Sweden.
EUGENE A. RIZZO has served as Carrier1's Vice President, Sales and Marketing
since March 1998 and has over 21 years of experience in international sales and
marketing and 10 years of experience in the telecommunications industry. From
1993 to 1998, Mr. Rizzo managed sales and marketing groups for several
affiliates of Unisource NV, including Unisource Carrier Services and
AT&T-Unisource
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Communications Services ("AT&T-Unisource"), an international joint venture
between AT&T Corp. ("AT&T") and Unisource NV. Prior to joining Unisource, Mr.
Rizzo held various marketing and management positions with International
Business Machines Corporation ("IBM"), Wang Laboratories, Inc. and Tandem
Computers Inc. ("Tandem"). While at Tandem, Mr. Rizzo assisted in the start-up
of Tandem's European Telco Group. Mr. Rizzo holds a Master of Business
Administration degree from the University of Massachusetts. He is a citizen of
the United States.
TERJE NORDAHL has served as Carrier1's Chief Operating Officer since March
1998 and has 25 years of experience in telecommunications operations. Mr.
Nordahl also has extensive experience in the computer and data industry. As a
Managing Director at Unisource Business Networks BV ("Unisource Business
Networks") from 1997 to 1998, he established and built the Unisource Business
Data Network in Norway. From 1995 to 1997, Mr. Nordahl was President of Telia AS
(Norway), Telia's subsidiary in Norway, where he supervised the building of an
ATM backbone network with integrated voice and data services. Mr. Nordahl worked
closely with Nortel on this project. From 1993 to 1995, Mr. Nordahl established
and operated Creative Technology Management AS ("CTM"), which provided business
development services for government and industrial organizations. Prior to
establishing CTM, Mr. Nordahl held engineering, development and marketing
positions with various companies, including IBM and telecommunications companies
affiliated with Ericsson (L.M.) Telephone Co. and ITT Corp. Mr. Nordahl holds a
Bachelor of Science degree from Heriot-Watt University, Edinburgh and has
completed the INSEAD Advanced Management Program. He is a citizen of Norway.
JOACHIM W. BAUER has served as Carrier1's Chief Financial Officer since
March 1998 and has five years of experience in the telecommunications industry.
From 1994 to 1998, Mr. Bauer served as Chief Financial Officer of Unisource
Carrier Services. Before joining Unisource Carrier Services, Mr. Bauer held
various management positions with IBM and its affiliates, including Controller
of IBM (Switzerland). Mr. Bauer graduated from a commercial school in Zurich,
was educated at IMEDE business school, Lausanne, Switzerland, and completed the
senior executive program of the Swiss Executive School (SKU). Mr. Bauer holds a
Certified Diploma in Accounting and Finance (CPA). He is a citizen of Germany.
KEES VAN OPHEM has served as Carrier1's Vice President, Purchase and General
Counsel since March 1998, with responsibility for interconnection, licensing and
legal affairs. Mr. van Ophem has seven years of experience in the
telecommunications industry. Prior to joining Carrier1, he was Vice President
Purchase and General Counsel for Unisource Carrier Services from 1994 to 1998
and was on its management board from its inception in early 1994. From 1992 to
1994 Mr. van Ophem served as legal counsel to Royal PTT Nederland NV (KPN)
("KPN"), with responsibility for the legal aspects of its start-up ventures in
Hungary, Bulgaria, Czech Republic and Ukraine and the formation of Unisource
Carrier Services. Prior to joining KPN, Mr. van Ophem worked at law firms in
Europe and the United States. Mr. van Ophem holds a Juris Doctorate degree from
the University of Amsterdam and, as a Fulbright scholar, a Master of Laws degree
in International Legal Studies from New York University. He is a citizen of The
Netherlands.
NEIL E. CRAVEN has served as Carrier1's Vice President, Business Development
since March 1998 and has five years of experience in the telecommunications
industry. From 1995 to 1998, Mr. Craven was a member of the management team at
Unisource Carrier Services, initially responsible for Corporate Strategy and
Planning and later serving as Vice President of Business Development. Prior to
joining Unisource Carrier Services, Mr. Craven was employed by Siemens AG in
Germany, where he worked on various international infrastructure projects. Mr.
Craven has an Honors degree in Computer Engineering from Trinity College, Dublin
and a Master of Business Administration degree from the Rotterdam School of
Management. He is a citizen of Ireland.
PHILIP POULTER has served as Carrier1's Managing Director of Sales, United
Kingdom and Ireland since June 1998 and has over 30 years of experience in the
telecommunications industry. Prior to joining Carrier1, Mr. Poulter was
Operations Director of ACC Long Distance UK Ltd. ("ACC"), a switch-based
provider of telecommunications services, from December 1997 to June 1998. From
March 1997 to
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December 1997, Mr. Poulter served as Network & Carrier Services Director of ACC.
From August 1996 to March 1997, Mr. Poulter was Managing Director of Nelcraft
Services Ltd., a provider of installation and maintenance services relating to
the cable television and telecommunications industries. From March 1995 to
August 1996, Mr. Poulter served as Carrier Manager of ACC. From 1993 to 1995,
Mr. Poulter was employed as Sales Director for Business Communication for
Videotron Corporation Ltd. ("Videotron"), a U.K. provider of cable television
and telephony services. Prior to joining Videotron, Mr. Poulter held various
management, sales and engineering positions, including more than fifteen years
of experience in designing and implementing telecommunications switching and
transmission systems for British Telecom. Mr. Poulter is a director of Carrier1
UK Ltd., a subsidiary of Carrier1 International. Mr. Poulter has a Final
Certificate in Electronics and Communications from the London C & G Institute.
He is a citizen of the United Kingdom.
EDWARD A. GROSS has served as Carrier1's Managing Director of Sales,
Germany, Austria and Switzerland since May 1998 and has over 20 years of
experience in the telecommunications and networking industries. Prior to joining
Carrier1, Mr. Gross served as Sales Director, Germany for Unisource Carrier
Services from December 1996 to May 1998. From March 1996 to December 1996, Mr.
Gross served as Director of Customer Services Engineering--Central Europe for
AT&T-Unisource. From 1992 to 1996, Mr. Gross was a member of the management team
at Unisource Business Networks, where he was responsible for the start-up of
operations in Germany and Austria and subsequently served as Director of
Customer Services. Prior to joining Unisource Business Networks, Mr. Gross was
employed by Unisys Corporation for more than 12 years, during which time he held
various positions in network support and software development, primarily in
Germany as well as South Korea and the United States. Mr. Gross holds a Bachelor
of Science degree in Management Studies from the University of Maryland and has
completed the Accelerated Development Program at London Business School. He is a
citizen of the United States.
ISABELLE RUSSIER has served as Carrier1's Managing Director of Sales, France
since August 1998 and has three years of experience in the telecommunications
industry. From November 1997 to July 1998, Ms. Russier was employed in London by
ACC, where she handled various projects in its Business Development Europe
Division. From December 1995 to October 1997, Ms. Russier was employed in France
as General Manager of sales for UNIFI Communications, Inc., a U.S.-based
telecommunications value-added service provider. From 1992 to 1995, she worked
for Apple Computer, Inc., most recently as a Regional Sales Director, and from
1987 to 1992, she was employed by Intel Corp. in a variety of sales positions.
Ms. Russier holds an Engineering degree in Microelectronics and a European
Master of Business Administration degree (ISA) from the HEC School of
Management. She is a citizen of France.
MARCUS J. GAUW has served as Carrier1's Managing Director of Sales, Internet
since May 1998 and has 13 years of experience in the telecommunications
industry. From 1996 to 1998, Mr. Gauw served as Sales Manager for Internet
Transit Services at AT&T-Unisource, and from 1994 to 1996, he served as Sales
Manager, Voice Services at AT&T-Unisource. From 1992 to 1994, Mr. Gauw was a
Senior Sales Consultant for Unisource Business Networks. Prior to joining
Unisource Business Networks, Mr. Gauw was employed by KPN for approximately
seven years, during which time he held various positions in sales and marketing.
Mr. Gauw holds a Bachelor's degree in Telecommunications and Electronics from
Hogere Technische School, Alkmaar, The Netherlands. He is a citizen of The
Netherlands.
GUSTAV SCHAEFER has served as Carrier1's Managing Director of Sales, Benelux
since September 1998 and has over nine years of experience in the
telecommunications industry. From 1995 to 1998, Mr. Schaefer was employed by
Unisource Carrier Services, where he contributed to the development of the
service provider market. Prior to joining Unisource Carrier Services, Mr.
Schaefer was employed by KPN, where he served as a sales consultant and later
developed and implemented KPN's Call Center business solutions. Mr. Schaefer
received a Master's degree in Physics from Delft Technical University. He is a
citizen of The Netherlands.
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<PAGE>
CARLOS COLINA has served as Carrier1's Manager, Carrier Sales--North America
since September 1998 and has over 23 years of experience in the
telecommunications industry. Prior to joining Carrier1, Mr. Colina handled
various sales and marketing assignments with AT&T, including responsibility for
directing AT&T's efforts in the assessment and analysis of the international
business switched services marketplace from 1993 to 1998. Mr. Colina has
extensive training in voice and data communications and holds a Bachelor's
degree in Information Sciences from Fordham University. He also has completed
the Wharton School of Business/AT&T business education program. He is a citizen
of the United States.
RICK MIKOLAJCZUK has served as Project Director, Network Build for Carrier1
since November 1998 and has over 28 years of experience in the
telecommunications industry. Prior to joining Carrier1, Mr. Mikolajczuk was an
Engineering Manager for Telewest Communications PLC ("Telewest"), a provider of
cable television and telephony services to businesses and residences in the
United Kingdom, where he was responsible for engineering Telewest's National
Network from its design stage in early 1997 through to completion in October
1998. From 1971 to 1996, Mr. Mikolajczuk was employed by British Telecom, where
he gained extensive experience in duct, cable and transmission planning,
external operations and quality management. Mr. Mikolajczuk holds an Engineering
degree in Electronics from the University of Liverpool. He is a citizen of the
United Kingdom.
GLENN M. CREAMER has served as a director of Carrier1 International since
August 1998. Mr. Creamer has been a Managing Director of Providence Equity
Partners Inc. since its inception in 1996 and is also a General Partner of
Providence Ventures L.P., which was formed in 1991. Mr. Creamer is also a Vice
President of Narragansett Capital Inc., which he joined in 1988. Mr. Creamer is
a director of American Cellular Corporation, Celpage, Inc., Epoch Networks, Inc.
and Wireless One Network L.P. Mr. Creamer received a Bachelor of Arts degree
from Brown University and a Master of Business Administration degree from the
Harvard Graduate School of Business Administration. He is a citizen of the
United States.
JONATHAN E. DICK has served as a director of Carrier1 International since
August 1998. Mr. Dick has been a Managing Director of Primus Venture Partners,
Inc. since December 1993. Prior to joining Primus in June 1991, Mr. Dick held
various positions in sales management at Lotus Development Corporation. Mr. Dick
is also a director of PlanSoft Inc. Mr. Dick received a Bachelor of Science
degree in Applied Mathematics and Economics from Brown University and a Master
of Business Administration degree from the Harvard Graduate School of Business
Administration. He is a citizen of the United States.
MARK A. PELSON has served as a director of Carrier1 International since
August 1998. Mr. Pelson is a Principal of Providence Equity Partners Inc., which
he joined in August 1996. Prior to 1996, Mr. Pelson was a co-founder and
director, from 1995 to 1996, of TeleCorp., Inc., a wireless telecommunications
company, and from 1989 to 1995 served in various management positions with AT&T,
including most recently as a general manager of strategic planning and mergers
and acquisitions. Mr. Pelson is a director of American Cellular Corporation,
Madison River Telephone Company, L.L.C. and Wired Ventures Inc. Mr. Pelson
received a Bachelor of Arts degree from Cornell University and a Juris Doctorate
from Boston University. Mr. Pelson is the son of Victor A. Pelson. He is a
citizen of the United States.
VICTOR A. PELSON has served as a director of Carrier1 International since
January 1999. Mr. Pelson is a Senior Advisor to Warburg Dillon Read LLC., an
investment banking firm. He was a Director and Senior Advisor of Dillon, Read &
Co. Inc. at the time of its merger in 1997 with SBC Warburg. Before joining
Dillon, Read in April 1996, Mr. Pelson was associated with AT&T from 1959 to
March 1996, where he held a number of executive positions, including Group
Executive and President responsible for the Communications Services Group,
Executive Vice President and member of the Management Executive Committee. At
his retirement from AT&T, Mr. Pelson was Chairman of Global Operations (for what
is now AT&T, Lucent Technologies and NCR) and a member of the Board of
Directors. Mr. Pelson is also chairman of the board of trustees of New Jersey
Institute of Technology and a director of Eaton Corporation and United Parcel
Service of America, Inc. Mr. Pelson received a Bachelor of Science degree in
Mechanical Engineering from New Jersey Institute of Technology and a Master of
Business
80
<PAGE>
Administration degree from New York University. Mr. Pelson is the father of Mark
A. Pelson. He is a citizen of the United States.
THOMAS J. WYNNE has served as a director of Carrier1 International since
January 1999. Mr. Wynne is currently a partner with Sycamore Creek Development
Co. He was President and Chief Operating Officer of LCI International Inc. and
its subsidiaries from July 1991 to October 1997. From 1977 to 1991, Mr. Wynne
held several executive positions with MCI Communications Corp., including
President of the West Division, Vice President of Sales and Marketing for the
Mid-Atlantic Division, and Vice President in the Midwest Division. Mr. Wynne is
also a director of Advanced Radio Telecom Corp. Mr. Wynne holds a Bachelor of
Science degree in Political Science from St. Joseph's University. He is a
citizen of the United States.
BOARD OF DIRECTORS
The general affairs and business of Carrier1 International are managed by
the Board of Directors (the "Board"). Carrier1 International's Articles of
Incorporation (the "Articles") provide for at least three directors appointed by
a general meeting of shareholders for terms no greater than six years. Under the
Articles, the number and terms of directors are to be determined, and each
director may be reelected or removed at any time, by a general meeting of
shareholders. Directors are not required to hold any shares in Carrier1
International by way of qualification. Carrier1 International is bound by the
joint signature of two directors or the sole signature of a managing director
for ordinary course management decisions, if one has been appointed by the
Board. Carrier1 International currently has six directors and has no persons
appointed as corporate officers.
COMMITTEES OF THE BOARD OF DIRECTORS
Carrier1 International currently does not have any Board committees.
COMPENSATION OF DIRECTORS
Carrier1 International will reimburse the members of the Board for their
reasonable out-of-pocket expenses incurred in connection with attending Board
meetings. Additionally Carrier1 International expects to maintain directors' and
officers' liability insurance. Members of the Board receive no other
compensation for services provided as a Director.
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<PAGE>
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to, the Chief Executive
Officer and the other four most highly compensated executive officers of
Carrier1 during the period from March 4, 1998 through December 31, 1998.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
SHORT TERM MAXIMUM NUMBER OF
COMPENSATION SECURITIES ALL OTHER
---------------------- UNDERLYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION PERIOD SALARY(B) BONUS (A) (B)(C)
- ----------------------------------------- --------- ----------- ----------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Stig Johansson........................... March-
President and Chief Executive Officer December
1998 $ 245,569 $ 46,044 711,111 $ 61,738
Gene Rizzo............................... March-
Vice President, Sales and Marketing December
1998 173,343 32,502 711,111 49,436
Terje Nordahl............................ April-
Chief Operating Officer December
1998 135,207 25,352 355,555 44,217
March-
Joachim W. Bauer.........................
Chief Financial Officer December
1998 150,230 28,168 711,111 56,980
Kees van Ophem........................... March-
Vice-President, Purchase and General
Counsel December
1998 150,230 28,168 711,111 36,944
</TABLE>
- ------------------------
(a) During the period from March 4, 1998 through December 31, 1998, these
individuals held options in Carrier One, LLC, which in turn held
substantially all of the equity of Carrier1. Purchases of interests in the
LLC by employees of Carrier1 were capped at a contractual amount, which is
the amount set forth under "Long Term Compensation" above or, if lower, the
employee's portion of the overall amount available for options to employees
under the plan. That overall amount was capped at 11.1% of outstanding LLC
interests. Pursuant to a restructuring of Carrier1's management equity,
these options for LLC interests have been cancelled and equivalent options
for shares of Carrier1 International common stock have been issued in their
place. The economic terms of these new options are substantially the same as
the terms of the LLC options. The table assumes that the maximum number of
Class A Units would be purchased by such purchasers.
(b) Carrier1 records this compensation expense in Swiss Francs. The U.S. dollar
amounts shown were calculated using an average exchange rate for the period
of March 4, 1998 through December 31, 1998 of $0.69337 to SFr1.
(c) Consists of business expenses and contributions under a pension plan for its
executive officers paid by Carrier1 International GmbH, a wholly owned
subsidiary of Carrier1 International. Business expenses consist of car and
travel expenses in the following amounts (in thousands):
<TABLE>
<S> <C>
Stig Johansson....................................................... $ 22.2
Gene Rizzo........................................................... 22.2
Terje Nordahl........................................................ 20.0
Joachim Bauer........................................................ 22.2
Kees van Ophem....................................................... 22.2
</TABLE>
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<PAGE>
STOCK OPTION GRANTS AND FISCAL YEAR-END VALUES
The following tables set forth information regarding grants of options to
purchase Class A Units in Carrier One, LLC (the "LLC") and the fiscal year-end
value of such options, which were granted to the executive officers listed in
the Summary Compensation Table above pursuant to the 1998 Option Plan. During
that time, the LLC held substantially all of the equity of Carrier1
International. Pursuant to a restructuring of Carrier1's management equity,
these options for LLC interests have been cancelled and equivalent options for
shares of Carrier1 International common stock have been issued in their place.
The economic terms of these new options are substantially the same as the terms
of the LLC options.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
MAXIMUM PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS PRESENT VALUE
UNDERLYING GRANTED TO EXERCISE AT DATE OF
OPTIONS EMPLOYEES PRICE GRANT
NAME GRANTED(A) IN 1998 ($/SHARE) EXPIRATION DATE ($/OPTION)(B)
- -------------------------------------------- ----------- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Stig Johansson.............................. 711,111 17.6% $ 1.00 March 4, 2008 $ 0.15
Gene Rizzo.................................. 711,111 17.6 1.00 March 4, 2008 0.15
Terje Nordahl............................... 355,555 8.8 1.00 March 4, 2008 0.15
Joachim W. Bauer............................ 711,111 17.6 1.00 March 4, 2008 0.15
Kees van Ophem.............................. 711,111 17.6 1.00 March 4, 2008 0.15
</TABLE>
- ------------------------
(a) During the period from March 4, 1998 through December 31, 1998, these
individuals held options in Carrier One, LLC, which in turn held
substantially all of the equity of Carrier1. Purchases of interests in the
LLC by employees of Carrier1 were capped at a contractual amount, which is
the amount set forth above or, if lower, the employee's portion of the
overall amount available for options to employees under the plan. That
overall amount was capped at 11.1% of outstanding LLC interests.
(b) The fair value of option grants is estimated on the date of grant using the
minimum value option-pricing model, as allowed under SFAS 123 for nonpublic
companies, for pro-forma footnote purposes with the following assumptions
used: dividend yield of 0%, risk-free interest rate of 5.53%, and expected
option life of 5 years.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(A)
LLC UNITS ----------------- --------------------
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------------- ------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Stig Johansson.............................. 0 $ 0 --/711,111 $ --/--
Gene Rizzo.................................. 0 0 --/711,111 --/--
Terge Nordahl............................... 0 0 --/355,555 --/--
Joachim W. Bauer............................ 0 0 --/711,111 --/--
Kees van Ophem.............................. 0 0 --/711,111 --/--
</TABLE>
- ------------------------
(a) No options were in-the-money on December 31, 1998.
Under the 1998 Option Plan, the LLC authorized the issuance of options for
up to 4,444,444 Class A Units, of which options for 4,044,442 underlying Class A
Units were granted. These options have been
83
<PAGE>
cancelled in exchange for the grant of new options to acquire shares of Carrier1
International's common stock. See "Certain Relationships and Related
Transactions--Equity Investor Agreements--Securities Purchase and Cancellation
Agreement."
Carrier1 has authorized the issuance of options for up to 2,222,222 shares
of Carrier1 International's common stock pursuant to the 1999 Share Option Plan,
of which Carrier1 has granted 2,110,968 options to its employees and anticipates
granting a further 75,000 options to its employees in the near term. Carrier1
has also issued options to acquire 20,000 shares to each of Messrs. Wynne and
Pelson outside the scope of the 1999 Option Plan. See "Certain Relationships and
Related Transactions--Equity Investor Agreements--1999 Share Option Plan."
EMPLOYMENT AGREEMENTS
Each of Stig Johansson, Eugene A. Rizzo, Terje Nordahl, Joachim Bauer and
Kees van Ophem (the "Executives") has entered into an employment agreement with
a wholly owned subsidiary of Carrier1 International. Such agreements include,
among others, the following terms:
TERM. The employment agreements may be terminated by either party after
August 31, 1999, upon six months' notice.
NONDISCLOSURE, NONCOMPETITION AND NONSOLICITATION COVENANTS. Each Executive
has agreed that during his period of employment and the eighteen months
thereafter (the "Non-Compete Period") he or she will refrain from disclosing
confidential information and will not participate in any business that is
engaged in the provision of international long distance telecommunications
services or that is otherwise in competition with any business conducted by the
LLC or its subsidiaries. Additionally, each Executive has agreed that during the
Non-Compete Period, he or she will not induce or attempt to induce any employee
of Carrier1 to leave the employ of Carrier1, nor will he attempt to induce any
supplier, distributor or customer of Carrier1 or its affiliates to cease doing
business with Carrier1. In addition, each Executive is subject to nondisclosure,
noncompetition and nonsolicitation covenants pursuant to Deeds of Covenant
entered into among the LLC, Carrier One Limited, Providence and the Executives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Carrier1 International currently does not have a compensation committee and
the compensation of executive officers and other key employees of Carrier1 are
determined by the Board. Stig Johansson, Carrier1's President and Chief
Executive Officer, is currently a member of the Board and participates in such
determination.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EQUITY INVESTMENTS
As of May 1, 1999, shares of Carrier1 International's common stock have been
subscribed and paid for by Carrier1's management and employees, Providence
Equity Partners L.P. (which holds one share) and the LLC. Messrs. Johansson,
Bauer, Rizzo, van Ophem, Craven, Nordahl, Gross and Poulter are among the
management that have subscribed and paid for outstanding shares. Actual issuance
of shares held by management and employees was pending as of May 1, 1999.
The LLC is the vehicle through which Providence and Primus participate in
the equity investment in Carrier1 International. In addition, Thomas J. Wynne
and Victor A. Pelson, who are directors of Carrier1 International, hold
interests in the LLC through arrangements arrived at separately with Providence
and Primus. Messrs. Wynne and Pelson each own (directly or through trusts
organized for the benefit of family members) 400,000 Class A Units in the LLC,
acquired at a purchase price of $1.00 per Class A Unit. Messrs. Wynne and Pelson
each disclaims beneficial ownership of any Class A Units in any such trusts. Mr.
Wynne's and Mr. Pelson's Class A Units relate to a total of 400,000 shares of
Carrier1 International's common stock to be held by the LLC or approximately
1.13% of Carrier1 International's common stock on a fully diluted basis. Messrs.
Wynne and Pelson, however, do not directly hold any outstanding shares of
Carrier1 International's common stock.
As of May 1, Carrier1 had substantially completed a restructuring of its
management equity arrangements. Pursuant to this restructuring, each of Messrs.
Johansson, Bauer, Rizzo, van Ophem, Craven, Nordahl, Gross and Poulter in effect
has exchanged his equity interests and options that he had held in the LLC to
acquire an equivalent dollar amount of shares and options of Carrier1
International common stock. Each effected this exchange through a series of
transactions with the LLC, Providence and Primus and Carrier1 International.
Actual issuance of the Shares acquired in this exchange is pending. These
individuals' portions of the total equity investment in Carrier1 International
did not change significantly as a result of this restructuring, but each of
these individuals will hold common stock and options to acquire common stock of
Carrier1 International directly. In addition, Carrier1 International has granted
Thomas J. Wynne and Victor A. Pelson options to purchase a total of 40,000
shares of Carrier1 International's common stock (20,000 shares of common stock
for each), at $2.00 per share.
1999 SHARE OPTION PLAN
The Board of Carrier1 International has adopted the 1999 Share Option Plan
(the "1999 Share Option Plan"), under which the Company and related companies of
the consolidated Carrier1 group may grant to any employee or director options
(the "Options") for shares of Carrier1 International's common stock ("Shares")
or other equity securities issued by Carrier1 International. The Option Plan is
administered by the Board or a committee appointed by the Board, and authorizes
the Board or such committee to issue Options in such forms and on such terms as
determined by the Board or such committee. The Board or such committee may
determine the number of Options to grant, provided that the number of Shares
issued pursuant to the Option Plan shall be no greater than 2,222,222 Shares.
The per Share exercise price for the Options may not be less than $2.00. If
Options are to be granted to an employee of a subsidiary, such subsidiary will
grant such Options instead of Carrier1 International. Carrier1 International
will grant the subsidiary options to acquire Shares to meet its Option
obligations at a per Share exercise price based upon an agreed fair market value
(or, failing agreement, a fair market value determined by the Board). Options
granted under the Option Plan will vest in five equal annual installments
beginning the first anniversary of the grant of such Options. Options will
expire if not exercised within 10 years of the grant, or on an earlier date as
specified by the Board or the committee. If the employment of a participant is
terminated for any reason, all unvested Options will immediately expire and
vested Options must be exercised within a particular number of days, which
number will vary depending on the reasons for termination. Subject to certain
exceptions, Options will be nontransferable
85
<PAGE>
during the life of an optionee except pursuant to a valid domestic relations
order. Upon an optionee's death, disability or termination of employment, the
subsidiary which employs the optionee, or its designee, will have the right to
repurchase all Shares held by the optionee, whether or not such Shares were
acquired pursuant to the exercise of Options. Under Luxembourg law, Carrier1
International and certain subsidiaries may be precluded from exercising such
right directly.
Carrier1 has granted Options pursuant to the 1999 Share Option Plan to
acquire approximately 2,110,968 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.
SECURITIES PURCHASE AGREEMENT
Carrier1 International, the LLC and up to 44 employee investors
(collectively, the "Management Investors") have entered into the Securities
Purchase Agreement (the "Securities Purchase Agreement") (effective as of March
1, 1999) under which each Management Investor has purchased a specified number
of Shares at $2.00 per Share, for an aggregate purchase price of $2.14 million.
As part of the restructuring of the management equity arrangements described
above, each of Messrs. Johansson, Bauer, Rizzo, van Ophem, Craven, Nordahl,
Gross, and Poulter has, in effect, exchanged 68,260 Class A Units (at $1.00 per
unit) to acquire, pursuant to the Securities Purchase Agreement, 34,130 Shares
(at $2.00 per Share). Issuance of these Shares by Carrier1 International is
pending. Carrier1 International intends in the future to issue additional Shares
to employees that are or become party to the Securities Purchase Agreement. The
Securities Purchase Agreement also contains provisions relating to the sale of a
number of Shares (at $2.00 per Share) sufficient to complete the equity
investment in Carrier1 International by the LLC in which Providence, Primus and
Messrs. Wynne and Pelson have membership interests. The $60.0 million Equity
Investment by Providence and Primus was completed in February, 1999. The LLC has
paid in an additional $800,000 to the capital of Carrier1 International.
Issuance of the remaining 400,000 Shares to the LLC pursuant to these provisions
is pending as of May 1, 1999. The Securities Purchase Agreement provides that
Carrier1 International will indemnify the LLC and Management Investors for,
among other things, losses related to any transaction financed or to be financed
with proceeds from the sale of securities purchased pursuant to the Securities
Purchase Agreement or any related agreement and environmental losses. The
Securities Purchase Agreement contains customary conditions, representations and
warranties.
REGISTRATION RIGHTS AGREEMENT
Carrier1 International, the LLC, and Messrs. Johansson, Bauer, Rizzo, van
Ophem, Craven, Nordahl, Gross, Poulter, Wynne and Pelson (the "Original
Management Investors") have entered into a registration rights agreement
(effective as of March 1, 1999) (the "Registration Rights Agreement"). The
Registration Rights Agreement provides that the LLC may at any time request
registration under the Securities Act of its Shares and certain other equity
securities. In addition, the Registration Rights Agreement gives certain
piggyback registration rights to the LLC and the Original Management Investors
and, at the request of certain Original Management Investors, possibly
additional employees party to the Securities Purchase Agreement or the
Securityholders' Agreement described below. The Original Management Investors do
not, however, have piggyback rights in connection with an initial public
offering. The Registration Rights Agreement contains provisions governing the
registration statement filing process. Among other things, it provides that
Carrier1 International will bear all registration expenses and expenses for each
piggyback registration in which the LLC or any of the Original Management
Investors participate, other than underwriting discounts and commissions, in
connection with its obligations under the Registration Rights Agreement.
86
<PAGE>
SECURITYHOLDERS' AGREEMENT
In connection with the Securities Purchase Agreement, Carrier1 International
has entered into a securityholders' agreement (effective as of March 1, 1999)
(the "Securityholders' Agreement") with Messrs. Wynne and Pelson, the Management
Investors and the LLC. The Securityholders' Agreement places restrictions on
Management Investors' ability to transfer their securities without the prior
written consent of the Board except under special circumstances. Transfers of
securities are subject to the right of first refusal by the LLC or its
transferee. The LLC will also benefit from preemptive rights in certain other
circumstances. The Securityholders' Agreement also provides that the Management
Investors will (i) consent to and raise no objections to a sale of Carrier1
International approved by the Board and (ii) comply with a Board request to
pledge their securities to secure financing to be provided to Carrier1
International. Management Investors have tag-along rights in the event of sales
by the LLC or its members of securities if a change of control is involved. The
Securityholders' Agreement provides for certain individuals to be appointed to
the Board. Finally, under the Securityholders' Agreement, the Management
Investors agree not to disclose confidential information of, compete with, or
solicit employees or customers from the LLC or the Company.
EPOCH PEERING ARRANGEMENT
Carrier1 has entered into a peering arrangement with Epoch Networks. The
contract with Epoch Networks provides for the free exchange of IP traffic
between Carrier1 and Epoch Networks. A fund managed by Providence that holds a
majority of the Class A Units of the LLC and another fund managed by Providence
that also holds an interest in Class A Units of the LLC own a combined 21% of
the outstanding equity of Epoch Networks.
OTHER TRANSACTIONS
The LLC has advanced a loan of $68,260, bearing interest at 12%, to Mr. van
Ophem, evidenced by a promissory note dated June 30, 1998, to finance his equity
investment in the LLC. As of December 31, 1998, Mr. van Ophem owed $68,260 to
the LLC. Mr. van Ophem is required to repay principal and interest on the loan
in five equal annual installments of $18,936 commencing July 1, 2001. Carrier1
expects (effective as of March 1, 1999) to become the creditor with respect to
such loan.
During the period ended December 31, 1998, Carrier1 reimbursed Providence
and Primus for expenses incurred in connection with the formation of Carrier1
and the negotiation of certain agreements entered into by Carrier1. Such
reimbursements totaled $339,000 and were expensed as selling, general and
administrative expenses.
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<PAGE>
PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Shares of Carrier1 International, as of May 12, 1999, by
(1) each person known to Carrier1 International to own beneficially more
than 5% of Carrier1 International's outstanding Shares,
(2) each director of Carrier1 International,
(3) each executive officer of Carrier1 International listed in the
Summary Compensation Table under "Management" above and
(4) all executive officers and directors of Carrier1 International as a
group.
All information with respect to beneficial ownership has been furnished to
Carrier1 International by the respective shareholders of Carrier1 International.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER OF SHARES SHARES
- --------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Carrier One, LLC................................................................. 30,399,999 86.04%
c/o Providence Equity Partners Inc.
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Providence Equity Partners L.P.(2)............................................... 30,400,000 86.04
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Jonathan M. Nelson(2)............................................................ 30,400,000 86.04
Paul J. Salem(2)................................................................. 30,400,000 86.04
<CAPTION>
NAME OF EXECUTIVE OFFICER OR DIRECTOR
- ---------------------------------------------------------------------------------
<S> <C> <C>
Stig Johansson(3)................................................................ 105,241 *
Eugene A. Rizzo(3)............................................................... 105,241 *
Terje Nordahl(3)................................................................. 69,685 *
Joachim Bauer(3)................................................................. 105,241 *
Kees van Ophem(3)................................................................ 105,241 *
Glenn M. Creamer (2)............................................................. 30,400,000 86.04
Jonathan E. Dick................................................................. -- --
Mark A. Pelson................................................................... -- --
Victor A. Pelson(4).............................................................. 20,000 *
Thomas J. Wynne(4)............................................................... 20,000 *
All directors and executive officers as a group (11 persons)..................... 31,035,890 87.84
</TABLE>
- ------------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a person is deemed a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting
of such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities
which that person has the right to acquire beneficial ownership of within 60
days. More than one person may be deemed to be a beneficial owner of the
same securities.
(2) The LLC is the direct beneficial owner of 29,999,999 Shares and Providence
Equity Partners L.P. ("Providence L.P.") is the direct beneficial owner of 1
Share. Providence L.P. is the majority Class A Unit holder of the LLC, and
by virtue of such status may be deemed to be the beneficial owner of the
Shares in which the LLC has direct beneficial ownership. Providence Equity
Partners L.L.C. ("PEP LLC") is the general partner of Providence L.P., and
by virtue of such status may be deemed to be the
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beneficial owner of the Shares in which Providence L.P. has direct or
indirect beneficial ownership. Jonathan M. Nelson, Glenn M. Creamer and Paul
J. Salem may be deemed to share voting and investment power with respect to
the Shares in which PEP LLC has direct or indirect beneficial ownership.
Each of Jonathan M. Nelson, Glenn M. Creamer, Paul J. Salem, PEP LLC and
Providence L.P. disclaims such deemed beneficial ownership.
(3) Includes 34,130 Shares, issuance of which by Carrier1 International is
pending, and an additional 71,111 Shares (35,555, in the case of Mr.
Nordahl) issuable to each such person upon exercise of options which are
exercisable within 60 days.
(4) Consists of options that Carrier1 International has issued to each of Thomas
J. Wynne and Victor A. Pelson for a total of 40,000 Shares of its common
stock (20,000 Shares each).
The following table sets forth certain information regarding the current
beneficial ownership of Class A Units (the "Class A Units") of the LLC by:
(1) Each director of Carrier1 International,
(2) Each executive officer of Carrier1 International listed in the Summary
Compensation Table under "Management" above.
(3) All directors and executive officers of Carrier1 International as a
group as of May 1, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF DIRECTOR/EXECUTIVE OFFICER(1) NUMBER OF UNITS UNITS(1)
- ---------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Stig Johansson.................................................................... -- --
Eugene A. Rizzo................................................................... -- --
Terje Nordahl..................................................................... -- --
Joachim Bauer..................................................................... -- --
Kees van Ophem.................................................................... -- --
Glenn M. Creamer (2).............................................................. 50,000,000 82.24%
Jonathan E. Dick.................................................................. -- --
Mark A. Pelson.................................................................... -- --
Victor A. Pelson (3).............................................................. 400,000 *
Thomas J. Wynne (3)............................................................... 400,000 *
All directors and executive officers as a group (11 persons)...................... 50,800,000 83.55%
</TABLE>
- ------------------------
* Less than one percent.
(1) Based upon 60.8 million Class A Units outstanding.
(2) Providence L.P. holds 50,000,000 Class A Units. PEP LLC is the general
partner of Providence L.P., and by virtue of such status may be deemed to be
the beneficial owner of the Class A Units in which Providence L.P. has
direct or indirect beneficial ownership. Glenn M. Creamer may be deemed to
share voting and investment power with respect to the Class A Units in which
PEP LLC has direct or indirect beneficial ownership. Each of Glenn M.
Creamer and PEP LLC disclaims such deemed beneficial ownership.
(3) Thomas J. Wynne and Victor A. Pelson each have purchased (directly or
through trusts organized for the benefit of family members) 400,000 Class A
Units in the LLC, which in turn will use the proceeds of such purchases to
acquire a total of 400,000 Shares. These Class A Units do not include
additional options that Carrier1 International has issued to each of Thomas
J. Wynne and Victor A. Pelson for a total of 40,000 Shares of its common
stock (20,000 Shares each). Messrs. Wynne and Pelson intend to disclaim
beneficial ownership in any Class A Units held in any such trusts.
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DESCRIPTION OF THE NOTES
Each of the Old Dollar Notes and the Old Euro Notes were issued under an
Indenture, each dated as of February 19, 1999 (the "Dollar Indenture" and the
"Euro Indenture," respectively, and together the "Indentures"), between the
Company, as issuer, and The Chase Manhattan Bank, as trustee under each
Indenture (each a "Trustee" and together the "Trustees"). The New Dollar Notes
will be issued under the Dollar Indenture and the New Euro Notes will be issued
under the Euro Indenture. The Indentures have been filed as exhibits to the
Registration Statement of which this prospectus is a part and are available as
set forth under the heading "Where You Can Find More Information." The terms of
the New Notes of a series are identical to the terms of the Old Notes of such
series for which they may be exchanged pursuant to the Exchange Offer, except
that the New Notes will be registered under the Securities Act and will not
contain restrictions on transfer or include provisions relating to additional
interest and will contain terms of an administrative nature that differ from
those of the Old Notes. New Notes will otherwise be treated as Notes for
purposes of the Indentures.
The following summary of certain provisions of the Indentures does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indentures, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended. Whenever particular defined terms of the Indentures not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions." The term "Company" as used
hereunder means Carrier1 International S.A. and any successors in interest
thereto under the relevant Indenture, excluding its Subsidiaries.
GENERAL
The Notes will be unsecured (except to the extent described under
"--Security" below) unsubordinated obligations of the Company, initially limited
to $160.0 million principal amount of Dollar Notes and [Euro]85.0 million
principal amount of Euro Notes, and will mature on February 15, 2009. Each
Dollar Note will initially bear interest at 13.25% per annum, and each Euro Note
will initially bear interest at 13.25% per annum, from the Closing Date or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually (to Holders of record at the close of
business on the February 1 or August 1 immediately preceding the Interest
Payment Date) on February 15 and August 15 of each year, commencing August 15,
1999. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
If by the date that is six months after the Closing Date, the Company has
not consummated a registered exchange offer for the Old Dollar Notes or the Old
Euro Notes or caused a shelf registration statement with respect to resales of
the Old Dollar Notes or the Old Euro Notes to become effective, the interest
rate on such series of Notes will increase by 0.5% per annum until the
consummation of a registered exchange offer or the effectiveness of a shelf
registration statement. Any interest will be computed on the basis of a 360-day
year of twelve 30-day months. See "--Registration Rights."
Principal of, and premium, if any, and interest on, the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or agency
of the Company in the Borough of Manhattan, the City of New York (which
initially will be the corporate trust office of the relevant Trustee in the City
of New York); PROVIDED that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register.
The Dollar Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. The Old Dollar Notes are represented by and the New Dollar
Notes will be represented by one or more permanent global Dollar Notes (each, a
"Global Dollar Note") and deposited with the relevant Trustee as custodian for,
and registered in the name of a nominee of, DTC. The Euro Notes will be issued
only in fully registered form, without coupons, in denominations of [Euro]1,000
of principal amount and any integral multiple thereof. The Old Euro Notes
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initially sold in reliance on Rule 144A are represented by and the New Euro
Notes will be represented by a permanent global Euro Notes (each, a "Global Euro
Note" and, together with the Global Dollar Notes, the "Global Notes") and
deposited with the relevant Trustee, as common depositary for Euroclear and
Cedel Bank. Old Euro Notes offered and sold in transactions outside the United
States in reliance on Regulation S are, and will be, represented solely by
certificated Old Euro Notes. If a Qualified Institutional Buyer of a beneficial
interest in a Global Euro Note wishes to hold such interest through DTC, any
such beneficial interests will be represented by one or more permanent global
Euro Notes in definitive, fully registered form without interest coupons (each,
a "DTC Euro Note") and will be deposited with the relevant Trustee as custodian
for, and registered in the name of a nominee of, DTC. No service charge will be
made for any registration of transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described below under "--Covenants" and applicable
law, the Company may issue additional Notes ("Additional Notes") under the
Indentures. Each series of Old Notes, any New Notes of such series and any
Additional Notes subsequently issued in such series will be treated as a single
class for all purposes under the relevant Indenture. References in this
"Description of the Notes" to the Notes refer to the relevant series of Notes.
THE GLOBAL SECURITIES
Ownership of beneficial interests in a global Dollar Note will be limited to
persons who have an account with DTC or Euroclear and Cedel Bank
("participants") or persons who hold interests through participants. Beneficial
interests in the global Dollar Notes will be shown on, and transfers thereof
will be effected only through records maintained by DTC (with respect to its
participants) and its participants. Beneficial interests in the global Euro
Notes will be shown on, and transfers thereof will be effected through records
maintained by Euroclear and Cedel Bank (with respect to their participants) and
their participants; PROVIDED, HOWEVER, that beneficial interests in the DTC Euro
Notes will be shown on and transfers thereof will be effected through records
maintained by DTC (with respect to its participants) and its participants.
Qualified institutional buyers may hold their interest in a Global Note directly
through DTC or Euroclear and Cedel Bank, if they are participants in such
system, or indirectly through organizations which are participants in such
system. Carrier1 expects that pursuant to procedures established by DTC or
Euroclear and Cedel Bank, as applicable, upon deposit of a Global Note
representing New Notes, DTC or Euroclear and Cedel Bank, as applicable, will
credit the account of participants tendering Old Notes in exchange for New Notes
with an interest in the applicable Global Note. All beneficial interests in the
global securities will be subject to the procedures and requirements of DTC,
Euroclear or Cedel Bank, as applicable. Transactions settled through DTC,
Euroclear and Cedel will settle on a T+3 basis.
Owners of beneficial interests in the global securities will not be entitled
to have Notes registered in their names, and will not receive or be entitled to
receive physical delivery of definitive certificates representing individual
Notes except in certain limited circumstances set forth in the relevant
Indenture. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the securities represented by
a global security to such persons may be limited. In addition, because DTC,
Euroclear and Cedel Bank can act only on behalf of their respective
participants, who in turn act on behalf of persons who hold interests through
such participants, the ability of a person having an interest in the securities
represented by a global security to pledge or transfer such interest to persons
or entities that do not participate in DTC's, Euroclear's or Cedel Bank's
system, or to otherwise take actions in respect of such interest, may be
affected by the lack of a physical definitive security in respect of such
interest.
So long as DTC, Euroclear or Cedel Bank, as applicable, or any nominee
thereof is the registered owner or holder of any of the global securities, DTC,
Euroclear or Cedel Bank, as applicable, or such nominee, as the case may be,
will be considered the sole owner or holder of the securities represented by
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such global securities for all purposes under the Indentures. No beneficial
owner of an interest in the global securities will be able to transfer that
interest except in accordance with DTC's, Euroclear's or Cedel Bank's applicable
procedures, in addition to those provided for under the relevant Indenture.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel Bank will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
The Company expects that DTC, Euroclear or Cedel Bank, as applicable, will
take any action permitted to be taken by a holder of Notes (including the
presentation of Notes for exchange as described below) only at the direction of
one or more participants to whose account the interests in a global security is
credited and only in respect of such portion of the securities as to which such
participant or participants has or have given such direction.
PAYMENTS
Payments of any amounts owing in respect of the global securities will be
made through one or more paying agents to DTC (in the case of global Dollar
Notes and DTC Euro Notes) or Euroclear or Cedel Bank (in the case of global Euro
Notes (other than the DTC Euro Notes)) in proportion to their respective
interests as the registered owner thereof. All amounts payable under the Dollar
Notes will be payable in U.S. dollars and all amounts payable under the Euro
Notes will be payable in Euro, except as otherwise provided below. None of the
Company, any Trustee, the transfer agent or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest. If the Euro Notes are included in the
Regulated Unofficial Market (Freiverkehr) of the Frankfurt Stock Exchange, the
Company will maintain a paying agent and registrar in Germany.
The Company expects that DTC, Euroclear or Cedel Bank, as the case may be,
or any nominee thereof, upon receipt of any payments made in respect of the
global securities, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the global Note, as shown on the records of DTC, Euroclear or Cedel Bank, as
applicable. The Company also expects that payments by participants to owners of
beneficial interests in the global securities held through such participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
participants.
PAYMENTS ON GLOBAL EURO NOTES. Payments to holders of global Euro Notes in
respect of principal and interest on the Euro Notes will be made in Euro, except
as may otherwise be agreed between any applicable securities clearing system and
any holders. See "--Currency Conversions for Holders of Beneficial Interests in
DTC Euro Notes." Payments will be subject in all cases to any fiscal or other
laws and regulations applicable thereto. None of the Company, the relevant
Trustee or any paying agent shall be liable to any holder of a global Euro Note
or other person for any commissions, costs, losses or expenses in relation to or
resulting from any currency conversion or rounding effected in connection
therewith.
CURRENCY CONVERSIONS FOR HOLDERS OF BENEFICIAL INTERESTS IN DTC EURO
NOTES. Notwithstanding the payment provisions described above, investors who
hold beneficial interests in DTC Euro Notes, directly or indirectly, through DTC
will be paid in U.S. dollars converted from such payments in Euro by the
applicable agent unless the registered holder, on behalf of any such owner of
beneficial interests, elects to receive payments in Euro or the chosen currency,
as the case may be. All costs of conversion, if any, will be borne by holders of
beneficial interests in the DTC Euro Notes, by deduction from such payments.
An owner of a beneficial interest in a DTC Euro Note may receive payment in
Euro by notifying the DTC participant through which its beneficial interest in
the DTC Euro Note is held on or prior to the record date of (i) such investor's
election to receive payment in Euro and (ii) wire transfer instructions to
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<PAGE>
an account entitled to receive the relevant payment. Such DTC participant must
notify DTC of such election and wire transfer instructions on or prior to the
second New York Business Day after the record date for any payment of interest
and on or prior to the eighth day prior to the payment of principal. DTC will
notify the paying agent of such election and wire transfer instructions on or
prior to the fourth New York Business Day after the record date for any payment
of interest and on or prior to the sixth New York Business Day prior to the
payment of principal. If complete instructions are received by the DTC
participant and forwarded by the DTC participant to DTC and by DTC to the paying
agent on or prior to such dates, such investor will receive payment in Euro
outside DTC; otherwise only U.S. dollar payments will be made by the paying
agent. All costs of such payment by wire transfer will be borne by registered
holders receiving such payments by deduction from such payments. For purposes of
the foregoing, "New York Business Day" means a day all banking institutions are
not authorized or obligated by law or executive order to be closed in The City
of New York.
Investors may be subject to foreign exchange risks that may have important
economic and tax consequences to them.
INFORMATION CONCERNING DTC, EUROCLEAR AND CEDEL
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
The Company understands that: Euroclear and Cedel Bank hold securities for
participating organizations and facilitate the clearance and settlement of
securities transactions between their respective participants through electronic
book-entry changes in accounts of such participants. Euroclear and Cedel Bank
provide to their participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Euroclear and Cedel Bank interface with
domestic securities markets. Euroclear and Cedel Bank participants are financial
institutions such as underwriters, securities brokers and dealers, banks, trust
companies and certain other organizations. Indirect access to Euroclear or Cedel
Bank is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodian relationship with a
Euroclear or Cedel Bank participant, either directly or indirectly.
Subject to compliance with any transfer restrictions applicable to the
global Notes, cross-market transfers between the participants in DTC, on the one
hand, and Euroclear or Cedel Bank participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel Bank, as the case may be, by its depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel Bank,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel Bank, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving interests in the global Notes in DTC, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to DTC, Euroclear participants and Cedel Bank participants may not
deliver instructions directly to the depositaries for Euroclear or Cedel Bank.
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Because of time zone differences, the securities account of a Euroclear or
Cedel Bank participant purchasing an interest in a global security from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel Bank participant, during the securities
settlement processing day (which must be a business day for Euroclear and Cedel
Bank) immediately following the settlement date of DTC. Cash received in
Euroclear or Cedel Bank as a result of sales of interest in a global securities
by or through a Euroclear or Cedel Bank participant to a participant in DTC will
be received with value on the settlement date of DTC but will be available in
the relevant Euroclear or Cedel Bank cash account only as of the business day
for Euroclear or Cedel Bank following DTC's settlement date.
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures to facilitate transfers of interests in the global Notes and global
Warrants among participants in DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, any Trustee or
any paying agent will have any responsibility for the performance by DTC,
Euroclear and Cedel Bank or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
If (i) at any time DTC is unwilling or unable to continue as a depositary,
or Euroclear and Cedel Bank cease to be a clearing agency, for the global Notes
and, in either case, a successor depositary or clearing agency, as the case may
be, is not appointed by the Company within 90 days or (ii) certain other events
occur, as provided in the applicable Indenture, then, certificated securities
will be issued in exchange for the Global Securities. All such certificated
securities representing Old Notes would be subject to certain transfer
restrictions.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after February 15, 2004 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice, at the
following Redemption Prices (expressed in percentages of principal amount), plus
accrued and unpaid interest, if any, to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period commencing February 15 of the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2004........................................................................ 106.625%
2005........................................................................ 104.417
2006........................................................................ 102.208
2007 and thereafter......................................................... 100.000
</TABLE>
In addition, at any time prior to February 15, 2002, the Company at its
option may redeem Notes of either series in an aggregate principal amount equal
to up to 35% of the principal amount of the Dollar Notes or Euro Notes, as the
case may be (including the principal amount of any Additional Notes of such
series), with funds in an amount equal to the proceeds of one or more sales of
Capital Stock (other than Disqualified Stock) of, or capital contributions to,
the Company, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 113.25%, plus accrued and
unpaid interest to the Redemption Date (subject to the rights of holders of
record on the relevant Regular Record Date that is prior to the Redemption Date
to receive interest due on an Interest Payment Date); PROVIDED that:
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<PAGE>
(i) an aggregate principal amount equal to at least 65% of the principal
amount of the initially issued Dollar Notes or Euro Notes, as the case may
be (plus the principal amount of any Additional Notes of such series)
remains outstanding after each such redemption, and
(ii) notice of any such redemption is provided within 60 days of each
such sale or capital contribution.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the relevant Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the relevant Notes are
listed or, if the relevant Notes are not listed on a national securities
exchange, by lot or by such other method as such Trustee in its sole discretion
shall deem to be fair and appropriate; PROVIDED that no Dollar Note of $1,000 in
principal amount or less or Euro Note of [Euro]1,000 in principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
In the event that (i) as a result of any change in, or amendments to, any
laws or treaties (or any regulations or rulings promulgated thereunder) or any
change in official position regarding the application of such laws, treaties,
regulations or rulings (including a holding, judgment or order by a court of
competent jurisdiction), which change, amendment, application or interpretation
becomes effective after the Closing Date, the Company has become or would become
obligated to pay, on the next date on which any amount would be payable under or
with respect to the Notes, any Additional Amounts (as defined herein), and (ii)
the Company cannot reasonably arrange (without other material adverse
consequences to the Company) for another obligor to make such payment so as to
avoid the requirement to pay such Additional Amounts, then the Company may
redeem all, but not less than all, the Notes at any time at 100% of the
principal amount thereof, together with accrued interest thereon, if any, to the
redemption date. See "--Additional Amounts."
SINKING FUND
There will be no sinking fund payments for the Notes.
REGISTRATION RIGHTS
The Company has agreed with the Placement Agents, for the benefit of the
Holders, that the Company will use its best efforts, at its cost, to file with
the United States Securities and Exchange Commission (the "Commission") and
cause to become effective a registration statement with respect to a registered
offer to exchange each series of the Old Notes for an issue of New Notes, which
shall be unsubordinated notes of the Company with terms identical in all
material respects to such series of Old Notes (except that the New Notes will be
registered under the Securities Act and therefore will not contain restrictions
on transfer, will not contain certain provisions relating to additional interest
and will contain terms of an administrative nature that differ from those of the
Old Notes).
The registration statement of which this prospectus is a part constitutes
the registration statement to be filed pursuant to the Registration Rights
Agreement. Upon such Registration Statement being declared effective, the
Company shall offer the New Notes in return for surrender of the applicable Old
Notes. Such offer shall remain open for not less than 20 business days after the
date notice of the Exchange Offer is mailed, or otherwise provided, to Holders.
For each Old Note surrendered to the Company under the Exchange Offer, the
Holder will receive a New Note of equal principal amount. Interest on each New
Note shall accrue from the last Interest Payment Date on which interest was paid
on the Old Notes so surrendered or, if no interest has been paid on such Old
Notes, from the Closing Date. In the event that applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or under certain other circumstances, the Company shall, at its cost, use
its best efforts to cause to become effective a shelf registration statement
(the "Shelf Registration Statement") with respect
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to resales of each series of Old Notes and to keep such Shelf Registration
Statement effective until the expiration of the time period referred to in Rule
144(k) under the Securities Act after the Closing Date, or such shorter period
that will terminate when all Notes covered by the Shelf Registration Statement
have been sold pursuant to the Shelf Registration Statement or Rule 144 under
the Securities Act or are no longer outstanding. The Company shall, in the event
of such a shelf registration, provide to each Holder copies of the prospectus,
notify each Holder when such Shelf Registration Statement has become effective
and take certain other actions as are required to permit resales of the Notes. A
Holder that sells its Notes pursuant to a Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a Holder (including certain
indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective with respect to either series
of Old Notes on or prior to the date that is six months after the Closing Date
the interest rate borne for such series of Old Notes will be increased by 0.5%
per annum until the Exchange Offer is consummated or the Shelf Registration
Statement is declared effective.
If the Company effects the Exchange Offer, the Company will be entitled to
close the Exchange Offer 20 business days after the commencement thereof,
PROVIDED that it has accepted all Old Notes theretofore validly surrendered in
accordance with the terms of the Exchange Offer. Notes not tendered in the
Exchange Offer shall be subject to all of the terms and conditions specified in
the relevant Indenture and to certain transfer restrictions.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement, a copy
of which is available as set forth under the heading "Where You Can Find More
Information."
SECURITY
Pursuant to each Indenture, the Company has purchased and pledged to the
relevant Trustee for the benefit of the Holders of the relevant Notes the
Pledged Securities in such amount as will be sufficient upon receipt of
scheduled interest and principal payments of such securities to provide for
payment in full for the first five scheduled interest payments due on the Notes.
The Company used approximately $49.2 million of the net proceeds from the
issuance of the Dollar Units and [Euro]26.9 million of the net proceeds from the
issuance of the Euro Units to acquire the Pledged Securities. The Pledged
Securities have been pledged by the Company to the relevant Trustee for the
benefit of the Holders of the relevant series of Notes pursuant to the relevant
Pledge Agreement and will be held by the relevant Trustee in the relevant Pledge
Account. Pursuant to each Pledge Agreement, immediately prior to an Interest
Payment Date on the Notes, the Company may either deposit with the relevant
Trustee from funds otherwise available to the Company cash sufficient to pay the
interest scheduled to be paid on such date or the Company may direct such
Trustee to release from the relevant Pledge Account proceeds sufficient to pay
interest then due on the Notes. In the event that the Company exercises the
former option, the Company may thereafter direct such Trustee to release to the
Company proceeds or Pledged Securities from the relevant Pledge Account in like
amount. A failure by the Company to pay interest on either series of Notes in a
timely manner through the first five scheduled interest payment dates will
constitute an immediate Event of Default under the applicable Indenture, with no
grace or cure period.
Each series of Notes is secured in part by the applicable Pledged Securities
and the applicable Pledge Account (including cash and any other property on
deposit therein) maintained with an affiliate of such Trustee as securities
intermediary (the "Securities Intermediary") and, accordingly, such Pledged
Securities and Pledge Account will also secure repayment of the principal amount
of such Notes to the extent of such security. Under each Pledge Agreement, once
the Company makes the first five scheduled interest payments on the Notes, all
of the remaining Pledged Securities and any other amounts in such Pledge
Account, if any, will be released from the Pledge Account and thereafter the
Notes will be unsecured.
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RANKING
The Indebtedness evidenced by the Notes will rank PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
After giving PRO FORMA effect to the Original Offering and the Equity Investment
as of December 31, 1998, the Company would have had no indebtedness outstanding
other than the Notes of both series. In addition, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. See "Risk Factors--Our substantial indebtedness
and our ability to incur more indebtedness could adversely affect our financial
health and prevent us from fulfilling our obligations under the Notes," "--The
Notes will be effectively subordinated to our secured debt" and "--Our operating
companies have no obligation to make payments on the Notes. They may face legal
or other limitations on their ability to make cash available for payment on the
Notes."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
Indentures for the definition of any other capitalized term used herein for
which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged with or consolidated
with a Restricted Subsidiary or assumed in connection with an Asset Acquisition
by a Restricted Subsidiary and not Incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in conformity with GAAP; PROVIDED that the
following items shall be excluded in computing Adjusted Consolidated Net Income
(without duplication):
(i) the net income (or loss) of any Person that is not a Restricted
Subsidiary, except (x) with respect to net income, to the extent of the
amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made
by the Company or any Restricted Subsidiary in such Person during such
period;
(ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant described below (and in
such case, except to the extent includable pursuant to clause (i) above),
the net income (or loss) of any Person accrued prior to the date it becomes
a Restricted Subsidiary or is merged into or consolidated with the Company
or any of its Restricted Subsidiaries or all or substantially all of the
property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries;
(iii) the net income of any Restricted Subsidiary other than a Permanent
Guarantor to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary of such net income is
not at the time permitted (after giving effect to any effective waiver,
consent or approval) by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary;
(iv) any gains or losses attributable to Asset Sales (without regard to
clause (c) or (d) in the proviso to the definition thereof);
(v) solely for purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below, any amount
paid or accrued as dividends on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of its
Restricted Subsidiaries;
(vi) all extraordinary gains and extraordinary losses or extraordinary
charges;
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(vii) any compensation expense to the extent paid or payable solely with
Capital Stock (other than Disqualified Stock) of the Company or any options,
warrants or other rights to acquire Capital Stock (other than Disqualified
Stock) of the Company; and
(viii) the cumulative effect of a change in accounting principles.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom:
(i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and
(ii) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles,
all as set forth on the most recent quarterly or annual consolidated balance
sheet of the Company and its Restricted Subsidiaries, prepared in conformity
with GAAP and filed with the Commission or provided to the relevant Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
(i) an investment by the Company or any of its Restricted Subsidiaries
in any other Person pursuant to which such Person shall become a Restricted
Subsidiary or shall be merged into or consolidated with the Company or any
of its Restricted Subsidiaries; PROVIDED that such Person's primary business
is related, ancillary or complementary to the businesses of the Company and
its Restricted Subsidiaries on the date of such investment, as determined in
good faith by the Board of Directors (whose determination shall be
conclusive and evidenced by a Board Resolution) or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries
of the property and assets of any Person other than the Company or any of
its Restricted Subsidiaries that constitute substantially all of a division
or line of business of such Person; PROVIDED that the property and assets
acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition, as
determined in good faith by the Board of Directors (whose determination
shall be conclusive and evidenced by a Board Resolution).
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of:
(i) all or substantially all of the Capital Stock of any Restricted
Subsidiary or
(ii) all or substantially all of the assets that constitute a division
or line of business of the Company or any of its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of:
(i) all or any of the Capital Stock of any Restricted Subsidiary,
(ii) all or substantially all of the property and assets of an operating
unit or business of the Company or any of its Restricted Subsidiaries or
(iii) any other property and assets (other than the Capital Stock of or
any other Investment in an Unrestricted Subsidiary) of the Company or any of
its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not
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governed by the provisions of the relevant Indenture applicable to mergers,
consolidations and sales of all or substantially all of the assets of the
Company;
PROVIDED that "Asset Sale" shall not include:
(a) sales, transfers or other dispositions of Temporary Cash
Investments, inventory, receivables and other current assets,
(b) sales, transfers or other dispositions of assets constituting a
Restricted Payment (or a transaction excluded from the definition of the
term "Restricted Payments") permitted to be made under the "Limitation on
Restricted Payments" covenant,
(c) sales, transfers or other dispositions of assets with a fair market
value (as certified in an Officers' Certificate) not in excess of $2 million
in any transaction or series of related transactions, or
(d) sales or other dispositions of assets for consideration at least
equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets
of the kind described in clause (B) of the second paragraph of the
"Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such Indebtedness and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as:
(i) a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 35% (50%, if the
Permitted Holders hold more than 35% of the voting power of the Voting Stock
of the Company on a fully diluted basis) of the total voting power of the
Voting Stock of the Company on a fully diluted basis and such ownership
represents a greater percentage of the total voting power of the Voting
Stock of the Company, on a fully diluted basis, than is held by Permitted
Holders on such date; or
(ii) during any period of two consecutive years beginning on or after
the Closing Date, individuals who at the beginning of such period were
members of the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of
the Board of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in
office.
"Closing Date" means the date on which the Notes are first issued under the
Indentures.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation all series and classes of such common stock.
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"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,
(i) Consolidated Interest Expense,
(ii) provision for all taxes based on income, profits or capital,
(iii) depreciation expense,
(iv) amortization expense (including but not limited to amortization of
goodwill and intangibles and amortization and write-off of financing costs)
and
(v) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made), less all non-cash items
increasing Adjusted Consolidated Net Income (other than any item reversing,
offsetting or reducing any such accrual or reserve),
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage
ownership interest in the income of such Restricted Subsidiary not owned on the
last day of such period by the Company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
on Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period, all as determined on
a consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of:
(i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Transaction Date to
(ii) four times the amount of Consolidated EBITDA for the then most
recent fiscal quarter for which financial statements of the Company have
been filed with the Commission or provided to the relevant Trustee pursuant
to the "Commission Reports and Reports to Holders" covenant described below
(such quarter being the "Quarter");
PROVIDED that, in making the foregoing calculation:
(A) PRO FORMA effect shall be given, in calculating the amount of
Indebtedness outstanding on the Transaction Date, to any Indebtedness to be
Incurred on the Transaction Date, or to be repaid, repurchased, redeemed or
otherwise retired or discharged on the Transaction Date;
(B) PRO FORMA effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving PRO FORMA effect to the application of
proceeds of any Asset Disposition) that occur from the beginning of the
Quarter through the Transaction Date (the "Reference Period"), as if they
had occurred and such proceeds had been applied on the first day of such
Reference Period; and
(C) PRO FORMA effect shall be given to asset dispositions and asset
acquisitions (including giving PRO FORMA effect to the application of
proceeds of any asset disposition) that have been made by any Person that
has become a Restricted Subsidiary or has been merged with or into, or
consolidated with, the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person
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was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on
the first day of such Reference Period;
PROVIDED that to the extent that clause (B) or (C) of this sentence requires
that PRO FORMA effect be given to an Asset Acquisition or Asset Disposition,
such PRO FORMA calculation shall be based upon the full fiscal quarter
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed of for which financial
information is available.
"Consolidated Net Worth" means, at any date of determination, shareholders'
equity (plus, to the extent not otherwise included, Preferred Stock of the
Company) as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"disinterested member" means, with respect to any transaction, a member of
the Board of Directors having no material financial interest in or with respect
to such transaction. A member of the Board of Directors shall not be deemed to
have such a financial interest solely by reason of such member's holding Capital
Stock of the Company or any parent thereof or any options, warrants or other
rights in respect of such Capital Stock.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(i) required to be redeemed prior to the Stated Maturity of the Notes,
(ii) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the Notes or
(iii) convertible into or exchangeable for Capital Stock referred to in
clause (i) or (ii) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the Notes;
PROVIDED that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below and such Capital Stock, or the agreements or instruments
governing the redemption rights thereof, specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior to
the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"European Government Obligations" means securities that are direct and
unconditional obligations of the Belgian, Dutch, French, German or Swiss
government and are not callable or redeemable at the option of the issuer
thereof; provided that at the time of determination the conversion rate between
the sovereign currency of such country and the Euro is fixed and shall also
include a depository receipt issued
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by a bank or trust company as custodian with respect to any such European
Government Obligation or a specific payment of interest on or principal of any
such European Government Obligation held by such custodian for the account of
the holder of a depository receipt; PROVIDED that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the European Government Obligation or the specific
payment of interest on or principal of the European Government Obligation
evidenced by such depository receipt.
"European Government Securities" means securities that are direct and
unconditional obligations of the German government meeting the requirements of
the Pledge Agreement relating to the Euro Notes.
"European Union" means the European Union, including the countries of
Austria, Belgium, Denmark, France, Finland, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom; as
well as any other country which at the time of determination is a member of the
European Union.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking or appraisal firm and set forth in their written opinion
which shall be delivered to the relevant Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession; PROVIDED, HOWEVER, that all reports and other financial
information provided by the Company to the Holders of the relevant series of
Notes or the relevant Trustee shall be prepared in accordance with GAAP as in
effect from time to time. All ratios and computations contained or referred to
in the relevant Indenture shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
relevant Indenture shall be made without giving effect to (i) the amortization
or write-off of any expenses incurred in connection with the offering of the
Units and (ii) the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"German Network" means the fiber optic network to be built in Germany by the
Company or any of its Restricted Subsidiaries with affiliates of Viatel, Inc.
and Metromedia Fiber Network Inc. contemplated by the letter of intent dated
August 20, 1998.
"German Network L/C" means a letter of credit in an amount not to exceed $75
million issued to secure obligations of the Company or any of its Restricted
Subsidiaries with respect to the German Network.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any such obligation, direct or
indirect, contingent or otherwise, of such Person:
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(i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
arrangements are on arm's-length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
PROVIDED that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, enter into any Guarantee of or otherwise become liable for or with
respect to, or become responsible for, the payment of, contingently or
otherwise, such Indebtedness, including an "Incurrence" by means of the
acquisition of more than 50% of the Capital Stock of any Person; PROVIDED that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money;
(ii) all principal obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(iii) all reimbursement obligations of such Person in respect of letters
of credit or other similar instruments (excluding obligations with respect
to letters of credit (including trade letters of credit) or other similar
instruments securing obligations (other than obligations described in (i) or
(ii) above or (v), (vi) or (vii) below) entered into in the ordinary course
of business of such Person to the extent such letters of credit are not
properly honored and drawn upon or, if properly honored and drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement);
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except Trade
Payables;
(v) all Capitalized Lease Obligations of such Person;
(vi) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED that the amount of such Indebtedness of such Person shall be the
lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(vii) all Indebtedness of other Persons Guaranteed by such Person;
provided that the amount of Indebtedness of such Person shall be the lesser
of (A) the amount Guaranteed and (B) the amount of such Indebtedness of such
other Persons; and
(viii) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements, except
if such agreements (a) are designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder.
The amount of Indebtedness of any Person as described above at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent
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obligations as described above, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided:
(A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance as determined in conformity with
GAAP,
(B) that obligations for money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness" so
long as such money is held to secure the payment of such interest,
(C) that the amount of an obligation in respect of a letter of credit or
other similar instrument is the aggregate undrawn and unexpired amount
thereof plus the aggregate amount of drawings properly honored thereunder
that have not then been reimbursed, and
(D) that "Indebtedness" shall not include any liability for federal,
state, local or other taxes.
Indebtedness shall not be deemed to include any obligation arising from the
honoring of a check, draft or similar instrument drawn against insufficient
funds, provided that such obligation is extinguished within five business days
of its Incurrence.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances, loans or other extensions of credit
to customers or suppliers in the ordinary course of business to the extent
required by GAAP to be recorded as accounts receivable, prepaid expenses or
deposits on the balance sheet of the Company or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include:
(i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and
(ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of
(or in) any Person that has ceased to be a Restricted Subsidiary, including
without limitation, by reason of any transaction permitted by clause (iii)
of the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant;
PROVIDED that the fair market value of the Investment remaining in any Person
that has ceased to be a Restricted Subsidiary shall not exceed the aggregate
amount of Investments previously made in such Person valued at the time such
Investments were made less the net reduction of such Investments. For purposes
of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below:
(i) "Investment" shall include the fair market value of the assets (net
of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and
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(iii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Management Investor" means any officer, director, employee or other member
of the management of the Company or any of its Subsidiaries, or family members
or relatives thereof, or trusts or partnerships for the benefit of any of the
foregoing, or any of their heirs, executors, successors and legal
representatives.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale when
received in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of
(i) brokerage commissions and other fees and expenses (including fees
and expenses of counsel and investment bankers) related to such Asset
Sale,
(ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole, including as a consequence of
any transfer of funds in connection with the application thereof in
accordance with the "Limitation on Asset Sales" covenant,
(iii) payments made, or required to be made, to repay Indebtedness or
any other obligation outstanding at the time of such Asset Sale that
either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such Asset Sale,
(iv) all distributions and other payments required to be made to
minority interest holders in a Restricted Subsidiary or joint venture as
a result of such Asset Sale by or of such Restricted Subsidiary or joint
venture, or to any other Person (other than the Company or a Restricted
Subsidiary) owning a beneficial interest in the assets disposed of in
such Asset Sale, and
(v) appropriate amounts to be provided by the Company or any
Restricted Subsidiary as a reserve against any liabilities or obligations
associated with such Asset Sale, including, without limitation, pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in
conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds
of such issuance or sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
In the event that any consideration for any Asset Sale that would otherwise
constitute Net Cash Proceeds is required to be held in escrow pending
determination of whether a purchase price adjustment, indemnification or other
payment or other similar adjustment will be made, such consideration will become
Net Cash Proceeds only when and to the extent released from escrow to the
Company or a Restricted Subsidiary.
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"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the relevant Trustee and providing
notice to each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(iii) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(iv) that, unless the Company defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to Purchase shall
cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Payment Date;
(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered; PROVIDED that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or an integral multiple
thereof, with respect to the Dollar Notes, and [Euro]1,000 or an integral
multiple thereof, with respect to the Euro Notes.
On the Payment Date, the Company shall
(i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase;
(ii) deposit with the relevant Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the relevant Trustee all
Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the
Company.
The relevant Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the relevant
Trustee shall promptly authenticate and mail to such Holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof, with respect to the Dollar Notes, and
[Euro]1,000 or an integral multiple thereof, with respect to the Euro Notes. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The relevant Trustee shall act as the Paying
Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase. To the extent
the provisions of any such laws or regulations conflict with the provisions of
the relevant Indenture, the Company will
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comply with such laws and regulations and will not be deemed to have breached
its obligations under such Indenture by virtue thereof.
"Permanent Guarantor" means a Restricted Subsidiary that irrevocably
guarantees the payment of the Notes on an unsubordinated basis; provided that
such guarantee may provide that it shall be automatically and unconditionally
released and discharged upon:
(i) any sale, exchange or transfer (including by way of merger or
consolidation), to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange, transfer or other transaction is not prohibited by the relevant
Indenture),
(ii) the legal or covenant defeasance of the Notes or satisfaction and
discharge of the relevant Indenture, subject to customary contingent
reinstatement provisions or
(iii) upon the merger or consolidation of the Permanent Guarantor with
and into the Company or another Permanent Guarantor that is the surviving
Person in such merger or consolidation.
"Permitted Holder" means any of the following: any of Providence Equity
Partners L.P., Providence Equity Partners II L.P., Providence Equity Partners
III L.P., Primus Capital Fund IV Limited Partnership and Primus Executive Fund
Limited Partnership and any of the respective Affiliates or successors of the
foregoing.
"Permitted Investment" means:
(i) an Investment in the Company (including the Notes of either series)
or a Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into, or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; PROVIDED that such Person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment;
(ii) Temporary Cash Investments;
(iii) commissions, payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses in accordance with GAAP;
(iv) stock, obligations, securities or other Investments received (a) in
satisfaction of judgments or (b) in settlement of debts, or as a result of
foreclosure, perfection or enforcement of any Lien, in each case under this
clause (b) arising in the ordinary course of business and not in
contemplation of the acquisition of such stock, obligations, securities or
other Investments;
(v) Investments in negotiable instruments held for collection, lease,
utility and worker's compensation, performance and other similar pledges or
deposits and other pledges or deposits permitted under the "Limitation on
Liens" covenant;
(vi) obligations under Interest Rate Agreements and Currency Agreements
designed solely to protect the Company or its Restricted Subsidiaries
against fluctuations in interest rates or foreign currency exchange rates;
(vii) Investments in a joint venture to cover the Company's portion of
the cost (including the cost of design, development, acquisition,
construction, installation and improvement) of building a telecommunications
network (or network segment) in Europe, provided that the Company or any of
its Restricted Subsidiaries will directly own their portion of such network
(or network segment); and Investments in joint ventures to acquire or
maintain or otherwise relating to any rights-of-way, wayleaves, governmental
approvals, licenses, franchises or concessions relating to any such network
(or network segment);
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(viii) Investments in any Person in an aggregate amount not to exceed
25% of any gains (net of any losses) attributable to Asset Sales after the
Closing Date and prior to the date of such Investment; and
(ix) loans or advances to directors, officers or employees of the
Company or any Restricted Subsidiary that do not in the aggregate exceed $3
million at any time outstanding.
"Permitted Joint Venture" means any joint venture between the Company or any
Restricted Subsidiary and any Person other than a Subsidiary, engaged in the
provision or sale of telecommunications services, or in any other business that
is related, ancillary or complementary to the provision or sale of
telecommunications services, as determined in good faith by the Board of
Directors (whose determination shall be conclusive if evidenced by a Board
Resolution); PROVIDED that prior to making any Investment in such a Person, the
Company's Board of Directors shall have determined that such Investment fits the
Company's strategic plan and is on terms that are fair and reasonable to the
Company.
"Permitted Liens" means:
(i) Liens for taxes, assessments, governmental charges or claims not yet
delinquent, or that in the aggregate are not material, or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision,
if any, as shall be required in conformity with GAAP shall have been made;
(ii) statutory and common law Liens of landlords, carriers,
warehousemen, mechanics, suppliers, materialmen or repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or that have been bonded or being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security and other similar legislation or other
insurance-related obligations (including, without limitation, pledges or
deposits securing liability to insurance carriers under insurance or
self-insurance arrangements);
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, licenses, obligations for utilities, statutory or
regulatory obligations, bankers' acceptances, letters of credit, surety and
appeal bonds, government or other contracts, completion guarantees,
performance and return-of-money bonds and other obligations of a similar
nature incurred in the ordinary course of business (exclusive of obligations
for the payment of borrowed money);
(v) easements, rights-of-way, municipal and zoning ordinances, utility
agreements, reservations, encroachments, restrictions and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries;
(vi) Liens (including extensions, renewals and replacements thereof)
upon real or personal property or assets (including leases on an
indefeasible right-to-use basis); PROVIDED that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with
the "Limitation on Indebtedness" covenant described below, to finance or
refinance the cost (including the cost of design, development, acquisition,
construction, installation, improvement, transportation or integration) of
the item of property or assets subject thereto and the original such Lien is
created prior to, at the time of or within one year after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or assets, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements, accessions or proceeds
in respect of such item;
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(vii) leases, subleases, licenses or sublicenses granted to others that
do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction (and
related rights) in favor of a contractor or developer, or arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens (including extensions, renewals and replacements thereof) on
property or assets of, or on shares of Capital Stock or Indebtedness of, any
Person existing (in the case of the original such Lien) at the time such
Person becomes, or becomes a part of, any Restricted Subsidiary; PROVIDED
that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property, assets,
Capital Stock or Indebtedness so acquired (plus improvements, accessions or
proceeds (including dividends or distributions) in respect thereof);
(xii) Liens in favor of the Company or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment, order,
decree or award against the Company or any Restricted Subsidiary that does
not give rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness or other obligations under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to
protect the Company or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business;
(xviii) Liens on or sales or transfers of receivables (including related
rights);
(xix) Liens that secure Indebtedness or other obligations with an
aggregate principal amount not in excess of $5 million at any time
outstanding;
(xx) Liens placed by any third party on property over which the Company
or any Restricted Subsidiary has easement or other rights or on any leased
property, or arising by reason of subordination or similar agreements
relating thereto; and Liens arising by reason of any condemnation or eminent
domain proceedings;
(xxi) Liens on Capital Stock or other securities of an Unrestricted
Subsidiary that secure Indebtedness or other obligations of such
Unrestricted Subsidiary;
(xxii) any encumbrance or restriction (including, but not limited to,
put and call agreements) with respect to Capital Stock of any joint venture
or similar arrangement pursuant to any joint venture or similar agreement;
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(xxiii) Liens (including extensions, renewals and replacements thereof)
on property or assets acquired by the Company or any Restricted Subsidiary;
provided that (a) such Liens were not created in connection with or in
anticipation of such acquisition, (b) such Liens do not secure Indebtedness
other than Indebtedness assumed in connection with such acquisition, and (c)
such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets so acquired
(plus improvements, accessions or proceeds in respect thereof); and
(xxiv) Liens on cash set aside at the time of the Incurrence of any
Indebtedness, or government securities purchased with such cash, in either
case to the extent that such cash or government securities prefund the
payment of interest on such Indebtedness and are held in an escrow account
or similar arrangement to be applied for such purpose.
"Pledge Account" means an account established with the relevant Securities
Intermediary for the benefit of the applicable Trustee pursuant to the terms of
relevant Pledge Agreement for the deposit of the applicable Pledged Securities
to be purchased by the Company with the net proceeds from the sale of relevant
series of Notes.
"Pledge Agreements" means the U.S. Dollar Collateral Pledge and Security
Agreement, dated as of the Closing Date, made by the Company in favor of the
relevant Trustee with respect to the Dollar Notes and the Euro Collateral Pledge
and Security Agreement, dated as of the Closing Date, made by the Company in
favor of the relevant Trustee with respect to the Euro Notes, as each such
agreement may be amended, restated, supplemented or otherwise modified from time
to time.
"Pledged Securities" means the U.S. Government Securities to be purchased by
the Company and held in the relevant Pledge Account in accordance with the
Pledge Agreement related to the Dollar Notes and the European Government
Securities to be purchased by the Company and held in the relevant Pledge
Account in accordance with the Pledge Agreement related to the Euro Notes.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without limitation,
all series and classes of such preferred stock or preference stock.
"refinance" means refinance, refund, replace, renew, repay, modify, restate,
defer, substitute, supplement, reissue, resell or extend (including by way of
any exchange of Indebtedness, or pursuant to any defeasance or discharge
mechanism); and the terms "refinances," "refinanced" and "refinancing" as used
for any purpose in the Indentures shall have a correlative meaning.
"Released Indebtedness" means, with respect to any Asset Sale:
(i) Indebtedness of the Company or any Restricted Subsidiary which is
assumed by the purchaser or any affiliate thereof in connection with such
Asset Sale; PROVIDED that the Company or such Restricted Subsidiary receives
written, unconditional, valid and enforceable releases from each creditor,
no later than the closing date of such Asset Sale and
(ii) Indebtedness of a Restricted Subsidiary that is no longer a
Restricted Subsidiary as a result of such Asset Sale; PROVIDED that neither
the Company nor any other Restricted Subsidiary thereafter Guarantees such
Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries:
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(i) for the most recent fiscal year of the Company, accounted for more
than 10% of the consolidated revenues of the Company and its Restricted
Subsidiaries or
(ii) as of the end of such fiscal year, was the owner of more than 10%
of the consolidated assets of the Company and its Restricted Subsidiaries,
all as set forth on the most recently available consolidated financial
statements of the Company for such fiscal year.
"Stated Maturity" means:
(i) with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of principal of
such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or
interest on any debt security, the date specified in such debt security as
the fixed date on which such installment is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company or
any Permanent Guarantor Incurred to finance the acquisition of a Person engaged
in a business that is related, ancillary or complementary to the business
conducted by the Company or any of its Restricted Subsidiaries, which
Indebtedness by its terms, or by the terms of any agreement or instrument
pursuant to which such Indebtedness is Incurred:
(i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or
any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of the Company's obligations under the Notes;
PROVIDED that such Indebtedness may provide for and be repaid at any time from
the proceeds of a capital contribution or the sale of Capital Stock (other than
Disqualified Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following:
(i) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof;
(ii) bankers' acceptances, time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized
under the laws of the United States of America, any state thereof or any
foreign country recognized by the United States of America, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating organization
(as defined in Rule 436 under the Securities Act) or any money-market fund
sponsored by a registered broker dealer or mutual fund distributor;
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above or clause
(vi) below entered into with a bank meeting the qualifications described in
clause (ii) above;
(iv) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P;
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(v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
S&P or Moody's; and
(vi) direct obligations of, or obligations fully and unconditionally
guaranteed by, (a) The Netherlands, the United Kingdom, France, Germany or
Switzerland, or (b) any other member of the European Economic Community and
rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means:
(i) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below and
(ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary (including any
newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any Restricted Subsidiary; PROVIDED
that:
(A) any Guarantee by the Company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by the Company or such
Restricted Subsidiary (or both, if applicable) at the time of such
designation;
(B) either (I) the Subsidiary to be so designated has total assets of
$1,000 or less or (II) if such Subsidiary has assets greater than such
amount, such designation would be permitted under the "Limitation on
Restricted Payments" covenant described below and
(C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; PROVIDED that:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such
time, have been permitted to be Incurred (and shall be deemed to have been
Incurred) for all purposes of the relevant Indenture.
Any such designation by the Board of Directors shall be evidenced to the
relevant Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are:
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(i) direct obligations of the United States of America for the payment
of which its full faith and credit is pledged or
(ii) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the payment of
which is unconditionally guaranteed as a full faith and credit obligation by
the United States of America,
which, in either case, are not callable or redeemable at the option of the
issuer thereof at any time prior to the Stated Maturity of the Notes, and shall
also include a depository receipt issued by a bank or trust company as custodian
with respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such U.S. Government Obligation held by such
custodian for the account of the holder of a depository receipt; PROVIDED that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt.
"U.S. Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes of either series
(including any New Notes of either series, but excluding any Additional Notes),
and other Indebtedness existing on the Closing Date); PROVIDED that the Company
or any Permanent Guarantor may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Leverage Ratio would be greater than zero and less
than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following:
(i) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed (after giving effect to any refinancing thereof) the
sum of (a) $100 million, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below, plus (b) an amount equal to the lesser of (1) 80% of the consolidated
book value of the accounts receivable of the Company and its Restricted
Subsidiaries determined in accordance with GAAP (determined as of the end of
the most recently ended fiscal quarter for which reports have been filed
with the Commission or provided to the relevant Trustee) and (2) $100
million;
(ii) Indebtedness owed (A) to the Company evidenced by a promissory note
or (B) to any Restricted Subsidiary; PROVIDED that any event which results
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to the
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Company or another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this clause
(ii);
(iii) Indebtedness issued to refinance then outstanding Indebtedness
(other than Indebtedness Incurred under clause (i), (ii), (iv), (vi),
(viii), (xi) or (xii) of this paragraph) and any refinancings thereof, in an
amount not to exceed the amount so refinanced (plus premiums, accrued
interest, fees and expenses); PROVIDED that Indebtedness the proceeds of
which are used to refinance the Notes in part or Indebtedness that is PARI
PASSU with, or expressly subordinated in right of payment to, the Notes or
any Notes Guarantee shall only be permitted under this clause (iii) if (A)
in case the Notes are refinanced in part or the Indebtedness to be
refinanced is PARI PASSU with the Notes or any Notes Guarantee, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
PARI PASSU with, or expressly subordinate in right of payment to, the
remaining Notes or any Notes Guarantee, (B) in case the Indebtedness to be
refinanced is expressly subordinated in right of payment to the Notes or any
Notes Guarantee, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is issued or
remains outstanding, is expressly made subordinate in right of payment to
the Notes or any Notes Guarantee at least to the extent that the
Indebtedness to be refinanced is subordinated to the Notes or any Notes
Guarantee and (C) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced and the Average Life of such
new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced; and PROVIDED FURTHER that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of
any Restricted Subsidiary pursuant to this clause (iii);
(iv) Indebtedness (A) in respect of performance, surety, appeal or other
similar bonds provided in the ordinary course of business and (B) arising
from agreements providing for indemnification, adjustment of purchase price
or similar obligations, or from Guarantees or letters of credit, bankers'
acceptances, surety or performance bonds or other similar instruments
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition;
(v) Indebtedness of the Company or any Permanent Guarantor, to the
extent the net proceeds thereof are promptly (A) used to purchase Notes
tendered in an Offer to Purchase made as a result of a Change in Control or
(B) deposited to defease the Notes as described below under "Defeasance";
(vi) Guarantees of the Notes and Guarantees of Indebtedness of the
Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
and Guarantees of Indebtedness of any Restricted Subsidiary by any
Restricted Subsidiary provided such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the relevant Indenture
providing for a Guarantee of payment of the Notes by such Restricted
Subsidiary;
(vii) Indebtedness (including Guarantees and the German Network L/C)
Incurred to finance or refinance the cost (including the cost of design,
development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network
assets (including leases on an indefeasible right-to-use basis and multiple
investment units) (including acquisitions by way of Capitalized Lease and
acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment,
inventory or network assets so acquired) by the Company or a Restricted
Subsidiary;
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(viii) Indebtedness of the Company or any Permanent Guarantor not to
exceed, at any one time outstanding (after giving effect to any refinancing
thereof), two times the sum of (A) the Net Cash Proceeds received by the
Company after the Closing Date as a capital contribution or from the
issuance and sale of its Capital Stock (other than Disqualified Stock) to a
Person that is not a Subsidiary of the Company, to the extent (I) such
capital contribution or Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph or clause (iii), (iv), (vi) or (x) of
the second paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if such capital
contribution or Net Cash Proceeds are used to consummate a transaction
pursuant to which the Company Incurs Acquired Indebtedness, the amount of
such Net Cash Proceeds exceeds one-half of the amount of Acquired
Indebtedness so Incurred and (B) 80% of the fair market value of property
(other than cash and cash equivalents) received by the Company after the
Closing Date as a capital contribution or from the sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or sale of Capital
Stock has not been used pursuant to clause (iii), (iv) or (vii) of the
second paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if such capital
contribution or Capital Stock is used to consummate a transaction pursuant
to which the Company Incurs Acquired Indebtedness, 80% of the fair market
value of the property received exceeds one-half of the amount of Acquired
Indebtedness so Incurred PROVIDED that such Indebtedness does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes;
(ix) Acquired Indebtedness;
(x) Strategic Subordinated Indebtedness;
(xi) Indebtedness in respect of bankers' acceptance and letters of
credit, all in the ordinary course of business, in an aggregate amount
outstanding at any time not to exceed $10 million; and
(xii) subordinated Indebtedness of the Company or any Permanent
Guarantor (in addition to Indebtedness permitted under clauses (i) through
(xi) above) in an aggregate principal amount outstanding at any time (after
giving effect to any refinancing thereof) not to exceed $100 million.
(b) For purposes of determining compliance with any Dollar-denominated
restriction on the Incurrence of Indebtedness denominated in another currency,
the Dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was Incurred (or, in the case of
Indebtedness under a revolving credit facility, at the time of commitment),
PROVIDED that if such Indebtedness is Incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable Dollar-denominated restriction to be exceeded if calculated at the
relevant currency exchange rate in effect on the date of such refinancing, such
Dollar-denominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. The principal amount of
any Indebtedness Incurred to refinance other Indebtedness, if Incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
respective Indebtedness is denominated that is in effect on the date of such
refinancing.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit, bankers' acceptances or other similar
instruments supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included and (2) any Liens granted pursuant
to the equal and ratable provisions referred to in the "Limitation on Liens"
covenant described below shall not be treated as giving rise to Indebtedness.
For purposes of determining compliance with this "Limitation on Indebtedness"
covenant, (1) any other obligation of the obligor on such Indebtedness arising
under any Lien or letter of credit, bankers' acceptance or other similar
instrument or obligation supporting such
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Indebtedness shall be disregarded to the extend that the same secures the
principal amount of such Indebtedness and (2) in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion, shall
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses (but may allocate portions of such Indebtedness between or among
such clauses).
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire shares of such
Capital Stock and (y) dividends or distributions on Capital Stock of a
Restricted Subsidiary held by minority interest holders on no more than a
pro rata basis, measured by value and based on all outstanding Capital Stock
of such Restricted Subsidiary) held by Persons other than the Company or any
of its Restricted Subsidiaries,
(ii) purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital Stock)
held by any Person other than the Company or any Wholly Owned Restricted
Subsidiary or (B) a Restricted Subsidiary (including options, warrants or
other rights to acquire such shares of Capital Stock) held by any Affiliate
of the Company (other than a Wholly Owned Restricted Subsidiary) or any
holder (or any Affiliate of such holder) of 5% or more of the Capital Stock
of the Company,
(iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is expressly
subordinated in right of payment to the Notes or any Notes Guarantee or
(iv) make any Investment, other than a Permitted Investment, in any
other Person
(such payments or any other actions described in clauses (i) through (iv) above
being collectively "Restricted Payments") if, at the time of, and after giving
effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing,
(B) the Company could not Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of
(1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100%
of the amount of such loss) accrued on a cumulative basis during the
period (taken as one accounting period) beginning on the first day of the
fiscal quarter beginning immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed with the Commission or
provided to the relevant Trustee pursuant to the "Commission Reports and
Reports to Holders" covenant PLUS
(2) the aggregate Net Cash Proceeds received by the Company after the
Closing Date as a capital contribution or from the issuance and sale
permitted by the relevant Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the
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Company, including the proceeds of an issuance or sale permitted by the
relevant Indenture of Indebtedness of the Company for cash subsequent to
the Closing Date upon the conversion of such Indebtedness into Capital
Stock (other than Disqualified Stock) of the Company, or from the
issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company
(in each case, exclusive of any Disqualified Stock or any options,
warrants or other rights that are redeemable at the option of the holder,
or are required to be redeemed, prior to the Stated Maturity of the
Notes), in each case except to the extent such Net Cash Proceeds are used
to Incur Indebtedness pursuant to clause (viii) of the second paragraph
under the "Limitation on Indebtedness" covenant PLUS
(3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and Investments under clause (vi),
(viii) or (xii) of the second paragraph of this "Limitation on Restricted
Payments" covenant) in any Person resulting from payments of interest on
Indebtedness, dividends, distributions, repayments of loans or advances,
or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale or
other disposition of any such Investment (except, in each case, to the
extent of any gain on such sale or other disposition that would be
included in the calculation of Adjusted Consolidated Net Income for
purposes of clause (C)(1) above), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided
in the definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes or any Notes Guarantee, including premium, if any, and
accrued and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the second paragraph of the
"Limitation on Indebtedness" covenant;
(iii) the repurchase, redemption or other acquisition of Capital Stock
of the Company or any Subsidiary of the Company (or options, warrants or
other rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a capital contribution or a substantially concurrent offering
of, shares of Capital Stock (other than Disqualified Stock) of the Company
(or options, warrants or other rights to acquire such Capital Stock);
(iv) the making of any principal payment on or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other
than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital Stock);
(v) payments or distributions to dissenting shareholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the relevant
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company;
(vi) any Investment in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and its
Restricted Subsidiaries on the date of such Investment; PROVIDED that the
aggregate amount of Investments made pursuant to this clause (vi) does not
exceed the sum of (a) $25 million, plus (b) the amount of Net Cash Proceeds
received by the
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Company after the Closing Date as a capital contribution or from the sale of
its Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (viii) of the second paragraph
under the "Limitation on Indebtedness" covenant or to make Restricted
Payments pursuant to clause (C)(2) of the first paragraph, or clauses (iii),
(iv) or (x) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (c) the net reduction in Investments made pursuant to this
clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale or other disposition
of any such Investment (except in each case to the extent of any gain on
such sale or other disposition that would be included in the calculation of
Adjusted Consolidated Net Income for purposes of clause (C)(1) above) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), PROVIDED that the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) Investments acquired as a capital contribution to or in exchange
for Capital Stock (other than Disqualified Stock) of the Company;
(viii) Investments in Permitted Joint Ventures not exceeding, at the
time of the Investment, the sum of (A) $10 million and (B) the net reduction
in Investments made pursuant to this clause (viii) resulting from
distributions on or repayments of such Investments or from the Net Cash
Proceeds from the sale or other disposition of any such Investment (except
in each case to the extent of any gain on such sale or disposition that
would be included in the calculation of Adjusted Consolidated Net Income for
purposes of clause (C)(1) above) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition of
"Investments"), PROVIDED that the net reduction in any Investment shall not
exceed the amount of such Investment;
(ix) repurchases of Warrants pursuant to a Repurchase Offer or within
ten days of their expiration in accordance with the terms of the Warrant
Agreements in effect on the Closing Date, any purchase of any fractional
shares of Common Stock (or other Capital Stock of the Company issuable upon
exercise of the Warrants) in connection with an exercise of the Warrants,
and any payments in connection with the anti-dilution provisions of the
Warrant Agreements;
(x) the purchase, redemption, retirement or other acquisition for value
of shares of Capital Stock of the Company or options, warrants or other
rights to purchase such shares held by Management Investors upon death,
disability, retirement, termination of employment or pursuant to the terms
of any agreement under which such shares of Capital Stock or options,
warrants or other rights were issued; PROVIDED that the aggregate
consideration paid for such purchase, redemption, retirement or other
acquisition for value of such shares or options, warrants or other rights
after the Closing Date does not in the aggregate exceed (A) $5 million, plus
(B) the aggregate Net Cash Proceeds received by the Company after the
Closing Date as a capital contribution from, or from the issuance or sale
to, Management Investors of Capital Stock of the Company or any options,
warrants or other rights to acquire such Capital Stock, plus (C) the
proceeds of insurance policies used to effect any such purchase, redemption,
retirement or other acquisition;
(xi) any purchase, redemption, retirement or other acquisition of
Capital Stock deemed to occur upon the exercise of options, warrants or
other rights if such Capital Stock represents a portion of the exercise
price thereof; or
(xii) other Restricted Payments in an aggregate amount not to exceed $5
million plus the net reduction in Investments made pursuant to this clause
(xii) resulting from distributions on or repayments of such Investments or
from the Net Cash Proceeds from the sale or other disposition of any such
Investment (except in each case to the extent of any gain on such sale or
disposition that would be included in the calculation of Adjusted
Consolidated Net Income for purposes of clause (C)(1) above) or from such
Person becoming a Restricted Subsidiary (valued in each case as provided in
the definition of "Investments"), PROVIDED that the net reduction in any
Investment shall not exceed the amount of such Investment;
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PROVIDED that, except in the case of clauses (i), (iii) and (xi), no Default or
Event of Default shall have occurred and be continuing or occur as a consequence
of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof, an Investment referred to in clause (vii) thereof and a purchase,
redemption, retirement or other acquisition of Capital Stock referred to in
clause (xi) thereof), and the Net Cash Proceeds from any capital contribution or
any issuance of Capital Stock referred to in clauses (iii), (iv) and (vi)
thereof, shall be included in calculating whether the conditions of clause (C)
of the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary,
(iii) make loans or advances to the Company or any other Restricted
Subsidiary, or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date, including under the Indentures or any
other agreements or instruments in effect on the Closing Date, and any
refinancings of such agreements or instruments; PROVIDED that the
encumbrances and restrictions in any such refinancings are no less favorable
in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being refinanced;
(ii) existing under or by reason of applicable law or any requirement of
any applicable governmental regulatory authority;
(iii) existing with respect to any Person, or any property or assets,
acquired by the Company or any Restricted Subsidiary, existing at the time
of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable (A) in the case of an
acquisition of such Person, to any other Person or (B) in the case of an
acquisition of such property or assets, any other property or assets;
(iv) in the case of clause (iv) (and, solely with respect to clauses
(A), (B) and (D) of this clause (iv), clause (i)) of the first paragraph of
this "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant, (A) that restrict in a customary manner
the subletting, assignment or transfer of any property or asset that is, or
is subject to, a lease, license, conveyance or contract or similar property
or asset, (B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the
relevant Indenture, (C) arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of the
Company or any Restricted Subsidiary in any manner material to the Company
or any Restricted Subsidiary or (D) arising under the terms of Indebtedness
Incurred under clause (vii) of the second paragraph of the "Limitation on
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Indebtedness" covenant that restrict the transfer of the property or assets
acquired with such Indebtedness;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary;
(vi) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued, or any agreement relating to
the sale, disposition or financing of receivables, if (A) either (1) the
encumbrance or restriction applies only in the event of a payment default or
a default with respect to a financial covenant contained in the terms of
such Indebtedness or agreement or (2) the Company in good faith determines
(as set forth in a Board Resolution) that any such encumbrance or
restriction will not materially affect the Company's ability to make
principal or interest payments on the Notes and (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders of the
Notes than is customary in comparable financings (as determined by the
Company in good faith);
(vii) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
or
(viii) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from:
(1) creating, incurring, assuming or suffering to exist any Liens
otherwise permitted under the "Limitation on Liens" covenant or
(2) restricting the sale or other disposition of property or assets of
the Company or any of its Restricted Subsidiaries that secure Indebtedness
of the Company or any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except:
(i) to the Company or a Wholly Owned Restricted Subsidiary;
(ii) issuances of director's qualifying shares or issuances or sales to
foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law;
(iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and
any Investment in such Person remaining after giving effect to such issuance
or sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant if made on the date of such issuance or sale;
or
(iv) issuances or sales of Common Stock of a Restricted Subsidiary,
provided that the Company or such Restricted Subsidiary applies the Net Cash
Proceeds, if any, of any such sale in accordance with clause (A) or (B) of
the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company or any Subsidiary
Guarantor which is PARI PASSU with or expressly
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subordinate in right of payment to the Notes or any Notes Guarantee ("Guaranteed
Indebtedness"), unless:
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the relevant Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and
(ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee, until payment in
full of the outstanding principal amount of such Notes and any premium or
accrued and unpaid interest thereon then due and owing;
PROVIDED that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary:
(a) that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation
of, such Person becoming a Restricted Subsidiary or
(b) of Indebtedness Incurred pursuant to clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant.
If the Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the
Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(i) any sale, exchange or transfer (including by way of merger or
consolidation), to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange, transfer or other transaction is not prohibited by the relevant
Indenture),
(ii) the legal or covenant defeasance of the Notes or satisfaction and
discharge of the relevant Indenture, subject to customary contingent
reinstatement provisions,
(iii) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee or
(iv) upon the merger or consolidation of such Subsidiary Guarantor with
and into the Company or another Subsidiary Guarantor that is the surviving
Person in such merger or consolidation.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms that taken as a whole are no less favorable to the Company or
such Restricted Subsidiary than could be obtained, at the time of such
transaction or, if such transaction is pursuant to a written agreement, at the
time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
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The foregoing limitation does not limit, and shall not apply to:
(i) transactions (A) approved by a majority of the disinterested members
of the Board of Directors or (B) for which the Company or a Restricted
Subsidiary delivers to the relevant Trustee a written opinion of a
nationally recognized investment banking or appraisal firm stating that the
transaction is fair to the Company or such Restricted Subsidiary from a
financial point of view, or is upon terms that taken as a whole are no less
favorable to the Company or such Restricted Subsidiary than could be
obtained in a comparable arm's-length transaction;
(ii) any transaction solely between or among the Company and any of its
Wholly Owned Restricted Subsidiaries or solely between or among Wholly Owned
Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to directors
of the Company who are not employees of the Company;
(iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company
files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes;
(v) any Restricted Payments (or a transaction excluded from the
definition of the term "Restricted Payments") not prohibited by the
"Limitation on Restricted Payments" covenant;
(vi) transactions consisting of or pursuant to employment or benefit
agreements, plans, programs or arrangements for or with, or indemnification
or contribution obligations to, employees, officers or directors in the
ordinary course of business;
(vii) the entering into of the Securities Purchase and Cancellation
Agreement, the 1999 Share Option Plan, the Securities Purchase Agreement,
the Registration Rights Agreement and the Securityholders' Agreement, as
described in the Offering Memorandum relating to the Original Offering, and
performance of the obligations and the transactions contemplated thereby; or
(viii) issuances or sales of Capital Stock (other than Disqualified
Stock) of the Company or options, warrants or other rights to acquire such
Capital Stock.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (ii) through
(viii) of this paragraph, the aggregate amount of which exceeds $2 million in
value, must be approved or determined to be fair in the manner provided for in
clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the relevant Indenture to be directly secured equally and ratably with (or, if
the obligation or liability to be secured by such Lien is expressly subordinated
in right of payment to the Notes, prior to) the obligation or liability secured
by such Lien.
The foregoing limitation does not apply to:
(i) Liens existing on the Closing Date;
(ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the
Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such
other Restricted Subsidiary;
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(iv) Liens securing Indebtedness which is permitted to be Incurred under
clause (iii) of the second paragraph of the "Limitation on Indebtedness"
covenant to refinance secured Indebtedness; PROVIDED that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets securing the Indebtedness being
refinanced;
(v) Liens on the Capital Stock of, or any property or assets of, a
Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary
(or obligations in respect thereof) permitted under the "Limitation on
Indebtedness" covenant; or
(vi) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties more than one
year after acquiring such assets or properties and then or thereafter leases
such assets or properties or any part thereof or any other assets or properties
which the Company or such Restricted Subsidiary, as the case may be, intends to
use for substantially the same purpose or purposes as the assets or properties
sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(i) the lease is for a period, including renewal rights, of not in
excess of three years;
(ii) the lease secures or relates to industrial revenue or pollution
control bonds;
(iii) the transaction is solely between the Company and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(iv) the Company or such Restricted Subsidiary, within 12 months after
the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance
with clause (A) or (B) of the second paragraph of the "Limitation on Asset
Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless:
(i) the consideration received by the Company or such Restricted
Subsidiary (including any Released Indebtedness and including by way of
relief from or by any other Person assuming responsibilities for any
liabilities other than Indebtedness ("Released Liabilities")) is at least
equal to the fair market value of the assets sold or disposed of; PROVIDED
that this clause (i) shall not apply to any sale, transfer or other
disposition arising from foreclosure, condemnation or similar action with
respect to any assets and
(ii) at least 75% of the consideration received (including any Released
Indebtedness and Released Liabilities) consists of cash, Temporary Cash
Investments or Released Indebtedness and Released Liabilities; PROVIDED,
HOWEVER, that this clause (ii) shall not apply to long-term assignments in
capacity in a telecommunications network or other transfers of indefeasible
rights of use, multiple investment units or dark fibers.
In the event and to the extent that the Net Cash Proceeds received by the
Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the
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Company and its Subsidiaries has been filed with the Commission or provided to
the relevant Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant), then the Company shall or shall cause the relevant Restricted
Subsidiary to:
(i) within 12 months after the date Net Cash Proceeds so received exceed
10% of Adjusted Consolidated Net Tangible Assets
(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or any
Restricted Subsidiary providing a Notes Guarantee, or Indebtedness of any
other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or
(B) invest an equal amount, or the amount not so applied pursuant to
clause (A), (or enter into a definitive agreement committing to so invest
within 12 months after the date of such agreement) in property or assets
(other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as
determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) and
(ii) apply (no later than the end of the 12-month period referred to in
clause (i)) such excess Net Cash Proceeds (to the extent not applied or
committed to be applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause (i)
of the preceding sentence and not applied or committed to be applied as so
required by the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders of the Notes (and if and to the
extent required by the terms of any Indebtedness that is PARI PASSU with the
Notes or any Notes Guarantee ("Pari Passu Indebtedness"), purchase, redeem or
repay such Pari Passu Indebtedness) on a PRO RATA basis an aggregate principal
amount of Notes (and an amount of Pari Passu Indebtedness) equal to the Excess
Proceeds on such date, at a purchase price equal to 100% of the principal amount
of the Notes (and the required amount of Pari Passu Indebtedness) plus accrued
interest (if any) to the Payment Date. If the aggregate principal amount of the
Notes and aggregate principal amount of such Pari Passu Indebtedness validly
tendered and not withdrawn (or otherwise subject to purchase, redemption or
repayment) exceeds such Excess Proceeds, such Excess Proceeds will be
apportioned between the Notes and such Pari Passu Indebtedness, with the portion
of such Excess Proceeds payable in respect of the Notes to equal the lesser of
(x) the Excess Proceeds amount multiplied by a fraction, the numerator of which
is the aggregate principal amount of the Notes and the denominator of which is
the sum of the aggregate principal amount of the Notes and the aggregate
principal amount of such Pari Passu Indebtedness and (y) the principal amount of
Notes validly tendered and not withdrawn.
Any Excess Proceeds remaining after such Offer to Purchase is completed may
be applied to fund any general corporate purpose not prohibited by the relevant
Indenture.
For purposes of the first paragraph of this "Limitation on Asset Sales"
covenant:
(1) securities received by the Company or any Restricted Subsidiary in
any Asset Sale that are converted by the Company or such Restricted
Subsidiary into cash within 12 months after such Asset Sale and
(2) consideration consisting of Indebtedness of the Company or any
Restricted Subsidiary, shall be deemed to be cash.
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REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, PLUS accrued and
unpaid interest (if any) to the Payment Date.
The terms of other Indebtedness of the Company and its Subsidiaries may
provide that the occurrence of a Change of Control constitutes a default
thereunder, prohibit certain events that would constitute a Change of Control,
or require such Indebtedness to be repurchased or repaid upon a Change of
Control. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under the terms of such
other Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. The above covenant requiring
the Company to repurchase the Notes will, unless consents are obtained, require
the Company to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase. The Company's ability to pay cash to the Holders upon a Change of
Control may be limited by the Company's then existing financial resources. There
can be no assurance that the Company will have sufficient funds available at the
time of any Change of Control to make any debt payment (including repurchases of
Notes) required by the foregoing covenant or under the terms of any other
Indebtedness.
The Change of Control purchase feature is a result of negotiations between
the Company and the Placement Agents. The Company has no present plans to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
contained in the Indentures, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or recapitalizations,
that would not constitute a Change of Control under the Indentures, but that
could increase the amount of Indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall file with the Commission to the extent then
permitted by the Securities Exchange Act of 1934, as amended, and by the
Commission, all such information on an appropriate available form as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Securities Exchange Act of 1934 as if it were a U.S. company and subject thereto
including information required by annual, quarterly and current reports whether
or not required to be so filed. The Company shall supply the relevant Trustee
and each Holder or shall supply to the relevant Trustee for forwarding to all
Holders, without cost to such Holders, copies of such reports and other
information. In addition, at all times prior to the earlier of the date of the
Registration and the date that is six months after the Closing Date, the Company
shall, at its cost, supply the relevant Trustee and each Holder or shall supply
to the relevant Trustee for forwarding to all Holders, without cost to such
Holders, quarterly and annual reports substantially equivalent to those
described above or which would otherwise be required by the Exchange Act
commencing with the report for the fiscal quarter ending immediately after the
Closing Date; provided that the Company may deliver copies of the registration
statement (including pre-effective amendments thereto) with respect to the
Exchange Offer to the extent it contains the information that would have been
required in such reports. In addition, at all times prior to the Registration,
upon the request of any Holder or any prospective purchaser of the Notes
designated by a Holder, the Company shall supply to such Holder or such
prospective purchaser the information required under Rule 144A under the
Securities Act.
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EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the relevant
Indenture:
(a) default in the payment of principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise;
(b) default in the payment of interest on any Note when the same becomes
due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first five scheduled interest
payments on the relevant series of Notes on the applicable Interest Payment
Date will constitute an Event of Default with no grace or cure period;
(c) default in the performance or breach of the provisions of such
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase when required in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of
Control" covenant;
(d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in such Indenture or under the relevant
Notes (other than a default specified in clause (a), (b) or (c) above) or
the relevant Pledge Agreement and such default or breach continues for a
period of 30 consecutive days after written notice by the relevant Trustee
or the Holders of 25% or more in aggregate principal amount of the relevant
series of Notes;
(e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal
amount of $10 million or more in the aggregate for all such issues of all
such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the holder thereof to
declare such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such acceleration
has not been rescinded or annulled within 30 days of such acceleration
and/or (II) the failure to make a principal payment at the final (but not
any interim) fixed maturity and such defaulted payment shall not have been
made, waived or extended within 30 days of such payment default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $10 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 60 consecutive days
following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $10 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or order
for (A) relief in respect of the Company or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of the Company or any Significant Subsidiary or for all or substantially all
of the property and assets of the Company or any Significant Subsidiary or
(C) the winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall remain
unstayed and in effect for a period of 30 consecutive days; or
(h) the Company or any Significant Subsidiary (A) commences a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar
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official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit
of creditors; or
(i) the relevant Pledge Agreement shall cease to be in full force and
effect or enforceable in accordance with its terms, other than in accordance
with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the relevant Indenture, the relevant Trustee or the Holders of
at least 25% in aggregate principal amount of the Dollar Notes or the Euro
Notes, as the case may be, then outstanding, by written notice to the Company
(and to the relevant Trustee if such notice is given by the Holders), may, and
such Trustee at the request of such Holders shall, declare the principal of, and
premium, if any, and accrued and unpaid interest on the relevant Notes to be
immediately due and payable. Upon a declaration of acceleration, such principal
of, and premium, if any, and accrued and unpaid interest shall be immediately
due and payable. In the event of a declaration of acceleration because an Event
of Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) shall
be remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
principal of, and premium, if any, and accrued and unpaid interest on the Notes
then outstanding shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of either Trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding Notes of the relevant series, by written notice to the Company and
to the relevant Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if:
(i) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the relevant Notes that have
become due solely by such declaration of acceleration, have been cured or
waived and
(ii) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Dollar Notes or Euro Notes, as the case may be, may direct the time,
method and place of conducting any proceeding for any remedy available to the
relevant Trustee or exercising any trust or power conferred on such Trustee.
However, such Trustee may refuse to follow any direction that conflicts with law
or the relevant Indenture, that may involve such Trustee in personal liability,
or that such Trustee determines in good faith may be unduly prejudicial to the
rights of Holders of the Dollar Notes or Euro Notes, as the case may be, not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from Holders of
the relevant Notes. A Holder may not pursue any remedy with respect to the
relevant Indenture or the relevant Notes unless:
(i) the Holder gives the relevant Trustee written notice of a continuing
Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Dollar Notes or Euro Notes, as the case may be, make a written
request to such Trustee to pursue the remedy;
(iii) such Holder or Holders offer such Trustee indemnity satisfactory
to such Trustee against any costs, liability or expense;
(iv) such Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
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(v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Dollar Notes or Euro Notes, as the case
may be, do not give such Trustee a direction that is inconsistent with the
request.
However, such limitations do not apply to the right of any Holder of a Note to
receive payment of the principal of, and premium, if any, or interest on, such
Note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
Each Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under such Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company is also obligated to notify the relevant Trustee of any default or
defaults in the performance of any covenants or agreements under the relevant
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless:
(i) the Company shall be the continuing Person, or the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or that acquired or leased such property and assets of the Company
shall be a corporation organized and validly existing under the laws of the
Kingdom of the Netherlands (including the Netherlands Antilles), Bermuda,
Canada, Switzerland, any member state of the European Union or the United
States of America or any jurisdiction thereof and shall expressly assume, by
a supplemental indenture, executed and delivered to the relevant Trustee,
all of the obligations of the Company on the relevant series of Notes and
under the relevant Indenture;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro forma
basis, the Company or any Person becoming the successor obligor of the Notes
shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
PROVIDED that this clause (iii) shall only apply to a sale of less than all
of the assets of the Company;
(iv) immediately after giving effect to such transaction on a pro forma
basis the Company, or any Person becoming the successor obligor on such
Notes, as the case may be, could Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant; PROVIDED
that this clause (iv) shall not apply to a consolidation, merger or sale of
all (but not less than all) of the assets of the Company if all Liens and
Indebtedness of the Company or any Person becoming the successor obligor of
the Notes, as the case may be, and its Restricted Subsidiaries outstanding
immediately after such transaction would, if Incurred at such time, have
been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have
been Incurred) for all purposes of the relevant Indenture; and
(v) the Company delivers to the relevant Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clauses (iii) and (iv) above) and Opinion of Counsel, in each case to
the effect that such consolidation, merger or transfer and such supplemental
indenture
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complies with this provision and that all conditions precedent provided for
in this paragraph relating to such transaction have been complied with;
PROVIDED, HOWEVER, that (x) in giving any such opinion such counsel may rely on
an Officers' Certificate as to compliance with the foregoing clauses (ii), (iii)
and (iv) and as to any matters of fact and (y) clauses (iii) and (iv) above will
not apply if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the jurisdiction of
organization of the Company, and such transaction does not have as one of its
purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE
Each Indenture provides that the Company will be deemed to have paid and
will be discharged from any and all obligations in respect of the Notes issued
thereunder on the 123rd day after the deposit referred to below, and the
provisions of the relevant Indenture will no longer be in effect with respect to
such Notes (except for, among other matters, certain obligations to register the
transfer or exchange of such Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things:
(A) the Company has deposited with the relevant Trustee, in trust, money
and/or U.S. Government Obligations, in the case of Dollar Notes, or European
Government Obligations, in the case of Euro Notes, that through the payment
of interest and principal in respect thereof in accordance with their terms
will provide money in an amount sufficient to pay the principal of, premium,
if any, and accrued interest on the relevant Notes (i) on the Stated
Maturity of such payments in accordance with the terms of the relevant
Indenture and such Notes or (ii) on any earlier Redemption Date pursuant to
the terms of the relevant Indenture and such Notes; PROVIDED that the
Company has provided the relevant Trustee with irrevocable instructions to
redeem all of the outstanding Notes of such series on such Redemption Date,
(B) the Company has delivered to the relevant Trustee (i) either (x) an
Opinion of Counsel to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of the Company's
exercise of its option under this "Defeasance" provision and will be subject
to federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the
same effect unless there has been a change in applicable federal income tax
law after the Closing Date such that a ruling is no longer required or (y) a
ruling directed to the relevant Trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel and (ii)
an Opinion of Counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the
passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending on
the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any other
material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and
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(D) if at such time the relevant Notes are listed on a national
securities exchange, the Company has delivered to the relevant Trustee an
Opinion of Counsel to the effect that the relevant Notes will not be
delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT
Each Indenture further provides that the provisions of such Indenture will
no longer be in effect with respect to clauses (iii) and (iv) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Covenants" and "Repurchase of Notes upon a Change of Control,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets" and with respect to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants, clause (d) under "Events of Default" with respect to such other
covenants and clauses (e) and (f) under "Events of Default" shall be deemed not
to be Events of Default upon, among other things, the deposit with the relevant
Trustee, in trust, of money and/or U.S. Government Obligations in the case of
Dollar Notes, and European Government Obligations, in the case of Euro Notes,
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the relevant Notes
(i) on the Stated Maturity of such payments in accordance with the terms of the
relevant Indenture and the Notes or (ii) on any earlier Redemption Date pursuant
to the terms of the relevant Indenture and such Notes, PROVIDED that the Company
has provided the relevant Trustee with irrevocable instructions to redeem all of
the outstanding Notes of such series on such Redemption Date, the satisfaction
of the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the relevant Trustee of an Opinion
of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT
In the event the Company exercises its option to omit compliance with
certain covenants and provisions of either Indenture with respect to the
relevant series of Notes as described in the immediately preceding paragraph and
such Notes are declared due and payable because of the occurrence of an Event of
Default that remains applicable, the amount of money and/or U.S. Government
Obligations, in the case of Dollar Notes, and European Government Obligations,
in the case of Euro Notes, on deposit with the relevant Trustee will be
sufficient to pay amounts due on such Notes at the time of their Stated Maturity
or earlier Redemption Date but may not be sufficient to pay amounts due on such
Notes at the time of the acceleration resulting from such Event of Default.
However, the Company will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of either Indenture or either Pledge Agreement
may be made by the Company and the relevant Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the
outstanding Dollar Notes or Euro Notes, as the case may be; PROVIDED, HOWEVER,
that no such modification or amendment may, without the consent of each Holder
affected thereby:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(ii) reduce the principal amount of, or premium, if any, or interest on,
any Note,
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note,
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(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on
or after the Redemption Date) of any Note,
(v) reduce the above-stated percentage of outstanding Notes the consent
of whose Holders is necessary to modify or amend the applicable Indenture,
(vi) waive a default in the payment of principal of, or premium, if any,
or interest on, the Notes,
(vii) release any collateral subject to the relevant Pledge Agreement
(other than as contemplated thereby), or
(viii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the applicable Indenture or for waiver
of certain defaults.
ADDITIONAL AMOUNTS
All payments made by the Company under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account of
any present or future tax, duty, levy, impost, assessment, or other governmental
charge (including penalties, interest and other liabilities related thereto)
(collectively, "Taxes") imposed or levied by or on behalf of Luxembourg or any
other jurisdiction in which the Company is organized or is a resident for tax
purposes or by any government authority or political subdivision or territory or
possession or agency therein or thereof having the power to tax (each, a "Taxing
Authority"), unless the Company is required to withhold or deduct Taxes by law
or by the interpretation or administration thereof.
If the Company is required to withhold or deduct any amount for or on
account of Taxes imposed by a Taxing Authority within Luxembourg or within any
other jurisdiction in which the Company is organized or is a resident for tax
purposes, from any payment made under or with respect to the Notes, the Company
will pay such additional amounts ("Additional Amounts") as may be necessary so
that the net amount received by each Holder of Notes after such withholding or
deduction will not be less than the amount the Holder and beneficial owner would
have received if such Taxes had not been withheld or deducted; PROVIDED that no
Additional Amounts will be payable with respect to a payment made to a Holder of
Notes or to a third party on behalf of a Holder, with respect to:
(a) any Taxes that would not have been so imposed but for the existence
of any present or former connection between such Holder and the jurisdiction
imposing such tax (other than the mere receipt of such payment or the
ownership or holding outside of Luxembourg of such Note);
(b) any estate, inheritance, gift, sales, excise, transfer, personal
property tax or similar tax, assessment or governmental charge;
(c) any Taxes payable otherwise than by deduction or withholding from
payments of principal of, premium, if any, or interest on such Note; or
(d) Taxes that would not have been imposed but for the failure of the
Holder or beneficial owner of a Note to comply, upon written request
therefor furnished by the Company to the Trustee, with any certification,
identification, information, or other documentation requirement under law,
regulation, administrative practice or an applicable treaty that is a
precondition to exemption from, or reduction in the rate of the imposition,
deduction or withholding of Taxes;
nor will Additional Amounts be paid:
(i) if the payment under or with respect to the Notes could have been
made by another paying agent without such deduction or withholding,
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(ii) if the payment under or with respect to the Notes could have been
made without such deduction or withholding if the beneficiary of the payment
had presented the Note for payment within 30 days after (A) the date on
which such payment or such Note became due and payable or (B) the date on
which payment thereof is duly provided for, whichever is later (except to
the extent that the holder would have been entitled to Additional Amounts
had the Note been presented on the last day of such 30 day period),
(iii) with respect to any payment under or with respect to the Notes to
any holder who is a fiduciary or partnership or any person other than the
sole beneficial owner of such payment, to the extent that a beneficiary or
settlor with respect to such fiduciary, a member of such a partnership or
the beneficial owner of such payment would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the actual holder of such Note.
The Company will also (i) make such withholding or deduction and (ii) remit the
full amount deducted or withheld to the relevant authority in accordance with
applicable law. The Company will use its reasonable efforts to obtain certified
copies of tax receipts evidencing the payment of any Taxes so deducted or
withheld from each Taxing Authority imposing such Taxes. The Company will supply
to the relevant Trustee for forwarding to all Holders, without cost to such
Holders, within 60 days after the date the payment of any Taxes so deducted or
withheld is due pursuant to applicable law, certified copies of tax receipts
evidencing such payment by the Company or if, notwithstanding the Company's
efforts to obtain such receipts, the same are not obtainable, other evidence of
such payments by the Company.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Company will be obligated to pay
Additional Amounts with respect to such payment, the Company will deliver to the
relevant Trustee an Officers' Certificate stating the fact that such Additional
Amounts will be payable, the amounts so payable and will set forth such other
information as is necessary to enable such Trustee to pay such Additional
Amounts to holders of Notes on the payment date.
The foregoing provisions shall survive any termination or the discharge of
the relevant Indenture and shall apply MUTATIS MUTANDIS to any jurisdiction in
which any successor Person to the Company is organized or is engaged in business
for tax purposes or any political subdivision or taxing authority or agency
thereof or therein.
In addition, the Company will pay any stamp, issue, registration,
documentary or other similar taxes and duties, including interest and penalties,
payable in Luxembourg or any political subdivision thereof or therein in respect
of the creation, issue and offering of the Notes.
Whenever in the relevant Indenture, the Notes or this prospectus there is
mentioned in any context, the payment of amounts based upon principal of,
premium, if any, or interest or of any other amount payable under or with
respect to any of the Notes, such mention shall be deemed to include mention of
the payment of Additional Amounts to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof.
GOVERNING LAW AND CONSENT TO JURISDICTION
The Notes and the Indentures are governed by the laws of the State of New
York. The Company has appointed CT Corporation System, 1633 Broadway, New York,
NY 10019 as its agent for service of process in any suit, action or proceeding
with respect to the relevant Indenture or the Notes and for actions brought
under federal or state securities laws, in each case brought in any federal or
state court located in the City of New York and will agree to submit to the
jurisdiction of such courts.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
Each Indenture provides that no recourse for the payment of the principal
of, or premium, if any, or interest on, any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no
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recourse under or upon any obligation, covenant or agreement of the Company in
such Indenture, or in any of the Notes or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer, director, employee or controlling person of the Company or
of any successor Person thereof. Each Holder, by accepting the Notes, waives and
releases all such liability.
CONCERNING THE TRUSTEE
Each Indenture provides that, except during the continuance of a Default,
the relevant Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Indenture. If an Event of Default
has occurred and is continuing, the relevant Trustee will use the same degree of
care and skill in its exercise of the rights and powers vested in it under such
Indenture as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
Each Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the relevant Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. Such Trustee is
permitted to engage in other transactions; PROVIDED, HOWEVER, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
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TAXATION
As used herein, the term "Company" refers to Carrier1 International,
excluding its subsidiaries.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
considerations relevant to the acquisition, ownership and disposition of the
Notes. The discussion is based upon provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), its legislative history, judicial authority,
current administrative rulings and practice, and existing and proposed Treasury
Regulations, including regulations concerning the treatment of debt instruments
issued with original issue discount (the "OID Regulations"), all as in effect
and existing on the date hereof. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the conclusions
set forth below, possibly on a retroactive basis. This discussion assumes that
any Notes are or will be held as capital assets (as defined in Section 1221 of
the Code) by the holders thereof. Except as otherwise described herein, this
discussion applies only to a person that is an initial holder who purchased
Units pursuant to the Original Offering at the initial offering price and that
is (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States, any
State thereof or the District of Columbia, (iii) an estate the income of which
is subject to U.S. federal income taxation regardless of source or (iv) a trust
if a court within the United States is able to exercise primary supervision over
the administration of such trust and one or more U.S. persons has the authority
to control all substantial decisions of such trust (a "U.S. Holder"). Non-U.S.
Holders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the Notes. In addition, this
discussion does not purport to deal with all aspects of U.S. federal income
taxation that might be relevant to other particular holders in light of their
personal investment circumstances or status, nor does it discuss the U.S.
federal income tax consequences to certain types of holders that may be subject
to special rules under the U.S. federal income tax laws, such as persons owning
(or treated as owning) 10% or more of the total combined voting power of the
Company, financial institutions, insurance companies, dealers in securities or
foreign currency, tax-exempt organizations, foreign corporations or nonresident
alien individuals, or persons that hold Notes that are a hedge against, or that
are hedged against, currency risk or that are part of a straddle or conversion
transaction, or persons whose functional currency is not the U.S. dollar.
Moreover, the effect of any applicable state, local or foreign tax laws is not
discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH HOLDER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF NOTES.
EXCHANGE OFFER. The exchange of an Old Note by a U.S. Holder for a New Note
will not constitute a taxable exchange of the Note, and thus a U.S. Holder will
not recognize taxable gain or loss upon receipt of a New Note, a U.S. Holder's
holding period for a New Note will include the holding period for the Old Note
so exchanged and such U.S. Holder's adjusted tax basis in a New Note will be the
same as such U.S. Holder's adjusted tax basis in the Old Note so exchanged.
ALLOCATION OF ISSUE PRICE BETWEEN NOTES AND WARRANTS
The Old Notes were issued together with warrants and were treated as part of
an "investment unit" for U.S. Federal income tax purposes. Accordingly, the
total issue price of each Unit was allocated between its components (i.e., Notes
and warrants) on the basis of the fair market value of each such component as of
the issue date. The amounts so allocated were a U.S. Holder's initial tax basis
in his warrants and Notes, respectively, and the amount so allocated to the
Notes was the issue price of the Notes. The issue price of the Dollar Units for
U.S. federal income tax purposes was the price at which a substantial amount of
the Dollar Units were sold to the public (excluding sales to dealers,
underwriters, brokers and similar persons).
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The issue price of the Euro Units for U.S. federal income tax purposes was
determined under the same principle. The Company intends to take the position
that $9.02 of the $1,000 issue price of each Dollar Unit should be allocated to
each associated warrant and the remainder should be allocated to each Dollar
Note. The Company also intends to take the position that [Euro]9.02 of the
[Euro]1,000 issue price of each Euro Unit should be allocated to each associated
warrant and the remainder should be allocated to each Euro Note. On the basis of
this allocation and the Company's best judgment, the amount of original issue
discount ("OID") will fall within the DE MINIMIS exception for OID under the
Code and will be treated as zero. Each Holder will be bound by such allocation
for U.S. federal income tax purposes unless such Holder disclosed on a statement
attached to its tax return for the taxable year that includes the acquisition
date of such Unit that its allocation differs from that of the Company. No
assurance can be given that the Internal Revenue Service (the "IRS") will accept
the Company's allocation. If the Company's allocation were successfully
challenged by the IRS, the issue price, the amount of original issue discount
accrued on the Notes and gain or loss on the sale or disposition of a Note or
warrant would be different from that resulting under the allocation determined
by the Company.
NOTES
TAXATION OF STATED INTEREST ON NOTES. Stated interest on a Note will be
includible in the income of a U.S. Holder in accordance with such U.S. Holder's
regular method of tax accounting. In the case of the Euro Notes, a cash method
U.S. Holder will translate stated interest into U.S. dollars at the spot
exchange rate in effect on the date such interest payment is received. In the
case of an accrual method U.S. Holder of Euro Notes, the amount of any interest
income accrued during any accrual period will generally be determined by
translating such accruals into U.S. dollars at the average exchange rate
applicable to the accrual period (or, with respect to an accrual period that
spans two taxable years, at the average exchange rate for the partial period
within the taxable year). Such a U.S. Holder will additionally realize exchange
gain or loss with respect to any interest income accrued on the date that
payment in respect of such interest income is received (or on the date the Note
is disposed of) in an amount equal to the difference between (x) the amount
determined by converting the amount of the payment received into U.S. dollars at
the spot exchange rate in effect on the date such payment is received and (y)
the amount of interest income accrued in respect of such payment according to
the rule set forth in the prior sentence. Any such exchange gain or loss will
generally be treated as ordinary income or loss. Notwithstanding the rules
described above, an accrual method U.S. Holder may alternatively make an
election to apply a "spot accrual convention" that effectively allows such U.S.
Holder to translate accrued interest into U.S. dollars at a single spot exchange
rate, as set forth in Treasury Regulations Section1.988-2(b)(2)(iii)(B). The
above election will apply to all other debt obligations held by the U.S. Holder
and may not be changed without the consent of the IRS. The amount of interest
income earned by a U.S. Holder as set forth in this paragraph will generally be
treated as "passive income" or, in the case of certain U.S. Holders, "financial
services income", in either case from sources outside the United States, and any
foreign currency exchange gain or loss as set forth in this paragraph will
generally be treated as realized from sources within the United States.
SALE, EXCHANGE OR REDEMPTION OF NOTES
In general, unless a nonrecognition provision applies, the sale, exchange,
redemption (including pursuant to an offer by the Company) or other disposition
of a Note will be a taxable event for U.S. federal income tax purposes. In such
event, a U.S. Holder will recognize gain or loss equal to the difference between
(i) the amount of cash plus the fair market value of any property received upon
such sale, exchange, redemption or other taxable disposition (except to the
extent such cash or property is attributable to accrued interest, which will be
taxable as ordinary income) and (ii) the U.S. Holder's adjusted tax basis in the
Note. Any such gain or loss with respect to a Dollar Note should be capital gain
or loss and will be long-term capital gain or loss if such Dollar Note has been
held by the U.S. Holder for more than one year at the time of such sale,
exchange, redemption or other disposition. Such gain generally will be treated
as U.S. source and, under recently issued U.S. Treasury Regulations, loss on
such
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disposition would be allocated to reduce U.S. source income, subject to
applicable limitations. With respect to the sale, exchange, retirement or
repayment of a Euro Note, the foreign currency amount realized will be
considered to be the payment of accrued but unpaid interest (on which exchange
gain or loss is recognized as described above) and as a payment of principal.
With respect to such payment of principal, exchange, gain or loss is separately
computed on the foreign currency amount of the purchase price that is repaid to
the extent that the rate of exchange on the date of retirement or disposition
differs from the rate of exchange on the date such Euro Note was acquired.
Exchange gain or loss computed on accrued interest, and principal is recognized,
however, only to the extent of total gain or loss on the transaction. In
general, any such recognized exchange, gain or loss will be treated as ordinary
income realized from U.S. sources.
SPECIAL INTEREST
Because the Notes provide for the payment of special interest in certain
circumstances described under "Description of the Notes--Registration Rights"
("Special Interest"), the Notes will be subject to the Treasury Regulations that
apply to debt instruments that provide for one or more contingent payments.
Under those Regulations, however, a payment is not a contingent payment merely
because of a contingency that, as of the issue date, is either "remote" or
"incidental". The Company intends to take the position that, solely for these
purposes, the payment of Special Interest is a remote or incidental contingency.
The Company's determination that such payments are a remote or incidental
contingency for these purposes is binding on a U.S. Holder, unless such U.S.
Holder discloses in the proper manner to the Internal Revenue Service that it is
taking a different position. Prospective investors should consult their tax
advisers as to the tax considerations relating to the payment of Special
Interest, in particular in connection with the Treasury Regulations relating to
contingent payment instruments.
TAXATION OF ADDITIONAL AMOUNTS
In the event that Additional Amounts are paid in respect of withholding or
deduction for taxes imposed on payments on the Notes (as described in
"Description of the Notes--Additional Amounts") such Additional Amounts will be
taxable to a U.S. Holder as ordinary income at the time such amounts are accrued
or received, in accordance with the U.S. Holder's method of accounting for U.S.
federal income tax purposes. The amount taxable to a U.S. Holder also will
include all taxes withheld or deducted in respect thereof. Thus, a U.S. Holder
may be required to report income in an amount greater than the cash it receives
in respect of payments on its Notes. However, a U.S. holder may, subject to
certain limitations, be eligible to claim as a credit or deduction in respect of
such taxes for purposes of computing its U.S. federal income tax liability. The
rules relating to foreign tax credits are extremely complex, and U.S. Holders
should consult their own tax advisors with regard to the availability of a
foreign tax credit and the application of the foreign tax credit to their
particular situation.
TRANSACTIONS IN EURO
Euro received as interest on, or on the sale, exchange or retirement of a
Euro Note will have a tax basis equal to their U.S. dollar value at the time
such interest is received or at the time payment is received in consideration of
such sale, exchange or retirement. The amount of gain or loss recognized on a
sale or other disposition of such Euro will be equal to the differences between
(i) the amount of U.S. dollars, or the fair market value in U.S. dollars of the
other currency or property received in such sale or other disposition and (ii)
the tax basis of such Euro.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and OID on a Note and the proceeds of certain
sales of Notes in respect of U.S. Holders other than certain exempt persons
(such as corporations). A 31.0% backup withholding tax will apply to such
payments if the U.S. Holder fails to provide a correct taxpayer identification
number or certification of exempt status or, with respect to certain payments,
the U.S. Holder fails to report in full all interest income and the IRS notifies
the payor of such under-reporting.
Any amounts withheld under the backup withholding rules will be allocated as
a credit against such U.S. Holder's U.S. federal income tax liability and may
entitle such U.S. Holder to a refund, provided the required information is
furnished to the IRS. Treasury regulations, generally effective for payment made
after December 31, 2000, modify certain of the certification requirements for
backup withholding. It is possible that the Company and other withholding agents
may request a new withholding exemption from holders in order to qualify for
continued exemption from backup withholding under Treasury regulations when they
become effective.
CERTAIN LUXEMBOURG TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX CONSULTANTS TO DETERMINE POSSIBLE
LUXEMBOURG TAX CONSEQUENCES OF AN EXCHANGE OR PURCHASE OF NOTES.
The following summary outlines certain Luxembourg tax consequences to
persons who are nonresidents of Luxembourg and who do not have a permanent
establishment in Luxembourg ("Non-Resident Holders") with respect to the
ownership and disposition of Notes.
Under Luxembourg tax laws currently in effect, there is no withholding tax
on payment of principal, interest, nor on accrued but unpaid interest in respect
of the Notes, nor is any Luxembourg withholding tax payable upon the redemption
of the Notes.
Non-Resident Holders of Notes are not liable for Luxembourg income tax on
payments of principal or interest or upon redemption of, or on capital gains on
sale of, any Notes.
No stamp, value added, issue, registration, transfer or similar taxes or
duties will, under present Luxembourg law, be payable in Luxembourg by the
holders of the Notes in connection with the issue of the Notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge and represent that it will deliver a
prospectus in connection with any resale of such New Notes. This prospectus, as
it may be amended or supplemented from time to time, may be used by certain
broker-dealers (as specified in the Registration Rights Agreement) in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. Carrier1 has agreed that, for a period not to exceed 90 days after
the Expiration Date, it will furnish additional copies of this prospectus, as
amended or supplemented, to any such broker-dealer that reasonably requests such
documents for use in connection with any such resale. In addition, until
, 1999, all dealers effecting transactions in the New Notes may be required to
deliver a prospectus.
Carrier1 will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Carrier1 has agreed to pay certain expenses incident to the Exchange Offer,
and Carrier1 will indemnify the holders of the Old Notes against certain
liabilities.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
Carrier1 by Debevoise & Plimpton, New York, New York, special New York counsel
to Carrier1.
EXPERTS
The financial statements as of December 31, 1998 and for the period from
February 20, 1998 (date of inception) to December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche Experta AG, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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PAGE
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<S> <C>
INDEPENDENT AUDITORS' REPORT............................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31,
1998:
Consolidated Balance Sheet............................................................................... F-3
Consolidated Statement of Operations..................................................................... F-4
Consolidated Statement of Shareholders' Equity........................................................... F-5
Consolidated Statement of Cash Flows..................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND FOR THE PERIOD
FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO MARCH 31, 1998:
Consolidated Balance Sheet............................................................................... F-19
Consolidated Statement of Operations..................................................................... F-20
Consolidated Statement of Shareholders' Equity........................................................... F-21
Consolidated Statement of Cash Flows..................................................................... F-22
Notes to Consolidated Financial Statements............................................................... F-23
</TABLE>
F-1
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Carrier1 International S.A.
We have audited the accompanying consolidated balance sheet of Carrier1
International S.A. and subsidiaries (collectively, the "Company") as of December
31, 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from February 20, 1998 (date of inception)
to December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Carrier1 International S.A. and
subsidiaries as of December 31, 1998, and the results of its operations and its
cash flows for the period from February 20, 1998 (date of inception) to December
31, 1998 in conformity with generally accepted accounting principles in the
United States of America.
DELOITTE & TOUCHE EXPERTA AG
<TABLE>
<S> <C>
/s/ DAVID WILSON /s/ JERRY M. MAYER
David Wilson Jerry M. Mayer
</TABLE>
Erlenbach, Switzerland
March 17, 1999
F-2
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 4,184
Restricted cash.................................................................. 1,518
Accounts receivables............................................................. 1,217
Unbilled receivables............................................................. 1,645
Other receivables................................................................ 3,014
Prepaid expenses and other current assets........................................ 3,179
---------
Total current assets........................................................... 14,757
PROPERTY AND EQUIPMENT--Net (See Note 5)........................................... 31,091
INVESTMENT IN JOINT VENTURE (See Note 6)........................................... 4,675
OTHER ASSETS....................................................................... 911
---------
TOTAL.............................................................................. $ 51,434
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................................................... $ 27,602
Accrued liabilities.............................................................. 4,643
---------
Total current liabilities...................................................... 32,245
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $2 par value, 30,000,000 shares authorized, 18,885,207 issued and
outstanding (See Note 2)....................................................... 37,770
Accumulated deficit.............................................................. (19,235)
Accumulated other comprehensive income........................................... 654
---------
Total shareholders' equity..................................................... 19,189
---------
TOTAL.............................................................................. $ 51,434
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<S> <C>
REVENUES.......................................................................... $ 2,792
OPERATING EXPENSES:
Cost of services................................................................ 11,669
Selling, general and administrative............................................. 8,977
Depreciation and amortization................................................... 1,409
---------
Total operating expenses...................................................... 22,055
---------
LOSS FROM OPERATIONS.............................................................. (19,263)
OTHER INCOME (EXPENSE):
Interest income (expense), net.................................................. 81
Other, net...................................................................... (53)
---------
Total other income (expense).................................................. 28
---------
LOSS BEFORE INCOME TAX BENEFIT.................................................... (19,235)
INCOME TAX BENEFIT--Net of valuation allowance (See Note 9)....................... --
---------
NET LOSS.......................................................................... $ (19,235)
---------
---------
EARNINGS (LOSS) PER SHARE:
Loss from operations:
Basic......................................................................... $ (2.61)
---------
---------
Diluted....................................................................... $ (2.61)
---------
---------
Net loss:
Basic......................................................................... $ (2.61)
---------
---------
Diluted....................................................................... $ (2.61)
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON ACCUMULATED COMPREHENSIVE
STOCK DEFICIT INCOME TOTAL
--------- ------------ ----------------- ----------
<S> <C> <C> <C> <C>
Issuance of shares (18,885,207 shares)....................... $ 37,770 -- -- $ 37,770
Comprehensive income (loss):
Net loss................................................... -- $ (19,235) -- (19,235)
Other comprehensive income, net of tax:
Currency translation adjustments......................... -- -- $ 654 654
----------
Total comprehensive loss................................... (18,581)
--------- ------------ ----- ----------
BALANCE--December 31, 1998................................... $ 37,770 $ (19,235) $ 654 $ 19,189
--------- ------------ ----- ----------
--------- ------------ ----- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (19,235)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 1,409
Changes in operating assets and liabilities:
Restricted cash............................................................. (1,518)
Receivables................................................................. (5,838)
Prepaid expenses and other current assets................................... (3,165)
Other assets................................................................ (898)
Trade accounts payable and accrued liabilities.............................. 14,804
---------
Net cash used in operating activities..................................... (14,441)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (15,191)
Investment in joint venture..................................................... (4,675)
---------
Net cash used in investing activities..................................... (19,866)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.......................................... 37,770
---------
Net cash provided by financing activities................................. 37,770
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS...................... 721
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 4,184
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................. --
---------
End of period................................................................... $ 4,184
---------
---------
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING ACTIVITIES:
As of December 31, 1998, the Company had purchased approximately $17,315 of
equipment on open accounts payable.
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 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.
Since inception, the Company has financed its operations through equity
contributions. The expansion of the Company's business and network will require
significant capital to fund planned capital expenditures, working capital, cash
flow deficits and any debt service. As of December 31, 1998, the major investors
had contributed $37,770 in equity to fund start-up operations and have committed
to contribute an additional $22,230 in equity. In January 1999, the major
investors contributed the additional $22,230 in exchange for common stock of the
Company. In February 1999, the Company raised additional capital through a
private placement debt offering (see Note 13). If additional sources of
financing are required, the Company intends to pursue commercial bank
borrowings, equipment financing or accounts receivable financing, or the private
or public sale of equity or debt securities.
2. ORGANIZATION
In February 1998, the investors of the Company purchased a shelf company
registered in the United Kingdom which was ultimately renamed Carrier1 UK
Limited ("UK"). Subsequently, UK formed subsidiaries in Switzerland, Germany,
the United States and the United Kingdom. In August 1998, Carrier1 International
S.A. ("SA") was formed. Subsequently, SA formed subsidiaries in France, the
Netherlands, Germany, Austria and Luxembourg. Both UK and SA were 99.995% owned
by Carrier One, LLC ("LLC"), a Delaware limited liability company. In December
1998, the Company reorganized the ownership structure of all of its
subsidiaries. The Company, in exchange for all of the outstanding shares of UK,
issued 15,365,207 shares of common stock to LLC.
The effects of the reorganization have been accounted for as a
reorganization of entities under common control similar to a pooling of
interests. This reorganization has been reflected in the Company's consolidated
financial statements as if the post-reorganization structure had been in effect
since the date of inception since all of the entities are under common control.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Estimates are used
when accounting for such items as revenue,
F-7
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
long-term customer contracts, allowances for uncollectable receivables,
investments, telecommunications expense, depreciation and amortization, employee
benefit plans and taxes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles in the United States.
The financial statements include the consolidated accounts of the Company with
all significant intercompany balances and transactions eliminated.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the Company's reporting currency. The financial
statements of the Company's non-U.S. subsidiaries, where the local currency is
the functional currency, are translated into U.S. dollars using exchange rates
in effect at period end for assets and liabilities and average exchange rates
during each reporting period for results of operations. Adjustments resulting
from translation of financial statements are reflected as a separate component
of shareholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the respective functional
currency are included in results of operations as incurred.
REVENUE
The Company recognizes revenue on telecommunication services, generally
measured in terms of traffic minutes processed or transmission capacity provided
to customers, in the period that the service is provided. Revenue is presented
net of discounts.
COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity for a period except those resulting
from investments by owners and distributions to owners. For the period from
February 20, 1998 (date of inception) to December 31, 1998, other comprehensive
income consisted of foreign currency translation adjustments.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed by
including the stock options and stock subscriptions considered to be dilutive
common stock equivalents, unless deemed anti-dilutive.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of interest bearing certificates of
deposit of well-rated European banks. The Company considers all highly-liquid
investments with a maturity of 90 days or less at the time of
F-8
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purchase to be cash equivalents. The carrying amount reported in the
accompanying balance sheets for cash equivalents approximates fair value due to
the short-term maturity of these instruments.
RESTRICTED CASH
At December 31, 1998, $1,518 of cash was pledged as collateral on
outstanding letters of credit and guarantees to telecommunication companies that
provide refile services to the Company.
OTHER RECEIVABLES
Other receivables consist primarily of value-added tax refund receivables at
December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes the charges received from the equipment and software suppliers for
turnkey installation and customization and network set-up costs. Depreciation is
recorded commencing with the first full month that the assets are in service.
The straight-line depreciation method is applied using the assets' estimated
useful lives as follows:
<TABLE>
<S> <C>
Switching equipment, routers and
network management equipment
including related software 5 years
Computer and data center equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of lease term or estimated
useful life
</TABLE>
Indefeasible right of use investments are amortized over their estimated
useful lives, not to exceed 15 years even in those cases where the right of use
has been acquired for a longer period of time. During the period from February
20, 1998 (date of inception) to December 31, 1998, the Company acquired a
25-year indefeasible right of use on a transatlantic cable. This indefeasible
right of use is being amortized over a useful life of 15 years. Maintenance,
repairs, and reengineering costs are charged to expense as incurred.
LONG-LIVED ASSETS
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. In the event that events
or circumstances indicate that the cost of any long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down is required. The write-down would be measured as the difference
between the discounted estimated future operating cash flows from such asset and
the carrying value.
F-9
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION PLANS
The Company maintains various plans for providing employee pension benefits,
which conform to laws and practices in the countries concerned. Retirement
benefit plans are generally funded by contributions by both the employees and
the companies to independent entities that operate the retirement benefit
schemes. Where this is not the case, appropriate liabilities are recorded in the
financial statements. Currently, all of the Company's pension plans are defined
contribution plans.
TAXES
Taxes are provided based on reported income and include taxes on capital as
well as non-recoverable tax withheld on dividends, management fees and royalties
received or paid. Such taxes are calculated in accordance with the tax
regulations in effect in each country. The Company provides for deferred taxes
using the comprehensive liability method. Provision is made in respect of all
temporary differences arising between the tax values of assets and liabilities
and their values in the consolidated financial statements. Provision is made
against deferred tax assets to the extent that it is more likely than not that
these will not be realized. Deferred tax balances are adjusted for subsequent
changes in tax rates or for new taxes imposed. Deferred tax liabilities are
included under provisions. Non-recoverable withholding taxes are only accrued if
distribution by subsidiary companies is probable.
STOCK-BASED COMPENSATION PLANS
The Company records compensation expense for its stock-based compensation
plans in accordance with the intrinsic value method prescribed by APB 25,
"Accounting for Stock Issued to Employees." Intrinsic value is the amount by
which the estimated market value of the underlying stock exceeds the exercise
price of the stock option on the measurement date, generally the date of grant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998, the carrying amounts of the Company's financial
instruments approximate their fair value.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 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
F-10
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standard is effective for the Company'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 the Company's financial statements.
4. EARNINGS PER SHARE
The following details the earnings per share calculations for the period
from February 20, 1998 (date of inception) to December 31, 1998 (in thousands of
U.S. dollars, except per share information):
<TABLE>
<S> <C>
Loss from operations............................................ $ (19,263)
---------
---------
Net loss........................................................ $ (19,235)
---------
---------
Total number of shares used to compute basic earnings
(loss) per share.............................................. 7,367,000
---------
---------
Loss from operations:
Basic loss per share.......................................... $ (2.61)
---------
---------
Diluted loss per share........................................ $ (2.61)
---------
---------
Net loss:
Basic loss per share.......................................... $ (2.61)
---------
---------
Diluted loss per share........................................ $ (2.61)
---------
---------
</TABLE>
Potential dilutive securities have been excluded from the computation for
the period from February 20, 1998 (date of inception) to December 31, 1998 as
their effect is antidilutive. Had the Company been in a net income position for
the period from February 20, 1998 (date of inception) to December 31, 1998,
diluted earnings per share would have included an additional 2,822,000 shares
related to outstanding stock options and stock subscriptions (determined using
the treasury stock method at the estimated average market value).
F-11
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Network equipment............................................... $ 14,613
Indefeasible right of use investments........................... 11,106
Leasehold improvements.......................................... 1,712
Furniture, fixtures and office equipment........................ 709
Construction in progress........................................ 4,353
-----------
32,493
Less: accumulated depreciation and amortization................. (1,402)
-----------
Property and equipment, net................................... $ 31,091
-----------
-----------
</TABLE>
At December 31, 1998, network equipment totaling $13,565 has been accrued as
trade accounts payable and is expected to be pledged as collateral under a
product financing arrangement with a vendor. The Company is currently
negotiating the terms and conditions of such financing arrangement with the
vendor, which is obligated to provide financing under the terms of the related
turnkey purchase agreement.
6. INVESTMENT IN JOINT VENTURE
The Company entered into a binding letter of intent dated August 20, 1998
(the "LOI") with affiliates of Viatel, Inc. ("Viatel") and Metromedia Fiber
Network, Inc. ("Metromedia") which sets forth the principal terms upon which the
parties will build and own a telecommunications network in Germany (the "German
Network"). Under the LOI, the parties have agreed to form a company (the
"Developer") to act as their agent to arrange construction of the German
Network. The Developer will be owned 50.01%, 24.995%, and 24.995% by Viatel, the
Company and Metromedia, respectively. The Developer will be responsible for the
development, design, construction and supervision of the German Network and will
also provide other services related to the German Network.
The parties are currently in negotiations with respect to the legal
structure of the Developer and the definitive project terms. Until such
development agreement has been negotiated and executed by the parties, Viatel
will provide such services as the Developer is obligated to provide under the
LOI. Each of the parties has contributed $4.05 million for incremental costs,
and their pro-rata share of $2.5 million for pre-development costs. Each party
is obligated to provide the Developer with a $75 million letter of credit,
conditional upon the ability of each of the Company and Metromedia to raise at
least $75 million through financing or equity. Failure by any party to do so
will terminate the LOI with respect to such party, and any or all of the parties
that have not so defaulted may, at their option, assume the rights and
obligations of the defaulting party and continue with the construction of the
German Network. If neither remaining party assumes the rights and obligations of
the defaulting party, the LOI is terminated. Under the terms of the LOI, Viatel
is entitled to receive a developer's fee of 3% of certain construction costs
associated with the German Network.
Upon completion of the German Network, each party will own its own cable
subduct and access points. In addition, to the extent possible, each party will
have its own divisible and transferable rights in all
F-12
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
6. INVESTMENT IN JOINT VENTURE (CONTINUED)
permits, easements, rights of way and other third party approvals. In the event
the agreement is terminated, each party (other than a defaulting party) is
entitled to maintain its ownership interest in any intellectual property rights,
technology, plans, permits and approvals (to the extent such permits and
approvals are issued in the name of such party) and other intangible property,
as well as in any actual construction completed and materials ordered.
On February 19, 1999, the parties executed a development agreement. In
accordance with the development agreement, the Company provided a 109.5 million
Deutsche Mark letter of credit (approximately $64.8 million) to the Developer to
fund the Company's share of construction costs (see Note 13).
The Company currently estimates that its share of the development costs of
the German Network will be up to approximately $82 million, including the fiber
deployed, which is expected to be incurred over the next 15 months.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain network capacity, office space, equipment,
vehicles, and operating facilities under noncancellable operating leases.
Certain leases contain renewal options and many leases for office space require
the Company to pay additional amounts for operating and maintenance costs. As of
December 31, 1998, future minimum lease payments under operating leases with
remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 11,393
2000............................................................ 2,863
2001............................................................ 2,637
2002............................................................ 2,558
2003............................................................ 1,235
Thereafter...................................................... 692
-----------
Total minimum lease payments.................................. $ 21,378
-----------
-----------
</TABLE>
Total rental expense under operating leases was $5,171 during the period
from February 20, 1998 (date of inception) to December 31, 1998.
PURCHASE COMMITMENTS
During the period from February 20, 1998 (date of inception) to December 31,
1998, the Company entered into an agreement to purchase a Multiple Investment
Unit ("MIU") that gives the Company rights to a portion of a trans-Atlantic
cable scheduled for completion in early 2000. Currently, the Company estimates
its remaining share of development and construction costs to be $11,262. The
Company has also
F-13
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
entered into various contracts with vendors to provide network set-up and
maintenance services. Based on the Company's current network development plans,
such amounts are expected to be paid as follows:
<TABLE>
<CAPTION>
NETWORK
IN THOUSANDS MIU SERVICES TOTAL
- ------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
1999......................................................... $ 3,155 $ 9,050 $ 12,205
2000......................................................... 7,155 9,360 16,515
2001......................................................... 952 952
--------- --------- ---------
$ 11,262 $ 18,410 $ 29,672
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. INCENTIVE COMPENSATION PLANS
In February 1998, the employee stock option plan (the "Stock Option Plan")
was adopted. This plan provides for the issuance of options to purchase Class A
or Class B shares of LLC, based on certain criteria as defined in the plan
document. The aggregate number of option units to be issued under the Stock
Option Plan is the lesser of 4,444,444 units or 11.1% of the number of shares
purchased by the current owners of LLC. The per-share exercise price for the
options may not be less than $1 per share. Options vest over a period of five
years and expire if not exercised within 10 years of the grant. In connection
with the creation of the Stock Option Plan, employees were required to agree to
reduce the percentage of the bonus to which they are eligible under the
Company's cash bonus plan (the "Cash Bonus Plan"). As of December 31, 1998, the
Company had granted options to acquire 4,044,442 Class A shares for a purchase
price of $1 per share to certain members of management. As a result of the
reorganization of the Company in December 1998, the Company intends to create a
new option plan so that employees will be granted options from the Company
rather than LLC. The Company intends to have LLC cancel options granted under
the Stock Option Plan and will grant replacement options with the same economic
terms under the new plan. (See Note 13).
As required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
determined the pro-forma information as if the Company had accounted for stock
options under the fair value method of SFAS 123. The weighted-average fair value
of options granted during the period was $0.15 per option. The fair value of
option grants is estimated on the date of grant using the minimum value
option-pricing model, as allowed under SFAS 123 for nonpublic companies, for
pro-forma footnote purposes with the following assumptions used: dividend yield
of 0%, risk-free interest rate of 5.53%, and expected option life of 5 years.
The tax-effected pro-forma effect of these options would be as follows:
<TABLE>
<S> <C>
Net loss, as reported............................................. $ (19,235)
Estimated fair value of options granted, net of tax............... (226)
---------
Net loss, adjusted................................................ $ (19,461)
---------
---------
Adjusted net loss per share--basic basis.......................... $ (2.64)
---------
---------
</TABLE>
F-14
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
8. INCENTIVE COMPENSATION PLANS (CONTINUED)
In March 1998, the Company established the Cash Bonus Plan to provide
incentive compensation to certain officers and employees. Individuals are
eligible to receive an annual cash bonus ranging from 10% to 25% of their annual
salary based on the terms of their employment agreement. Bonuses are payable at
the discretion of the Board of Directors based upon the Company achieving
specific goals.
Employees were also entitled to subscribe to purchase shares (the "Stock
Purchase Plan") in LLC at the price of $1 per Class A unit up to a maximum
investment of approximately $68 per employee. The purchase offer was valid until
September 1, 1998 with payment due before October 1, 1998. Under the Stock
Purchase Plan, certain employees committed to purchase approximately 1,424,000
Class A units with an aggregate value of approximately $1,424. Management has
determined that no compensation expense is required to be recognized in
connection with this plan since the estimated market value of the stock was less
than the price paid by employees. As a result of the reorganization of the
Company in December 1998, the Company has amended the Stock Purchase Plan so
that employees will be issued shares of common stock of the Company rather than
units of LLC. In 1999, the Company collected the amounts due from employees
under the Stock Purchase Plan and expects to issue the related shares by May 31,
1999.
9. INCOME TAXES
The income tax benefit for the period from February 20, 1998 (date of
inception) to December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Current......................................................... $ --
Deferred........................................................ 5,378
-----------
5,378
Valuation allowance............................................. (5,378)
-----------
Total........................................................... $ --
-----------
-----------
</TABLE>
The Company has tax loss carryforwards of approximately $5,378 at December
31, 1998. 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. Net operating
losses expire as follows: 2003--$149; 2005--$3,245; 2013--$318. Net operating
losses totaling $1,666 do not expire. 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.
Deferred income tax assets result primarily from net operating loss
carryforwards. Other components of deferred income tax assets and liabilities
are not significant as of December 31, 1998.
F-15
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
10. RELATED PARTY TRANSACTIONS
During the period from February 20, 1998 (date of inception) to December 31,
1998, the Company reimbursed certain companies, which are shareholders in LLC,
for expenses incurred in connection with the formation of the Company and the
negotiation of certain agreements entered into by the Company. Such
reimbursements totaled $339 and were expensed as selling, general and
administrative expenses.
The Company has entered into a transmission peering arrangement with an
entity that is 21% beneficially owned by a combination of Providence Equity
Partners L.P., the majority unitholder of LLC, and Providence Equity Partners II
L.P., another unitholder of LLC. Under the terms of the agreement, the parties
agree to carry certain levels of each other's traffic on their network without
charge for one year. This agreement is automatically renewable unless it is
terminated by either party with appropriate notice as required by the agreement.
11. EMPLOYEE BENEFIT PLANS
The Company contributes to defined contribution pension plans in accordance
with the laws and practices of the countries in which it operates. During the
period from February 20, 1998 (date of inception) to December 31, 1998, the
Company recorded pension expense totaling $267.
12. SEGMENT AND RELATED INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires the Company to disclose certain information related to
segments and geographic areas in which the Company operates and its major
customers.
SEGMENT INFORMATION
The Company has identified two reportable operating segments as defined in
SFAS No. 131: voice services and Internet Protocol ("IP") services. The voice
services segment provides long distance voice telecommunications services to
competitive fixed-line operators, other carriers, wireless operators, resellers
and multi-national corporations. The IP services segment provides IP
telecommunications services to Internet service providers.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance of segments based on its fixed cost contribution, which is defined
as segment revenues less direct variable costs incurred by the segment. Fixed
cost contribution is a non-GAAP measure of financial performance. Shared costs
and assets are not allocated to the segments. There were no intersegment
transactions during the period from February 20, 1998 (date of inception) to
December 31, 1998.
F-16
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
12. SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized financial information concerning the Company's reportable
segments as of December 31, 1998 and for the period from February 20, 1998 (date
of inception) to December 31, 1998 is shown in the following table. The "Other"
column includes unallocated shared network and corporate related assets.
<TABLE>
<CAPTION>
VOICE IP
SERVICES SERVICES OTHER CONSOLIDATED
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenues........................................ $ 2,735 $ 57 $ 2,792
Fixed cost contribution......................... 61 57 118
Identifiable assets............................. 9,599 1,801 40,034 51,434
Depreciation and amortization................... 483 125 801 1,409
Capital expenditures............................ 10,082 1,926 25,160 37,168
</TABLE>
GEOGRAPHIC INFORMATION
The following table also provides detail of the Company's revenues for the
period from February 20, 1998 (date of inception) to December 31, 1998 and
long-lived assets as of December 31, 1998 on a geographic basis. Revenues have
been allocated based on the location of the customer. Indefeasible right of use
investments are included based on the entity which owns the investment. The
Company did not earn any revenues in its country of domicile, Luxembourg.
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES ASSETS
----------- -----------
<S> <C> <C>
Germany................................................................ $ 878 $ 10,369
Switzerland............................................................ 108 14,186
United Kingdom......................................................... 1,768 7,399
United States.......................................................... 3,006
Other countries........................................................ 38 1,717
----------- -----------
$ 2,792 $ 36,677
----------- -----------
----------- -----------
</TABLE>
MAJOR CUSTOMERS
During the period from February 20, 1998 (date of inception) to December 31,
1998, the Company earned 69% of its revenues from three major customers as
follows:
<TABLE>
<CAPTION>
% OF
CUSTOMER REVENUES
- ----------------------------------------------------------------------------------- -------------
<S> <C>
Interroute Telecommunications (UK) Limited......................................... 46%
WorldCom Telecommunications Services GmbH.......................................... 13%
Star Telecommunications Deutschland GmbH........................................... 10%
--
69%
--
--
</TABLE>
F-17
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
13. SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
On January 15, 1999, the Board of the Company adopted the 1999 Share Option
Plan (the "1999 Option Plan"), under which Carrier1 International SA and related
companies of the consolidated Carrier1 group (the "Related Corporations") may
grant to any employee of the Company or Related Corporations options in equity
securities (the "Options") issued by the Company. The 1999 Option Plan is
administered by the Board and may be administered by a committee appointed by
the Board, and authorizes the Board or such committee to issue Options in such
forms and on such terms as determined by the Board or such committee. The Board
or such committee may determine the number of Options to grant, provided that
the number of shares of the Company (the "Shares") issued pursuant to the 1999
Option Plan is no greater than the lesser of (a) 2,222,222 Shares and (b) the
number of Shares representing 11.1% of the Shares held by purchasers purchasing
shares pursuant to a securities purchase agreement dated as of December 30,
1998. The per-share exercise price for the Options may not be less than $2.
Options granted under the 1999 Option Plan vest in five equal annual
installments beginning on the first anniversary of the grant of such Options.
Options expire if not exercised within 10 years of the grant, or on an earlier
date as specified by the Board or the committee. If the employment of a
participant is terminated for any reason, all unvested Options immediately
expire and vested Options must be exercised within a certain period of time as
specified by the plan document. The Company expects to cancel the options
granted under the 1998 Stock Option Plan and issue replacement options under the
1999 Option Plan by May 31, 1999.
On February 10, 1999, the Company increased its authorized number of shares
to 55,000,000.
LONG-TERM DEBT
On February 19, 1999, the Company issued $165 million and [Euro]85 million
of 13 1/4% senior notes (the "Notes") with detachable warrants with a scheduled
maturity of February 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
F-18
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
13. SUBSEQUENT EVENTS (CONTINUED)
capital stock, selling assets, issuing or selling stock of restricted
subsidiaries, or effecting a consolidation or merger.
The Company is obligated to use its best efforts to cause the Notes to
generally be freely transferable under the Securities Act of 1933 no later than
August 19, 1999. If this requirement is not met, then the interest on the Notes
will increase by 0.5% per annum until the Notes are generally freely
transferable.
COMMITMENTS
On February 2, 1999, the Company entered into a letter of intent for a lease
for network fiber, which requires monthly payments of $274, including operating
and maintenance costs, for 36 months, after which the Company will obtain a
15-year IRU for the leased fiber at no additional charge. The Company will be
required to pay an annual operating and maintenance fee of $250 for the term of
the indefeasible right of use.
On February 18, 1999, the Company entered into an agreement to purchase
fiber optic cable for the German Network during 1999 for $20,286, 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 the Company to make payment in full by December 31, 2001 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 the Company without charge.
F-19
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
1998*
MARCH 31, ------------
1999
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 107,960 $ 4,184
Restricted cash..................................................................... 1,446 1,518
Restricted investments held in escrow (See Notes 5 and 6)........................... 98,180 --
Accounts receivables................................................................ 6,583 1,217
Unbilled receivables................................................................ 5,829 1,645
Other receivables................................................................... 5,301 3,014
Prepaid expenses and other current assets........................................... 4,508 3,179
----------- ------------
Total current assets.............................................................. 229,807 14,757
PROPERTY AND EQUIPMENT--Net........................................................... 41,546 31,091
INVESTMENT IN JOINT VENTURE........................................................... 4,675 4,675
RESTRICTED INVESTMENTS HELD IN ESCROW (See Note 6).................................... 44,854 --
OTHER ASSETS.......................................................................... 8,895 911
----------- ------------
TOTAL................................................................................. $ 329,777 $ 51,434
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.............................................................. $ 36,015 $ 27,602
Accrued liabilities................................................................. 15,279 4,643
----------- ------------
Total current liabilities......................................................... 51,294 32,245
LONG-TERM DEBT (See Note 6) 249,608 --
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, $2 par value, 30,000,000 shares authorized, 30,000,000 and 18,885,207
issued and outstanding at March 31, 1999 and December 31, 1998, respectively...... 60,000 37,770
Additional paid-in capital.......................................................... 2,304 --
Accumulated deficit................................................................. (34,265) (19,235)
Accumulated other comprehensive income.............................................. 836 654
----------- ------------
Total shareholders' equity........................................................ 28,875 19,189
----------- ------------
TOTAL................................................................................. $ 329,777 $ 51,434
----------- ------------
----------- ------------
</TABLE>
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements.
F-20
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO MARCH 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD
THREE FROM
MONTHS FEBRUARY 20,
ENDED 1998 TO
MARCH 31, MARCH 31,
1999 1998
---------- ------------
<S> <C> <C>
REVENUES................................................................................ $ 12,293 $ --
OPERATING EXPENSES:
Cost of services...................................................................... 17,015 --
Selling, general and administrative................................................... 3,318 157
Depreciation and amortization......................................................... 1,336 --
----------
Total operating expenses............................................................ 21,669 157
---------- ------------
LOSS FROM OPERATIONS.................................................................... (9,376) (157)
OTHER INCOME (EXPENSE):
Interest expense...................................................................... (4,205)
Interest income....................................................................... 979 --
Currency exchange loss, net........................................................... (2,428) --
---------- ------------
Total other income (expense)........................................................ (5,654) --
---------- ------------
LOSS BEFORE INCOME TAX BENEFIT.......................................................... (15,030) (157)
INCOME TAX BENEFIT--Net of valuation allowance.......................................... -- --
---------- ------------
NET LOSS................................................................................ $ (15,030) $ (157)
---------- ------------
---------- ------------
EARNINGS (LOSS) PER SHARE:
Loss from operations:
Basic............................................................................... $ (0.33) $ (1.50)
---------- ------------
---------- ------------
Diluted............................................................................. $ (0.33) $ (1.50)
---------- ------------
---------- ------------
Net loss:
Basic............................................................................... $ (0.53) $ (1.50)
---------- ------------
---------- ------------
Diluted............................................................................. $ (0.53) $ (1.50)
---------- ------------
---------- ------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-21
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 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 (11,114,793 shares)........ 22,230 22,230
Issuance of warrants.......................... $ 2,304 $ 2,304
Comprehensive income (loss):
Net loss.................................... (15,030) (15,030)
Other comprehensive income, net of tax:
Currency translation adjustments.......... 182 182
----------
Total comprehensive loss.................... (14,848)
----------- ----------- ------------ ----- ----------
BALANCE--March 31, 1999....................... $ 60,000 $ 2,304 $ (34,265) $ 836 $ 28,875
----------- ----------- ------------ ----- ----------
----------- ----------- ------------ ----- ----------
</TABLE>
See notes to unaudited consolidated financial statements.
F-22
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO MARCH 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD
THREE FROM
MONTHS FEBRUARY 20,
ENDED 1998 TO
MARCH 31, MARCH 31,
1999 1998
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (15,030) (157)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 1,336 --
Changes in operating assets and liabilities:
Restricted cash.................................................................. 71 --
Receivables...................................................................... (12,077) --
Prepaid expenses and other current assets........................................ (677) (1)
Other assets..................................................................... (8,515) --
Trade accounts payable and accrued liabilities................................... 15,982 44
----------- -----
Net cash used in operating activities.......................................... (18,910) (114)
----------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................................. (9,688) --
Purchase of restricted investments held in escrow.................................... (143,034) --
----------- -----
Net cash used in investing activities.......................................... (152,722) --
----------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt............................................ 66
Proceeds from issuance of long-term debt............................................. 249,608 --
Proceeds from issuance of common stock............................................... 24,533 177
----------- -----
Net cash provided by financing activities...................................... 274,141 243
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS........................... 1,267 (10)
----------- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................................. 103,776 119
CASH AND CASH EQUIVALENTS:
Beginning of period.................................................................. 4,184
----------- -----
End of period........................................................................ $ 107,960 $ 119
----------- -----
----------- -----
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING ACTIVITIES:
At March 31, 1999 and December 31, 1998, the Company had purchased approximately
$21,713 and $17,315, respectively, of equipment on open accounts payable.
</TABLE>
See notes to unaudited consolidated financial statements.
F-23
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO MARCH 31, 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 March 31, 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 March 31, 1999 and for the period from February 20, 1998 (date of
inception) to March 31, 1998 (in thousands of U.S. dollars, except share
information):
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS FEBRUARY 20,
ENDED 1998 TO
MARCH 31, MARCH 31,
1999 1998
------------- ------------
<S> <C> <C>
Loss from operations............................................. $ (9,376) $ (157)
------------- ------------
------------- ------------
Net loss......................................................... $ (15,030) $ (157)
------------- ------------
------------- ------------
Total number of shares used to compute basic earnings
(loss) per share............................................... 28,145,000 105,000
------------- ------------
------------- ------------
Loss from operations:
Basic loss per share........................................... $ (0.33) $ (1.50)
------------- ------------
------------- ------------
Diluted loss per share......................................... $ (0.33) $ (1.50)
------------- ------------
------------- ------------
Net loss:
Basic loss per share........................................... $ (0.53) $ (1.50)
------------- ------------
------------- ------------
Diluted loss per share......................................... $ (0.53) $ (1.50)
------------- ------------
------------- ------------
</TABLE>
Potential dilutive securities have been excluded from the computation for
the three months ended March 31, 1999 and for the period from February 20, 1998
(date of inception) to March 31, 1998 as their effect is antidilutive. Had the
Company been in a net income position for the three months ended March 31, 1999
and for the period from February 20, 1998 (date of inception) to March 31, 1998,
diluted
F-24
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO MARCH 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
3. EARNINGS PER SHARE (CONTINUED)
earnings per share would have included an additional 2,822,000 and 2,822,000
shares, respectively, related to outstanding stock options and stock
subscriptions (determined using the treasury stock method at the estimated
average market value).
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999, consist of the following:
<TABLE>
<S> <C>
Network equipment............................................... $ 27,145
Indefeasible right of use investments........................... 10,331
Leasehold improvements.......................................... 3,647
Furniture, fixtures and office equipment........................ 1,794
Construction in progress........................................ 1,185
-----------
44,102
Less: accumulated depreciation and amortization................. (2,556)
-----------
Property and equipment, net................................... $ 41,546
-----------
-----------
</TABLE>
5. INVESTMENT IN JOINT VENTURE
On February 19, 1999, the parties to the joint venture executed a
development agreement. In accordance with the development agreement, the Company
provided a 109.5 million Deutsche Mark letter of credit (approximately $64.8
million) to the Developer to fund the Company's share of construction costs. To
secure the letter of credit, the Company placed securities with a value of $64.8
million in an escrow account at the bank.
6. LONG-TERM DEBT
On February 19, 1999, the Company issued $165 million and 85 million Euro 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.
F-25
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO MARCH 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
6. LONG-TERM DEBT (CONTINUED)
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.
The Company is obligated to use its best efforts to cause the Notes to
generally be freely transferable under the Securities Act of 1933 no later than
August 19, 1999. If this requirement is not met, then the interest on the Notes
will increase by 0.5% per annum until the Notes are generally freely
transferable.
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.
7. COMMITMENTS AND CONTINGENCIES
LEASES
On February 2, 1999, the Company entered into a letter of intent for a lease
for network fiber, which requires monthly payments of $274, including operating
and maintenance costs, for 36 months, after which the Company will obtain a
15-year IRU for the leased fiber at no additional charge. The Company will be
required to pay an annual operating and maintenance fee of $250 for the term of
the IRU.
PURCHASE COMMITMENTS
On February 18, 1999, the Company entered into an agreement to purchase
fiber optic cable for the German Network during 1999 for $20,286, 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 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. If a loan is not provided, the seller is obligated to
provide certain additional equipment to the Company without charge.
8. INCOME TAXES
The Company has tax loss carryforwards of approximately $15,000 at March 31,
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.
F-26
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO MARCH 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
9. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments for the three months ended March 31, 1999 is shown in the following
table. The "Other" column includes unallocated shared and corporate related
assets.
<TABLE>
<CAPTION>
VOICE
SERVICES IP SERVICES OTHER CONSOLIDATED
------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 11,911 $ 382 $ 12,293
Fixed cost contribution............................ 2,345 382 2,727
Identifiable assets................................ 14,656 2,040 313,081 329,777
</TABLE>
10. SUBSEQUENT EVENTS
LONG-TERM DEBT
The Company is in the process of negotiating a vendor financing agreement
with Nortel. The Nortel credit facility is to be for the financing of equipment
delivered by Nortel and for a limited amount of telecommunication equipment
supplied by other vendors.
SHAREHOLDERS' EQUITY
Carrier1 has granted Options pursuant to the 1999 Share Option Plan to
acquire approximately 2,110,968 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.
PURCHASE COMMITMENTS
On April 16, 1999, the Company 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 provides two unprotected wavelengths on the routes
between Hamburg and Frankfurt, Hamburg and Berlin, Berlin and Frankfurt in
exchange. The first wavelength to Scandinavia is scheduled for receipt by
Carrier1 in the first quarter of 1999, the second for early fourth quarter,
1999. Carrier1 will deliver the two wavelengths on the German ring during the
first quarter of 2000.
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 is scheduled to be delivered between June 1(st) and June 30(th) 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 will pay $3.0 million on the date of acceptance, the remaining
$12.0 million will be offset by the delivery of Carrier1's wavelength.
PAYMENT TO NORTEL
On April 16, 1999, Carrier1 paid Nortel for equipment delivered prior to
that date in the amount of $27.9 million.
F-27
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
Carrier1 International S.A.
Offer to exchange its
13 1/4% Senior Dollar Notes Due 2009 and
13 1/4% Senior Euro Notes Due 2009
, 1999
- --------------------------------------------------------------------------------
Dealer Prospectus Delivery Obligation
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Luxembourg law, civil liability of directors both to the company and
to third parties is generally considered to be a matter of public policy. It is
possible that Luxembourg courts would declare void an explicit or even implicit
contractual limitation on directors' liability to Carrier1 International S.A.
Carrier1 International S.A., however, can validly agree to indemnify the
directors against the consequences of liability actions brought by third parties
(including shareholders if such shareholders have personally suffered a damage
which is independent of and distinct from the damage caused to the company).
Under Luxembourg law, an employee of Carrier1 International S.A. can only be
liable to Carrier1 International S.A. for damages brought about by his or her
willful acts or gross negligence. Any arrangement providing for the
indemnification of officers against claims of Carrier1 would be contrary to
public policy. Employees are liable to third parties under general tort law and
may enter into arrangements with Carrier1 International S.A. providing for
indemnification against third party claims.
Under Luxembourg law, an indemnification agreement can never cover a willful
act or gross negligence.
Carrier1 intends to implement an agreement providing for the indemnification
of officers and directors (the "Agreement"), having terms substantially similar
to the following:
The corporation 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
attorneys' 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
corporation, or, at the request of the corporation, of any other corporation
partnership, joint venture, trust or other enterprise in which the
corporation holds a direct or indirect ownership interest or of which the
corporation 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 corporation, 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 corporation 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
corporation against such a director, committee member or fonde de pouvoir to
procure a judgment in favor of the corporation (1) such indemnification
shall be limited to expenses (including attorneys' fees) actually and
reasonably incurred by such person in the defense or settlement of such
action or suit, and (2) notwithstanding, any other provisions hereof, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
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 corporation may purchase and maintain insurance on behalf of any
person who is or was or has agreed to become a director, committee member or
fonde de pouvoir of the corporation, or is or was serving at the request of
the corporation in any equivalent position in any such other corporation,
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
II-1
<PAGE>
not the corporation would have the power to indemnify him against such
liability under the provisions of the Agreement, 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 the
Agreement or any portion thereof shall be invalidated on any ground by any
court of competent jurisdiction, then the corporation shall nevertheless
indemnify each such director, committee member or fonde de pouvoir and may
indemnify each employee or agent of the corporation 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 corporation, to the fullest extent permitted by any applicable
portion of the Agreement that shall not have been invalidated and to the
fullest extent permitted by applicable law.
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 corporation shall be liable to
the corporation 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 the Agreement 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 corporation or its stockholder,
(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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of Carrier1 International S.A.*
4.1 Indenture, dated as of February 19, 1999, between Carrier1 International S.A. and the Chase Manhattan
Bank, as Trustee, relating to Carrier1 International S.A.'s 13 1/4 Senior Dollar Notes Due 2009*
4.2 Form of 13 1/4 Senior Dollar Note (included in Exhibit 4.1)
4.3 Indenture, dated as of February 19, 1999, between Carrier1 International S.A. and the Chase Manhattan
Bank, as Trustee, relating to Carrier1 International S.A.'s 13 1/4 Senior Euro Notes Due 2009*
4.4 Form of 13 1/4 Senior Euro Note (included in Exhibit 4.3)
4.5 Notes Registration Rights Agreement, dated February 12, 1999, among Carrier1 International S.A., Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc., Warburg Dillon Read LLC and Bear, Stearns & Co.
Inc.*
4.6 U.S. Dollar Collateral Pledge and Security Agreement, dated as of February 19, 1999, among Carrier1
International S.A., The Chase Manhattan Bank, as Trustee and The Chase Manhattan Bank, as securities
intermediary*
4.7 Euro Collateral Pledge and Security Agreement, dated as of February 19, 1999, among Carrier1
International S.A., The Chase Manhattan Bank, as Trustee and The Chase Manhattan Bank AG, as securities
intermediary*
5.1 Opinion of Debevoise & Plimpton**
10.1 Dollar Warrant Agreement, dated as of February 19, 1999, between Carrier1 International S.A. and The
Chase Manhattan Bank, as Warrant Agent*
10.2 Euro Warrant Agreement, dated as of February 19, 1999, between Carrier1 International S.A. and The Chase
Manhattan Bank, as Warrant Agent*
10.3 Warrants Registration Rights Agreement, dated as of February 12, 1999, between Carrier1 International
S.A. and The Chase Manhattan Bank, as Warrant Agent*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Carrier1 International S.A. 1999 Share Option Plan
10.5 Master Option Agreement, dated as of December 30, 1998, among Carrier1 International S.A., Carrier One
LLC, Carrier1 International GmbH, Carrier1 B.V., Carrier1 France S.A.R.L., Carrier1 U.K. Limited and
Carrier1 GmbH & Co. AG
10.6 Form of Option Agreement
10.7 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Stig Johansson*
10.8 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Eugene A. Rizzo*
10.9 Employment Agreement, dated as of March 26, 1998, between Carrier One AG and Terje Nordahl*
10.10 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Joachim Bauer*
10.11 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Kees van Ophem*
10.12 Securities Purchase Agreement, dated as of March 1, 1999, among Carrier1, Carrier One LLC and the
employee investors named therein**
10.13 Registration Rights Agreement, dated as of March 1, 1999, among Carrier1 International S.A., Carrier One
LLC, Stig Johansson, Joachim Bauer, Gene Rizzo, Kees van Ophem, Terje Nordahl and the other parties
named therein**
10.14 Securityholders' Agreement, dated as of March 1, 1999, among Carrier1 International S.A. and the
employee investors named therein**
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of Carrier1 International S.A.*
23.1 Consent of Deloitte & Touche Experta AG
23.2 Consent of Debevoise & Plimpton (included in Exhibit 5.1 hereto)
24.1 Power of Attorney from Glenn M. Creamer*
24.2 Power of Attorney from Jonathan E. Dick*
24.3 Power of Attorney from Stig Johansson*
24.4 Power of Attorney from Mark A. Pelson*
24.5 Power of Attorney from Victor A. Pelson*
24.6 Power of Attorney from Thomas J. Wynne*
24.7 Power of Attorney from Joachim Bauer*
25.1 Statement of Eligibility of The Chase Manhattan Bank on Form T-1*
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements or related
notes and therefore has been omitted.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising over the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ZURICH ON MAY 17,
1999.
<TABLE>
<S> <C> <C>
By: *
-----------------------------------------
Name: Stig Johansson
Title: Chief Executive Officer and
President
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE
INDICATED.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
Director, Chief Executive
* Officer and President
- ------------------------------ (Principal Executive May 17, 1999
Stig Johansson Officer)
Chief Financial Officer
* (Principal Financial
- ------------------------------ Officer and Principal May 17, 1999
Joachim W. Bauer Accounting Officer)
* Director
- ------------------------------ May 17, 1999
Glenn M. Creamer
* Director
- ------------------------------ May 17, 1999
Jonathan E. Dick
* Director
- ------------------------------ May 17, 1999
Mark A. Pelson
* Director
- ------------------------------ May 17, 1999
Victor A. Pelson
* Director
- ------------------------------ May 17, 1999
Thomas J. Wynne
Authorized Representative
CARRIER 1, INC. ** in the U.S. May 17, 1999
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEES VAN OPHEM
-------------------------
Kees van Ophem May 17, 1999
by Power of Attorney
**By: /s/ KEES VAN OPHEM
-------------------------
Kees van Ophem, ITS May 17, 1999
SECRETARY
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of Carrier1 International S.A.*
4.1 Indenture, dated as of February 19, 1999, between Carrier1 International S.A. and the Chase Manhattan
Bank, as Trustee, relating to Carrier1 International S.A.'s 13 Senior Dollar Notes Due 2009*
4.2 Form of 13 Senior Dollar Note (included in Exhibit 4.1)
4.3 Indenture, dated as of February 19, 1999, between Carrier1 International S.A. and the Chase Manhattan
Bank, as Trustee, relating to Carrier1 International S.A.'s 13 Senior Euro Notes Due 2009*
4.4 Form of 13 Senior Euro Note (included in Exhibit 4.3)
4.5 Notes Registration Rights Agreement, dated February 12, 1999, among Carrier1 International S.A., Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc., Warburg Dillon Read LLC and Bear, Stearns & Co.
Inc.*
4.6 U.S. Dollar Collateral Pledge and Security Agreement, dated as of February 19, 1999, among Carrier1
International S.A., The Chase Manhattan Bank, as Trustee and The Chase Manhattan Bank, as securities
intermediary*
4.7 Euro Collateral Pledge and Security Agreement, dated as of February 19, 1999, among Carrier1
International S.A., The Chase Manhattan Bank, as Trustee and The Chase Manhattan Bank AG, as securities
intermediary*
5.1 Opinion of Debevoise & Plimpton**
10.1 Dollar Warrant Agreement, dated as of February 19, 1999, between Carrier1 International S.A. and The
Chase Manhattan Bank, as Warrant Agent*
10.2 Euro Warrant Agreement, dated as of February 19, 1999, between Carrier1 International S.A. and The Chase
Manhattan Bank, as Warrant Agent*
10.3 Warrants Registration Rights Agreement, dated as of February 12, 1999, between Carrier1 International
S.A. and The Chase Manhattan Bank, as Warrant Agent*
10.4 Carrier1 International S.A. 1999 Share Option Plan
10.5 Master Option Agreement, dated as of December 30, 1998, among Carrier1 International S.A., Carrier One
LLC, Carrier1 International GmbH, Carrier1 B.V., Carrier1 France S.A.R.L., Carrier1 U.K. Limited and
Carrier1 GmbH & Co. AG
10.6 Form of Option Agreement
10.7 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Stig Johansson*
10.8 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Eugene A. Rizzo*
10.9 Employment Agreement, dated as of March 26, 1998, between Carrier One AG and Terje Nordahl*
10.10 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Joachim Bauer*
10.11 Employment Agreement, dated as of March 4, 1998, between Carrier One AG and Kees van Ophem*
10.12 Securities Purchase Agreement, dated as of March 1, 1999, among Carrier1, Carrier One LLC and the
employee investors named therein**
10.13 Registration Rights Agreement, dated as of March 1, 1999, among Carrier1 International S.A., Carrier One
LLC, Stig Johansson, Joachim Bauer, Gene Rizzo, Kees van Ophem, Terje Nordahl and the other parties
named therein**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.14 Securityholders' Agreement, dated as of March 1, 1999, among Carrier1 International S.A. and the
employee investors named therein**
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of Carrier1 International S.A.*
23.1 Consent of Deloitte & Touche Experta AG
23.2 Consent of Debevoise & Plimpton (included in Exhibit 5.1 hereto)
24.1 Power of Attorney from Glenn M. Creamer*
24.2 Power of Attorney from Jonathan E. Dick*
24.3 Power of Attorney from Stig Johansson*
24.4 Power of Attorney from Mark A. Pelson*
24.5 Power of Attorney from Victor A. Pelson*
24.6 Power of Attorney from Thomas J. Wynne*
24.7 Power of Attorney from Joachim Bauer*
25.1 Statement of Eligibility of The Chase Manhattan Bank on Form T-1*
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
<PAGE>
Exhibit 10.4
CARRIER1 INTERNATIONAL S.A.
1999 SHARE OPTION PLAN
1. PURPOSE. The purpose of the Carrier1 International S.A. 1999 Share
Option Plan (the "Plan") is to attract, retain and encourage key employees of
Carrier1 International S.A. (the "Company") and of Related Corporations and
other individuals who render services to the Company or any other Related
Corporations, by providing opportunities to participate in the ownership of the
Company and its future growth through the grant of options ("Options"). As used
herein, "Related Corporations" shall mean (a) Carrier One, LLC and any
corporation in which Carrier One, LLC or the Company, directly or indirectly,
owns more than fifty percent (50%) of the outstanding equity securities having
general voting power under ordinary circumstances to elect at least a majority
of the directors of such corporation; (b) any partnership, association, joint
venture or other unincorporated organization or entity with respect to which
Carrier One, LLC or the Company, directly or indirectly, owns equity securities
in an amount sufficient to control the management of such partnership,
association, joint venture or other unincorporated organization or entity; and
(c) any corporation, partnership, association, joint venture or other
unincorporated organization or entity in which Carrier One, LLC or the Company,
directly or indirectly, has more than a fifty percent (50%) equity interest.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or by a committee
appointed by the Board (the "Committee"). Hereinafter, all references in this
Plan to the "Committee" shall mean the Board if no Committee has been appointed.
Subject to ratification of the grant or authorization of each Option by the
Board (if so required by applicable law), and subject to the terms of the Plan,
the Committee shall have the authority to (i) determine to whom Options shall be
granted (from among the class of individuals and entities eligible under
paragraph 3 to receive Options); (ii) determine the time or times at which
Options shall be granted; (iii) determine the number, type, class and purchase
price of Shares (as defined in paragraph 4 below) subject to each Option, which
prices shall not be less than the minimum price specified in paragraph 6; (iv)
determine (subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (v) extend the
period during which outstanding Options may be exercised; (vi) determine whether
restrictions such as repurchase options are to be
<PAGE>
imposed on Shares subject to Options, and the nature of such restrictions, if
any, and (vii) interpret the Plan and prescribe and rescind rules and
regulations relating to it. The interpretation and construction by the Committee
of any provisions of the Plan or of any Option granted under it shall be final
unless otherwise determined by the Board. The Committee may from time to time
adopt such rules and regulations for carrying out the Plan as it may deem
advisable. No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts of a
majority of the members of the Committee at a meeting at which a quorum is
present, or acts reduced to or approved in writing by all of the members of the
Committee (if consistent with applicable law), shall be the valid acts of the
Committee. From time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies however caused,
or remove all members of the Committee and thereafter directly administer the
Plan.
C. GRANT OF OPTIONS TO BOARD MEMBERS. Subject to the requirements of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934 ("Rule 16b-3"),
if applicable, or comparable securities laws and regulations applicable in any
non-U.S. jurisdiction ("Foreign Rules"), Options may be granted to members of
the Board or directors of any other Related Corporations. All Options grants to
members of the Board or directors of any other Related Corporations shall in all
other respects be made in accordance with the provisions of this Plan applicable
to other eligible persons. Consistent with the provisions of Rule 16b-3 or
Foreign Rules, members of the Board or directors of any other Related
Corporations who either (i) are eligible to receive Options grants pursuant to
the Plan or (ii) have been granted Options may vote on any matters affecting the
administration of the Plan or the grant of any Options pursuant to the Plan,
except that no such member shall act upon the granting to himself or herself of
Options, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board or directors of any other Related
Corporations during which action is taken with respect to the granting to such
member of Options.
3. ELIGIBLE EMPLOYEES AND OTHERS. Options may be granted to any
employee, director (subject to paragraph C. above) or officer of the Company or
any other Related Corporations (such Company or Related Corporation employing
such employee, director or officer being referred to as "Employer"). If Options
are to be granted to an employee, director or officer of a Related Corporation,
then such Related Corporation instead of the Company shall grant such Options
with the
2
<PAGE>
approval of the Committee, provided that the terms and conditions of the grant
shall be in strict conformity with this Plan and when such Related Corporation
is authorized to act under this Plan, shall so act in accordance with
instructions given by the Committee. The Employer may take into consideration a
recipient's individual circumstances in determining whether to grant an Option.
The granting of any Option to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from
participation in any other grant of Options.
4. SHARES. The Shares subject to Options shall be authorized shares
of the Company (the "Shares"), including Shares reacquired by the Company in any
manner. The aggregate number of Shares which may be issued pursuant to the Plan
is the lesser of (a) 2,222,222 Shares and (b) that number of shares as is equal
to 11.1% of that number of shares purchased from time to time by the Purchasers
who are or became a party to that certain Securities Purchase Agreement dated as
of March 1, 1999 among the Company and the Purchasers named therein, subject to
adjustment as provided in paragraph 12. If any Option granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part, the Shares
subject to such Option shall again be available for grants of Options under the
Plan.
5. GRANTING OF OPTIONS. The date of grant of an Option (the "Date of
Grant") under the Plan will be the date specified by the Committee at the time
it grants the Option; provided, however, that such date shall not be prior to
the date on which the Committee acts to approve the grant.
6. MINIMUM OPTION PRICE. The price per Share upon exercise of an
Option shall be not less than US$ 2.00 per Share plus the amount of any capital
duty payable by the Company, the Employer or the employee exercising such Option
in respect of the issuance of such Share (the "Exercise Price").
7. OPTION DURATION. Subject to earlier termination as provided in
paragraph 9 or in the agreement granting such Option, each Option shall expire
on the date specified by the Committee, but not more than ten years from the
date of grant. Subject to earlier termination as provided in paragraph 9, the
term of each Option shall be the term set forth in the original instrument
granting such Option.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 11, or as specifically is provided to the contrary in the agreement
granting such Option, each Option granted under the Plan shall be exercisable as
follows:
A. VESTING. Subject to paragraph 9 below, each Option shall become
exercisable for the percentage of the total number of Shares subject to the
Option as is set forth opposite the applicable date below:
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On or after the Date of Grant but prior to the First Anniversary 0%
of the date of beginning of employment with the Company or
Related Company (the "Applicable Date")
On or after the First Anniversary of the Applicable Date but 20%
prior to the Second Anniversary of the Applicable Date
On or after the Second Anniversary of the Applicable Date but 40%
prior to the Third Anniversary of the Applicable Date
On or after the Third Anniversary of the Applicable Date but 60%
prior to the Fourth Anniversary of the Applicable Date
On or after the Fourth Anniversary of the Applicable Date but 80%
prior to the Fifth Anniversary of the Applicable Date
On or after the Fifth Anniversary of the Applicable Date 100%
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee, or as set forth below.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total number
of Shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes exercisable.
9. TERMINATION OF EMPLOYMENT.
A. NO FURTHER VESTING. Unless otherwise specified in the agreement
relating such Option, if an optionee ceases to be employed by the Employer and
all Related Corporations for any reason whatsoever, the portion of his or her
Options not exercisable as of the date the optionee ceases to be so employed
shall be void and not exercisable in any event. For purposes of this paragraph
9, employment shall be considered as continuing uninterrupted during any bona
fide leave of absence approved in writing by the Employer (such as those
attributable to illness). Options granted under the Plan shall not be affected
by any change of employment within or among the Employer and Related
Corporations so long as the optionee continues to be an employee of the Employer
or any Related Corporation. Nothing in the Plan shall
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be deemed to give any optionee of any Option the right to be retained in
employment or other service by the Employer or any Related Corporation for any
period of time.
B. DEATH. Unless otherwise specified in the agreement relating to
such Option, if an optionee ceases to be employed by the Employer and all
Related Corporations by reason of his or her death, any Option owned by such
optionee may be exercised, to the extent otherwise exercisable on the date of
death, by the estate, personal representative or beneficiary who has acquired
the Option by will or by the laws of descent and distribution until the
specified expiration date of the Option.
C. DISABILITY. Unless otherwise specified in the agreement relating
to such Option, if an optionee ceases to be employed by the Employer and all
Related Corporations by reason of his or her Disability, such optionee, or his
or her personal representative, shall have the right to exercise any Option held
by him or her on the date of termination of employment for the number of Shares
for which he or she could have exercised it on that date until the specified
expiration date of the Option. For the purposes of the Plan, "Disability" shall
mean a mental or physical condition which in the reasonable opinion of a
majority of the Board renders optionee unable or incompetent to properly carry
out his duties and responsibilities contemplated by his or her employment by the
Employer or a Related Corporation, which condition shall have existed for a
period of 90 or more consecutive days or a total of 180 days in any period of
365 consecutive days.
D. TERMINATION NOT FOR CAUSE. If the Employer or a Related
Corporation terminates the optionee's employment for any reason other than for
Cause (as defined below) (and the optionee does not continue in the employ of
another Related Corporation), then such optionee shall have the right to
exercise any Option held by him or her on the date of termination of employment
for the number of Shares for which he or she could have exercised it on that
date until the earlier of (i) the specified expiration date of the Option or
(ii) 90 days from the date of the termination of the optionee's employment.
E. RIGHT TO PURCHASE. In the event (a) the optionee dies or becomes
Disabled or (b) the Employer or a Related Corporation terminates the optionee's
employment for any reason other than Cause, then in any such event, the Employer
or its designee shall have an option for a period of eighteen (18) months after
such event to both (i) purchase all or any portion of the Shares owned by the
optionee as of the date Optionee's employment was terminated, whether or not
acquired pursuant to the exercise of Options granted pursuant to the Plan, at a
purchase price equal to the Fair Market Value per Share and (ii) cancel the
unexercised portion of any outstanding Option upon written notice and an
aggregate payment to optionee equal to the number of Shares for which the Option
is exercisable multiplied by the difference between (x) the Fair Market Value
per Share and (y) the Exercise Price. If the Employer elects to
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so purchase such Shares, then upon twenty (20) days prior notification (the
"Notice") of such optionee, optionee shall sell and the Employer shall purchase
such Shares. The closing of such purchase and sale shall take place on a date
designated by the Employer, which shall not be more than sixty (60) days
following the date of notification to the optionee. "Fair Market Value" means
the value of the Shares determined as of the date (the "Valuation Date") prior
to the date of the Notice. The Fair Market Value of the Shares shall be
determined by the mutual agreement of the optionee (or his estate or personal
representative, as the case may be) and the Employer, within ten (10) days after
the Valuation Date. If the optionee (or his estate or personal representative,
as the case may be) and the Employer fail to agree on the Fair Market Value of
the Shares during such ten (10) day period, the Fair Market Value of the Shares
shall be determined by a Qualified Appraiser selected by mutual agreement of the
optionee (or his estate or personal representative, as the case may be) and the
Employer within twenty (20) days after the Valuation Date. "Qualified Appraiser"
shall mean a person experienced in evaluating international telecommunications
companies. If the optionee (or his estate or personal representative, as the
case may be) and the Employer fail to agree on the selection of a Qualified
Appraiser during such period, then each of the optionee (or his estate or
personal representative, as the case may be) and the Employer shall designate a
Qualified Appraiser within ten (10) days after the twenty (20) day period
following the Valuation Date. Within forty-five (45) days of their appointment,
each of the two Qualified Appraisers designated by the optionee and the Employer
shall submit to the optionee and the Employer a written report setting forth
their determination of the Fair Market Value of the Shares and the factors
utilized in making such determination. If the Qualified Appraisers do not agree
as to the Fair Market Value of the Shares, and if the higher valuation of either
Qualified Appraiser does not exceed the lower valuation of the other Qualified
Appraiser by more than fifteen percent (15%), then the Fair Market Value of the
Shares shall be the amount arrived at by adding the Fair Market Value of the
Shares as determined by each of the two Qualified Appraisers and dividing such
aggregate by two. If the higher valuation exceeds the lower valuation by more
than fifteen percent (15%), or if the two Qualified Appraisers have not
submitted written reports within the required forty-five (45) day period, the
two Qualified Appraisers shall appoint a third Qualified Appraiser, who within
thirty (30) days after its selection, shall submit to the optionee and the
Employer, a written report setting forth its determination of the Fair Market
Value of the Shares and the factors utilized in making such determination. The
Fair Market Value of the Shares shall then be the amount arrived at by adding
the Fair Market Value of the Shares as determined by each of the two Qualified
Appraisers whose valuations are closest to each other and dividing such
aggregate amount by two. If either the optionee (or his estate or personal
representative, as the case may be) or the Employer fails to select a Qualified
Appraiser, the Qualified Appraiser selected by the other shall determine the
Fair Market Value of the Shares. The determination of Fair Market Value pursuant
hereto shall be final and binding upon the optionee (or his estate or personal
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representative, as the case may be) and the Employer. The costs incurred in
retaining the Qualified Appraisers to perform valuations pursuant to this
Agreement shall be borne as follows: the costs of a Qualified Appraiser selected
by the optionee shall be borne by the optionee; the costs of a Qualified
Appraiser selected by the Employer shall be borne by the Employer; and the costs
of a third Qualified Appraiser, if any, shall be borne one-half by the optionee
(or his estate or personal representative, as the case may be) and one-half by
the Employer.
F. VOLUNTARY TERMINATION. If the optionee voluntarily terminates his
employment with the Employer or a Related Corporation (and is not in the employ
of another Related Corporation), then optionee shall have the right to exercise
the option for the number of Shares for which he could have exercised it on the
date of termination of employment until the earlier of (i) the specified
expiration date of the option or (ii) 30 days from the date of the termination
of optionee's employment. In the event the optionee voluntarily terminates his
employment with the Employer or a Related Corporation, the Employer shall have
an option for a period of 18 months after such termination to purchase all or
any portion of the Shares owned by the optionee as of the date optionee's
employment was terminated, whether or not acquired pursuant to the exercise of
the option, at the purchase price set forth opposite the applicable date below:
Date of voluntary termination is on or The Exercise Price per Share
after the Applicable Date but prior to the
third anniversary of the Applicable Date
Date of voluntary termination is on or 50% of the Fair Market Value
after the third anniversary of Applicable per Share
Date but prior to the fifth anniversary of
the Applicable Date
Date of voluntary termination is after the Fair Market Value per Share
fifth anniversary of the Applicable Date
The Fair Market Value of the Shares shall be the Fair Market Value thereof
(determined in accordance with paragraph E. above) as of the date prior to the
Notice as referred to in this paragraph. In addition, and without limiting the
Employer's right to repurchase the optionee's Shares, the Employer shall have
the right to cancel the unexercised portion of any outstanding option upon
written notice and an aggregate payment of US$ 1.00 to optionee. If the Employer
elects to so purchase such Shares, then upon twenty (20) days prior written
notice (the "Notice") to optionee, optionee shall sell and the Employer shall
purchase such Shares. The closing of such purchase and sale shall take place on
a date designated by the Employer, which shall not be more than sixty (60) days
following the date of the Notice.
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G. TERMINATION FOR CAUSE. If the Employer or a Related Corporation
terminates the optionee's employment for Cause, then such optionee shall have
the right to exercise any Option held by him or her on the date of termination
of employment for the number of Shares for which he or she could have exercised
it on that date until the earlier of (i) the specified expiration date of the
Option or (ii) 30 days from the date of the termination of the optionee's
employment. In the event that the Employer or a Related Corporation terminates
the optionee's employment for Cause, the Employer shall have an option for a
period of eighteen (18) months after such termination to purchase all or any
portion of the Shares owned by the optionee as of the date Optionee's employment
was terminated, whether or not acquired pursuant to the exercise of Options
granted pursuant to the Plan, at a purchase price of the Exercise Price per
Share. In addition, and without limiting the Employer's right to repurchase the
optionee's Shares, the Employer shall have the right to cancel the unexercised
portion of any outstanding Option upon written notice and an aggregate payment
of US$ 1.00 to optionee. If the Employer elects to so purchase such Shares, then
upon twenty (20) days prior notification of such optionee, optionee shall sell
and the Employer shall purchase such Shares. The closing of such purchase and
sale shall take place on a date designated by the Employer, which shall not be
more than sixty (60) days following the date of notification to the optionee.
"Cause" shall mean (i) a breach by the optionee of any employment agreement
between the Employer or a Related Corporation and the optionee, (ii) any act of
dishonesty, embezzlement, unauthorized use or disclosure of Confidential
Information (as defined in the employment agreement between optionee and the
Employer or a Related Corporation), intellectual property, or trade secrets,
common law fraud or other fraud with respect thereto, (iii) the commission by
optionee of a felony, a crime involving moral turpitude or any other act causing
material harm to the Company's, the Employer's or any of the Related
Corporations' standing or reputation, (iv) optionee's willful and continued
failure to perform his duties to the Employer or a Related Corporation as
reasonably requested by the Company, the Board of Directors thereof, (v)
optionee's willful misconduct or gross negligence, or (v) the willful commission
by optionee of an act which (a) constitutes unfair competition with the Company,
the Employer or any of the Related Corporations, (b) induces any other employee
to leave the employ of the Employer or any of the Related Corporations or (c)
induces any customer of the Company, the Employer or any of the Related
Corporations to breach or terminate a contract with the Company, the Employer or
a Related Corporation.
H. VIOLATION OF NONCOMPETITION, NONSOLICITATION OR CONFIDENTIALITY
OBLIGATIONS. Notwithstanding anything to the contrary in this paragraph 9, if
the optionee breaches any confidentiality, noncompetition or nonsolicitation
obligation to the Company, the Employer or a Related Corporation, including any
such obligation contained in any employment agreement between the optionee and
the Employer or a Related Corporation or in the Securityholders' Agreement dated
March 1, 1999 among the Company and certain of its securityholders, the Employer
shall have an option for
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a period of eighteen (18) months after the Employer has actual knowledge of such
breach to both (i) purchase all or any portion of the Shares owned by the
optionee as of the date optionee's employment was terminated, whether or not
acquired pursuant to the exercise of Options granted pursuant to the Plan, at a
purchase price equal to the Exercise Price per Share and (ii) cancel any
unexercised vested portion of any outstanding Option upon written notice and an
aggregate payment of US$ 1.00 to optionee. If the Employer elects to so purchase
such Shares, then upon twenty (20) days prior notification of such optionee,
optionee shall sell and the Employer shall purchase such Shares. The closing of
such purchase and sale shall take place on a date designated by the Employer,
which shall not be more than sixty (60) days following the date of notification
to the optionee.
10. NON-TRANSFERABILITY. No Option shall be assignable or
transferable by the optionee except by will, by the laws of descent and
distribution or pursuant to a valid domestic relations order. Except as set
forth in the previous sentence, during the lifetime of an optionee each Option
shall be exercisable only by such optionee.
11. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 10 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to Shares issuable upon
exercise of Options. In the event of any conflict or inconsistency between the
provisions of the Plan and an instrument relating to an option grant hereunder,
the terms of such instrument shall govern. The Committee may specify that any
Option shall be subject to such other termination and cancellation provisions as
the Committee may determine. The Committee may from time to time confer
authority and responsibility on one or more of its own members and/or one or
more officers of the Employer to execute and deliver such instruments. The
proper officers of the Employer are authorized and directed to take any and all
action necessary or advisable from time to time to carry out the terms of such
instruments.
12. ADJUSTMENTS. Upon the occurrence of any of the following events,
an optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Employer relating
to such Option:
A. SHARE DIVIDENDS AND SHARE SPLITS. If the Shares shall be
subdivided or combined into a greater or smaller number of Shares or if the
Company shall issue any Shares as a share dividend on its outstanding Shares,
the number of Shares deliverable upon the exercise of Options shall be
appropriately increased or decreased
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proportionately, and appropriate adjustments shall be made in the purchase price
per Share to reflect such subdivision, combination or share dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger, sale of all or substantially all
of the Company's assets or otherwise (an "Acquisition"), the Committee or the
board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Options, either (i)
make appropriate provision for the continuation of such Options by substituting
on an equitable basis for the Shares then subject to such Options either (a) the
consideration payable with respect to the outstanding Shares in connection with
the Acquisition, (b) equity securities of the surviving corporation or (c) such
other securities as the Successor Board deems appropriate, the fair market value
of which shall approximate the fair market value of the Shares subject to such
Options immediately preceding the Acquisition; or (ii) upon written notice to
the optionees, provide that all Options must be exercised, to the extent then
exercisable, within a specified number of days of the date of such notice, at
the end of which period the Options shall terminate; or (iii) terminate all
Options in exchange for a cash payment equal to the excess of the fair market
value of the Shares subject to such Options (to the extent then exercisable)
over the exercise price thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the Company
or of another corporation or entity are issued with respect to the outstanding
Shares, an optionee upon exercising an Option shall be entitled to receive for
the purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such recapitalization
or reorganization.
D. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the
Committee.
E. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of Shares of any class, or securities convertible into
Shares of any class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of Shares subject to Options. No
adjustments shall be made for dividends paid in cash or in property other than
securities of the Company.
F. FRACTIONAL SHARES. No fractional Shares shall be issued under the
Plan and the optionee shall receive from the Employer cash in lieu of such
fractional Shares.
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G. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B or C above, the class and aggregate number of Shares set
forth in paragraph 4 hereof that are subject to Options which previously have
been or subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events described in such subparagraphs. The Committee,
or the Successor Board shall determine the specific adjustments to be made under
this paragraph 13 and, subject to paragraph 2, its determination shall be
conclusive.
13. MEANS OF EXERCISING OPTIONS. An Option (or any part of
installment thereof) shall be exercised by giving written notice to the Employer
at its principal office address, or to such transfer agent as the Employer shall
designate. Such notice shall identify the Option being exercised and specify the
number of Shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Employer, through delivery of
Shares having a fair market value equal as of the date of the exercise to the
cash exercise price of the Option or (c) at the discretion of the Employer, by
any combination of (a) and (b) above. The holder of an Option shall not have the
rights of a shareholder with respect to the Shares covered by such Option until
the date of issuance of a receipt or certificate to such holder for such Shares.
Except as expressly provided above in paragraph 12 with respect to changes in
capitalization and share dividends, no adjustments shall be made for
distributions, dividends or similar rights for which the record date is before
the date such Share is issued.
14. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board as
of December 30, 1998. The Plan shall expire at the end of the day on December
30, 2008 (except as to Options outstanding on that date). The Board may
terminate or amend the Plan in any respect at any time. Except as otherwise
provided in this paragraph 14, in no event may action of the Board or
shareholders alter or impair the rights of an optionee, without such optionee's
consent, under any Option previously granted to such optionee.
15. APPLICATIONS OF FUNDS. The proceeds received by a Related
Corporation from the sale of Shares pursuant to Options granted and Purchases
authorized under the Plan shall be applied in accordance with the terms of the
Carrier1 International S.A. Master Option Agreement.
16. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Option, the vesting or transfer of restricted Shares or securities acquired on
the exercise of an Option hereunder, or the making of a distribution or other
payment with respect to such Shares or securities, the Employer may demand from
the optionee or to deduct from payments of any kind otherwise due to the
optionee any foreign, federal, state or local taxes of any kind required by law
to be withheld with respect to
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the exercise of Options. The Employer in its discretion may condition the
exercise of an Option, on the optionee's making satisfactory arrangement for
such withholding. Such arrangements may include (i) payment by the optionee to
the Employer in cash or by check, (ii) withholding by the Employer from the
optionee's salary, and/or (iii) delivery of Shares by the optionee to the
Employer having a fair market value equal as of the date of the exercise to the
amount of the withholding taxes.
17. GOVERNMENTAL REGULATION. The Employer's obligation to sell and
deliver Shares pursuant to the exercise of the Options is subject to the
approval of any governmental authority required in connection with the
authorization, issuance or sale of such Shares.
Government regulations may impose reporting or other obligations on
the Company or the Employer with respect to the Plan. For example, the Employer
may be required to file tax information returns reporting the income received by
optionees of Options in connection with the Plan.
18. GOVERNING LAW; JURISDICTION. (a) The validity and construction of
the Plan and the instruments evidencing Options shall be governed by the laws of
Luxembourg.
(b) The courts of England have jurisdiction to hear and decide any
suit, action or proceedings, and to settle any disputes, which may arise out of
or in connection with this Plan (respectively, "Proceedings" and "Disputes") and
for this purpose each party irrevocably submits to the jurisdiction of the
Courts of England.
(c) Paragraph (b) above does not prevent any party to this Plan from
taking proceedings relating to Proceedings or Disputes in any other courts with
jurisdiction.
(d) Each party irrevocably waives any objection which it might at any
time have to the courts of England being nominated as the forum to hear and
decide any Proceedings and to settle any disputes and agrees not to claim that
the courts of England are not a convenient or appropriate forum.
Date Approved by the Board of Directors of the Company: December 30, 1998.
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Exhibit 10.5
CARRIER 1 INTERNATIONAL S.A.
MASTER OPTION AGREEMENT
This Agreement is by and between Carrier 1 International S.A., a
Luxembourg SOCIETE ANONYME (the "Company"), and the entities listed on the
signature pages hereto (the "Employers" and each an "Employer").
W I T N E S S E T H:
WHEREAS, the Company wishes to provide certain employees of the Company
and any other Related Corporations (as defined below) with an opportunity to
participate in the ownership of the Company and its future growth through the
grant of certain options and has set up the Carrier 1 International S.A. 1998
Share Option Plan (the "Plan"), effective as of March 1, 1999 applicable to such
employees;
WHEREAS, each Employer has entered into or will enter into one or more
Carrier 1 International S.A. Option Agreements (the "Employee Option
Agreements") with certain employees (the "Optionees" providing for the grant by
the Employer of options (the "Employee Options") over certain Option Shares (as
defined below), in each case in accordance with the Plan; and
WHEREAS, the Company wishes to grant to each Employer the rights
provided herein for the sole purpose of enabling each Employer to carry out its
obligations under the Employee Option Agreements to which it is a party in
accordance with the Plan;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to each Employer, subject
to the terms and conditions herein, the right and option to purchase from the
Company the number of Option Shares necessary for such Employer to carry out its
obligations under any Employee Option Agreement for the grant of any Employee
Options approved by the Board or the Committee (as defined in the Plan) at a
purchase price equal to the Fair Market Value (as defined below) (the "Master
Option").
2. DEFINITIONS. All capitalized terms used herein but not defined
herein shall have the meanings ascribed such terms in the Plan. For the purposes
of this Agreement, the following terms shall have the meanings set forth in this
Section 2:
<PAGE>
(a) FAIR MARKET VALUE. "Fair Market Value" with respect to any
Option Shares means the value of the Option Shares determined as of the date
(the "Valuation Date") prior to the date of the Notice (as defined in Section
3(b) below). The Fair Market Value of the Shares shall be determined by the
mutual agreement of the Employer and the Company, within ten (10) days after the
Valuation Date. If the Employer and the Company fail to agree on the Fair Market
Value of the Shares during such ten (10) day period, the Fair Market Value of
the Shares shall be determined by the Board of Directors of Carrier One, LLC.
(b) OPTION SHARES. "Option Shares" shall mean a total of up to
2,222,222 Shares.
(c) PERSON. "Person" shall mean an individual, partnership,
corporation, association, trust, joint venture, unincorporated organization and
any government, governmental department or agency or political subdivision
thereof or other entity.
(d) RELATED CORPORATION. "Related Corporation" shall have the
meaning provided in the Plan.
(e) SHARES. "Shares" shall mean ordinary shares of the
Company.
3. TERMS AND CONDITIONS. It is understood and agreed that the Master
Option evidenced hereby is subject to the following terms and conditions:
(a) TIMING: NUMBER OF SHARES. An Employer may exercise the
Master Option in whole or in part on one or more occasions, but only upon and
after the exercise by an Optionee of an Employee Option granted under an
Employee Option Agreement with such Employer in accordance with its terms and
only for a number of Option Shares equal to the number of Option Shares for
which the Optionee has so exercised its Employee Option.
(b) EXERCISE OF OPTION. This Master Option may be exercised by
giving written notice (the "Notice") to the Company at its principal office
address, or to such transfer agent as the Company shall designate. Such notice
shall specify the number of Shares as to which this Master Option is being
exercised and the applicable Employee Option Agreement. Unless otherwise agreed,
the payment of the purchase price therefor shall be made immediately following
the determination of the Fair Market Value in United States dollars in cash.
(c) NON-TRANSFERABILITY. No Master Option shall be assignable
or transferable by an Employer except that any Master Option may be transferred
to another Employer which is a party to this Agreement.
(d) CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. Upon the
occurrence of any of the following events, the Employers' rights with respect to
this Master Option shall be adjusted as hereinafter provided:
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(i) SHARE DIVIDENDS AND SHARE SPLITS. If the Shares shall be
subdivided or combined into a greater or smaller number of Shares or if the
Company shall issue any Shares as a share dividend on its outstanding Shares,
the number of Shares deliverable upon the exercise of this Master Option shall
be appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per Share to reflect such
subdivision, combination or share dividend.
(ii) CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"), the
Committee or the board of directors of any entity assuming the obligations of
the Company hereunder (the "Successor Board"), shall either (i) make appropriate
provision for the continuation of the Master Option by substituting on an
equitable basis for the Shares then subject to the Master Option either (a) the
consideration payable with respect to the outstanding shares in connection with
the Acquisition, (b) equity securities of the surviving corporation or (c) such
other securities as the Successor Board deems appropriate, the fair market value
of which shall approximate the fair market value of the Shares subject to the
Master Option immediately preceding the Acquisition; or (ii) upon written notice
to the Employers, provide that the Master Option must be exercised, to the
extent then exercisable, within a specified number of days of the date of such
notice, at the end of which period the Master Option shall terminate; or (iii)
terminate the Master Option in exchange for a cash payment equal to the excess
of the fair market value of the Shares subject to the Employee Options (to the
extent then exercisable) over the exercise price thereof.
(iii) RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph (ii) above) pursuant to which securities of the
Company or of another corporation or entity are issued with respect to the
outstanding Shares, an Employer upon exercising this Master Option shall be
entitled to receive for the purchase price paid upon such exercise the
securities it would have received if it had exercised this Master Option prior
to such recapitalization or reorganization.
(iv) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, this Master Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the
Committee.
(v) FRACTIONAL SHARES. No fractional Shares shall be issued
pursuant to an exercise of this Master Option.
(e) MODIFICATION OF OPTION. The Committee shall have the
authority to instruct the Employer to effect, at any time and from time to time,
the modification of the terms of this Agreement and of any Employee Option
Agreement (subject to the limitations contained in the Plan).
3
<PAGE>
(f) COMPLIANCE WITH LAW AND REGULATIONS. This Master Option
and the obligation of the Company to sell and deliver Shares hereunder shall be
subject to all applicable laws, rules and regulations of any jurisdiction and to
such approvals by any government or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for Shares
prior to (i) the listing of such Shares on any stock exchange on which the
Shares may then be listed, and (ii) the completion of any registration or
qualification of such Shares under any applicable law, or any rule or regulation
of any government body which the Company shall, in its sole discretion,
determine to be necessary or advisable. Moreover, this Master Option may not be
exercised if its exercise, or the receipt of Shares pursuant thereto, would be
contrary to applicable law.
4. RESTRICTIONS ON DISPOSITION. All Shares acquired by the Employer
pursuant to this Agreement shall be held solely on behalf of the relevant
Optionee, and shall be used without delay to satisfy the obligations of the
Employer under the respective Employee Option Agreement.
5. NOTICES. Any notice hereunder to the Company shall be addressed to
it at c/o Carrier One AG, Regus Building, Stockerhof, Dreikonig Strasse 31A,
8002 Zurich, Switzerland, with a copy to Providence Equity Partners, 900 Fleet
Center, 50 Kennedy Plaza, Providence, RI 02903 and any notice hereunder to an
Employer shall be addressed to it c/o Carrier One AG, Regus Building, Stakerhof,
Dreikonig Strasse 31A, 8002 Zurich, Switzerland, subject to the right of either
party to designate at any time hereafter in writing some other address.
6. GOVERNING LAW: JURISDICTION. (a) This Agreement shall be construed
and administered in accordance with and governed by the laws of Luxembourg.
(b). The courts of England have jurisdiction to hear and decide any
suit, action or proceedings, and to settle any disputes, which may arise out of
or in connection with this Agreement (respectively, "PROCEEDINGS" and
"DISPUTES") and for this purpose each party irrevocably submits to the
jurisdiction of the Courts of England.
(c). Paragraph (b) above does not prevent any party to this Agreement
from taking proceedings relating to Proceedings or Disputes in any other courts
with jurisdiction.
(d). Each party irrevocably waives any objection which it might at any
time have to the courts of England being nominated as the forum to hear and
decide any Proceedings and to settle any disputes and agrees not to claim that
the courts of England are not a convenient or appropriate forum.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and each Employer has executed this
Agreement as of March 1, 1999.
CARRIER 1 INTERNATIONAL S.A.
By: /s/ Stig Johansson
------------------
Name:
Title:
CARRIER 1 INTERNATIONAL
GMBH
By: /s/ Stig Johansson
------------------
Name:
Title:
CARRIER 1 GMBH & CO. KG
By: /s/ Stig Johansson
------------------
Name:
Title:
5
<PAGE>
CARRIER 1 UK LIMITED
By: /s/ Stig Johansson
------------------
Name:
Title:
CARRIER 1 BV
By: /s/ Stig Johansson
------------------
Name:
Title:
CARRIER 1 INTERNATIONAL
MANAGEMENT COMPANY
By: /s/ Stig Johansson
------------------
Name:
Title:
CARRIER 1 FRANCE S.A.R.L.
By: /s/ Stig Johansson
------------------
Name:
Title:
6
<PAGE>
Exhibit 10.6
CARRIER1 INTERNATIONAL S.A.
OPTION AGREEMENT
This Agreement is by and among Carrierl International GmbH (the
"Employer"), [.] (the "Optionee"), Carrier One, LLC, a Delaware limited
liability company ("Carrier One"), and Carrierl International S.A., a Luxembourg
SOCIETE ANONYME (the "Company").
W I T N E S S E T H:
WHEREAS, Optionee is an employee of Employer.
WHEREAS, the Employer is a subsidiary of the Company.
WHEREAS, the Employer wishes to provide the Optionee with an
opportunity to participate in the ownership of the Company and its future growth
through the grant of the Option (as defined below) over certain Option Shares
(as defined below) under this Agreement.
WHEREAS, pursuant to the Carrier1 International S.A. Master Option
Agreement, the Company has agreed to make certain options available to the
Employer in order to enable the Employer to carry out its obligations under this
Agreement.
WHEREAS the Optionee agrees to grant to the Employer (or its
designees) certain repurchase rights.
NOW THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. GRANT OF OPTION. Pursuant to the provisions of the Carrierl
International S.A. 1999 Share Option Plan (the "Plan") attached hereto as Annex
A, effective as of March 1, 1999, the Employer grants to Optionee, subject to
the terms and conditions of the Plan and subject further to the terms and
conditions herein, the right and option (the "Option") to purchase from the
Employer all or any part of the Option Shares at a purchase price equal to
US$2.00 per Share plus the amount of any capital duty payable by the Company,
the Employer or the Optionee in respect of the issuance of such Option Shares
(the "Exercise Price").
2. DEFINITIONS. All capitalized terms used herein but not defined
herein shall have the meanings ascribed such terms in the Plan. For the purposes
of this Agreement, the following terms shall have the meanings set forth in this
Section 2:
<PAGE>
(a) CAUSE. "Cause" shall mean (i) a breach by the Optionee of
any employment agreement between the Employer, the Company or a Related
Corporation and the Optionee, (ii) any act of dishonesty, embezzlement,
unauthorized use or disclosure of Confidential Information (as defined in the
employment agreement between optionee and the Employer, the Company or a Related
Corporation), intellectual property, or trade secrets, common law fraud or other
fraud with respect thereto, (iii) the commission by Optionee of a felony, a
crime involving moral turpitude or any other act causing material harm to the
Employer's, the Company's or any of the Related Corporations' standing or
reputation, (iv) Optionee's willful and continued failure to perform his duties
to the Employer, the Company or a Related Corporation as reasonably requested by
the Board of Directors thereof, (v) Optionee's willful misconduct or gross
negligence, or (v) the willful commission by Optionee of an act which (x)
constitutes unfair competition with the Employer or any of the Related
Corporations, (y) induces any other employee to leave the employ of the
Employer, the Company or any of the Related Corporations or (z) induces any
customer of the Employer, the Company or any of the Related Corporations to
breach or terminate a contract with the Employer, the Company or a Related
Corporation.
(b) CHANGE OF CONTROL. "Change of Control" shall mean (i) any
sale, transfer or other disposition of all or substantially all of the
consolidated assets of the Company and the Related Corporations (whether by
merger, consolidation, reorganization or otherwise), in one transaction or a
series of related transactions, to any "person" or "group" (as such terms are
used for purposes of Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not applicable) and (ii) any sale,
transfer, disposition by a shareholder or shareholders of the Company of Shares
or by a member or members of Carrier One of Units or other equity securities of
Carrier One (including by merger, consolidation or otherwise) in a transaction
or series of related transactions which results in the Persons who are members
(or shareholders) who, directly or indirectly, own a majority of the Company's
Shares with the right to vote generally prior to such sale, transfer or
disposition owning less than 50% of the outstanding voting Shares of the
Company, directly or indirectly, with the right to vote generally.
(c) DISABILITY. "Disability" shall mean a mental or physical
condition which in the reasonable opinion of a majority of the Board renders
Optionee unable or incompetent to properly carry out his duties and
responsibilities contemplated by his employment by the Employer or a Related
Corporation, which condition shall have existed for a period of 90 or more
consecutive days or a total of 180 days in any period of 365 consecutive days.
(d) FAIR MARKET VALUE. "Fair Market Value" means the value of
the Shares determined as of the date (the "Valuation Date") prior to the date of
the Notice (as defined in Section 3(d)(iv) or (v) below, as the case may be).
The Fair Market Value of
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<PAGE>
the Shares shall be determined by the mutual agreement of Optionee (or his
estate or personal representative, as the case may be) and the Employer, within
ten (10) days after the Valuation Date. If Optionee (or his estate or personal
representative, as the case may be) and the Employer fail to agree on the Fair
Market Value of the Shares during such ten (10) day period, the Fair Market
Value of the Shares shall be determined by a Qualified Appraiser selected by
mutual agreement of Optionee (or his estate or personal representative, as the
case may be) and the Employer within twenty (20) days after the Valuation Date.
If government, governmental department or agency or political subdivision
thereof or other entity.
(e) PUBLIC SALE. "Public Sale" shall have the meaning as
ascribed to it in the Securityholders' Agreement.
(f) QUALIFIED APPRAISER. "Qualified Appraiser" shall mean a
person experienced in evaluating international telecommunications companies.
(g) SECURITYHOLDERS' AGREEMENT. "Securityholders' Agreement"
shall mean the Securityholders' Agreement among the Company, Carrier One and the
other securityholders from time to time party thereto dated March 1, 1999.
(h) SHARES. "Shares" shall mean ordinary shares of the
Company.
3. TERMS AND CONDITIONS. In addition to the terms and conditions
contained in the Plan, it is understood and agreed that the Option evidenced
hereby is subject to the following additional terms and conditions:
(a) The Option shall expire on the tenth (10th) anniversary of
the Applicable Date, subject to earlier termination as provided in Paragraph (d)
below.
(b) VESTING.
(i) Subject to Paragraph (d) and the other terms of
this Agreement regarding the exercisability of this Option, this Option shall
become exercisable for the respective percentages of the total number of Option
Shares as is set forth opposite the date indicated below:
<TABLE>
<S> <C>
On or after December 1, 1998 (the "Applicable
Date") but prior to the First Anniversary of the
Applicable Date 0%
On or after the First Anniversary of the
Applicable Date but prior to the Second
Anniversary of the Applicable Date 20%
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
On or after the Second Anniversary of the
Applicable Date but prior to the Third
Anniversary of the Applicable Date 40%
On or after the Third Anniversary of the
Applicable Date but prior to the Fourth
Anniversary of the Applicable Date 60%
On or after the Fourth Anniversary of the
Applicable Date but prior to the Fifth
Anniversary of the Applicable Date 80%
On or after the Fifth Anniversary of the 100%
Applicable Date
</TABLE>
Once an installment becomes exercisable it shall remain exercisable
until expiration or termination of the Option.
(ii) Notwithstanding Paragraph 3(b)(i) above, this Option
shall automatically vest in its entirety upon the effective date of a Change in
Control which occurs while the Optionee is employed by the Employer or a Related
Corporation.
(c) EXERCISE OF OPTION. This Option (or any part of installment
thereof) may be exercised by giving written notice to the Employer at its
principal office address, or to such transfer agent as the Employer shall
designate. Such notice shall identify the Option being exercised and specify the
number of Shares as to which this Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) through delivery of Shares having a fair market value
equal as of the date of the exercise to the cash exercise price of the Option,
(c) by any combination of (a) and (b) above. Optionee shall not have the rights
of a shareholder with respect to the Shares covered by this Option until the
date on which the Shares are recorded in his or her name in the share registry
of the Company. Except as expressly provided below with respect to changes in
capitalization and share dividends, no adjustments shall be made for
distributions, dividends or similar rights for which the record date is before
the date such Share is issued.
(d) TERMINATION OF EMPLOYMENT.
(i) NO FURTHER VESTING. If Optionee ceases to be employed by
the Employer and all Related Corporations for any reason whatsoever, the portion
of this Option not exercisable as of the date Optionee ceases to be so employed
shall be void and not exercisable in any event. For purposes of this Paragraph
(d), employment shall be considered as continuing uninterrupted during any bona
fide leave of absence approved in writing by the Employer. This Option shall not
be affected by any change of
4
<PAGE>
employment within or among the Employer and Related Corporations so long as
Optionee continues to be an employee of the Employer or any Related Corporation.
Nothing in the Plan or this Agreement shall be deemed to give Optionee the right
to be retained in employment or other service by the Employer or any Related
Corporation for any period of time.
(ii) TERMINATION UPON DEATH OR DISABILITY. If the Optionee
ceases to be employed by the Employer and all Related Corporations by reason of
his death or Disability, then Optionee (or his personal representative, estate
or beneficiary, as applicable) shall have the right to exercise this Option for
the number of Shares for which Optionee could have exercised it on the date of
termination of employment until the specified expiration date of the Option,
(iii)TERMINATION NOT FOR CAUSE. If the Employer or a
Related Corporation terminates Optionee's employment for any reason other than
for Cause (and the Optionee does not continue in the employ of another Related
Corporation), then Optionee (or his personal representative, estate or
beneficiary, as applicable) shall have the right to exercise this Option for the
number of Shares for which Optionee could have exercised it on the date of
termination of employment until the earlier of (i) the specified expiration date
of the Option or (ii) 90 days from the date of the termination of Optionee's
employment.
(iv) RIGHT TO PURCHASE. In the event (a) Optionee dies or
becomes Disabled or (b) the Employer or a Related Corporation terminates the
Optionee's employment for any reason other than Cause, then in any such event,
the Employer shall have an option for 18 months after such event to both (x)
purchase all or any portion of the Shares owned by the Optionee as of the date
Optionee's employment was terminated, whether or not acquired pursuant to the
exercise of this Option, at a purchase price equal to the Fair Market Value per
Share and (y) cancel any unexercised portion of any outstanding Option upon
written notice and an aggregate payment to Optionee equal to the number of
Shares for which the Option is exercisable multiplied by the difference between
(A) the Fair Market Value per Share and (B) the Exercise Price. If the Employer
elects to so purchase such Shares, then upon twenty (20) days prior written
notice (the "Notice") to Optionee, Optionee shall sell and the Employer shall
purchase such Shares. The closing of such purchase and sale shall take place on
a date designated by the Employer, which shall not be more than sixty (60) days
following the date of the Notice.
(v) VOLUNTARY TERMINATION. If the Optionee voluntarily
terminates his employment with the Employer or a Related Corporation (and is not
in the employ of another Related Corporation), then Optionee shall have the
right to exercise this Option for the number of Shares for which he could have
exercised it on the date of termination of employment until the earlier of (i)
the specified expiration date of the Option or (ii) 30 days from the date of the
termination of Optionee's employment. In the event the
5
<PAGE>
Optionee voluntarily terminates his employment with the Employer or a Related
Corporation, the Employer shall have an option for a period of 18 months after
such termination to purchase all or any portion of the Shares owned by the
Optionee as of the date Optionee's employment was terminated, whether or not
acquired pursuant to the exercise of this Option, at the purchase price set
forth opposite the applicable date below:
<TABLE>
<S> <C>
Date of voluntary termination is on or the Exercise Price
after the Applicable Date but prior to the
third anniversary of the Applicable Date
Date of voluntary termination is on or 50% of the Fair
after the third anniversary of the Market Value per
Applicable Date but prior to the fifth Share
anniversary of the Applicable Date
Date of voluntary termination is after the Fair Market Value per
fifth anniversary of the Application Date Share
</TABLE>
In addition, and without limiting the Employer's right to repurchase the
Optionee's Shares, the Employer shall have the right to cancel the unexercised
portion of any outstanding Option upon written notice without compensation. If
the Employer elects to so purchase such Shares, then upon twenty (20) days prior
written notice (the "Notice") to Optionee, Optionee shall sell and the Employer
shall purchase such Shares. The closing of such purchase and sale shall take
place on a date designated by the Employer, which shall not be more than sixty
(60) days following the date of the Notice.
(vi) TERMINATION FOR CAUSE. If the Employer or a Related
Corporation terminates Optionee's employment for Cause, then Optionee shall have
the right to exercise this Option for the number of Shares for which he could
have exercised it on the date of termination of employment until the earlier of
(i) the specified expiration date of the Option or (ii) 30 days from the date of
the termination of Optionee's employment. In the event the Employer or a Related
Corporation terminates the Optionee's employment for Cause, the Employer shall
have an option for a period of 18 months after such termination to purchase all
or any portion of the Shares owned by the Optionee as of the date Optionee's
employment was terminated, whether or not acquired pursuant to the exercise of
this Option, at a purchase price of the Exercise Price per Share. In addition,
and without limiting the Employer's right to repurchase the Optionee's Shares,
the Employer shall have the right to cancel the unexercised portion of any
outstanding Option upon written notice without compensation. If the Employer
elects to so purchase such Shares, then upon twenty (20) days prior notification
of Optionee, Optionee shall sell and the Employer shall purchase such Shares.
The closing of such purchase and sale shall take place on a date designated by
the Employer, which shall not be more than sixty (60) days following the date of
notification to Optionee.
6
<PAGE>
(vii) VIOLATION OF NONCOMPETITION NONSOLICITATION OR
CONFIDENTIALITY OBLIGATIONS. Notwithstanding anything to the contrary in this
Paragraph (d), if the Optionee breaches any confidentiality, noncompetition or
nonsolicitation obligation to the Employer, the Company or a Related
Corporation, including any such obligation contained in any employment agreement
between the Optionee and the Employer or a Related Corporation or in the
Securityholders' Agreement, the Employer shall have an option for a period of 18
months after the Employer has actual knowledge of such breach to purchase all or
any portion of the Shares owned by the Optionee as of the date Optionee's
employment was terminated, whether or not purchased pursuant to the exercise of
Options granted pursuant to the Plan, at a purchase price equal to the Exercise
Price per Share. In addition, and without limiting the Employer's right to
repurchase the Optionee's Shares, the Employer shall have the right to cancel
any unexercised portion of any outstanding Option upon written notice without
compensation. If the Employer elects to so purchase such Shares, then upon
twenty (20) days prior notification of such Optionee, Optionee shall sell and
the Employer shall purchase such Shares. The closing of such purchase and sale
shall take place on a date designated by the Employer, which shall not be more
than sixty (60) days following the date of notification to the Optionee,
(viii) In the event that any purchase of Shares by the
Employer pursuant to this Agreement, taking into consideration any other
purchases of Shares made by the Company or any Related Corporation, would
violate any law applicable to the Company, the Employer or any other Related
Corporations or result in a default under any financing agreement entered into
from time to time by the Company, the Employer or any Related Corporations with
third parties, then, provided the Employer has elected to purchase such Shares
within the applicable time period specified herein, the Employer may defer the
closing of the purchase and sale of such Shares until such time as such closing
would no longer result in such a violation or default. In such case, the
purchase price payment obligations of the Employer shall bear interest from the
date such price would otherwise have come due but for the operation of this
subparagraph (viii) until the date of payment at a rate equal to the average
annual interest rate payable by the Company and any other Related Corporations
on its and their third party indebtedness for money borrowed, as determined by
the Board.
(e) NON-TRANSFERABILITY. No Option shall be assignable or
transferable by Optionee except by will, by the laws of descent and distribution
or pursuant to a valid domestic relations order. Except as set forth in the
previous sentence, during the lifetime of Optionee, this Option shall be
exercisable only by Optionee.
(f) CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. Upon the
occurrence of any of the following events, an Optionee's rights with respect to
this Option shall be adjusted as hereinafter provided:
7
<PAGE>
(i) SHARE DIVIDENDS AND SHARE SPLITS. If the Shares
shall be subdivided or combined into a greater or smaller number of Shares or if
the Company shall issue any Shares as a share dividend on its outstanding
Shares, the number of Shares deliverable upon the exercise of this Option shall
be appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or share dividend.
(ii) CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"), the
Employer, under the instruction from the Committee or the board of directors of
any entity assuming the obligations of the Company hereunder (the "Successor
Board"), shall either (i) make appropriate provision for the continuation of
this Option by substituting on an equitable basis for the Shares then subject to
this Option either (a) the consideration payable with respect to the outstanding
Shares in connection with the Acquisition, (b) equity securities of the
surviving corporation or (c) such other securities as the Successor Board deems
appropriate, the fair market value of which shall approximate the fair market
value of the Shares subject to this Option immediately preceding the
Acquisition; or (ii) upon written notice to Optionee, provide that this Option
must be exercised, to the extent then exercisable, within a specified number of
days of the date of such notice, at the end of which period this Option shall
terminate; or (iii) terminate this Option in exchange for a cash payment equal
to the excess of the fair market value of the Shares subject to this Option (to
the extent then exercisable) over the exercise price thereof.
(iii) RECAPITALIZATION OR REORGANIZATION. In the event
of a recapitalization or reorganization of the Company (other than a transaction
described in subparagraph (ii) above) pursuant to which securities of the
Company or of another corporation or entity are issued with respect to the
outstanding Shares, Optionee upon exercising this Option shall be entitled to
receive for the purchase price paid upon such exercise the securities he would
have received if he had exercised this Option prior to such recapitalization or
reorganization.
(iv) DISSOLUTION OR LIQUIDATION. In the event of the
proposed dissolution or liquidation of the Company, this Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the
Committee.
(v) ISSUANCES OF SECURITIES. Except as expressly
provided herein, no issuance by the Company of Shares of any class, or
securities convertible into Shares of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to this Option. No adjustments shall be made for dividends paid in cash
or in property other than securities of the Company.
8
<PAGE>
(vi) FRACTIONAL SHARES. No fractional Shares shall be
issued pursuant to an exercise of this Option and Optionee shall receive from
the Employer cash in lieu of such fractional Shares.
(vii) The Company and Carrier One hereby agree to take
such actions (including, in the case of Carrier One, voting its shares to amend
the articles of association and modify the capital of the Company) as may be
reasonably required to give effect to this Section 3(f).
(g) MODIFICATION OF OPTION. The Employer, under the
instruction from the Committee, shall have the authority to effect, at any time
and from time to time, with the consent of Optionee, the modification of the
terms of this Agreement (subject to the limitations contained in the Plan).
(h) NO RIGHT TO CONTINUED EMPLOYMENT. This Option shall not
confer upon Optionee any right with respect to continuance of employment by the
Employer or any Related Corporation, nor shall it interfere in any way with the
right of the Employer to terminate Optionee's employment at any time.
(i) COMPLIANCE WITH LAW AND REGULATIONS. This Option and the
obligation of the Employer to sell and deliver Shares hereunder shall be subject
to all applicable laws, rules and regulations of any jurisdiction and to such
approvals by any government or regulatory agency as may be required. The
Employer shall not be required to issue or deliver any certificates for Shares
prior to (i) the listing of such Shares on any stock exchange on which the
Shares may then be listed, and (ii) the completion of any registration or
qualification of such Shares under any applicable law, or any rule or regulation
of any government body which the Employer shall, in its sole discretion,
determine to be necessary or advisable. Moreover, this Option may not be
exercised if its exercise, or the receipt of Shares pursuant thereto, would be
contrary to applicable law.
4. RESTRICTIONS ON DISPOSITION. All Shares acquired by Optionee
pursuant to this Agreement shall be subject to such restrictions on sale,
encumbrance and other disposition as may be set forth in the Securityholders'
Agreement or other applicable securityholders' agreement to which Optionee is,
or is required to become, a party.
5. OPTIONEE BOUND BY PLAN. Optionee hereby acknowledges receipt of a
copy of the Plan and agrees to be bound by all the terms and provisions
thereof.
6. WITHHOLDING TAXES. Optionee acknowledges and agrees that the
Employer and the Related Corporations have the right to demand from the Optionee
or to deduct from payments of any kind otherwise due to Optionee any foreign,
federal, state or local taxes of any kind required by law to be withheld with
respect to the exercise of this
9
<PAGE>
Option hereunder. The Employer in its discretion may condition the exercise of
this Option on the Optionee's making satisfactory arrangements for such
withholding. Such arrangements may include (i) payment by the Optionee to the
Employer in cash or by check, (ii) withholding by the Employer from the
Optionee's salary, and/or (iii) delivery of Shares by the Optionee to the
Employer having a fair market value equal as of the date of the exercise to the
amount of the withholding taxes.
7. ASSIGNMENT. The Employer may assign all or any part of its rights
and obligations under this Agreement to the Company or any other Related
Corporations and may designate any third party to consummate any purchase of
Shares required or permitted by the terms of this Agreement.
8. NOTICES. Any notice hereunder to the Employer shall be addressed to
it at its principal business office, with a copy to Providence Equity Partners,
900 Fleet Center, 50 Kennedy Plaza, Providence, RI 02903 and to the Company, c/o
Carrierl International GmbH, Militarstrasse 36, 9004 Zurich, Switzerland, and
any notice hereunder to Optionee shall be sent to the address reflected on the
payroll records of the Employer, subject to the right of either party to
designate at any time hereafter in writing some other address.
9. GOVERNING LAW JURISDICTION. (a) This Agreement shall be construed
and administered in accordance with and governed by the laws of Luxembourg. In
the event of any conflict or inconsistency between the provisions of the Plan
and this Agreement, the terms of this Agreement shall govern.
(b) The courts of England have jurisdiction to hear and decide
any suit, action or proceedings, and to settle any disputes, which may arise out
of or in connection with this Agreement (respectively, "Proceedings" and
"DISPUTES") and for this purpose each party irrevocably submits to the
jurisdiction of the Courts of England.
(c) Paragraph (b) above does not prevent any party to this
Agreement from taking proceedings relating to Proceedings or Disputes in any
other courts with jurisdiction.
(d) Each party irrevocably waives any objection which it might
at any time have to the courts of England being nominated as the forum to hear
and decide any Proceedings and to settle any disputes and agrees not to claim
that the courts of England are not a convenient or appropriate forum.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be
executed by its duly authorized officer and Optionee has executed this Agreement
as of the first day of March 1999.
------------------------------
/./
CARRIER1 INTERNATIONAL
GmbH
BY:
---------------------------
NAME:
TITLE:
CARRIER1 INTERNATIONAL
S.A.
BY:
---------------------------
NAME:
TITLE:
CARRIER ONE, LLC
BY:
---------------------------
NAME:
TITLE:
[SIGNATURE PAGE TO OPTION AGREEMENT]
11
<PAGE>
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(in Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS ENDED THREE MONTHS ENDED INCEPTION TO INCEPTION TO
MARCH 31, 1999 MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999
<S> <C> <C> <C> <C>
Earnings:
Net Loss (15,030) (19,303) (19,235) (49,117)
Interest-Expensed 4,205 8,478 11 29,893
-------- -------- -------- --------
Earnings (10,825) (10,825) (19,224) (19,224)
Fixed Charges:
Interest-Expensed 4,205 8,478 11 29,893
Interest-Capitalized - - - -
Interest-portion of rent expense 214 214 231 231
-------- -------- -------- --------
Total Fixed Charges 4,419 8,692 242 30,124
Ratio of Earnings to Fixed Charges n/a n/a n/a n/a
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-75195 of Carrier1 International S.A. of our report dated March 17, 1999
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the headings "Summary Consolidated Financial Data,"
"Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE EXPERTA AG
/s/ David Wilson /s/ Jerry M. Mayer
David Wilson Jerry M. Mayer
Erlenbach, Switzerland
May 17, 1999
