<PAGE>
REGISTRATION NO. 333-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2000.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
CARRIER1 INTERNATIONAL S.A.
(Exact name of Registrant as specified in its charter)
LUXEMBOURG 4813 98-0199626
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
-----------
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, ESQ.
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)
-----------
COPY TO:
PAUL D. BRUSILOFF, ESQ.
DEBEVOISE & PLIMPTON
TOWER 42 INTERNATIONAL FINANCIAL CENTER
OLD BROAD STREET
LONDON EC2N 1HQ
(4420) 7786-9000
-----------
Approximate date of commencement of proposed sale to the public: From
time to time or at one time after the effective date of this registration
statement.
If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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(c) 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. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
-----------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE REGISTERED AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
(1) REGISTERED(1) SHARE(1)(2) PRICE(1)(2) FEE(2)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shares, par value
$2.00 per share 1,685,813 $41.41 $69,809,516 $18,430
-------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) There are being registered under this registration statement 1,685,813
common shares of Carrier1 International S.A. as may from time to time be
issued upon exercise of outstanding warrants, and sold by the selling
shareholders, pursuant to this registration statement. The proposed
maximum offering price per share will be determined, from time to time, by
the selling shareholders in connection with the sale by the selling
shareholders of the securities registered under this registration
statement.
(2) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee, based upon the average of the high and low sales prices
for the American Depositary Shares, each American Depositary Share
representing 0.2 of one share, as reported on the Nasdaq National Market
on August 14, 2000.
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>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT, OF WHICH THIS
PROSPECTUS IS PART, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 17, 2000.
PROSPECTUS
Carrier1 International S.A.
1,685,813 Shares
in the form of Shares or American Depositary Shares
---------
This prospectus relates to the registration of the offer and sale of up to
1,685,813 common shares of Carrier1 International S.A., par value $2.00 per
share, that are issuable upon exercise of warrants held by the selling
shareholders named in this prospectus. The shares may be offered for sale in the
form of common shares or American Depositary Shares (ADSs).
The offering price for the shares that may be sold by the selling shareholders
may be the market price for our common shares prevailing at the time of the
sale, a price related to the prevailing market price, a negotiated price or such
other price as the selling shareholders determine from time to time.
We will not receive any proceeds from the sales of the shares by the selling
shareholders. We will receive up to $2,096,874 upon the exercise of the dollar
warrants and up to $1,274,752 upon exercise of the euro warrants by the selling
shareholders, based on an exercise price of $2.00 per share.
Our common shares are traded on the Neuer Markt segment of the Frankfurt Stock
Exchange under the symbol "CJN". On August 14, 2000, the last reported sale
price of our common shares was (euro)48.5. ADSs, each representing 0.2 of our
common shares, are traded on the Nasdaq National Market under the symbol "CONE".
On August 14, 2000, the last reported sale price of our ADSs was $8.0625.
The offering by the selling shareholders is not being underwritten.
INVESTING IN THE SHARES OR ADSS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
---------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Summary........................................................................3
Risk Factors...................................................................9
Use Of Proceeds...............................................................23
Dividend Policy...............................................................23
Price Range Of Shares.........................................................23
Selected Consolidated Financial Data..........................................24
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations................................................................26
Business......................................................................41
Management....................................................................69
Certain Relationships And Related Transactions................................76
Principal And Selling Shareholders............................................79
Description Of Certain Indebtedness...........................................85
Description Of Share Capital..................................................87
Description Of American Depositary Receipts...................................93
Taxation.....................................................................101
Plan Of Distribution.........................................................106
Legal Matters................................................................107
Experts......................................................................107
Where You Can Find More Information..........................................108
-----------
When we refer to "Carrier1 International," we are referring to the
holding company Carrier1 International S.A., the issuer of the shares and ADSs.
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.
You should rely only on the information contained in this prospectus.
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 in this prospectus. 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 an offer or sale of securities is not permitted under applicable law. The
delivery of this prospectus or the securities offered by this prospectus does
not, under any circumstances, mean that there has not been a change in our
affairs since the date of this prospectus. It also does not mean that the
information in this prospectus is correct after this date.
-----------
i
<PAGE>
CERTAIN REGULATORY ISSUES
For investors outside the United States: No action has been or will be
taken in any jurisdiction by us or any selling shareholder that would permit a
public offering of the shares or ADSs or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this prospectus comes
are required by us and any selling shareholder to inform themselves about, and
to observe any restrictions as to, the offering of the shares and ADSs and the
distribution of this prospectus.
The distribution of this document, and the offering of the shares and
ADSs in the United Kingdom is restricted. This document has not been drawn up in
accordance with the United Kingdom's Public Offers of Securities Regulations
1995 and a copy has not been delivered to the Registrar of Companies in England
and Wales for registration. Accordingly, the shares and ADSs may not be offered
or sold in the United Kingdom other than to persons whose ordinary activities
involve them in the acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that do not constitute an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995.
Neither this prospectus, nor any other document issued in connection
with the offering of the shares and ADSs, may be issued or passed on to any
person in the United Kingdom unless that person is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such document may
otherwise be lawfully issued or passed on. This prospectus is only directed at
such persons in the UK and it would be imprudent for persons of any other kind
to respond to it.
The securities may not be offered, sold, transferred or delivered in or
from the Netherlands as part of their initial distribution or at any time
thereafter, directly or indirectly, other than to individuals or legal entities
who or which trade or invest in securities in the conduct of a business or
profession, which includes, but is not limited to, banks, brokers, dealers,
insurance companies, pension funds, other institutional investors and commercial
enterprises which regularly, as an ancillary activity, invest in securities.
This prospectus is being distributed on the basis that each person in
the Netherlands to whom this prospectus is issued is reasonably believed to be a
person falling within the exemption described in the foregoing paragraph.
Accordingly, by accepting delivery of this prospectus the recipient warrants and
acknowledges that it is a person falling within any such exemption.
The offering of the shares and ADSs in the Republic of Italy has not
been registered with the COMMISSIONE NAZIONALE PER LE SOCIETA E LA BORSA
("CONSOB") pursuant to Italian securities legislation. The distribution of this
prospectus in the Republic of Italy is restricted to persons who qualify as
professional investors under applicable Italian securities regulation.
PRESENTATION OF FINANCIAL INFORMATION
We report our financial statements in U.S. dollars and prepare our
financial statements in accordance with accounting principles generally accepted
in the United States. We have adopted a fiscal year end of December 31.
<PAGE>
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" or "Deutsche Mark" are to the lawful currency of
Germany.
2
<PAGE>
SUMMARY
THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. BEFORE YOU DECIDE TO INVEST IN OUR SHARES OR ADSS, YOU
SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.
CARRIER1
We are a rapidly expanding European facilities-based provider of voice,
Internet and bandwidth and related telecommunications services. We offer these
services primarily to other telecommunications service providers. In March 1998,
our experienced management team and Providence Equity Partners formed Carrier1
to capitalize on the significant opportunities emerging for facilities-based
carriers in Europe's rapidly liberalizing telecommunications markets. By
September 1998, we had deployed our initial network and commenced selling
services. By June 30, 2000, we had 352 contracts with voice customers and 154
contracts with Internet and bandwidth customers.
We are developing an extensive city-to-city European fiber optic
network accessing and linking key population centers. In select European cities,
we are also developing:
o intra-city networks, and
o data centers for housing and managing equipment.
We expect these intra-city networks to give us faster, lower cost
access to customers, with better quality control. We also expect to bundle and
cross-sell our intra-city network and data center capabilities with our other
services.
As of June 30, 2000, we offered voice, Internet and bandwidth and
related services in over 20 cities and 12 countries. In addition, as of June 30,
2000 we had arranged to secure, through a combination of building, buying and
swapping assets, a network of approximately 11,000 kilometers, which we expect
to become operational in stages through the end of 2000. This network will
consist of wholly-owned fiber in Germany, France, the United Kingdom, The
Netherlands, Norway and Sweden, and wholly owned capacity at speeds greater than
2.5 Gbps in Denmark, Italy, Switzerland and Belgium. The network will include a
2,370 kilometer network in Germany, a 2,650 kilometer network in France, a 1,150
kilometer network in the United Kingdom and intra-city networks in Amsterdam,
Paris, Milan, Rotterdam, Berlin and Munich. We expect to complete the Amsterdam
and Paris networks by the end of 2000.
We intend to continue rapidly expanding our network in a cost-effective
manner by building, buying or swapping network assets. For example, we completed
construction of the 2,370 kilometer German network in mid-July 2000 and, except
for a few segments for which we expect final regulatory approval later in the
third quarter, it is in commercial service. The German network connects 14
principal cities and passes a number of other major cities. We built the German
network with partners to lower our fixed cost of construction. We own our own
duct, which contains 72 fiber strands. We have swapped excess capacity on the
German network for fiber capacity on other networks in our target markets to
increase the reach of our owned and controlled network in a capital-efficient
way.
3
<PAGE>
INDUSTRY AND MARKET OPPORTUNITY
We believe that the market for advanced, high bandwidth, transmission
capacity and related voice and Internet services in Europe will grow
significantly due to a number of factors, including:
o LIBERALIZATION. As a result of liberalization, we expect the
European telecommunications market to experience an increase
in both international and national traffic volume, reduced
prices, increased service offerings and the emergence of new
entrants seeking to outsource some or all of their
telecommunications infrastructure and service needs.
o LARGE AND RAPIDLY GROWING MARKET FOR VOICE SERVICES. Industry
sources report that the European international long distance
market is among the largest in the world and is continuing to
grow rapidly.
o RAPIDLY GROWING DEMAND FOR INTERNET AND BANDWIDTH SERVICES.
Industry sources estimate that the penetration rate of web
users in Europe will grow from a level of approximately 10% at
the end of 1998 to approximately 45% in 2003. We believe that
substantial additional bandwidth and faster transmission
speeds will be required to accommodate new Internet intensive
business applications.
o DEMAND FOR RELATED SERVICES. Increasing demand for basic
telecommunications services presents opportunities for
companies to market other related services, such as data
center services.
BUSINESS STRATEGY
Our objective is to be a leading European provider to our target
customers of high quality voice, Internet and bandwidth and related services.
Our target customers are telecommunications service providers and other large
telecommunications users with similar needs. The key elements of our strategy
are:
o TARGET TELECOMMUNICATIONS SERVICE PROVIDERS AND OTHER LARGE
TELECOMMUNICATIONS USERS WITH SIMILAR NEEDS. By focusing on
telecommunications operators and other large
telecommunications users with similar needs, we can take
advantage of our management's strong market-oriented skills,
first-hand understanding of the European telecommunications
markets and long-standing customer relationships, with less
overhead than a mass retail carrier. We believe
telecommunications operators prefer an independent supplier to
an incumbent telephone operator or other supplier with which
they compete directly for mass retail customers.
o FOCUS ON CUSTOMER NEEDS. We will continue to build
relationships with a large number of telecommunications
service providers by providing quality, customized service and
a superior level of customer support.
o QUALITY OF SERVICE. Based on our management's
experience in telecommunications markets, we believe
that we offer among the highest minimum service
levels for voice and Internet and bandwidth services
in Europe. Owning fiber optic networks, switches,
multiplexers and routers helps us to control the
quality and breadth of our service offerings.
4
<PAGE>
o SUPERIOR CUSTOMER SUPPORT. We have designed our
systems with the goal of providing a level of
customer support significantly higher than that
generally offered in our target market in Europe.
o RAPID AND CAPITAL-EFFICIENT NETWORK EXPANSION. We seek to
invest in key strategic assets, such as our German and various
intra-city networks, which we can use as a currency for swaps
to extend our European coverage as rapidly as possible. We
have reduced the capital necessary to assemble our expanding
network by: sharing the cost of building the German network
with partners, selling or pre-selling conduit rights or
capacity to defray costs, and swapping capacity or services.
We plan to continue to take this rapid and capital-efficient
approach in implementing our strategy to secure intra-city
networks in up to 20 cities throughout Europe.
o EXPLOIT LOW COST PROVIDER POSITION. Owning a high capacity,
cross-border network in Europe gives us a significant cost
advantage over incumbent providers with extensive legacy
networks and newer competitors that currently lease the
majority of their network or will be required to lease a
significant amount of capacity in the future to meet increased
demand or that are incurring the full cost of building
networks without the use of capital-efficient swapping or
pre-selling.
o PURSUE GROWING DEMAND FOR BANDWIDTH. We believe that demand
for high bandwidth and Internet transmission capacity will
increase substantially over the next several years.
o BUNDLE AND CROSS-SELL A COMPREHENSIVE RANGE OF NETWORK
SOLUTIONS. We can customize our voice, Internet and bandwidth
and other capabilities in combinations, or as comprehensive
European end-to-end network solutions. We offer customers
these comprehensive network solutions to create a virtual
carrier network in which we will provide all of the European
telecommunications network infrastructure and services they
require, except for branding, sales and features customized
for their specific end users.
o In connection with this strategy, we and several other parties
formed Digiplex, a joint venture to build data centers in
which we can house and manage mission-critical data and
networking equipment both for ourselves and for our customers.
We have invested $23.25 million of the $155 million in total
equity committed in the project to develop these full-service
facilities in major markets throughout Europe. Digiplex
intends to build up to 20 to 25 facilities, generally ranging
in size from 100,000 to 350,000 square feet in major markets
in Europe during 2000 and 2001. We expect to have a minimum of
between 10,000 and 25,000 square feet available for our use
and the use of our customers in each facility. We expect to
connect each facility that we use to our fiber optic network.
In furtherance of our business strategy, we regularly explore possible
strategic partnerships, acquisitions, business combinations and other similar
transactions.
MANAGEMENT AND EQUITY SPONSORS
Stig Johansson, Chief Executive Officer, and our management have
extensive experience in European telecommunications markets and longstanding
relationships with European customers and suppliers.
5
<PAGE>
Funds managed by Providence Equity Partners Inc. and Primus Venture
Partners, Inc. have invested $60 million to finance the deployment of our
network and to fund our operations. As of June 30, 2000, the Providence funds
indirectly hold approximately 55.7%, or 50.6% on a fully diluted basis, and the
Primus funds indirectly hold approximately 11.1%, or 10.1% on a fully diluted
basis, of the shares of Carrier1 International. Providence is a private
investment firm that specializes in equity investments in telecommunications and
media companies in the United States and Europe. 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.
SUMMARY OF THE OFFERING BY SELLING SHAREHOLDERS
Unless otherwise indicated, the information throughout this prospectus
assumes that all outstanding euro warrants and dollar warrants are exercised and
the shares issued upon such exercise are sold.
Shares offered by selling shareholders......... Up to 1,685,813 shares, in the
form of shares or, in the United
States, ADSs.
Shares to be outstanding after exercise of all 43,406,991 shares, not including
euro warrants and dollar warrants........... the exercise of any outstanding
options or other warrants. As of
June 30, 2000 we had outstanding
options which, if fully
exercised, would allow the
holders to purchase an aggregate
of 2,612,718 shares.
The ADSs....................................... For shares sold in the form of
ADSs, each ADS represents 0.2
shares.
Dividend policy................................ We have never declared or paid
dividends, and we do not expect
to do so in the foreseeable
future.
Use of proceeds................................ We will not receive any of the
proceeds from the sale of the
shares by the selling
shareholders.
Neuer Market symbol............................ "CJN" for the shares.
Nasdaq National Market symbol.................. "CONE" for the ADSs.
RISK FACTORS
See "Risk Factors," immediately following this Summary, for a
discussion of risk factors relating to us, our business and an investment in the
shares and ADSs.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data
as of and for the period from February 20, 1998, our inception, to December 31,
1998, as of and for the year ended December 31, 1999, as of and for the six
months ended June 30, 1999 (unaudited), and as of and for the six months ended
June 30, 2000 (unaudited). The summary consolidated financial data as of and for
the period from our inception to December 31, 1998, and as of and for the year
ended December 31, 1999, were derived from our consolidated financial statements
which were audited by Deloitte & Touche Experta AG, independent auditors. The
data set forth below is not necessarily indicative of the results of future
operations and should be read in conjunction with our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Amounts are presented in thousands of U.S. dollars, except share data.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31, INCEPTION TO
JUNE 30, 2000 JUNE 30, 1999 1999 DECEMBER 31, 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ......................................... $ 108,798 $ 32,487 $ 97,117 $ 2,792
Cost of services (exclusive of amounts shown
separately below) ................................ 113,003 39,361 113,809 11,669
Selling, general and administrative expenses ..... 16,803 6,465 18,369 8,977
Depreciation and amortization .................... 13,379 3,634 13,849 1,409
------------ ------------ ------------ ------------
Loss from operations ............................. (34,387) (16,973) (48,910) (19,263)
Other income (expense):
Interest income ............................. 9,090 3,078 5,859 92
Interest expense ............................ (19,625) (12,605) (29,475) (11)
Other expense, net .......................... (6) (413) (555) --
Currency exchange loss, net ................. (15,825) (7,149) (15,418) (53)
------------ ------------ ------------ ------------
Loss before income tax benefit ................... (60,753) (34,062) (88,499) (19,235)
Income tax benefit, net of valuation allowance (1) -- -- -- --
------------ ------------ ------------ ------------
Net loss ......................................... $ (60,753) $ (34,062) $ (88,499) $ (19,235)
============ ============ ============ ============
Weighted average number of shares outstanding (2) 39,047,000 27,618,000 29,752,000 7,367,000
Net loss per share (basic) ....................... $ (1.56) $ (1.23) $ (2.97) $ (2.61)
Net loss per share (diluted) (3) ................. (1.56) (1.23) (2.97) (2.61)
OTHER FINANCIAL DATA:
EBITDA (4) ....................................... $ (21,008) $ (13,339) $ (35,061) $ (17,854)
Capital expenditures (5) ......................... 76,183 55,239 195,376 37,168
Net cash used in operating activities ............ (22,927) (52,410) (78,359) (14,441)
Net cash used in investing activities ............ (92,291) (186,952) (253,247) (19,866)
Net cash provided by financing activities ........ 590,199 280,429 353,450 37,770
7
<PAGE>
<CAPTION>
SIX MONTHS SIX MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31, INCEPTION TO
JUNE 30, 2000 JUNE 30, 1999 1999 DECEMBER 31, 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 508,814 $ 48,105 $ 28,504 $ 4,184
Restricted cash .................................. 21,202 2,815 5,512 1,518
Restricted investments (6) ....................... 47,246 135,486 90,177 --
Total assets ..................................... 1,008,039 325,289 437,655 51,434
Total long-term debt ............................. 241,333 253,979 337,756 --
Shareholders' equity (deficit) ................... 585,672 12,946 (34,509) 19,189
</TABLE>
----------
(1) Due to our limited operating history, we were unable to conclude that
realization of our 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. See notes to our consolidated financial
statements.
(2) See notes to our consolidated financial statements.
(3) Potential dilutive securities have been excluded from the computation for
the period from our inception to December 31, 1998 for the year ended
December 31, 1999 and for the six month periods ended June 30, 1999 and
2000, as their effect is antidilutive. See notes to our consolidated
financial statements.
(4) EBITDA stands for earnings before interest, taxes, depreciation,
amortization, foreign currency exchange gains or losses and other income
(expense). EBITDA is used by management and certain investors as an
indicator of a company's ability to service debt and to satisfy its
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 our 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 similarly titled measures as calculated under our
debt agreements.
(5) Consists of purchases of property and equipment, and an investment in a
joint venture.
(6) Reflects:
(a) the remaining portion of the net proceeds of our 13 1/4% senior notes
which was used to purchase government securities to secure and fund the
first five scheduled interest payments on the notes, and
(b) certain amounts used to collateralize letters of credit relating to the
construction of the German network.
See notes to our consolidated financial statements.
8
<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 EVENTS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED, AND
THE TRADING PRICE OF OUR SHARES AND ADSS COULD DECLINE. IN THAT EVENT, YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
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. To date, we have experienced net
losses and, generally, negative cash flow from operating activities. We expect
to incur net losses and negative cash flow from operating activities through at
least 2002. Whether or when we will generate positive cash flow from operating
activities will depend on a number of financial, competitive, regulatory,
technical and other factors, many of which are beyond our control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." We cannot assure you that we will
achieve profitability or positive cash flow.
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, accounting and
administrative resources, 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 procedures, 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 RESULTS MAY FLUCTUATE SIGNIFICANTLY.
At least initially, our revenues are dependent upon a relatively small
number of significant customers and contracts. The loss or addition of one or
more of these customers or contracts could cause significant fluctuations in our
financial performance. In addition, the significant expenses resulting from
9
<PAGE>
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.
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. 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. In that case, we may need to seek additional capital sooner than
we expect, and such additional financing may not be available on acceptable
terms or at all. Moreover, our substantial existing indebtedness and any
additional indebtedness we may incur 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, which in turn could increase our costs and
hinder our ability to swap or sell transmission capacity to other
telecommunications entities.
OUR INDEBTEDNESS AND OUR ABILITY TO INCUR MORE INDEBTEDNESS COULD PREVENT US
FROM FULFILLING OUR OBLIGATIONS UNDER OUR EXISTING DEBT OBLIGATIONS.
The following table shows certain important credit statistics at June
30, 2000.
<TABLE>
<S> <C>
Total long-term debt........................................... $ 241,333
Shareholders' equity........................................... 585,672
Total long-term debt as a percentage of total capitalization... 29%
</TABLE>
Our debt instruments limit, but do not prohibit, us from incurring more
indebtedness. Moreover, our debt instruments permit us to incur an unlimited
amount of indebtedness to finance the acquisition of equipment, inventory and
network assets.
If we cannot generate sufficient cash flow from operations to meet our
debt service requirements, we may be required to refinance our indebtedness. 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.
OUR DEBT AGREEMENTS IMPOSE OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY
PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES.
Our existing debt agreements 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, consolidations or other business combinations, repurchasing or
redeeming our shares, or otherwise capitalizing on business
10
<PAGE>
opportunities. Failure to comply with the covenants and restrictions in our
indentures or other financing agreements could trigger defaults under such
agreements even if we are able to pay our debt.
In addition, the indentures governing our 13 1/4% senior notes provide
that upon a "change of control," each note holder will have the right to require
us to purchase all or a portion of the holder's notes at a purchase price of
101% of the principal amount, together with accrued and unpaid interest, if any,
to the redemption date. We may be unable to incur the additional indebtedness or
otherwise obtain the additional funds necessary to satisfy that obligation,
which could have a material adverse effect on us. This provision could also
delay, deter or prevent a change of control transaction.
IF WE ARE UNABLE TO EXTEND OUR NETWORK IN THE MANNER WE HAVE PLANNED, OUR
OPERATING REVENUES OR GROSS MARGINS COULD BE ADVERSELY AFFECTED.
Our success will depend on our ability to continue to deploy our
network on a timely basis. A number of 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, other construction delays, natural disasters and
other casualties, delays in the deployment or delivery of network capacity of
others that we have arranged to acquire, and other events that we cannot
foresee. We have experienced some construction delays in connection with the
planned completion of our Amsterdam network, and some cost overruns and
construction delays in connection with the completion of portions of our German
network.
Delays in the continued deployment of our network could:
o limit the geographic scope of our services,
o prevent us from providing services on a cost-effective basis,
o reduce the number of customers we can attract and the volume
of traffic we carry,
o force us to rely more heavily on refiling or reselling for
terminating our voice traffic, increasing termination costs
and making our quality control more difficult, and
o affect our ability to obtain lower cost capacity on other
networks by swapping excess capacity or cause us to incur
penalties for untimely delivery of promised capacity or could
result in renegotiation (as has occurred on one occasion) or
termination of our swaps.
Any one of these results could prevent us from increasing our operating
revenues or could adversely impact gross margins.
EUROPEAN USE OF THE INTERNET, ELECTRONIC COMMERCE AND THE DEMAND FOR BANDWIDTH
INTENSIVE APPLICATIONS MAY NOT INCREASE AS SUBSTANTIALLY AS WE EXPECT, WHICH
WOULD LIMIT DEMAND FOR OUR SERVICES AND LIMIT OUR ABILITY TO INCREASE OUR
REVENUES.
Our business plan assumes that European use of the Internet, electronic
commerce and other bandwidth intensive applications will increase substantially
in the next few years, in a manner similar to the increased use in the United
States market in the past few years. If the use of bandwidth intensive
applications in Europe does not increase as anticipated, demand for some of our
services, including our
11
<PAGE>
Internet and bandwidth services will be lower than we currently anticipate and
our ability to generate revenues will be adversely affected. We cannot assure
you that demand for our services will grow in accordance with our expectations.
Reduced demand for our services will have a negative effect on our business.
WE HAVE NO CONTROL OVER THIRD PARTIES ON WHOM WE RELY FOR THE OPERATION OR
MAINTENANCE OF PORTIONS OF OUR NETWORK, AND IF THEY OR THEIR FACILITIES DO NOT
PERFORM OR FUNCTION ADEQUATELY, OUR NETWORK MAY BE IMPAIRED.
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
depend 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 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 DEPEND ON OUR HIGHLY TRAINED EXECUTIVE OFFICERS AND EMPLOYEES. ANY DIFFICULTY
IN RETAINING OUR CURRENT EMPLOYEES OR IN HIRING NEW EMPLOYEES WOULD ADVERSELY
AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.
Our operations are managed by a small number of key executive officers,
including our Chief Executive Officer, Stig Johansson. In addition, our business
functions are managed by a relatively small number of key employees. The loss of
any of these individuals could have a material adverse effect on us. 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 AND PEERING
ARRANGEMENTS COULD CAUSE US TO INCUR HIGHER TERMINATION COSTS THAN COMPETITORS
WHO HAVE SUCH ARRANGEMENTS.
One of the most cost-effective ways for an international operator to
achieve voice termination and access in a country in which it has a point of
presence is to negotiate an interconnection agreement with the national
incumbent telephone operator. Failure to maintain adequate interconnection
arrangements would cause us to incur higher voice termination and access costs,
which could have a material adverse effect on our ability to compete with
carriers that have a more effective system of interconnection agreements for the
countries in which they operate.
A substantial portion of our revenue from our voice products is based
on mobile traffic. We have arrangements in place for termination of mobile
traffic. However, direct operating agreements with mobile operators tend to be
expensive and refiling of mobile traffic generally does not meet our quality
targets. Although we currently have a number of direct agreements with mobile
operators and quality refilers in place, we cannot guarantee that we can
maintain these agreements or enter into similar agreements of adequate price
levels, or at all, to support the expansion of our mobile traffic.
Our ability to maintain arrangements for the free exchange of data with
European and United States ISPs that have traffic volumes roughly equivalent to
ours will also affect our costs. To the extent
12
<PAGE>
we do not maintain these peering arrangements, we are required to pay a transit
fee in order to exchange Internet traffic. Our inability to maintain sufficient
peering arrangements would keep our Internet termination costs high and could
limit our ability to compete effectively with other European Internet backbone
providers that have lower transit costs than we do.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Operations--Cost of Services."
IF WE LOST ONE OR MORE OF OUR GOVERNMENT LICENSES OR BECAME SUBJECT TO MORE
ONEROUS GOVERNMENT REGULATIONS, WE COULD BE ADVERSELY AFFECTED.
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 still 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 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 may cause us to lose favorable interconnection rates or, in
some cases, force us to stop operating in the relevant country.
THE ADOPTION OR MODIFICATION OF LAWS OR REGULATIONS RELATING TO THE INTERNET
COULD ADVERSELY AFFECT OUR BUSINESS.
The adoption or modification of laws or regulations relating to the
Internet could adversely affect our business. The European Union has recently
enacted its own privacy regulations. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws, such as those
governing intellectual property, privacy, libel and taxation, apply to the
Internet. In addition, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on companies conducting business online.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY.
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
13
<PAGE>
our ability to generate high traffic volumes from our customers while keeping
our costs of services low and to effectively bundle and cross-sell the services
we offer to our customers. We cannot assure you that we will be able to do so.
We expect price decreases in the European Internet market over the next
few years as competition increases. We cannot assure you that Internet service
prices will not decline more quickly than our Internet transmission or
termination costs, which could have a material adverse effect on our gross
profit margins.
As a result of the construction of European fiber optic networks by our
competitors, the price of wholesale bandwidth capacity is declining rapidly. The
decline in market prices has lowered the price at which we are able to sell our
voice and Internet and bandwidth products, including dark fiber, that is, fiber
that has been laid but not "lit" with transmission electronics. We also expect
technological advances that greatly increase the capacity of fiber optic cable
to exacerbate downward price pressure.
Other competitive factors include the following:
o Certain voice customers may redirect their traffic to another
carrier on the basis of even small differences in price.
o Carriers that have a more developed network than ours may
lower prices so as to increase volume and maximize utilization
rates.
See "Business--Competition."
OUR COMPETITORS MAY HAVE MORE EXPERIENCE, SUPERIOR OPERATIONAL ECONOMIES OR
GREATER RESOURCES, PLACING US AT A COST AND PRICE DISADVANTAGE.
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 Internet transport 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, Internet
transport and data center customers will typically renew their contracts because
it is costly and technically burdensome to switch providers, which could impede
our ability to attract new customers.
Although we believe that there has been and is currently strong demand
for data centers in the European market, there are numerous new entrants with
which we compete in specific markets. Many of our competitors have been
established providers of data center services in Europe for longer than we have.
There can be no assurance that new entrants like us will be able to effectively
compete.
We also compete with companies that are building European networks to
the extent these companies offer services to our target customers. Some of these
companies have more experience operating a network than our company does. We may
not be able to deploy a European network as
14
<PAGE>
quickly or run it as efficiently as some or all of these competitors, which
could impair our ability to compete with them.
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
own more infrastructure and thus may 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.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT COST-EFFECTIVE TRANSMISSION CAPACITY,
WHICH COULD DELAY OUR ABILITY TO PENETRATE CERTAIN MARKETS OR CARRY A HIGHER
VOLUME OF TRAFFIC IN MARKETS IN WHICH WE ALREADY OPERATE.
We lease or have purchased rights to use transmission capacity from
others, and we have swapped capacity on our own German network for transmission
capacity on other carriers' networks. We therefore currently depend on other
parties for much of our 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, those suppliers may no longer be willing to
provide us with capacity.
Until our owned network is fully operational, we will need to continue
to lease capacity. 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. We cannot
assure you that the cost of obtaining capacity will decrease. In addition, if
our owned network is not completed on a timely basis, we will need to rely on
leased lines to a greater extent than currently anticipated. If we cannot
purchase additional capacity at our target costs for additional needs we may
have in the future, we may have to seek to meet those needs by building
additional capacity, for which 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 voice 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:
o a shortage of capacity, requiring us to either lease more
capacity or reroute calls to other carriers at a higher
termination cost,
o higher termination costs, as we may have to use additional,
higher priced, refilers or resellers, and
o a possibly lower quality of service, as we may not be carrying
the traffic over our own network.
15
<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 ENHANCING OUR SOPHISTICATED BILLING, CUSTOMER AND
INFORMATION SYSTEMS. ANY SUCH DIFFICULTIES COULD DELAY OR DISRUPT OUR ABILITY TO
SERVICE OR BILL OUR CUSTOMERS.
Sophisticated information systems are vital to our growth and our
ability to:
o manage and monitor traffic along our network,
o track service provisioning, traffic faults and repairs,
o effect best choice routing,
o achieve operating efficiencies,
o monitor costs,
o bill and receive payments from customers, and
o reduce credit exposure.
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:
o market liberalization,
o significant technological advancements,
o introductions of new products and services utilizing new
technologies,
o increased availability of transmission capacity,
o expansion of telecommunications infrastructure, and
o increased use of the Internet for voice and data transmission.
If the growth we anticipate in the demand for telecommunications
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.
16
<PAGE>
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 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.
CUSTOMERS THAT ARE PRICE SENSITIVE MAY DIVERT THEIR TRAFFIC TO ANOTHER CARRIER
BASED ON SMALL PRICE CHANGES, RESULTING IN FLUCTUATIONS OR LOSS IN OUR REVENUE.
Voice customers often maintain relationships with a number of
telecommunications providers, and our contracts with our voice customers
generally do not impose on customers minimum 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. Similarly, while we seek to provide a
higher quality of service than our competitors, there is somewhat limited scope
for differentiation. There can be no assurance that small variations between our
prices and those of other carriers will not cause our customers to divert their
traffic or choose other carriers.
Our contracts with our voice 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 Internet
customers to carry their Internet 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 Internet traffic over a higher-cost route due to capacity and quality
constraints, our gross profit margins would be reduced.
WE RELY ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS, AND THE LOSS OF ANY SINGLE
CUSTOMER COULD THEREFORE HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES.
We currently depend on a small number of significant customers for our
revenues. In the six-month period ended June 30, 2000, for example, one customer
accounted for approximately 8% of our revenue. The loss of any single customer
could therefore have a material adverse effect on us. In addition, certain
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 Internet backbone providers. The consolidation of ISPs may reduce the
customer base for our Internet services.
WE WILL ENGAGE IN JOINT VENTURES, WHICH ARE ACCOMPANIED BY INHERENT RISKS.
We constructed the German network with Viatel and Metromedia. We are
investing in data center facilities through a joint venture. We may enter into
future joint ventures with other companies. All joint ventures are accompanied
by risks. These risks include:
o the lack of complete control over the relevant project,
o diversion of our resources and management time,
17
<PAGE>
o inconsistent economic, business or legal interests or
objectives among joint venture partners,
o 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
o difficulty maintaining uniform standards, controls, procedures
and policies.
THE COSTS AND DIFFICULTIES OF ACQUIRING AND INTEGRATING BUSINESSES OR ENGAGING
IN OTHER STRATEGIC TRANSACTIONS COULD IMPEDE OUR FUTURE GROWTH AND ADVERSELY
AFFECT OUR COMPETITIVENESS.
We intend to evaluate, and may enter into, acquisition or other
strategic transactions in order to expand our business or enhance our product
portfolio. We may acquire interests in businesses in countries in which we do
not currently operate. Any such acquisitions or other strategic transactions may
expose us to the following risks:
o the difficulty of identifying appropriate strategic
transaction candidates in the countries in which we do
business or intend to do business,
o the difficulty of assimilating the operations and personnel of
the acquired entities,
o the potential disruption to our ongoing business caused by
senior management's focus on the strategic transactions,
o our failure to successfully incorporate licensed or acquired
technology into our network and product offerings,
o the failure to maintain uniform standards, controls,
procedures and policies, and
o the impairment of relationships with employees and customers
as a result of changes in management and ownership.
We cannot assure you that we would be successful in overcoming these
risks, and our failure to overcome these risks could have a negative effect on
our business. Additionally, in connection with an acquisition, we will generally
record goodwill that must be amortized and which would reduce our earnings per
share.
In addition, in connection with the listing of our common shares on the
Neuer Markt segment of the Frankfurt Stock Exchange, we were required to agree
to comply with the German take-over code. Our compliance with the German
take-over code could have the effect of delaying or preventing a tender offer or
takeover. If we intend to merge with or acquire a publicly-traded German stock
corporation, we must comply with notice, disclosure and other regulatory
requirements.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH OTHER
HOLDERS OF OUR SECURITIES.
Funds managed by Providence Equity Partners Inc. alone, and funds
managed by Providence and funds managed by Primus Venture Partners Inc.
together, indirectly control us. Such ownership may present conflicts of
interest between the Providence or Primus funds and us. They may pursue or cause
us
18
<PAGE>
to pursue transactions that could enhance their controlling interest, or permit
them to realize upon their investment, in a manner that is not in the interests
of minority shareholders.
Providence and Primus, or their affiliates, currently have significant
investments in other telecommunications companies, 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 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.
THE INTERNATIONAL SCOPE OF OUR OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We may face certain risks because we conduct an international business
including:
o regulatory restrictions or prohibitions on the provision of
our services,
o tariffs and other trade barriers,
o longer payment cycles,
o problems in collecting accounts receivable,
o political risks, and
o 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 on our debt are denominated in U.S. dollars and euros, but
our revenues are denominated in other currencies as well. Any appreciation in
the value of the U.S. dollar or the euro relative to such other currencies could
decrease our revenues, increase our debt and interest payments and, therefore,
materially adversely affect our operating margins. Fluctuations in foreign
currencies may also make period to period comparisons of our results of
operations difficult.
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. While we believe that our systems have not
been and will not be adversely impacted by the introduction of the euro, there
can be no assurance that we will not incur increased operational costs or have
to modify or upgrade our information systems in order to respond to possible
accounting, billing and other logistical problems resulting from the conversion
to the euro. In
19
<PAGE>
addition, there can be no assurance that our third-party suppliers and customers
will be able to successfully implement the necessary protocols.
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 continue to function adequately although as of June 30, 2000, we
have not experienced any significant problems or failures and we do not expect
to experience any in the future. A failure of our computer systems or other
systems could have a material adverse effect on us. Any failure of the computer
systems of our vendors, suppliers or customers could materially and adversely
affect our ability to operate our network and retain customers and could impose
significant costs on us.
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.
VOLATILITY IN THE PRICE OF OUR COMMON SHARES COULD RESULT IN A LOWER TRADING
PRICE THAN YOUR PURCHASE PRICE.
The market price of our common shares and ADSs has fluctuated since our
shares and ADSs began to trade publicly in March, 2000. The market price of the
shares and ADSs may continue to fluctuate significantly in response to a number
of factors, some of which are beyond our control, including:
o quarterly variations in our operating results,
o changes in financial estimates by securities analysts,
o changes in market valuations of telecommunications companies,
o announcements by us, or our competitors, of significant
contracts, acquisitions, strategic partnerships, joint
ventures, business combinations, or capital commitments,
o loss of a major customer,
o additions or departures of key personnel, and
o sales of shares or ADSs.
20
<PAGE>
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
SHAREHOLDERS.
Historically, the market prices for securities of emerging companies in
the telecommunications industry have been highly volatile. In addition, the
stock market has experienced volatility that has affected the market prices of
equity securities of many companies and that often has been unrelated to the
operating performance of those companies. These broad market fluctuations may
adversely affect the market price of our shares or ADSs. Furthermore, following
periods of volatility in the market price of a company's securities,
shareholders of the company have often instituted securities class action
litigation against the company. Any similar litigation against us could result
in substantial costs and a diversion of management's attention and resources,
which could adversely affect the conduct of our business.
FUTURE SALES OF SUBSTANTIAL NUMBERS OF SHARES COULD ADVERSELY AFFECT THE MARKET
PRICE OF THE SHARES.
Of the 41,721,178 shares outstanding as of August 1, 2000,
approximately 55.7% are held indirectly by funds managed by Providence and
approximately 11.1% are held indirectly by funds managed by Primus. Subject
to some exceptions, the investment vehicle for the Providence and Primus
funds and each of our executive officers and directors agreed not to sell any
shares until August 23, 2000 without the prior written consent of Morgan
Stanley & Co. International Limited and Salomon Brothers International
Limited or certain of their affiliates. After that date, they may sell their
shares as permitted by the securityholders' agreement, U.S. securities laws
and other applicable laws. In addition, as of August 1, 2000, 2,612,718
shares were issuable upon the exercise of outstanding options. We expect to
grant additional options to employees in the future.
Future sales of a large block of our shares, or the perception that
these sales could occur, could cause a decrease in the market price of our
shares or ADSs.
OUR COMMITMENTS TO ISSUE ADDITIONAL COMMON SHARES MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND MAY IMPAIR OUR ABILITY TO RAISE CAPITAL.
We currently have outstanding commitments in the form of warrants and
options to issue a substantial number of new common shares. The shares subject
to these issuance commitments, to some degree, will be issued in transactions
registered with the Securities and Exchange Commission and thus will be freely
tradable. In other instances, these shares are subject to grants of registration
rights that, if and when exercised, would result in those shares becoming freely
tradable. We have also granted registration rights with respect to a number of
our outstanding common shares. The exercise of registration rights by persons
holding those shares would permit those persons to sell those shares without
regard to the limitations of Rule 144 under the Securities Act of 1933. An
increase in the number of common shares that will become available for sale in
the public market may adversely affect the market price of our common shares
and, as a result, could impair our ability to raise additional capital through
the sale of our equity securities.
EVENTS DESCRIBED BY OUR FORWARD-LOOKING STATEMENTS MAY NOT OCCUR.
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events and on industry publications. We have not independently
verified the data derived from industry publications.
21
<PAGE>
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:
o operations and prospects,
o technical capabilities,
o funding needs and financing sources,
o network deployment plans,
o scheduled and future regulatory approvals,
o expected financial position,
o business and financial plans,
o markets, including the future growth in the European
telecommunications market,
o expected characteristics of competing systems, and
o 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.
22
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the offering of the shares by the
selling shareholders. The proceeds to us from the exercise of warrants by the
selling shareholders, based on an exercise price of $2.00 per share, will be
approximately $3.37 million, assuming all warrants are exercised. We intend to
use the net proceeds of the exercise of the warrants for general corporate
purposes.
DIVIDEND POLICY
Carrier1 International has never declared or paid any dividends and
does not expect to do so in the foreseeable future. We do not expect to generate
any net income in the foreseeable future, but anticipate that future earnings
generated from operations, if any, will be retained to finance the expansion and
continued development of our business. Subject to the declaration of interim
dividends by Carrier1 International's board of directors, decisions to pay
dividends may only be made by its shareholders acting at a shareholders'
meeting. If Carrier1 International were to pay dividends, we would expect to pay
them in either U.S. dollars or euros. Any cash dividends payable to holders of
shares or ADSs who are nonresidents of Luxembourg would normally be subject to
Luxembourg statutory withholding taxes. See "Taxation--Certain Luxembourg Tax
Considerations." Any future determination with respect to the payment of
dividends on our shares will depend upon, among other things, our 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 dividends will
be restricted under the terms of our debt agreements.
PRICE RANGE OF SHARES
Our ADSs are traded on the NASDAQ National Market under the symbol
"CONE". The following table sets forth, for the calendar quarters indicated, the
actual high and low sale prices of our ADSs as reported on the NASDAQ National
Market.
<TABLE>
<CAPTION>
HIGH LOW
2000
<S> <C> <C>
First Quarter $ 34.50 $ 18.625
Second Quarter 16.75 10.75
</TABLE>
Our common shares are traded on the Neuer Markt segment of the
Frankfurt Stock Exchange under the symbol "CJN." The following table sets forth,
for the calendar quarters indicated, the actual high and low sale prices of our
common shares as reported on the Neuer Markt.
<TABLE>
<CAPTION>
HIGH LOW
2000
<S> <C> <C>
First Quarter euro 174 euro 90
Second Quarter 100.5 52
</TABLE>
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
as of and for the period from our inception to December 31, 1998, as of and for
the year ended December 31, 1999, and as of and for the six months ended June
30, 1999 (unaudited), and as of and for the six months ended June 30, 2000
(unaudited). The selected consolidated financial data as of and for the period
from our inception to December 31, 1998, and as of and for the year ended
December 31, 1999, were derived from our consolidated financial statements which
were audited by Deloitte & Touche Experta AG, independent auditors. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with our consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Amounts are presented in thousands of U.S. dollars, except share data.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS YEAR ENDED INCEPTION TO
ENDED ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 2000 JUNE 30, 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ......................................... $ 108,798 $ 32,487 $ 97,117 $ 2,792
Cost of services (exclusive of amounts shown
separately below) ................................ 113,003 39,361 113,809 11,669
Selling, general and administrative expenses ..... 16,803 6,465 18,369 8,977
Depreciation and amortization .................... 13,379 3,634 13,849 1,409
------------ ------------ ------------ ------------
Loss from operations ............................. (34,387) (16,973) (48,910) (19,263)
Other income (expense):
Interest income ............................. 9,090 3,078 5,859 92
Interest expense ............................ (19,625) (12,605) (29,475) (11)
Other expense, net .......................... (6) (413) (555) --
Currency exchange loss, net ................. (15,825) (7,149) (15,418) (53)
------------ ------------ ------------ ------------
Loss before income tax benefit ................... (60,753) (34,062) (88,499) (19,235)
Income tax benefit, net of valuation allowance (1) -- -- --
------------ ------------ ------------ ------------
Net loss ......................................... $ (60,753) $ (34,062) $ (88,499) $ (19,235)
============ ============ ============ ============
Weighted average number of shares outstanding (2) 39,047,000 27,618,000 29,752,000 7,367,000
Net loss per share (basic) ....................... $ (1.56) $ (1.23) $ (2.97) $ (2.61)
Net loss per share (diluted) (3) ................. (1.56) (1.23) (2.97) (2.61)
OTHER FINANCIAL DATA:
EBITDA (4) ....................................... $ (21,008) $ (13,339) $ (35,061) $ (17,854)
Capital expenditures (5) ......................... 76,183 55,239 195,376 37,168
Net cash used in operating activities ............ (22,927) (52,410) (78,359) (14,441)
Net cash used in investing activities ............ (92,291) (186,952) (253,247) (19,866)
Net cash provided by financing activities ........ 590,199 280,429 353,450 37,770
24
<PAGE>
<CAPTION>
SIX MONTHS SIX MONTHS YEAR ENDED INCEPTION TO
ENDED ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 2000 JUNE 30, 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 508,814 $ 48,105 $ 28,504 $ 4,184
Restricted cash .................................. 21,202 2,815 5,512 1,518
Restricted investments (6) ....................... 47,246 135,486 90,177 --
Total assets ..................................... 1,008,039 325,289 437,655 51,434
Total long-term debt ............................. 241,333 253,979 337,756 --
Shareholders' equity (deficit) ................... 585,672 12,946 (34,509) 19,189
</TABLE>
----------
(1) Due to our limited operating history, we were unable to conclude that
realization of our 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. See notes to our consolidated financial
statements.
(2) See notes to our consolidated financial statements.
(3) Potential dilutive securities have been excluded from the computation for
the period from our inception to December 31, 1998, for the year ended
December 31, 1999 and for the six month periods ended June 30, 1999 and
2000, as their effect is antidilutive. See notes to our consolidated
financial statements.
(4) EBITDA stands for earnings before interest, taxes, depreciation,
amortization, foreign currency exchange gains or losses and other income
(expense). EBITDA is used by management and certain investors as an
indicator of a company's ability to service debt and to satisfy its
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 our 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 similarly titled measures as calculated under our
debt agreements.
(5) Consists of purchases of property and equipment and investment in joint
venture.
(6) Reflects:
(a) the remaining portion of the net proceeds of our 13 1/4% senior
notes which was used to purchase government securities to secure and
fund the first five scheduled interest payments on the notes, and
(b) certain amounts used to collateralize letters of credit relating to
the construction of the German network. See notes to our
consolidated financial statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES. CERTAIN INFORMATION CONTAINED IN THE
DISCUSSION AND ANALYSIS OR SET FORTH ELSEWHERE IN THIS PROSPECTUS, INCLUDING
INFORMATION WITH RESPECT TO OUR PLANS AND STRATEGY FOR OUR BUSINESS AND RELATED
FINANCING, INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES, AS DETAILED IN THE "RISK FACTORS" SECTION OF THIS PROSPECTUS AND
IN OUR MOST RECENT FORM 10-K AS OF DECEMBER 31, 1999. 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 IN THIS PROSPECTUS.
OVERVIEW
We are a rapidly expanding European facilities-based provider of voice,
Internet and bandwidth and related telecommunications services. We offer these
services primarily to other telecommunications service providers. In March 1998,
our experienced management team and Providence Equity Partners formed Carrier1
to capitalize on the significant opportunities emerging for facilities-based
carriers in Europe's rapidly liberalizing telecommunications markets. By
September 1998, we had deployed our initial network and commenced selling
services. By June 30, 2000, we had 352 contracts with voice customers and 154
contracts with Internet and bandwidth customers.
We are developing an extensive city-to-city European fiber optic
network accessing and linking key population centers. In select European cities,
we are also developing intra-city networks and data centers for housing and
managing equipment. We expect these intra-city networks to give us faster, lower
cost access to customers, with better quality control. We also expect to bundle
and cross-sell our intra-city network and data center capabilities with our
other services. We intend to continue rapidly expanding our network in a
cost-effective manner by building, buying or swapping network assets.
To date, we have experienced net losses and, generally, negative cash
flow from operating activities. In the second quarter of 2000, we had positive
cash flow from operating activities of approximately $26.7 million. From our
inception to September 1998, our principal activities included developing our
business plans, obtaining governmental authorizations and licenses, acquiring
equipment and facilities, designing and implementing our voice and Internet
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, we commenced the roll-out of our
services. We expect to continue to generate net losses and negative cash flow
through at least 2002 as we expand our operations. Whether or when we will
generate positive cash flow from operating activities will depend on a number of
financial, competitive, regulatory, technical and other factors. See
"--Liquidity and Capital Resources."
Although our management is highly experienced in the wholesale
telecommunications business, our company itself has a limited operating history.
Prospective investors therefore have limited operating and financial information
about our company upon which to base an evaluation of our performance and an
investment in our securities.
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. We
have adopted a fiscal year end of December 31.
26
<PAGE>
FACTORS AFFECTING FUTURE OPERATIONS
REVENUES
We expect to generate most of our revenues through the sale of voice
and Internet and bandwidth services to other telecommunications service
providers. We record revenues from the sale of voice and Internet services at
the time of customer usage. Revenue from bandwidth IRU sales is recognized in
accordance with the Financial Accounting Standards Board (the "FASB")
interpretation of accounting rules generally on a monthly basis over contract
life, typically over 15 to 20 years. For contracts that satisfy sales-type lease
accounting, revenues are recognized at the time of sale. Our agreements with our
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. We generate a steady
stream of voice traffic by providing high-quality service and superior customer
support. Our Internet and bandwidth services are generally charged at a flat
monthly rate, regardless of usage, based on the line speed and level of
performance made available to the customer. We also offer usage-based Internet
pricing for our Internet transport services, "Internet Exchange Connect", "Euro
Transit" and "Global Transit", only in combination with Internet contracts that
have a fee-based component that guarantees minimum revenue, in order to
encourage usage of our network services by our Internet customers. Our
agreements with our Internet transport customers are generally for a minimum
term of twelve months. Currently, our bandwidth services are typically also for
an initial term of twelve months, although we expect to be able to offer more
flexible pricing alternatives to bandwidth customers in the future. We believe
that, if the quality of the service is consistently high, Internet transport
customers will typically increase the amount of capacity they purchase from us.
We believe that they will also generally renew their contracts because it is
costly and technically burdensome to switch carriers.
Our services are priced competitively and we emphasize quality and
customer support. The rates charged to voice and Internet and bandwidth
customers are subject to change from time to time. Our revenue per billable
minute for voice traffic in the second quarter of 2000 increased compared with
the second quarter 1999 as a result of a more favorable traffic and services
mix. The revenue per billable minute for voice traffic decreased in the second
quarter of 2000 compared with the first quarter 2000. We generally expect to
experience, and have planned for, declining revenue per billable minute for
voice traffic and declining revenue per Mb for Internet traffic and bandwidth,
in part as a result of increasing competition.
As a result of the construction of European fiber optic networks by our
competitors, the price of bandwidth capacity is declining rapidly, which has
lowered the price at which we are able to sell our Internet and bandwidth
products, including dark fiber. We also expect technological advances that
greatly increase the capacity of fiber optic cable to exacerbate downward price
pressure. We anticipate, however, that the incremental costs of lighting dark
fiber with transmission equipment will remain significant and will therefore
serve as an economic restraint to increases in available managed bandwidth
capacity at low marginal costs. Furthermore, we believe that price decreases
will promote demand for high volumes and opportunities for volume related
revenue increases. The impact on our results of operations from price decreases
has been in prior quarters, and we believe it will continue to be, at least
partially offset by decreases in our cost of providing services, largely due to
our increased use of our own fiber and our consequent decreased termination
costs, and increases in our voice and Internet traffic volumes. In addition, we
believe that our ability to bundle and cross-sell network services allows us to
compete effectively and to protect our business, in part, against the impact of
these price decreases.
Our focus on providing services to other operators results in us having
substantially fewer customers than a carrier in the mass retail sector. As a
result, a shift in the traffic pattern of any one
27
<PAGE>
customer, especially in the near term and on one of our high volume routes,
could have a material impact, positive or negative, on our revenues. For
example, in the six months ended June 30, 2000, one customer accounted for
approximately 8% of our revenues, and this customer may continue to account for
a significant portion of revenues in the near term. Furthermore, many wholesale
customers of voice services tend to be price sensitive and may switch suppliers
for certain routes on the basis of small price differentials. In contrast,
Internet and bandwidth customers tend to use fewer suppliers than voice
customers, cannot switch suppliers as easily and, we believe, are more sensitive
to service quality than to price. We believe that customers for data center
services are more sensitive to the value added services that we plan to provide
than to price. In addition, we believe that they are unlikely to move between
facilities due to their initial investments in tenant improvements and the high
costs and risks of network outage associated with moving to another facility.
We have entered into contracts to provide bandwidth and capacity on our
network with a total value to us of approximately $262 million over contract
life. Because we have not yet begun to deliver capacity under the contracts and
as most of these are operating leases, we will generally recognize revenue on a
monthly basis over contract life, typically over 15 to 20 years.
COST OF SERVICES, EXCLUSIVE OF ITEMS DISCUSSED SEPARATELY BELOW
Cost of services, exclusive of depreciation and amortization, which is
discussed separately below, are classified into the following general
categories: access costs, transmission costs, voice and Internet termination
costs and other costs of services.
ACCESS COSTS. We have minimal access costs as our customers are typically
responsible for the cost of accessing our network. We have begun to provide
services to switchless resellers. Switchless resellers do not have any
telecommunications infrastructure. Therefore, for services to switchless
resellers we will have access costs payable to the originating local provider,
usually the incumbent telephone operator. These costs are reflected in our
pricing and will vary based on calling volume and the distance between the
caller and our point of presence.
TRANSMISSION COSTS. Our transmission costs currently consist of leased capacity,
operation, administration and maintenance cost of owned fiber as well as switch
and router facilities costs. Leased capacity charges are fixed monthly payments
based on capacity provided and are typically higher than a "dark fiber cost
level," which is our 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 but which has not been "lit" with
transmission electronics. 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," or indefeasible rights of
use, known as "IRUs."
As part of our strategy to lower our cost base over time, we will seek
dark fiber cost levels for our entire transmission platform, through building,
acquiring or swapping capacity. For example, our German network is operational,
and, except for a few segments for which we expect final regulatory approval
later in the third quarter, in commercial service. The Paris and Amsterdam
intra-city networks will be operational at the end of 2000. We have acquired
intra-city capacity in London to lower our access costs, and we have made
capital-efficient arrangements to swap capacity on the German network for
capacity on other networks. We have secured an extensive UK network as part of
an agreement announced during the second quarter with 360networks. In this
agreement, we have agreed to purchase approximately $85 million of
infrastructure and bandwidth capacity from 360networks and 360networks in turn
has agreed to purchase approximately $150 million of infrastructure and
bandwidth capacity from us. As a part of this agreement, 360networks will
provide us with trans-Atlantic and North American capacity, as well as 12
strands of dark fiber on its diversely-routed 1,150 kilometer UK network between
Liverpool and London,
28
<PAGE>
connecting Manchester, Sheffield, Birmingham, Bristol, Nottingham and Cambridge.
We will provide and sell dark fiber on our German network and our Paris and
Amsterdam city rings and broadband capacity on our pan-European network. We
further minimize our transmission costs by optimizing the routing of our voice
traffic and increasing volumes on our fixed-cost leased and owned lines, thereby
spreading the allocation of fixed costs over a larger number of voice minutes or
larger volume of Internet traffic, as applicable. To the extent we overestimate
anticipated traffic volume, however, per unit costs will increase. As we
continue to develop our owned network and rely less on leased capacity, per unit
voice transmission costs are expected to decrease substantially, offset
partially by an increase in depreciation and amortization expense. We also
expect to experience declining transmission costs per billable minute or per Mb,
as applicable, as a result of increasing use of our owned network as opposed to
leased network assets, decreasing cost of leased transmission capacity,
increasing availability of more competitively priced IRUs and MIUs and
increasing traffic volumes.
VOICE TERMINATION COSTS. Termination costs represent the costs we are required
to pay to other carriers from the point of exit from our network to the final
point of destination. Generally, most 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 non-mobile call is terminated in a city in which we have 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 usually the least costly mode
of terminating a call. If a call is to a location in which we do not have a
point of presence, or have a point of presence but do not have an
interconnection agreement giving us 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. We pay
this carrier a refile fee for terminating our traffic. Most refilers currently
operate out of New York and various European cities such as London, Frankfurt
and Vienna, so that the refiled traffic is rerouted to such cities 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. We seek to reduce our refile costs by utilizing least cost routing. For
example, where we do not yet have interconnection agreements, we implement
"resale" agreements whereby a local carrier that has an interconnection
agreement with the incumbent telephone operator "resells" or shares this
interconnection right with us for a fee. Termination through resale agreements
is more expensive than through interconnection agreements but significantly less
expensive than through refile agreements because the traffic does not need to be
rerouted to another country.
In countries where we have not been directly authorized to provide
services, we 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. We
believe our refile and resale agreements are competitively priced. If our
traffic volumes are higher than expected, we may have to divert excess traffic
onto another carrier's network, which would also increase our termination costs.
We believe, however, that we have sufficient capacity and could, if necessary,
obtain more. In addition, our technologically advanced daily traffic monitoring
capabilities allow us to identify changes in volume and termination cost
patterns as they begin to develop, thereby permitting us to respond in a
cost-efficient manner.
We believe that our termination costs per unit should decrease as we
extend our network and increase transmission capacity. We also believe that
continuing liberalization in Europe will lead to decreases in termination costs
as new telecommunications service providers offer 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
29
<PAGE>
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.
TERMINATION OF MOBILE TRAFFIC. A substantial portion of our revenue from our
voice products is based on mobile traffic. We have arrangements in place for
termination of mobile traffic. However, direct operating agreements with mobile
operators tend to be expensive and refiling of mobile traffic generally does not
meet our quality targets. Although we currently have a number of direct
agreements with mobile operators and quality refilers in place, we cannot
guarantee that we can maintain these agreements or enter into similar agreements
of adequate price levels, or at all, to support the expansion of our mobile
traffic.
INTERNET TERMINATION COSTS. Termination costs represent costs we are required to
pay to other Internet backbone providers from the point of exit of our network.
Internet termination is effected through peering and transit arrangements.
Peering arrangements provide for the exchange of Internet traffic
free-of-charge. We have entered into peering arrangements with ISPs in the
United States and Europe, including recent peering arrangements with several
European incumbent telephone operators. There can be no assurance that we will
be able to negotiate additional peering arrangements. Under transit
arrangements, we are required to pay a fee to exchange traffic. That fee is
largely fixed and is based on the minimum Mb amount charged to us by our transit
partners.
Recently, the Internet services industry has experienced merger and
consolidation activity. This activity is likely to increase the concentration of
market power of Internet backbone providers, and may adversely affect our
ability to obtain peering and cost-effective transit arrangements.
OTHER COSTS OF SERVICES. Other costs of planned services include the expenses
associated with providing value-added Internet services and data center
capabilities. These expenses will consist primarily of certain engineering
costs, personnel costs and lease expenses within our data center facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our strategy of selling mainly to operators allows us to maintain lower
selling, general and administrative expenses than companies providing services
to the mass retail market. Our 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. We employ a direct sales force located in the major markets
in which we offer services. To attract and retain a highly qualified sales
force, we offer our sales personnel a compensation package emphasizing
performance-based commissions and equity options. We expect to incur significant
selling and marketing costs in advance of anticipated related revenue as we
continue to expand our operations and service offerings. Our selling, general
and administrative expenses are expected to decrease as a percentage of
revenues, however, once we have established our operations in targeted markets
and expanded our customer base.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which consist principally of equipment
(such as switches, multiplexers and routers), investments in indefeasible rights
of use and in multiple investment units, furniture and equipment. We depreciate
our network over periods ranging from 5 to 15 years and amortize our intangible
assets over a period of 5 years. We depreciate our investments in indefeasible
rights of use and in multiple investment units over their estimated useful lives
of not more than 20 years. We expect depreciation and amortization
30
<PAGE>
expense to increase significantly as we expand our owned network, including the
development of the German network.
RESULTS OF OPERATIONS
Because we commercially introduced our services in September 1998, our
management believes that a comparison of results for the year ended December 31,
1999 to the period from our inception to December 31, 1998 is not meaningful.
CONSOLIDATED QUARTERLY FINANCIAL DATA
The following table sets forth our consolidated financial data as of
and for the three-month periods ended June 30 and March 31, 2000 and December
31, September 30, June 30 and March 31, 1999. The consolidated financial data
were derived from our unaudited consolidated financial statements and include,
in the opinion of our 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 rest of this
discussion and with our consolidated financial statements and related notes.
Amounts are presented in thousands of U.S. dollars.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER JUNE 30, MARCH 31,
2000 2000 1999 30, 1999 1999 1999
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue ............................. $ 57,531 $ 51,267 $ 37,319 $ 27,311 $ 20,194 $ 12,293
Cost of services (exclusive of
amounts shown separately below) . 58,467 54,536 41,905 32,543 22,346 17,015
Selling, general and administrative
expenses ......................... 9,165 7,638 7,688 4,216 3,147 3,318
Depreciation and amortization ....... 7,228 6,151 6,032 4,183 2,298 1,336
--------- --------- --------- --------- --------- ---------
Loss from operations ................ (17,329) (17,058) (18,306) (13,631) (7,597) (9,376)
Other income (expense):
Interest income ..................... 6,406 2,684 772 2,009 2,099 979
Interest expense .................... (5,712) (13,913) (8,152) (8,718) (8,400) (4,205)
Other income (expense) .............. (3) (3) (117) (25) (413) --
Currency exchange gain (loss), net .. 3,862 (19,687) (10,200) 1,931 (4,721) (2,428)
--------- --------- --------- --------- --------- ---------
Loss before income tax benefit ...... (12,776) (47,977) (36,003) (18,434) (19,032) (15,030)
Income tax benefit, net of valuation
allowance ........................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net loss ............................ $ (12,776) $ (47,977) $ (36,003) $ (18,434) $ (19,032) $ (15,030)
========= ========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA .............................. $ (10,101) $ (10,907) $ (12,274) $ (9,448) $ (5,299) $ (8,040)
Net cash used in operating activities 26,729 (49,656) (18,790) (20,121) (20,932) (18,910)
Net cash used in investing activities (73,357) (18,934) (53,992) (13,311) (31,893) (152,722)
Net cash provided by (used in)
financing activities ............. 31,520 558,679 86,638 (2,153) (4,996) 274,141
</TABLE>
31
<PAGE>
FINANCIAL POSITION
Current assets at June 30, 2000 were approximately $675.5 million,
representing an increase of approximately 294% over current assets at December
31, 1999 of approximately $171.3 million, and a decrease of approximately 6%
over current assets at March 31 of approximately $720.2 million. The increase
from December 31, 1999, is primarily related to the receipt of the net proceeds
of our initial public offering of common stock in February 2000. In addition,
total accounts and unbilled receivables increased from approximately $45.0
million at December 31, 1999 and approximately $63.3 million at March 31, 2000,
to approximately $66.4 million at June 30, 2000 as a result of increased
revenues.
Property and equipment increased approximately 30% from approximately
$213.7 million at December 31, 1999 to approximately $277.4 million at June 30,
2000 mainly due to the investments in the construction of the German network.
Investment in joint ventures increased approximately 495% from
approximately $4.7 million at December 31, 1999 to approximately $27.9 million
at June 30, 2000 as a result of our investment in the Digiplex joint venture
(formerly Hubco).
Restricted investments held in escrow (both current and long-term)
decreased from December 31, 1999 and March 31, 2000 to June 30, 2000 as a result
of our funding of scheduled interest payments on our senior notes and additions
to our German network.
Other accrued liabilities increased approximately 40% from
approximately $17.0 million at December 31, 1999 to approximately $23.8 million
at June 30, 2000 mainly as a result of an increase in the value-added tax
payable.
Deferred revenue (both current and long-term) increased approximately
530% from approximately $5.0 million at December 31, 1999 and approximately 163%
from approximately $12.1 million at March 31, 2000 to approximately $31.6
million at June 30, 2000 as a result of new bandwidth and infrastructure sales
agreements.
Total long-term debt was approximately $241.3 million at June 30, 2000,
representing a decrease of approximately 29% from long-term debt at December 31,
1999 of approximately $337.8 million and a decrease of approximately 10% from
long-term debt at March 31, 2000 of approximately $268.2 million. The decrease
is related to the repayment of our credit facility with Nortel Networks of
approximately $77.2 million and the reclassification of our $26.1 million credit
facility with Siemens to short-term debt at June 30, 2000 since this facility
was repaid in July 2000.
Shareholders' equity (deficit) rose from a deficit of approximately
$34.5 million at December 31, 1999 to an equity balance of approximately $605.2
million at March 31, 2000, then declined to an equity balance of approximately
$585.7 million at June 30, 2000 mainly as a result of our initial public
offering and the net losses incurred in the first quarter and second quarter of
2000.
32
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THREE MONTHS ENDED JUNE
30, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
Revenues for the three months ended June 30, 2000 were approximately
$57.5 million, representing an increase of approximately 12% over revenues for
the three months ended March 31, 2000 of approximately $51.3 million and
approximately 185% over revenues for the three months ended June 30, 1999 of
approximately $20.2 million. Revenues primarily related to voice services, which
contributed approximately $47.9 million or 83% of total revenue in the second
quarter of 2000. Voice revenue grew 0.5% compared to the three months ended
March 31, 2000 and 203% over the three months ended June 30, 1999. Voice traffic
volume during the three months ended June 30, 2000 was approximately 343 million
minutes compared with approximately 309 million and 122 million minutes during
the three months ended March 31, 2000 and June 30, 1999, respectively. Average
revenue per minute was approximately 14 cents, which represented a decrease of
approximately 10% compared to the three months ended March 31, 2000 due
primarily to changes in traffic mix and, to a lesser extent, price reductions.
Average revenue per minute increased by approximately 8% compared to the second
quarter of 1999, which primarily reflects changes in traffic mix. The majority
of voice traffic in the second quarter of 2000 both originated and terminated in
Europe where prices are generally lower, but where we have implemented
interconnection agreements and therefore generally do not need to terminate
traffic via more costly refile or resale arrangements. Internet and bandwidth
services revenue was approximately $9.6 million during the three months ended
June 30, 2000, representing an increase of 170% over the three months ended
March 31, 2000 and 120% over the three months ended June 30, 1999, primarily due
to increases in our customer base. During the second quarter of 2000, we
recognized revenue of approximately $4.7 million from one bandwidth IRU contract
that qualified as a sales-type lease.
Cost of services (exclusive of items shown separately) for the three
months ended June 30, 2000 were approximately $58.5 million compared with
approximately $54.5 million and $22.3 million for the three months ended March
31, 2000 and June 30, 1999, respectively. Such costs increased primarily as a
result of costs directly associated with our increased voice traffic. These
costs consisted primarily of operation of the network, leases for transmission
capacity, operation, administration and maintenance cost of owned fiber as well
as termination expenses including refiling.
Expressed as a percentage of revenues, cost of services (exclusive of
items shown separately) was 102% during the three months ended June 30, 2000
compared with 106% and 111% for the three months ended March 31, 2000 and June
30, 1999, respectively. These decreases are primarily the result of higher
volumes carried on our existing network.
Depreciation and amortization for the three months ended June 30, 2000
was approximately $7.2 million compared with approximately $6.2 million and $2.3
million for the three months ended March 31, 2000 and June 30, 1999,
respectively. These costs increased over the three months ended June 30, 1999
due to higher investments for network equipment, indefeasible rights of use, and
other furniture and equipment.
Selling, general and administrative expenses were approximately $9.2
million during the three months ended June 30, 2000 compared with approximately
$7.6 million and $3.1 million for the three months ended March 31, 2000 and June
30, 1999, respectively. Such costs consisted primarily of personnel costs,
information technology costs, office costs, professional fees and expenses.
These costs increased over the three months ended June 30, 1999 primarily as a
result of increased headcount, information technology costs, promotional costs,
office costs and provisions for bad debts.
Net interest income for the three-month period ended June 30, 2000 was
approximately $0.7 million. Interest income of approximately $6.4 million
consisted of interest earned on deposits of
33
<PAGE>
escrowed proceeds of our senior notes and unused net proceeds of our initial
public offering. Interest expense of approximately $5.7 million mainly
consisted of interest accrued on the senior notes, less capitalized interest
of approximately $2.7 million.
The strengthening of the Euro to the U.S. dollar in the second quarter
of 2000 resulted in a currency exchange gain of $3.9 million, compared with
losses of $19.7 million and $4.7 million during the quarters ended March 31,
2000 and June 30, 1999, respectively.
Our management evaluates the relative performance of our voice and
Internet and bandwidth ("data") operations based on their respective fixed cost
contributions. Fixed cost contribution is defined as segment revenues less
direct variable costs incurred by the segment. Certain direct costs, such as
network and transmission costs, are shared by both the voice and data operations
and are not allocated by management to the segment.
Fixed cost contribution for voice services for the three-month period
ended June 30, 2000 was $4.8 million, representing $47.9 million in voice
revenue less $43.1 million, or approximately 13 cents per minute, in voice
termination costs. Fixed cost contribution for data services for the same period
was $7.5 million representing $9.6 million in data revenue less $2.1 million in
data direct cost.
SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 30,
1999
Revenues for the six months ended June 30, 2000 were approximately
$108.8 million, representing an increase of approximately 235% over revenues for
the six months ended June 30, 1999 of approximately $32.5 million. Revenues
primarily related to voice services, which contributed approximately $95.6
million or 88% of total revenue in the first half of 2000. Voice revenue grew
245% over the six months ended June 30, 1999. Voice traffic volume during the
six months ended June 30, 2000 was approximately 652 million minutes compared
with approximately 184 million minutes during the six months ended June 30,
1999. Average revenue per minute was approximately 14.6 cents, which represented
a decrease of approximately 3% compared to the six months ended June 30, 1999,
due primarily to changes in traffic mix and, to a lesser extent, price
reductions. The majority of voice traffic in the first half of 2000 both
originated and terminated in Europe where prices are generally lower, but where
we have implemented interconnection agreements and therefore generally do not
need to terminate traffic via more costly refile or resale arrangements.
Internet and bandwidth services revenue was approximately $13.2 million during
the six months ended June 30, 2000, representing an increase of 178% over the
six months ended June 30, 1999, primarily due to increases in our customer base.
Cost of services (exclusive of items shown separately) for the six
months ended June 30, 2000 were approximately $113.0 million compared with
approximately $39.4 million for the six months ended June 30, 1999. Such costs
increased primarily as a result of costs directly associated with our increased
voice traffic. These costs consisted primarily of operation of the network,
leases for transmission capacity, operation, administration and maintenance cost
of owned fiber as well as termination expenses including refiling.
Expressed as a percentage of revenues, cost of services (exclusive of
items shown separately) was approximately 104% during the six months ended June
30, 2000 compared with approximately 121% for the six months ended June 30,
1999. These decreases are primarily the result of higher volumes carried on our
existing network.
Depreciation and amortization for the six months ended June 30, 2000
was approximately $13.4 million compared with approximately $3.6 million for the
six months ended June 30, 1999. These
34
<PAGE>
costs increased compared to the six months ended June 30, 1999 due to higher
investments for network equipment, indefeasible rights of use, and other
furniture and equipment.
Selling, general and administrative expenses were approximately $16.8
million during the six months ended June 30, 2000 compared with approximately
$6.5 million for the six months ended June 30, 1999. Such costs consisted
primarily of personnel costs, information technology costs, office costs,
professional fees and expenses. These costs increased over the six months ended
June 30, 1999 primarily as a result of increased headcount, information
technology costs, promotional costs, office costs and provisions for bad debts.
Net interest expense for the six-month period ended June 30, 2000 was
approximately $10.5 million. It consisted during this period of approximately
$18 million of interest accrued on our senior notes, less capitalized interest
of approximately $4.1 million and interest income.
The over-all weakening of the Euro to the U.S. dollar in the first half
of 2000 resulted in a currency exchange loss of $15.8 million, compared with a
loss of $7.1 million during the six-month period ended June 30, 1999.
Fixed cost contribution for voice services for the six-month period
ended June 30, 2000 was $9.5 million, representing $95.6 million in voice
revenue less $86.1 million, or approximately 13 cents per minute, in voice
termination costs. Fixed cost contribution for data services for the same period
was $10.9 million representing $13.2 million in data revenue less $2.3 million
in data direct cost.
YEAR ENDED DECEMBER 31, 1999
Revenues for the year ended December 31, 1999 were approximately $97.1
million, primarily relating to voice services, which contributed $87.6 million
or 90% to the total revenue generated during that period. Voice traffic volume
of 606 million minutes was billed to our customers. Average revenue per minute
for the period was 14.5 cents. Revenue of $9.5 million for the same period was
generated by Internet and bandwidth services, including revenue of $3.2 million
associated with a second quarter bandwidth IRU contract that was recorded as a
sales-type lease.
Cost of services (exclusive of items shown separately) consists
primarily of operation of the network, leases for transmission capacity, and
termination expenses including refiling. These costs for the year ended December
31, 1999 were approximately $113.8 million, including $1.9 million of cost of
services associated with the second quarter bandwidth IRU contract.
Selling, general and administrative expenses were approximately $18.4
million for the year ended December 31, 1999 and consisted primarily of
personnel costs, information technology costs, office costs, professional fees
and expenses.
Depreciation and amortization for the year ended December 31, 1999 was
approximately $13.8 million and consisted primarily of depreciation costs for
network equipment, indefeasible rights of use, and other furniture and
equipment.
Net interest expense for the year ended December 31, 1999 was
approximately $23.6 million. It consisted during this period of approximately
$29.5 million of interest on the 13 1/4% senior notes, other short term and long
term debt, less interest income of approximately $5.9 million. Interest income
consists of interest earned from investing the remaining proceeds of the
investments by our equity sponsors, employees and directors and the issuance of
the 13 1/4% senior notes and related warrants.
35
<PAGE>
The weakening of the euro to the U.S. dollar in the year ended December
31, 1999 resulted in a currency exchange loss of approximately $15.4 million.
Fixed cost contribution for voice services for the year ended December
31, 1999 was $12.6 million, representing $87.6 million in voice revenue less
$75.0 million, or 12.4 cents per minute, in voice termination costs. Fixed cost
contribution for Internet and bandwidth services for the same period was $7.6
million, representing approximately $9.5 million in Internet and bandwidth
services revenue less approximately $1.9 million of cost of services for the
bandwidth IRU contract.
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1998
We commercially introduced our services in September 1998. Revenues for
the period from our inception to December 31, 1998 were approximately $2.8
million, primarily relating to voice services, which contributed 98% to the
total revenue achieved in 1998. Voice traffic volume from the start of
operations in September 1998 until the end of 1998 amounted to 10 million
minutes. Revenue of $0.1 million for the same period was generated by Internet
services.
Cost of services (exclusive of amounts shown separately) consists
primarily of operation of the network, leases for transmission capacity, and
termination expenses including refiling. These costs for the period from our
inception to December 31, 1998 were approximately $11.7 million.
Selling, general and administrative expenses were approximately $9.0
million for the period from our inception to December 31, 1998 and consisted
primarily of start-up expenses, personnel costs, information technology costs,
office costs, professional fees and promotion expenses.
Depreciation and amortization for the period from our 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.
Interest income during the period from our inception to December 31,
1998 consisted of interest earned from investing the proceeds of the issuance
of equity. Interest income totaled approximately $92,000 for the period from
our inception to December 31, 1998. No material interest expense was incurred
during the same period. No material currency exchange loss was incurred
during the same period.
Fixed cost contribution for voice services for the period from our
inception to December 31, 1998 was $0.1 million, representing $2.7 million in
voice revenue less $2.6 million in voice termination costs, reflecting the fact
that during the early stages of our operations we had relatively few
interconnection agreements with incumbent telephone operators so that traffic
had to be terminated at higher cost through refiling. Fixed cost contribution
for Internet and bandwidth services for the same period was equivalent to
Internet and bandwidth services revenue, or $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
We broadly define liquidity as our ability to generate sufficient cash
flow from operating activities to meet our obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
36
<PAGE>
From our inception through December 31, 1998, we financed our
operations through equity contributions. During the year ended December 31,
1999, we financed our operations through additional equity contributions and
with the proceeds of the issuance of our 13 1/4% senior notes and related
warrants, vendor financing and an interim credit facility. The further
development of our business and deployment of our network will require
significant capital to fund capital expenditures, working capital, cash flow
deficits and debt service. Our principal capital expenditure requirements
include the expansion of our network, including construction of the German and
intra-city networks, the acquisition of multiplexers, routers and transmission
equipment and the construction of data center facilities through an investment
in the Digiplex (formerly named Hubco) joint venture. Additional funding will
also be required for office space, switch site build-out and corporate overhead
and personnel.
Between our inception and December 31, 1998, we had incurred capital
expenditures of approximately $37.2 million, and during the year ended December
31, 1999 we incurred capital expenditures of approximately $195.4 million,
including amounts related to the German network in both periods. Capital
expenditures in 1998 and 1999 were principally for investments in fiber
infrastructure and transmission equipment. We estimate that we will incur
capital expenditures of approximately $362 million from January 2000 through the
end of 2001 ($242 million for 2000 and $120 million for 2001), including
approximately $23 million for our investment in the Digiplex joint venture. We
expect capital expenditures in 2000 and 2001 will be principally for investments
in fiber infrastructure and transmission equipment. We completed the
construction of the German network and portions of it became operational in July
2000, with full operation expected in the second half of 2000. We plan to
purchase additional multiplexers and routers for our network. We plan to
complete the Amsterdam and Paris intra-city network by the end of 2000.
As of December 31, 1998 funds managed by our equity sponsors had
invested a total of approximately $37.8 million to fund start-up operations. By
February 19, 1999, such funds had completed their aggregate investment totaling
$60 million in equity contributions. On February 19, 1999, we issued 13 1/4%
senior notes, with warrants, for net proceeds of approximately $242 million,
after deducting discounts and commissions and expenses. Approximately $79.0
million of the net proceeds were originally used to secure the first five
interest payments on the notes. In addition, as of December 31, 1999, employees
and directors had directly or indirectly invested approximately $6.7 million in
our shares.
On March 1, 2000, we completed our initial public offering of 8,625,000
shares of common stock (including the underwriters' overallotment of 1,125,000
shares) at a price of euro87 per share (approximately $87.42 per share). We
received proceeds of approximately $682 million, net of underwriting discounts
and commissions, listing fees, and offering-related expenses.
In addition to the net proceeds of our initial public offering, other
potential sources of capital, if available on acceptable terms or at all, may
include possible sales of dark fiber on the German or intra-city networks (such
as Amsterdam) or additional private or public financings, such as an offering of
debt or equity in the capital markets, an accounts receivable or bank facility
or equipment financings. We believe, based on our current business plan, that
these sources, or a combination of them, will be sufficient to fund the
expansion of our business as planned, and to fund operations until we achieve
positive cash flow. We expect to continue to generate net losses and negative
cash flow through at least 2002 as we expand our operations. Whether or when we
will generate positive cash flow will depend on a number of financial,
competitive, regulatory, technical and other factors. For example, our net
losses and negative cash flow from operating activities are likely to continue
beyond that time if:
o we decide to build extensions to our network because we cannot
otherwise reduce our transmission costs,
37
<PAGE>
o we do not establish a customer base that generates sufficient
revenue,
o we do not reduce our termination costs by negotiating
competitive interconnection rates and peering arrangements as
we expand our network,
o prices decline faster than we have anticipated,
o we do not attract and retain qualified personnel,
o we do not obtain necessary governmental approvals and operator
licenses, or
o we are unable to obtain any additional financing as may be
required.
Our ability to achieve these objectives is subject to financial,
competitive, regulatory, technical and other factors, many of which are beyond
our control. There can be no assurance that we will achieve profitability or
positive cash flow.
The actual amount and timing of our future capital requirements may
differ materially from our estimates as a result of, among other things, the
demand for our services and regulatory, technological and competitive
developments. There can be no assurance that sources of additional financing
will be available on acceptable terms or at all.
As of June 30, 2000, we had total current assets of $675.5 million, of
which $32.0 million was escrowed for interest payments on the 13 1/4% senior
notes and $2.5 million of which was allocated to the construction cost of the
German network. Net unrestricted cash as of the same date was $508.8 million. In
the first half of 2000, we allocated approximately $19.3 million in additional
funds for the construction cost of the German network and provided a letter of
credit to secure payment of that amount. The balance of that letter of credit
was $14.9 million as of June 30, 2000.
EBITDA, which we define as earnings before interest, taxes,
depreciation, amortization, foreign currency exchange gains or losses and other
income (expense), decreased from negative $12.3 million in the fourth quarter of
1999 to negative $10.9 million in the first quarter of 2000 and decreased to
negative $10.1 million in the second quarter of 2000. EBITDA is used by
management and certain investors as an indicator of a company's ability to
service 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 an indication of our operating performance or any other measure of
performance derived under generally accepted accounting principles. EBITDA as
used in this report may not be comparable to other similarly titled measures of
other companies or to similarly titled measures as calculated under our debt
agreements.
Our significant debt and vendor financing activity to date has
consisted of the following:
o On February 19, 1999, we issued $160 million and euro85
million of 13 1/4% senior notes, with a scheduled maturity of
February 15, 2009, with detachable warrants.
o On February 18, 1999 we entered into an agreement to
purchase fiber optic cable for the German network,
initially for $20.3 million plus value-added tax. As of
December 31, 1999, we had borrowed approximately $15.7
million under this agreement. We borrowed an additional
amount of approximately $10.4 million under this agreement
since December 31, 1999. We decided in June 2000 to repay
this financing and did so on July 5, 2000.
38
<PAGE>
o In June 1999, we entered into a financing facility with Nortel
Networks Inc., an equipment supplier. As of December 31, 1999,
we had borrowed substantially the full amount of the $75
million available under the facility. The debt outstanding
under this facility bore interest at a LIBOR-based floating
interest rate, and the weighted average on outstanding amounts
was 11.04% as of December 31, 1999. The debt was repaid from
the proceeds of our initial public offering.
o In December 1999, we entered into an interim credit agreement
with Morgan Stanley Senior Funding, Inc. and Citibank N.A. As
of December 31, 1999, we had borrowed euro10 million of the
$200.0 million (or the euro equivalent) available under the
facility. This debt bore interest at a LIBOR-based floating
interest rate equal to 6.72% as of December 31, 1999. The debt
outstanding under this facility (euro40 million at the time of
our initial public offering), was repaid from the proceeds of
our initial public offering, and the facility terminated.
FOREIGN CURRENCY
Our reporting currency is the U.S. dollar, and interest and principal
payments on the 13 1/4% senior notes are in U.S. dollars and euros and a
significant portion of our costs and investments are denominated in dollars.
However, the majority of our revenues and operating costs are derived from sales
and operations outside the United States and are incurred in a number of
different currencies. Accordingly, fluctuations in currency exchange rates may
have a significant effect on our 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 we are subject.
We will, however, continue to incur revenues and operating costs in non-Euro
denominated currencies, such as pounds sterling. Although we do not currently
engage in exchange rate hedging strategies, we may attempt to limit foreign
exchange exposure by purchasing forward foreign exchange contracts or engaging
in other similar hedging strategies. We have outstanding one contract to
purchase Deutsche Marks in exchange for dollars from time to time in amounts
anticipated to satisfy our Deutsche Mark-denominated obligations under our
German network arrangements. Any reversion from the euro currency system to a
system of individual country floating currencies could subject us to increased
currency exchange risk.
INFLATION
We do not believe that inflation will have a material effect on our
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
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. The
adoption of this standard is effective for the first quarter of our fiscal year
ending December 31, 2001. 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 our financial statements.
39
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion summarizes the financial instruments and
derivative instruments held by us at June 30, 2000 that are sensitive to changes
in interest rates and foreign exchange rates. In the normal course of business,
we also face risks that are either nonfinancial or nonquantifiable. Such risks
principally include country risk, credit risk, and legal risk, and are not
reviewed in this discussion.
INTEREST RATE RISK MANAGEMENT. Within the past year, the sensitivity of our cash
flows, earnings, and financial condition to changes in market interest rates
declined significantly, upon our repayment (from the proceeds of our initial
public offering) of the euro40 million, the $75 million and the $26 million
that were outstanding under floating rate facilities.
Because most of our outstanding debt at June 30, 2000 is fixed-rate
debt, a change in market interest rates is not likely to have a material effect
on our earnings, cash flows or financial condition. As of June 30, 2000, we did
not have a position in futures, forwards, swaps, options or other similar
financial instruments to manage the risk arising from these interest rate
exposures. FOREIGN EXCHANGE RISK MANAGEMENT. We have foreign exchange currency
exposures related to purchasing services and equipment and selling our services
in currencies other than the US dollar, our reporting currency. Because the
majority of our revenues and operating costs are derived from sales and
operations outside the United States and are incurred in a number of different
currencies, changes in foreign currency exchange rates may have a significant
effect on our results of operations and balance sheet data. The most significant
of our foreign currency exposures relate to our purchasing and selling
activities in the Western European countries such as Germany, Switzerland and
the United Kingdom, where our principal operations exist.
In addition, the euro85 million of our 13 1/4% senior notes payable
denominated in euros exposes us to foreign exchange rate risk.
40
<PAGE>
BUSINESS
OVERVIEW
We are a rapidly expanding European facilities-based provider of voice,
Internet and bandwidth and related telecommunications services. We offer these
services primarily to other telecommunications service providers. In March 1998,
our experienced management team and Providence Equity Partners formed Carrier1
to capitalize on the significant opportunities emerging for facilities-based
carriers in Europe's rapidly liberalizing telecommunications markets. By
September 1998, we had deployed our initial network and commenced selling
services. By June 30, 2000, we had 352 contracts with voice customers and 154
contracts with Internet and bandwidth customers.
We are developing an extensive city-to-city European fiber optic
network accessing and linking key population centers. In select European cities,
we are also developing intra-city networks and data centers for housing and
managing equipment. We expect these intra-city networks to give us faster, lower
cost access to customers, with better quality control. We also expect to bundle
and cross-sell our intra-city network and data center capabilities with our
other services.
As of June 30, 2000, we offered voice, Internet and bandwidth and
related telecommunications services in over 20 cities and 12 countries. In
addition, as of June 30, 2000 we had arranged to secure, through a combination
of building, buying and swapping assets, a network of approximately 11,000
kilometers, which we expect to become operational in stages through the end of
2000. This network will consist of wholly-owned fiber in Germany, France, the
United Kingdom, The Netherlands, Norway and Sweden, and wholly-owned capacity at
speeds greater than 2.5 Gbps in Denmark, Italy, Switzerland and Belgium. The
network will include a 2,370 kilometer network in Germany, a 2,650 kilometer
network in France, a 1,150 kilometer network in the United Kingdom and
intra-city networks in Amsterdam, Paris, Milan, Rotterdam, Berlin and Munich. We
expect to complete the Amsterdam and Paris networks by the end of 2000.
We intend to continue rapidly expanding our network in a cost-effective
manner by building, buying or swapping network assets. For example:
o We completed construction of the 2,370 kilometer German
network in mid-July 2000 and, except for a few segments for
which we expect final regulatory approval later in the third
quarter, it is in commercial service. The German network, when
fully operational, will connect 14 principal cities and pass a
number of other major cities. We built the German network with
partners to lower our fixed cost of construction. We own our
own duct, which contains 72 fiber strands. We have swapped
excess capacity on the German network for fiber capacity on
other networks in our target markets, including France,
Scandinavia and the United Kingdom, to increase the reach of
our owned and controlled network in a capital-efficient way.
Moreover, our duct has space for additional fiber strands
which may be used to meet additional demands for bandwidth or
improvements in technology.
o We have arranged to construct 44 kilometers of intra-city
network capacity in Amsterdam for expected completion in the
second half of 2000. We pre-sold conduit rights on this
network to lower our fixed cost of construction, and we have
swapped excess capacity to extend it an additional 70
kilometers. When completed, this network will connect major
telecommunications and business centers in Amsterdam.
41
<PAGE>
As we have expanded our owned network, we have been phasing out our leased
network assets.
Stig Johansson, Chief Executive Officer, and our management team have
extensive experience in European telecommunications markets and longstanding
relationships with European customers and suppliers. Mr. Johansson was formerly
the President of Unisource Carrier Services AG, a large European wholesale
carrier. Our 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. We believe that management's experience and
long-standing customer relationships were key to our launch of operations
approximately six months after our founding.
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.
INDUSTRY AND MARKET OPPORTUNITY
We believe that the market for advanced, high bandwidth, transmission
capacity, data centers and other telecommunications services in Europe will grow
significantly due to a number of factors, including:
o LIBERALIZATION. Entry to the telecommunications market was
liberalized in almost all European Union member states on
January 1, 1998. We expect the European telecommunications
market to experience developments similar to those that have
occurred in the United States and the United Kingdom following
liberalization, including an increase in both international
and national traffic volume, reduced prices, increased service
offerings and the emergence of new entrants seeking to
outsource some or all of their telecommunications
infrastructure and service needs. In addition, we expect some
regional carriers in the United States to begin to offer
international long distance service, which we believe will
lead to increased demand for alternative carriers of
transatlantic and European traffic.
o LARGE AND RAPIDLY GROWING MARKET FOR VOICE SERVICES. Industry
sources report that the European international long distance
market is among the largest in the world and is continuing to
grow rapidly, especially in the mobile sector, from which we
receive a substantial portion of our voice revenues.
o RAPIDLY GROWING DEMAND FOR INTERNET AND BANDWIDTH SERVICES.
Industry sources estimate that the penetration rate of web
users in Europe will grow from a level of approximately 10% at
the end of 1998 to approximately 45% in 2003. We believe that
substantial additional bandwidth and faster transmission
speeds will be required to accommodate new Internet intensive
business applications, such as electronic commerce, the
deployment of corporate intranets and virtual private
networks, voice communication over the Internet, video
conferencing, broadcast multimedia, application hosting
services, access via cellular networks, and other Internet
protocol-based value added products and services, third
generation mobile licenses, digital subscriber loops and
wireless local loop technology.
42
<PAGE>
o DEMAND FOR RELATED SERVICES. Increasing demand for basic
telecommunications services presents opportunities for
companies to market other related services, such as data
centers to house and manage a customer's mission-critical
telecommunications and data processing equipment which have
significant space and monitoring requirements.
BUSINESS STRATEGY
Our objective is to be a leading European provider to our target
customers of high quality voice, Internet and bandwidth and related services.
Our target customers are telecommunications service providers and other large
telecommunications users with similar needs. The key elements of our strategy
are:
o TARGET TELECOMMUNICATIONS SERVICE PROVIDERS AND OTHER LARGE
TELECOMMUNICATIONS USERS WITH SIMILAR NEEDS. By focusing on
telecommunications operators and other large
telecommunications users with similar needs, we can take
advantage of our management's strong market-oriented skills,
first-hand understanding of the European telecommunications
markets and long-standing customer relationships, with less
overhead than a mass retail carrier. We believe
telecommunications operators prefer an independent supplier to
an incumbent telephone operator or other supplier with which
they compete directly for mass retail customers.
In particular, we focus our marketing efforts on fixed-line
and mobile competitive operators that lack international
infrastructure. We also focus our marketing efforts on
established non-European operators that lack infrastructure in
Europe or are seeking lower-cost alternatives and wish to
outsource their European infrastructure needs. Based on our
management's experience in European telecommunications
markets, we believe these new entrants and non-European
operators prefer an independent supplier to an incumbent
telephone operator or other supplier with which they compete
directly. In addition, we believe that these customers are
increasingly seeking flexible, lower cost alternatives to the
high tariffs that incumbents have traditionally charged.
o FOCUS ON CUSTOMER NEEDS. We will continue to build
relationships with a large number of telecommunications
service providers by providing quality, customized service and
a superior level of customer support.
o QUALITY OF SERVICE. We believe that quality of
service is critical to obtaining and retaining
customers. Our technologically advanced network and
network management and information systems allow us
to offer our services at guaranteed minimum levels of
order implementation, response and repair time and
availability. Based on our management's experience in
telecommunications markets, we believe that we offer
among the highest minimum service levels for voice
and Internet and bandwidth services. Owning fiber
optic networks, switches, multiplexers and routers
helps us to control the quality and breadth of our
service offerings.
o SUPERIOR CUSTOMER SUPPORT. We have designed our
systems with the goal of providing a level of
customer support significantly higher than what we
believe is generally offered in our target market in
Europe, particularly by incumbent telephone
operators. Key features of these systems include: (1)
decentralized and locally based sales, installation
and basic support, facilitating quick response to
43
<PAGE>
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. We believe that these features allow us to
offer our customers the ability to monitor and
control services we provide them.
o RAPID AND CAPITAL-EFFICIENT NETWORK EXPANSION. We seek to
invest in key strategic assets, such as our German and
Amsterdam networks, which we can use as a currency for swaps
to extend our European coverage as rapidly as possible.
Through this strategy we are developing a cross-border network
linking principal cities of the European Union and expect to
continue to increase the number of countries covered by the
network and broaden our network presence within particular
countries. We have reduced the capital necessary to assemble
this existing and contracted network by:
o sharing the cost of building the German network with
partners,
o selling or pre-selling conduit rights or capacity to
defray costs, and
o swapping capacity or services.
We continue to take this rapid and capital-efficient approach
in implementing our strategy to secure intra-city networks in
up to 20 cities throughout Europe through swaps of fiber and
pre-selling of conduit rights. Similarly, we are taking a
capital-efficient approach to developing data center
capabilities by building them through a joint venture. We
expect that having intra-city networks and data center
capabilities will enhance the value of our network by bringing
us closer to major telecommunication centers and therefore to
our customers.
o EXPLOIT LOW COST PROVIDER POSITION. Owning a high capacity,
cross-border network in Europe gives us a significant cost
advantage over incumbent providers with extensive legacy
networks and newer competitors that currently lease the
majority of their network or that will be required to lease a
significant amount of capacity in the future to meet increased
demand or that are incurring the full cost of building
networks without the use of capital-efficient swapping or
pre-selling strategies. We believe that we will further reduce
the overall cost of deploying our network by continuing to
engage in swaps and sales of dark fiber. We believe that the
intra-city extension of our network in up to 20 major cities
will enhance our low-cost position by reducing the need for
alternative city carriers and leased lines, which can be
expensive and have long lead times for delivery. We expect
that acquiring our data center capabilities through a joint
venture will also enhance our low-cost position.
o PURSUE GROWING DEMAND FOR BANDWIDTH. We believe that demand
from European telecommunications carriers, Internet service
providers and other businesses, such as certain multinational
companies, for high bandwidth and Internet transmission
capacity will increase substantially over the next several
years primarily due to technological and regulatory
developments. We also believe that additional network
transmission capacity and faster transmission speeds will be
required to accommodate high bandwidth business applications
such as electronic commerce, the deployment of corporate
intranets and virtual private networks, facsimile transmission
over the Internet, video conferencing, access via cellular
networks, and other Internet protocol-based services. We
believe that pursuing this demand in the Internet sector will
be key to our continued success.
44
<PAGE>
o BUNDLE AND CROSS-SELL A COMPREHENSIVE RANGE OF NETWORK
SOLUTIONS. We can customize our voice, Internet and bandwidth
and other capabilities in combinations, or as comprehensive
European end-to-end network solutions. For example, we believe
existing customers that use our city-to-city capabilities will
be interested in locating their critical applications and
equipment in our data centers, as they become available. After
a customer places applications or equipment in a data center,
we have an enhanced opportunity to manage those applications
or equipment or to provide additional city-to-city or
intra-city transport. Similarly, a customer who may use our
intra-city and data center capabilities, as both of these
develop, may also find it convenient to use our city-to-city
and other capabilities. We can also offer customers the entire
range of our capabilities to create a virtual carrier network
in which we provide all of the European telecommunications
network infrastructure and services they require, leaving to
them the opportunity to focus on their own core business
functions, which we do not provide: branding, sales and
features customized for their specific end users. These
end-user ready solutions will allow a customer to select from
a menu of our capabilities to create its own branded
pan-European service, with the ability to monitor and control
the services we provide, without investing in the
infrastructure and support that we offer.
In furtherance of our business strategy, we regularly explore possible
strategic partnerships, acquisitions, business combinations and other similar
transactions, with a view to expanding our European and international presence,
securing cost-effective access to transmission capacity or other products and
services, or otherwise enhancing our business, operations and competitive
position. Our industry is characterized by high levels of this type of activity.
We expect to continue to regularly explore possibilities of this kind with other
telecommunications companies. We believe that the flexibility to utilize either
cash or our publicly traded shares as a currency for possible transactions may
enhance our ability to pursue acquisition or other business combination
opportunities. Any future transaction may be significant to us, although no
assurance can be given that any transaction will occur.
SERVICES
We are focusing on providing voice, Internet and bandwidth and related
services, primarily to other telecommunications service providers, at the high
level of quality expected by European customers. For the six months ended June
30, 2000, we had $95.6 million of revenues from voice services and $13.2 million
of revenues from Internet and bandwidth services. For more information about our
revenues, see the Notes to our consolidated financial statements.
VOICE SERVICES
Our voice services generally consist of providing transport from our
network points of presence located in strategic European cities and New York for
termination anywhere in the world. Our customers generally will arrange for
transmission of their traffic to one of our points of presence at their own
cost, although we may provide service from the customer's site if traffic volume
is sufficient. Customers may also access our network indirectly through our
indirect access services. Our voice service contracts guarantee a minimum of
99.9% availability on the network and maximum implementation, response and
repair times.
Our current offering of voice services allows a customer to access our
network both by direct connection and indirect access. Indirect access and other
capabilities have allowed us to provide value-added services to customers with
no telecommunications infrastructure, such as switchless resellers, to
45
<PAGE>
distributors of pre-paid phone cards and toll-free services, and to other
customers with needs for particular value-added capabilities, such as ISDN.
INTERNET AND BANDWIDTH SERVICES
Our objective is to be a major European Internet backbone and
value-added services provider.
INTERNET TRANSPORT SERVICES. We currently offer three types of Internet
transport services, "Global Transit Services," "Euro Transit Services" and
"Internet Exchange Connect Services." We offer these services at various
capacity and service levels.
Our Global and Euro Transit Services provide customers with high-speed,
high-quality connectivity to Internet domain addresses world-wide or within
Europe, depending on the service. This backbone service interconnects our
customers with selected Internet exchanges and other international Internet
backbone providers. Customers connected to the Global or Euro Transit Service
backbone have connectivity geared to providing optimal Internet reach and
connectivity.
Our Internet Exchange Connect Services, or IX Connect, is a
point-to-point option for customers who want to transit solely to a specific
Internet exchange or to a specific partner. It offers one-to-one connectivity to
a select number of destinations through main Internet exchanges in Europe and
the United States. We currently offer IX Connect connectivity to the following
Internet exchanges: LINX in London, BNIX in Brussels, AMS-IX in Amsterdam, D-GIX
in Stockholm, DE-CIX in Frankfurt, VIX in Vienna, MIX in Milan, CIPX in Geneva,
SFINX and PARIX in Paris, MAE East in Washington and MAE West in San Francisco.
We expect to extend connectivity to selected other exchanges in the United
States during the second half of 2000. 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. We will also guarantee certain minimum connection speeds and maximum
response and repair times.
VALUE-ADDED INTERNET SERVICES. We are currently offering select Internet-based
value added services. These include streaming media distribution, which consists
of the transmission of audio and video media, and virtual ISP service, which
consists of providing a menu of our capabilities from which an ISP can create
its own branded Internet service without investing in the Internet
infrastructure we plan to provide. For example, we have entered into an
agreement with Yahoo! Broadcast Services to facilitate the distribution of their
streaming media. To optimize the distribution process, we have enabled our
network for multicasting, which is an efficient mechanism for delivering
broadcasts from one source to thousands of receivers.
We are currently testing other Internet-based value-added services and
evaluating their introduction, which will depend on commercial feasibility and
demand. These services include virtual private networks using security
management, electronic-commerce related services, application hosting, wireless
access to the Internet, voice transmission over Internet protocol and unified
messaging services.
BANDWIDTH SERVICES. As we migrate our services to our owned transmission
network, we have increasingly targeted the demand for high quality bandwidth
services, including:
o MANAGED BANDWIDTH. Our managed bandwidth service provides
capacity of 2 Mbps, 34 Mbps, 45 Mbps, and 155 Mbps. Larger
bandwidths up to 2.5 Gbps are available upon request. These
services are designed for customers who require large data
transport capacity between cities.
46
<PAGE>
o WAVELENGTH SERVICES. The dense wave division multiplexing, or
DWDM, technology used in our network allows us to offer
optical wave or "wavelength" services to our customers, which
provides 2.5 Gbps to 10 Gbps of capacity. The capacity that we
use to provide these wavelengths is in addition to the
capacity we use to provide our other services. We can derive
on average eight 10 Gbps wavelengths, and up to thirty-two 10
Gbps wavelengths, from a single strand of fiber with equipment
that we currently have on order. We expect this capability to
increase with advances in technology. This service is designed
for customers who require very large transport capacities
between cities, but who do not wish to purchase dark fiber and
invest in the transmission electronics to enable the fiber to
carry traffic. We believe, based on our management's
experience, that many potential customers will be interested
in wavelength services because they allow purchases of
bandwidth in smaller increments than purchases of dark fiber
while retaining the control advantages of dark fiber.
o DARK FIBER. We also offer rights for dark fiber and related
services. Because dark fiber consists of fiber strands
contained within a fiber optic cable which has been laid but
has not yet been "lit" with transmission electronics,
purchasers of dark fiber typically install their own
electrical and optical transmission equipment. For example, in
December 1999, we entered into an 18 year IRU under which we
will provide two pairs of dark fiber on the German network,
and related services, to Tesion, a joint venture in which
Swisscom is a 50% participant.
DATA CENTER CAPABILITIES
Telecommunications and Internet technologies that are emerging in
Europe, as well as existing technologies, have significant space and monitoring
requirements. The liberalization of the telecommunications industry and
resulting increase in new entrants and demand for Internet and mobile services
have created a growing demand for data center services in Europe. We plan to
offer to customers state-of-the-art data centers for application hosting and to
house mission-critical voice, video, caching, data networking and transmission
equipment in a highly reliable, redundant and secure environment. We will also
offer technical support to monitor, manage and troubleshoot the equipment.
We believe the ability to offer managed data center capabilities will
help us to cross-sell multiple services to customers and to further secure our
relationships with those customers. In addition, as we develop additional
Internet services, we expect that these facilities will enhance our ability to
offer virtual ISP and similar services.
We are developing our network of data centers in major European markets
through our Digiplex joint venture. Digiplex intends to build up to 20 to 25
facilities, generally ranging in size from 100,000 to 350,000 square feet in
major markets in Europe during 2000 and 2001. We expect to have a minimum of
between 10,000 and 25,000 square feet for our use and the use of our customers
in each facility. We expect to connect each facility in which we become a
strategic anchor tenant to our fiber optic network. As a strategic anchor tenant
in these facilities, we will have favorable rents and rights to additional
space, subject to some conditions, including that we not become an affiliate of
a Digiplex competitor. We can opt not to be a tenant in some planned locations
and, if we wish to build data centers in additional locations, we have given
Digiplex the right of first refusal to construct them.
We expect to compete with Digiplex and another of our joint venture
partners in providing data center capabilities.
47
<PAGE>
NETWORK
We believe it is critical to own or control key elements of our network
in order to become a high-quality, low-cost provider. We commenced operations
primarily on a leased fiber optic transmission platform to enable our early
entry into the market. Over time, we have expanded our network in a phased
approach, adding capacity to meet expected increases in demand. To reduce our
cost base, however, we have sought to obtain additional transmission capacity at
dark fiber cost levels, through building new capacity and acquiring capacity
through purchases or swaps of excess capacity.
For example, by investing in the German network with partners, and by
pre-selling rights to conduit space on the Amsterdam network, we first reduced
our own cost of construction. We then swapped fiber on the German network for
transmission capacity in other regions. Similarly, we have swapped fiber to
extend the reach of the Amsterdam network.
In addition, by extending our network intra-city in up to 20 European
cities, we intend to acquire transmission capacity in areas that have
traditionally been served by very few carriers or by only one carrier. We expect
that these intra-city networks will lower the cost of our services by providing
us with a dark fiber alternative to expensive leased lines. We also expect that
these intra-city networks will serve as valuable currency to swap for capacity
on other networks.
Our early and continued use of multiplexers to establish points of
presence rapidly and cost effectively also illustrates this capital-efficient
approach to network expansion. Multiplexers are less costly and easier to
install than switches, enhance our flexibility and service quality and help to
reduce our termination costs. As voice traffic increases, we may replace
multiplexers with switches and redeploy these multiplexers in new markets. We
have the flexibility to continue using multiplexers and defer purchasing
additional switches until improved technologies, which we are in the process of
testing, become commercially available.
The following table shows, as of June 30, 2000, the cities where we had
Nortel switches, multiplexers and high-capacity Cisco routers in service. We
selected these cities because they represent important sites of European traffic
origination or termination. The table also shows, as of June 30, 2000, the
cities where we plan to install multiplexers and routers through the end of
2000. In anticipation of technological advances in voice transmission and
switches, we are generally deferring the installation of more traditional
switches. The timing, location and number of switches, multiplexers and routers
may change depending on advances in technology, customer demand or regulatory
conditions.
INSTALLED NETWORK COMPONENTS (AS OF JUNE 30, 2000)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
VOICE INTERNET
--------------------------------------------------- ---------------------------
SWITCHES MULTIPLEXERS ROUTERS
-------------------------- ----------------------- ---------------------------
<S> <C> <C>
Amsterdam Copenhagen Amsterdam
Berlin Geneva Brussels
Brussels Hanover Chicago
Dusseldorf Madrid Dusseldorf
Frankfurt Munich Frankfurt
Hamburg Oslo Geneva
London Hamburg
Manchester London
Milan Madrid
48
<PAGE>
<CAPTION>
--------------------------------------------------------------------------------
VOICE INTERNET
--------------------------------------------------- ---------------------------
SWITCHES MULTIPLEXERS ROUTERS
-------------------------- ----------------------- ---------------------------
<S> <C> <C>
New York Milan
Paris New York
Stockholm Paris
Vienna San Jose
Zurich Stockholm
Vienna
Washington D.C.
Zurich
<CAPTION>
PLANNED NETWORK INSTALLATIONS THROUGH END OF YEAR 2000
(AS OF JUNE 30, 2000)
--------------------------------------------------------------------------------
VOICE INTERNET
--------------------------------------------------- ---------------------------
SWITCHES MULTIPLEXERS ROUTERS
-------------------------- ----------------------- ---------------------------
<S> <C> <C>
Madrid Barcelona Barcelona
Bremen Copenhagen
Budapest Dallas
Chicago Dublin
Cologne Helsinki
Dortmund Leipzig
Dresden Lyon
Dublin Marseille
Essen Munich
Helsinki Oslo
Leipzig Rome
Lyon Stuttgart
Mannheim
Marseille
Nuremberg
Prague
Rome
San Francisco
Stuttgart
Washington D.C,
</TABLE>
We are also considering installing multiplexers in Athens, Lisbon,
and Warsaw, and routers in Athens, Berlin, Budapest, Manchester, Lisbon,
Prague and Warsaw.
EXISTING NETWORK
Our management believes that entering the liberalizing European
telecommunications markets early and establishing our position quickly with a
technologically advanced network has given us a competitive advantage in such
markets.
TRANSMISSION CAPACITY. As of June 30, 2000, our traffic is transmitted
principally over:
49
<PAGE>
1. three STM-1 (155 Mbps) transatlantic circuits, all terminating
in New York and starting in Amsterdam, Frankfurt, and London,
2. one DWDM enabled fiber ring connecting London, Paris,
Frankfurt and Amsterdam and, on a physically separate route,
one 2.5 Gbps wavelength, with an option to upgrade to 10 Gbps,
acquired in a swap for the purpose of diversity, configured in
a ring linking London, Brussels, Amsterdam, Frankfurt and
Paris,
3. one 2.5 Gbps wavelength, with an option to upgrade to 10 Gbps,
configured in a ring linking Paris, Zurich, Milan and Geneva,
4. two STM-1 linking Copenhagen and Stockholm,
5. two STM-1s linking Frankfurt and Vienna,
6. one STM-16 linking Hamburg and Copenhagen,
7. one E3 (34 Mbps) linking Vienna and Zurich,
8. one VC-3 (45 Mbps) linking Oslo and Stockholm,
9. one STM-1 linking London and Manchester,
10. one T3 (45 Mbps) linking MAE East and New York,
11. in Germany, STM-1s linking Frankfurt and Dusseldorf;
Dusseldorf and Hamburg; Hamburg and Berlin; Berlin and
Frankfurt; Hamburg and Hannover; Hannover and Frankfurt; and
Frankfurt and Munich,
12. two VC-3 circuits, acquired in a swap, linking London and
Stockholm, and
13. one long term lease of DWDM enabled fiber connecting the major
telecommunications facilities in London.
NETWORK MANAGEMENT CAPABILITIES. We have installed Synchronous Digital
Hierarchy, or SDH, equipment at each network point of presence that provides us
with information relating to the status and performance of all elements of our
network, including the transmission capacity provided to us by various third
parties. This SDH layer also provides us with flexibility to connect new
providers of transmission capacity and to configure this capacity in a flexible
manner.
PLANNED NETWORK DEPLOYMENT
We are continuing to pursue an aggressive timetable for extending the
scope of our network, thereby rapidly expanding our presence in our target
markets. We are installing a cross-border network linking the principal cities
of several European countries and will continue to increase the number of
countries covered by the network and broaden our presence within particular
countries and cities.
THE GERMAN NETWORK. We entered into a development agreement to build the German
network with affiliates of Viatel and Metromedia. We completed construction of
the German network in mid-July 2000, with full commercial operation expected by
the end of 2000. The German network, when fully operational, will be an
advanced, high-capacity, bi-directional self-healing 2,370 kilometer fiber optic
ring utilizing advanced SDH and DWDM technologies. The German network connects
Berlin, Bremen,
50
<PAGE>
Cologne, Dortmund, Dresden, Dusseldorf, Essen, Frankfurt, Hamburg, Leipzig,
Mannheim, Munich, Nuremberg, and Stuttgart. We own our own cable duct and access
points. Our cable duct contains 72 strands of fiber and has space for additional
strands, permitting for upgrades in quality or capacity in the future. Our
estimated share of the development costs will be approximately $115 million,
including the fiber initially deployed and the installation of 14 points of
presence.
We decided to build our network in Germany because:
o Germany is the largest telecommunications market in Europe and
a major center for voice and Internet traffic within Europe,
o there is limited availability of cost-effective transmission
capacity in Germany,
o leased transmission costs are currently high in Germany and we
desire to lower our cost base in such a large market,
o 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,
o installing multiple points of presence in Germany will reduce
our voice termination and access costs and improve our
position within the German regulatory framework, and
o Germany's central location within Europe provides a good base
from which to connect the German network to other parts of
Europe.
In addition, excess capacity on the German network has been useful to
us as a valuable currency to swap for capacity on other networks, as described
below. We believe excess capacity will continue to be useful swap currency.
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, controls all but certain
major decisions relating to the development of the German network which require
unanimous consent. Costs of construction are 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 is
entitled to a developer's fee of 3% of certain construction costs, 25% of which
is borne by us.
Each of Viatel, Metromedia and us provided 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.
THE SCANDINAVIAN NETWORK. Under the terms of another 15 year IRU exchange
agreement, we received two wavelength rings connecting Hamburg to Copenhagen and
Malmo, Sweden, in exchange for two wavelength rings connecting the German cities
of Hamburg, Berlin and Frankfurt. The initial capacity of the wavelengths will
be 2.5 Gbps, but we have secured options to upgrade to 10 Gbps. The agreement
includes the operations and maintenance on each of the wavelengths, and rack
space in repeater sites, regeneration sites and points of presence.
In addition, under the terms of an 18 year IRU capacity exchange
agreement, we will obtain transmission capacity along a 2,000 kilometer route
linking four major population centers of the Nordic
51
<PAGE>
region: Stockholm, Oslo, Gothenburg and Malmo. For the first three years of the
agreement we will receive a 2.5 Gbps wavelength, upgradable at our option to 10
Gbps or dark fiber after one year. We believe that receiving this wavelength
will enable us to defer the significant investment in transmission equipment
required to light the 2,000 kilometer route. In exchange, we will provide
Internet transmission capacity. The agreement includes the ancillary services
required for use of the transmission capacity. These services consist primarily
of operations and maintenance, rack space in repeater and regeneration sites,
power facilities and security, but do not include the transmission equipment
required to light the fiber if we elect to upgrade to dark fiber. We began to
deliver the Internet capacity in November 1999, and we expect to receive the
transmission capacity in August 2000.
THE U.K. NETWORK. Under the terms of an agreement with 360Networks, we will
acquire a 20-year IRU for twelve strands of dark fiber on its diversely-routed
1,150 kilometer UK network between Liverpool and London, connecting Manchester,
Sheffeld, Birmingham, Bristol, Nottingham and Cambridge. In exchange, we will
sell dark fiber on our German, Paris and Amsterdam networks and broadband
capacity on our other European networks.
THE FRENCH NETWORK. We currently have owned transmission capacity operational in
the northern part of France, including Paris. We are also a party to an exchange
agreement that, as amended, calls for us to provide 2 strands of fiber on our
German network in exchange for 2 strands of fiber on a 2,650 kilometer French
network that connects 14 cities, representing some of the largest population
centers within France.
OTHER CITY TO CITY EUROPEAN NETWORKS. Under the terms of a 10 year IRU, we will
receive a 2.5 Gbps wavelength linking Paris, Geneva, Zurich, Milan and
Frankfurt, which may be upgraded to 10 Gbps of capacity.
THE AMSTERDAM NETWORK. For the Amsterdam intra-city network, we are building a
44 kilometer ring of 12 ducts, one of which is to be filled with a cable of 144
strands of fiber and four of which have been pre-sold, reducing our future unit
costs. In addition, we have arranged a swap to extend this network by an
additional 70 kilometers, to cover the greater Amsterdam metropolitan area,
including Schiphol Airport and the major business parks. Construction of the
Amsterdam network is currently underway and is expected to be completed in the
second half of 2000.
THE PARIS NETWORK. For the Paris intra-city network, we are building a 32
kilometer network. When complete, the Paris network will connect major
telecommunications access points in Paris. We expect to complete the Paris
network in the second half of 2000.
OTHER INTRA-CITY NETWORKS. We are also building a 40 kilometer intra-city
network in Rotterdam, a 60 kilometer intra-city network in Milan, a 35 kilometer
intra-city network in Berlin and a 16 kilometer intra-city network in Munich. We
expect to complete these networks in the first half of 2001.
TRANSATLANTIC CAPACITY. We have arranged to purchase a multiple investment unit
in TAT-14, a transatlantic cable connecting Amsterdam, London and New York. We
expect TAT-14 to become operational during the first quarter of 2001. We have
also agreed to purchase either additional transatlantic capacity or North
American capacity at our option.
FURTHER NETWORK EXTENSIONS AND DEVELOPMENTS
We have already begun to extend our planned network beyond our original
deployment plans. We will consider further extending our network within Europe
beyond our current planned deployment in light of evolving market conditions and
our financial position and financing options. Due to the rapidly evolving
dynamics of the European telecommunications market, we will continually reassess
the most
52
<PAGE>
cost-effective means of network expansion. Future increases in the supply of
dark fiber may make building new capacity a less favorable option, in economic
terms, than variable or fixed-rate lease arrangements, the purchase of
transmission rights or the swapping of transmission capacity or services.
EXISTING AND PLANNED TRAFFIC TERMINATION ARRANGEMENTS
By establishing interconnection arrangements with incumbent telephone
operators in liberalized markets and direct operating agreements with incumbent
telephone operators in emerging markets, we can keep our costs of terminating
voice traffic lower and exercise greater control over quality and transmission
capacity than we can using refile or resale agreements. Similarly, entering into
additional peering agreements will minimize the cost of terminating our Internet
traffic.
VOICE TERMINATION. We carry voice traffic to any destination in the world,
either directly through interconnection or direct operating agreements or
indirectly 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 June 30, 2000, we had established points of interconnection to
provide for the local origination and termination of our voice traffic with
carriers in Austria, Belgium, Denmark, France, Germany, Italy, The
Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
As of June 30, 2000, we had interconnection applications pending in
Finland, Ireland, Spain and Norway. We also had upgraded our direct link into
Turkey, an important traffic destination from Germany, and had also implemented
direct operating agreements with local carriers for termination of voice traffic
in a number of emerging markets in Africa that are important traffic
destinations from France and the United Kingdom.
Most refilers currently operate out of New York and various European
cities such as London, Frankfurt and Vienna. Accordingly, much of our refiled
traffic is rerouted to these cities, but we can also refile traffic from most of
our other points of presence, where refiled traffic is then carried to its
termination point.
INTERNET TERMINATION. Internet termination is effected free-of-charge through
peering and for a fee through transit arrangements. As of June 30, 2000, we had
peering arrangements with over 100 ISPs and backbone providers, primarily in
Europe, including Cable & Wireless, and Deutsche Telekom. As our volume of
Internet traffic increases, we expect we will be in a position to negotiate
peering with 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 Internet backbone providers, we have transit agreements
with UUNet Technologies, Inc., an MCI WorldCom subsidiary, and GTE
Internetworking, a unit of GTE Corporation. In the United States, we have
peering arrangements with a number of providers, including Epoch Networks,
Exodus and PSINet.
OPERATIONS
NETWORK IMPLEMENTATION AND OPERATION
In July 1999, we assumed control of the technical operation of our
network from Cisco and Nortel, other than basic equipment servicing, so that we
manage all the customer-related functions of the
53
<PAGE>
business. A small team of operations staff will manage the future planning and
architecture of the network.
The voice and Internet network operating systems allow us to use
advanced software to maximize the efficient operation of the network, including
managing the flow of voice and Internet traffic on a daily basis and identifying
the precise location of faults. These systems are also sufficiently flexible to
allow us to migrate to more advanced technological applications as they become
commercially feasible.
We have a network operations center in London from which we operate the
voice and Internet network. We believe that a centralized network operations
center enables us to identify overloaded or malfunctioning circuits and reroute
traffic much more quickly than if the network were controlled by separate
network operations centers in different countries.
CUSTOMER SUPPORT
An essential goal of our business strategy is to provide a level of
customer support above that which is currently available in the
business-to-business telecommunications markets of Europe.
The in-country operations support team, together with the operations
teams at our network operations center, manages the point of presence locations
and implementation of a customer's order. The in-country operations and sales
teams provide a customer with local language support and quick access and
response to orders and other 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. Pro-active customer contact is managed from the help
desk at all times. During the second half of 2000, we plan to establish an
additional help desk in continental Europe to specifically address our German-
and French-speaking customers.
All customer service orders received by the local sales forces are
reported to the central order desk at our network operations center. The central
desk then logs the order into our computer system and directs the order to the
voice or Internet team. The central desk also tracks the status of an order
during implementation. We have automated our operational workflows so that the
status of customer order implementation, traffic faults, repair histories and
other customer-related information is accessible, on-line, by our employees at
any time. We believe that the internal visibility created by the on-line
availability to employees 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, we optimize our
ability to provide follow-up and proactive advice to our customers.
In addition to the minimum service level guarantees contained in our
voice and Internet service contracts, we also guarantee response times to
customer requests within hours, and repair times within one day of the fault
being reported.
INFORMATION SYSTEMS
We have obtained and installed advanced information technology systems
tailored to providing voice, Internet and bandwidth services to our target
customers. We have developed our own system to enable us to determine optimum
routing on a real-time basis, allowing us to optimize margins and quality within
the constraints of the network. In order to identify the most cost-efficient and
quality-acceptable route for voice traffic at any given time, the system takes
into account costs on a given route, the capacity
54
<PAGE>
of the route, and quality considerations. Routing information is updated daily
and takes into account the prior day's actual costs rather than hypothetical
forward costs. Once the optimum routing has been determined, all switches are
updated automatically from a routing computer. Among other things, our systems
are designed to facilitate on a real-time basis:
o swift and efficient order management,
o service provisioning,
o customer-responsive traffic fault management,
o daily detailed management information,
o billing,
o general management of the customer service process, and
o compliance with our performance level guarantees.
We currently use software programs developed by third parties as our
primary office and information management systems. These programs have been
tailored, however, to our particular specifications.
BILLING SYSTEMS
As part of our strategy of focusing on the specific needs of many types
of telecommunications service providers, our 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. Our billing system analyzes our traffic, revenues and margins by
customer and by route, on a daily basis, which is an important cost management
tool for us. Our voice customers are able to obtain call detail records and
other information through an on-line billing information inquiry function. We
plan to maintain separate billing modules for voice and Internet services,
although customers utilizing both services may be billed on one invoice if
desired.
TARGET CUSTOMERS
As of June 30, 2000, we had 352 contracts with voice customers and 154
contracts with Internet and bandwidth customers. We target the following
specific categories of customers:
o 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 voice traffic as well as their Internet and bandwidth
needs.
o WIRELESS OPERATORS. Wireless operators frequently outsource
much of their international and national long distance traffic
and also have demand for bandwidth.
o INCUMBENTS AND THEIR ALLIANCES. A number of incumbent
telephone operators and their affiliated alliances are
increasingly using wholesale carriers, rather than sending
traffic under bilateral agreements with other incumbents. As
these operators concentrate on their
55
<PAGE>
domestic markets, we expect they will increasingly outsource
their international networks and related traffic transmission
to independent carriers such as us.
o NON-EUROPEAN CARRIERS. This category includes operators that
lack infrastructure in Europe or have experienced an imbalance
in their remaining bilateral agreements and wish to outsource
their European telecommunications needs to an independent
supplier of wholesale services with which they do not compete
directly. This category will include regional Bell operating
companies that receive regulatory approval to provide long
distance services.
o ISPS AND REGIONAL AND SPECIALIST PROVIDERS. As demand for
Internet and bandwidth services grows in Europe, ISPs are
increasingly requiring low-cost transmission and connection
capabilities from wholesale carriers. Many ISPs do not own or
operate their own transmission capacity. This category also
includes application service providers, or ASPs.
o OTHER NON-INCUMBENT CARRIERS. This category includes operators
with international infrastructure, who select us to carry
overflow traffic, to carry traffic to select, low-price
destinations and to provide managed bandwidth services.
o 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. Switchless resellers do not have telecommunications
infrastructure, but access retail markets through the
infrastructure of others. The reseller category also includes
satellite resellers, a group that is currently demanding a
significant amount of low-cost Internet services.
o INTERNET CONTENT PROVIDERS AND MEDIA COMPANIES. This category
includes Internet-based content providers, media companies,
cable networks and emerging broadband service providers
looking to distribute their respective content in a
cost-effective manner to their end users. Demand for
distributing media-related content, such as audio and video
streaming and other value-added services, is expected to grow
significantly as broadband capabilities become available to
the end user.
o MULTI-NATIONAL CORPORATIONS. Increasingly, multi-national
corporations are seeking wholesale voice, Internet and
bandwidth services to reduce their costs or as a component of
their own value-added services such as frame relay. Although
we are not currently servicing this customer category, we
started to target select multi-national corporations in the
second quarter of 2000.
o 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. Although we are not
currently serving this customer category, we started to target
buying consortia in the second quarter of 2000 and will also
seek to provide our services to research consortia. The
research consortia represent an important part of the Internet
market.
56
<PAGE>
Our customers are located primarily in Europe and the United States,
with customers in Germany representing approximately 41% of our revenues for the
year ended December 31, 1999. See Note 13 to our consolidated financial
statements for more geographical financial information.
We use a credit screening process to evaluate potential new customers.
In performing our credit analysis, we rely primarily on internal assessments of
our 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. We currently
depend on a small number of significant customers for our revenues. For the six
months ended June 30, 2000, one customer accounted for approximately 8% of our
revenues and may continue to account for a significant portion of our revenues
in the near term. Our agreement with this customer employs usage-based pricing
and does not provide for minimum volume commitments.
SALES
As of June 30, 2000, we had an internal sales force focused on
marketing voice, Internet and bandwidth and data center services to customers.
We have sales representatives in Amsterdam, Brussels, Berlin, Dusseldorf,
Hamburg, Frankfurt, London, Madrid, New York, Milan, Paris, Stockholm, Vienna
and Zurich. As of June 30, 2000 we had 67 sales staff. 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. We intend to hire between approximately 20 and 30
additional sales executives as we increase the number of our offices and expand
our existing sales efforts. During the course of 2000 we 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.
Currently, our Frankfurt sales office functions as the regional head
office generally covering German-speaking Europe (Austria, Germany and
Switzerland) and Central and Eastern Europe; the Amsterdam sales office
functions as the regional head sales office for the Benelux countries (Belgium,
The Netherlands and Luxembourg); our Paris sales office functions as the
regional head office for France; our New York sales office functions as the
regional sales center for North America; our Stockholm sales office functions as
the regional sales center for the Nordic region (Denmark, Finland, Norway and
Sweden) and the Baltic region (Estonia, Latvia and Lithuania); our Milan sales
office functions as the regional sales center for Italy and Greece; our London
sales office functions as the regional head office for all English-speaking
countries in Europe (United Kingdom and Ireland); our Berlin sales office
functions as the regional sales center for the Berlin vicinity and Poland. The
new Madrid sales office functions as the sales center for the Iberian peninsula
(Portugal and Spain) and the new Vienna sales office serves Austria, Hungary,
the Czech Republic, Slovakia and the former Yugoslavia. Customers who are not
within a specific region are covered centrally by our Zurich headquarters sales
office, which also co-ordinates servicing pan-European and global customers. We
also anticipate establishing sales offices in Munich, Manchester and Geneva to
cover the regions around these cities, but we expect our regional strategy will
permit us to keep operating costs down until traffic volumes in various other
locations in Europe are large enough to justify establishing sales offices in
those locations.
We provide each prospective or actual customer with personalized
account management. Furthermore, in comparison to the mass retail market, the
business to business telecommunications market has a relatively small number of
customers. We expect that this market characteristic will permit us to continue
to provide personalized account management even as the number of our customers
continues to grow.
57
<PAGE>
PRICING
Our agreements with our 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. Our Internet and bandwidth services are generally charged at a
flat monthly rate, regardless of usage, based on the line speed and level of
performance made available to the customer. We also offer usage-based Internet
pricing for our Internet transport services only in combination with Internet
transport contracts that have a fee-based component that guarantees minimum
revenue, in order to encourage usage of our network services by our Internet
transport customers. Our agreements with our Internet transport customers are
generally for a minimum term of twelve months. Currently, our bandwidth services
are also typically for an initial term of twelve months, although we expect to
be able to offer more flexible pricing alternatives to bandwidth customers in
the future.
Our services are priced competitively and we emphasize quality and
customer support. The rates charged to voice and Internet and bandwidth
customers are subject to change from time to time. We expect to experience, and
have planned for, declining revenue per billable minute for voice traffic and
declining revenue per Mb for Internet traffic, in part as a result of increasing
competition, and declining revenue per Mb for bandwidth in part as a result of
advances in technology. We believe, however, that the impact on our results of
operations from such price decreases will be at least partially offset by
decreases in our cost of providing services and increases in our voice and
Internet traffic volumes. In addition, our ability to bundle and cross-sell
network services allows us to compete effectively and to protect our business,
in part, against the impact of these price decreases.
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 transmission capacity. New
networks are being built to provide significant additional capacity, creating
further downward pressure on prices. While decreasing prices are fueling growing
demand for bandwidth, they are also narrowing gross profit margins on long
distance voice traffic. Except for value-added services for switchless resellers
or indirect access customers, basic voice carrier services are not highly
differentiated, and switching carriers is not costly. Most 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. Our ability to compete
successfully in this environment will be highly dependent on our ability to
generate high traffic volumes from our customers while keeping the costs of our
services low. We believe that Internet customers will typically renew their
contracts, if the quality of the service is consistently high, because it is
costly and technically burdensome to switch carriers.
In voice services, we have 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 Telecommunications plc, Cable & Wireless Communications plc,
Global One, MCI WorldCom, Inc., Tele Danmark A/S, Deutsche Telekom, Teleglobe
Inc. and Telecom Italia S.p.A. The second category comprises new entrants to the
telecommunications market that provide wholesale services. This group includes
Energis plc, Pacific Gateway Exchange, Inc., Viatel, Inc., RSL Communications
Ltd., Interoute Telecommunications (UK) Ltd. and Storm Telecommunications
Limited.
58
<PAGE>
In Internet services, our main competitors include UUNet, a subsidiary
of MCI WorldCom, GTS, Level 3 Communications, InfoNet and KPN Qwest N.V., 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. Our main bandwidth competitors include KPN Qwest N.V.,
Global Telesystems, Inc., Global Crossing Ltd., Viatel, Inc., MCI WorldCom, Inc.
and Level 3 Communications, Inc. There are currently several existing and
potential operators with whom we will compete in providing data center services.
These include KPN Qwest N.V., Global Crossing Ltd., Level 3 Communications,
Inc., Telehouse Europe, Worldswitch, iaxis B.V. and our joint venture Digiplex.
Many of our competitors are larger enterprises that have greater
financial resources than we do, and accordingly may be able to deploy more
extensive networks or may be better able to withstand pricing and other market
pressures. In addition, incumbent telephone operators and their affiliates have
additional competitive advantages, such as control of access to local networks,
significant operational economies, large national networks, large retail
customer bases and close ties with national regulatory authorities.
GOVERNMENT REGULATION
The following discussion summarizes the material aspects of the
regulatory frameworks in certain regions in which we currently operate or plan
to operate in the near future. This discussion is intended to provide a general
overview of the more relevant regulations and our current regulatory posture in
the most significant jurisdictions in which we operate and expect to operate. It
is not intended as a detailed description of the entire regulatory framework
applicable to us.
OVERVIEW
Increasing regulatory liberalization in many countries'
telecommunications markets now permits more flexibility in the way we can
provide infrastructure and services to our 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 we intend 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 General ("DG") of the European Commission,
including DG Information Society (previously DG XIII) and DG Competition
(previously DG IV), 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.
The principal telecommunications operators in many European Union
member states, including in particular the United Kingdom, the Netherlands and
most Scandinavian countries, have generally accepted market liberalization and
have acted accordingly in their dealings with new entrants. In other markets, we
and other new entrants face less open and independent regulatory environments
and hence have experienced more protracted and difficult procedures in obtaining
licenses and negotiating interconnection agreements. We believe 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 our 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, we are unable to predict with certainty
59
<PAGE>
the precise impact of regulatory requirements and restrictions on our
implementation of our business strategy or on our financial performance.
International value-added telecommunications services, such as the data
center capabilities and value-added Internet services we intend to provide, are
generally not regulated or only lightly regulated in the United States and
Europe at the present time. The regulatory framework applicable to voice
transported over Internet protocols is still developing. In addition to the
telecommunications regulatory framework in Europe, a separate legal framework is
evolving for electronic commerce. Recently established or pending rules and
conventions on jurisdiction, consumer protection, and ISP liability for unlawful
content, copyright infringement and defamation could directly and adversely
impact our ISP and other of our Internet and bandwidth customers, which could
indirectly impact our business. We cannot predict, however, whether the final
forms of these or similar regulatory developments will affect us directly or
indirectly, or the way in which they may do so.
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, 1998 and for most
signatory countries (including ten European Union member states) the commitments
took effect on January 1, 1998. We believe that the WTO Agreement has increased
and will continue to increase opportunities for us and our 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
significantly expedite regulatory liberalization already underway in countries
in which we operate.
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
authorizations 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
60
<PAGE>
that telecommunications operators with significant market power are expected to
put in place under the supervision of national regulatory agencies.
In October 1997, the European Commission issued a consultative document
supporting the implementation 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 has subsequently
updated these benchmarks to take account of recently negotiated interconnection
arrangements. It 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 for
determining interconnection rates in many countries.
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. As an
infrastructure provider in many countries, we have been able to benefit from
lower interconnection rates than are applicable to many of our competitors.
However, in countries where we cannot effectively build out our own network
infrastructure, these rate differentials can work to our disadvantage. To the
extent we do not have a point of presence in a country we serve, such as Ireland
or Luxembourg, we will be forced to terminate traffic through refile or resale
agreements with other carriers, resulting in higher costs.
The European Commission has been regularly monitoring the
implementation by European Union member states of its overall regulatory
framework. On the basis of its most recent review, the Commission has indicated
its commitment to ensuring more uniform and consistent steps to put this
framework into practice. It has also concurrently announced its proposals for a
comprehensive overhaul of the existing framework which is intended to simplify
and consolidate existing directives related to licensing and interconnection.
In particular, the European Commission has stated its intention to
assess various ways of encouraging higher speed local access for Internet and
other data services, including a requirement for unbundling components of
incumbent telecommunications operators' local loops and steps to encourage the
licensing of wireless local loops. We believe that such initiatives could
stimulate demand for our Internet backbone and connection services. In addition,
the Commission is proposing to examine other interconnection-related issues,
such as the cost of terminating traffic on mobile systems and the availability
for resale of the infrastructure and services of mobile operators, that might
enable us to offer more cost effective and diverse services to our customers. We
believe that the Commission's proposals to streamline and make more efficient
current regulatory arrangements would have an overall beneficial impact on our
business operations and enable us to become more responsive to our customers'
needs. However, there can be no assurances as to the ultimate outcome of the
Commission's review or its impact on our business operations.
REGULATORY STATUS
The following discussion summarizes our assessment of the regulatory
situation in the major markets in which we expect to operate in the next several
years.
61
<PAGE>
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.
We have been granted an international simple voice services resale
license and an international facilities license that allows us to own
indefeasible rights of use and to lay cable for international services. The
international facilities license has been converted into a national Public
Telecommunications Operator (PTO) license through statutory instrument of the
United Kingdom Department of Trade and Industry, which came into force on
September 27, 1999. This national PTO license will allow us to provide any
national or international service in the United Kingdom. We have obtained a
switched access number which has been implemented with British Telecom. With
this access number, we can provide services directly to end users, which allows
our switchless reseller customers to offer switched access services directly to
their customers in the United Kingdom.
We currently have implemented interconnection agreements with Cable &
Wireless and British Telecom. In addition, we have entered into interconnection
agreements with other telecommunications operators in the United Kingdom to
route traffic to locations not directly served by us.
The current liberal regulatory climate in the United Kingdom has
encouraged the rapid development of new operators that are available to
interconnect with us or to be served by us as our customers. London, along with
New York, has become one of the major international centers for refiling of
traffic among international telecommunications service providers.
UNITED STATES. In June 1998, we obtained a Section 214 authorization to provide
international telecommunications services to all locations around the world. We
will be subject only to various reporting and filing obligations with respect to
our 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 our Section 214
authorization and the WTO Agreement, we will be expected to settle our
international switched traffic at or below the level of the international rate
benchmarks prescribed by the FCC. We would also have to obtain prior FCC
approval to resell leased lines between the United States and any country in
which we might operate with an affiliated carrier with market power. However, we
do not expect that any current or currently anticipated FCC regulatory
requirement would materially limit our 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 we intend to
operate.
We have experienced no difficulties in negotiating interconnection
agreements with U.S.-based telecommunications operators. These arrangements
permit us to extend our services into the U.S.
62
<PAGE>
domestic market as well as to terminate traffic worldwide. In addition, refiling
arrangements available in the United States allow us to terminate traffic in
European Union and other markets that are not directly served by our own
infrastructure. Depending on market conditions, such arrangements represent a
viable alternative to refiling through the United Kingdom or one of our other
points of presence.
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, 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. We have been issued a
nationwide Class 4 license for the provision of voice telephony services and a
Class 3 infrastructure license to construct and operate fiber optic cables. We
have obtained amendments to our infrastructure licenses to authorize the
geographic extension of our network. We do not anticipate any difficulty in
obtaining any further required amendments. We are in the process of filing
another amendment to extend our license prior to putting our German network into
service. However, we do not expect any problems or delays in obtaining any
necessary regulatory approvals.
On October 30, 1998, the German regulator ruled, in a case filed by us
against Deutsche Telekom, that Deutsche Telekom had to interconnect with us at
the two points of interconnect requested by us within three months after the
ruling. This ruling was implemented by both parties and was based on a condition
that we would install an additional 11 points of interconnection with Deutsche
Telekom when we deploy our German network.
We subsequently signed an interconnection agreement with Deutsche
Telekom that adds ten points of interconnection to the 13 points that we have
already arranged. Both parties are continuing to implement this interconnection
agreement through 2000. This agreement supersedes the German regulatory agency's
decision to the extent it does not require us to install additional points of
interconnection. However, if we do not install a point of interconnection in all
of the 23 access areas in Germany, the amount of traffic that we may originate
or terminate will be significantly limited in any access area in which we have
not installed a point of interconnection. We do not currently anticipate any
difficulties in installing points of interconnection in all 23 access areas.
We are currently negotiating a new interconnection agreement with
Deutsche Telecom. The interconnect tariffs as of January 1, 2000 have been
approved by the German regulator. We do not expect any adverse effect on our
business operations from the new interconnection tariffs and the new
interconnection agreement. We have obtained a switched access number and have
implemented it with Deutsche Telekom. With this access number, we can provide
services directly to end users, which allows our switchless reseller customers
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 the recommendation of the
Autorite de regulation des Telecommunications ("ART"), France's regulatory
agency.
63
<PAGE>
We have received 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 public voice telephony
providers. Public 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.
We have recently implemented an interconnection agreement with France
Telecom.
In France, the ART implements an extra charge (on a cost per minute
basis, regardless of whether the traffic originates in France) to finance the
cost of a universal service fund. The total amount of this universal service
fund was approximately $1.1 billion for 1998 and has been challenged by new
entrants in the French market, who have filed a complaint with DG Competition.
In response, the European Commission sent a reasoned opinion to the French
Government regarding non-conformity of French legislation to European Community
Directives regarding the telecommunication sector, in particular with respect to
methods of calculation of the net costs of telecommunications universal service
provision and contributions paid by telecommunications operators for its
financing. We are unable to estimate at this time the impact of the proposed
universal service program on our operating margins if fully implemented. We have
obtained from the French regulator a switched access number. With this number,
we can provide services directly to end users, which allows our switchless
reseller customers to offer switched access services directly to their customers
in France. We are in the process of filing an amendment to our L33.1 license
prior to putting the French network into service in order to cover the expansion
of this network. However, we do not expect any problems or delays in obtaining
any necessary regulatory approvals.
BELGIUM. In December 1997, the Belgian Parliament provided for the full
liberalization of the provision of telecommunications services. The
Telecommunications Act and secondary legislation have now been fully
implemented.
Under the current licensing scheme, applicants for a telecommunications
network operator license such as us must agree to make a minimum amount of
infrastructure investment or install a minimum amount of fiber 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 revenues to fund research
and development activities. We have been granted approval of our application to
become a network operator from the Belgian national regulator, the Belgian
Institute for Postal Services and Telecommunications ("BIPT"). We plan to deploy
dark fiber in Belgium, and have been granted an infrastructure license for this
purpose. We will also be required to obtain a voice services license in order to
serve switchless resellers and end users directly. We submitted this application
in the first half of 2000 and do not anticipate any significant delay in
obtaining regulatory approval.
We have implemented an interconnection agreement with Belgacom S.A.,
Belgium's incumbent telephone operator.
The Belgian telecommunications law also provides for the establishment
of a universal service fund, to be managed by BIPT, according to which operators
would be required to contribute in proportion to their revenues derived from the
Belgian market. The fund has not yet been activated. We are unable to estimate
at this time the impact of any potential universal service payments on the
overall cost of terminating our customers' calls in Belgium.
64
<PAGE>
ITALY. In 1997, the Italian authorities enacted a legislative framework for the
full liberalization of telecommunications services by January 1, 1998. This
framework has been fully implemented. We have obtained both infrastructure and
public voice licenses. In contrast with the other major markets in which we
operate, the Italian authorities require general authorization to provide
Internet services, which we have also obtained.
In July 1999, Telecom Italia published its Reference Interconnect Offer
(the "RIO"). The RIO provides for nationwide origination and termination, even
through one single point of interconnect with the incumbent's network, and has
brought interconnection rates down to a level much closer to the European Union
benchmarks for "best practices." We have implemented an interconnection
agreement with Telecom Italia.
We have obtained a switched access number which is implemented with
Telecom Italia. With this access number, we can provide services directly to end
users, which allows our switchless reseller customers to offer switched access
services directly to their customers in Italy.
In Italy, providers of network infrastructure and switched voice
services, as well as national mobile operators, may be required to contribute to
a universal service fund. Such a requirement has not yet taken effect and will
only be implemented if 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 may exempt new entrants from an
obligation to contribute to such a universal service fund. The Italian
competition agency may recommend such an exemption scheme to the Italian
regulator. However, we cannot assess at this time any possible impact of any
such universal service obligations on our 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.
We have obtained the necessary authorizations to provide both services
and infrastructure in The Netherlands.
We have implemented an interconnection agreement with KPN Telecom and
we have obtained a switched access number from the Dutch regulator. With this
access number, we can provide services directly to end users, which allows our
switchless reseller customers to offer switched access services directly to
their customers in the Netherlands amongst others.
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 Telecommunications Act provides for liberalization of the
Swiss telecommunication market as of January 1, 1998.
We have obtained the necessary authorization to provide voice
services and to provide and build infrastructure in Switzerland. Although
Switzerland is not a member of the European Union and accordingly European
Union directives do not apply, the Swiss regulatory agency, Ofcom, generally
follows European Union policies and directives. Switzerland is a party to the
WTO Agreement as well, and we expect that the national regulatory body will
follow the general principles and policies embedded in the WTO Agreement.
65
<PAGE>
We signed an interconnection agreement with Swisscom which has been
implemented, and we have obtained a switched access number which has been
implemented by Swisscom. With this access number, we can provide services
directly to end users, which allows our switchless reseller customers to offer
switched access services directly to their customers in Switzerland.
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. We obtained the
necessary licenses in Austria necessary to provide voice services and to operate
our own infrastructure.
The interconnection rules provide for cost-based interconnection rates
for every licenseholder, without distinction between infrastructure owners and
resellers. We have implemented an interconnection agreement with Telekom
Austria, the Austrian incumbent telephone operator. We have also obtained a
switched access number from the Austrian regulator which has been implemented by
Telekom Austria.
Telekom Austria has recently proposed interconnection arrangements that
are generally similarly structured to those provided by Deutsche Telekom in
Germany. It has indicated an intention to limit the amount of traffic that may
be originated or terminated in any of the eight access areas in which a carrier
interconnecting with its network does not have a point of interconnection. There
can be no assurance concerning the impact of any such restrictions on our
operations in Austria in the event that Telekom Austria's proposals are
implemented.
We believe that the restrictions proposed by Telekom Austria are
violating Austrian regulation as well as provisions of various relevant European
Union Directives. We may challenge Telekom Austria's restrictions in the future.
However, any process initiated by us against Telekom Austria's practices with
the Austrian regulator or the European Commission might well be costly and time
consuming, and we are unable to predict with certainty the timing and outcome of
such proceedings.
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 have been granted licenses to provide voice
telephony services. As of the end of 1999, numerous individual licenses for the
provision of telecommunications services to third parties or for the operation
of public telecommunications networks have been granted by the Spanish
regulator. In addition, a third license for a mobile telecommunications operator
was granted in June 1998. We expect to be able to provide services on a
wholesale basis to these newly authorized operators.
We have obtained the necessary licenses to provide infrastructure and
Internet services in Spain, and have a carrier's carrier registration in Spain.
We have filed an application to provide voice services in Spain, which we expect
to be granted in the second half of 2000, and anticipate implementing an
interconnection agreement in early 2001. We are not currently subject to access
deficit contributions or contributions to universal service obligations, but
such obligations might be imposed in the future by regulatory authorities.
SWEDEN, DENMARK, FINLAND, NORWAY, AND IRELAND. We are offering services in
Sweden and are planning to provide services in a number of countries including
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
66
<PAGE>
registration, notification, or prior approval procedures involving the national
regulator. We have complied with the applicable procedures in each of these
countries.
We have implemented an interconnection agreement with Tele Danmark in
Denmark and with Telia in Sweden. We have obtained switched access numbers in
both Sweden and Denmark, which are implemented by Telia and Tele Danmark. We
have opened discussions with the main national operators in Finland and Norway
and we expect that interconnection arrangements will be implemented when our
points of presence become operational in these countries. We have obtained a
switched access number in Finland and in Norway.
Any new service provider must obtain a license to provide services in
Ireland. We have received such a license. We expect that an interconnection
agreement with Telecom Eireann will be implemented when our point of presence in
Dublin is operational. We have also received a switched access number in
Ireland.
OTHER COUNTRIES. We will also be able to provide service through direct
operating agreements with correspondent telecommunications operators in
countries where we have not been directly authorized to provide services. As a
consequence of our having obtained the status of a recognized operator agency
under the rules of the International Telecommunications Union, we 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 June 30, 2000, we employed 247 people. Our employees represent
twenty different nationalities. None of our employees is represented by a labor
union or covered by a collective bargaining agreement. We believe that relations
with our employees are good.
PROPERTIES
We lease 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 2004.
Our aggregate rent expense was approximately $2.6 million for the
fiscal year ended December 31, 1999 and approximately $1.0 million for the
period from Inception to December 31, 1998.
LEGAL PROCEEDINGS
We may, from time to time, be a party to litigation or other legal
proceedings that arise in the normal course of our business operations. In
October 1998, in a case filed by us against Deutsche Telekom, the German
regulator made a ruling requiring Deutsche Telekom to interconnect with us at
two points of interconnection that we requested. We have not been since our
inception and are not presently a party to any litigation or arbitration that we
believe had or would reasonably be expected to have a material adverse effect on
our business or results of operations.
67
<PAGE>
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 our board, all of our executive officers and certain of the
experts named in this prospectus are residents of countries other than the
United States. A substantial portion of our 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:
o effect service of process within the United States upon us or
such persons; or
o enforce against us or such persons in U.S. courts judgments
obtained in U.S. 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 U.S. courts
in actions against us or such directors and officers, as well as certain of the
experts named in this prospectus, 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. We cannot assure investors that they
will be able to enforce any judgment against us, certain members of our board,
our executive officers or certain of the experts named in this prospectus,
including judgments under the U.S. securities laws.
68
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of Carrier1 as of June 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CARRIER1
---- --- ----------------------
<S> <C> <C>
Stig Johansson.......... 58 Chief Executive Officer, President and
Director of Carrier1 International
Eugene A. Rizzo......... 49 Vice President, Sales and Marketing
Terje Nordahl........... 53 Chief Operating Officer
Joachim W. Bauer........ 55 Chief Financial Officer
Kees van Ophem.......... 37 Vice President, Purchase and General Counsel
Neil E. Craven.......... 31 Vice President, Business Development
Alex Schmid............. 31 Vice President, Strategic Development
Glenn M. Creamer........ 38 Director of Carrier1 International
Jonathan E. Dick........ 41 Director of Carrier1 International
Mark A. Pelson.......... 38 Director of Carrier1 International
Victor A. Pelson........ 63 Director of Carrier1 International
Thomas J. Wynne......... 60 Director of Carrier1 International
</TABLE>
STIG JOHANSSON has served as a director of Carrier1 International since
August 1998 and as our 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 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, 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 our Vice President, Sales and Marketing
since March 1998 and has over 23 years of experience in international sales and
marketing and 12 years of experience in the
69
<PAGE>
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 Communications Services, an international
joint venture between AT&T Corp. and Unisource NV. Prior to joining Unisource,
Mr. Rizzo held various marketing and management positions with International
Business Machines Corporation, or "IBM", Wang Laboratories, Inc. and Tandem
Computers Inc. 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 our Chief Operating Officer since March
1998 and has 26 years of experience in telecommunications operations. Mr.
Nordahl also has extensive experience in the computer and Internet industry. As
a Managing Director at Unisource Business Networks BV 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. From 1993 to 1995, Mr. Nordahl established
and operated Creative Technology Management AS, 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
First Honors 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 our Chief Financial Officer since March
1998 and has six 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 our Vice President, Purchase and General
Counsel since March 1998, with responsibility for interconnection, licensing,
legal affairs and carrier relations. Mr. van Ophem has eight years of experience
in the telecommunications industry. Prior to joining us, 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), 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 our Vice President, Business Development
since March 1998 and has six 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.
70
<PAGE>
ALEX SCHMID has served as our Vice President, Strategic Development
since December 1999 and has over seven years of experience in international
telecommunications, Internet technology and media industry investments.
Immediately prior to joining us, Mr. Schmid was the General Partner of personal
investment vehicles targeting the technology, Internet, telecommunications and
media industries. From February 1996 until September 1998, Mr. Schmid was a
Managing Director and Head of Private Equity for the Bank Austria Group, where
he was responsible for investing primarily in European telecommunications and
telecommunications-related companies and investment vehicles. Mr. Schmid also
served on the Board of directors of Central Europe Telecom Investment L.P., a
venture capital fund targeting investments in telecommunications and
telecommunications-related companies in Central Europe. From August 1995 until
February 1996, Mr. Schmid was a Vice President at AIG Capital Partners. From
March 1993 until August 1995, Mr. Schmid was an Associate of the Private Equity
Group at Creditanstalt. Mr. Schmid is a graduate of the Wharton School at the
University of Pennsylvania with a Bachelor of Science in Economics. He is a
German citizen.
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 a director of
American Cellular Corporation, Celpage, Inc., Epoch Networks, Inc., Digiplex
S.A. (formerly Hubco S.A.), Wireless One Network L.P. and 360 Networks inc
(formerly Worldwide Fiber Inc.). 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 Paycor, Inc., PlanSoft Corporation
and Spirian Technologies, 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 Madison River Telephone Company,
L.L.C., GlobeNet Communications Group Limited and Language Line Holdings, LLC.
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 UBS Warburg 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, Dun & Bradstreet
Corporation and United Parcel Service, Inc. and Dynatech Corporation.
71
<PAGE>
Mr. Pelson received a Bachelor of Science degree in Mechanical Engineering from
New Jersey Institute of Technology and a Master of Business 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 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 are managed by the Board
of directors. Carrier1's Articles of Incorporation 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 by way of qualification. Carrier1 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 currently
has six directors and has no persons appointed as corporate officers.
Each director was appointed to hold office for a term of 6 years.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Our Board has an audit committee. The audit committee, consisting of
Messrs. Dick, Wynne and M. Pelson, is responsible for reviewing the services
provided by our independent auditors, our annual financial statements and our
system of internal accounting controls. The audit committee did not meet during
1999.
The Board has adopted a written charter for the audit committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Carrier1 does not have a compensation committee. The compensation of
executive officers and other of our key employees is determined by the Board.
Stig Johansson, our President and Chief Executive Officer, is currently a member
of the Board and has participated in such determinations. See "Certain
Relationships and Related Transactions" for a description of transactions
involving some members of the Board.
COMPENSATION OF DIRECTORS
Carrier1 will reimburse the members of the Board for their reasonable
out-of-pocket expenses incurred in connection with attending Board meetings.
Additionally Carrier1 maintains directors' and officers' liability insurance.
Carrier1 has granted 20,000 options to purchase shares to each of Messrs.
72
<PAGE>
Wynne and V. Pelson. Members of the Board receive no other compensation for
services provided as a director.
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to, our Chief Executive
Officer and our other four most highly compensated executive officers during the
periods from March 4, 1998 through December 31, 1998 and from January 1, 1999
through December 31, 1999. During 1998, these individuals held options in
Carrier One, LLC, which in turn held substantially all of the equity of
Carrier1. Pursuant to a restructuring of our management equity, these options
for Carrier One, LLC interests were cancelled and equivalent options for shares
of Carrier1 were issued in their place. The economic terms of these new options
are substantially the same as the terms of the Carrier One, LLC options.
<TABLE>
<CAPTION>
SHORT TERM COMPENSATION LONG TERM COMPENSATION
----------------------- ----------------------
OTHER SECURITIES ALL OTHER
NAME AND COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION PERIOD (A) SALARY (B) BONUS (B) (B)(C) OPTIONS (E)
------------------ ---------- ---------- --------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stig Johansson............ 1999 $ 279,603 $ 43,339 $ 27,938 $ 355,555 $ 72,823
PRESIDENT AND CHIEF 1988 245,569 46,044 22,188 (d) 39,550
EXECUTIVE OFFICER
Eugene A. Rizzo........... 1999 197,368 30,592 26,723 355,555 31,649
VICE PRESIDENT, SALES AND 1998 173,343 32,502 22,188 (d) 27,248
MARKETING
Terje Nordahl............. 1999 171,051 26,513 25,263 177,777 37,666
CHIEF OPERATING OFFICER 1998 135,207 25,352 19,969 (d) 24,248
Joachim W. Bauer.......... 1999 171,051 26,513 26,245 355,555 40,380
CHIEF FINANCIAL OFFICER 1998 150,230 28,168 23,147 (d) 34,793
Kees Van Ophem............ 1999 171,051 26,513 25,111 355,555 16,788
VICE PRESIDENT PURCHASE 1998 150,230 28,168 22,188 (d) 14,756
AND GENERAL COUNSEL
</TABLE>
----------
(a) Short term compensation for the 1998 period relates to the period from
March 4, 1998 through December 31, 1998 except in the case of Terje
Nordahl, for whom the relevant 1998 period was March 26, 1998 through
December 31, 1998.
(b) We record this compensation expense in Swiss Francs. The U.S. dollar
amounts shown for 1998 were calculated using an average exchange rate of
$0.69337 to SFr1, and for 1999 were calculated using an average exchange
rate of $0.65789 to SFr1.
(c) Consists of general business expenses and contributions under a health
plan for our executive officers. Business expenses consist of car and
travel expenses in the following approximate amounts, in thousands:
73
<PAGE>
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Stig Johansson.............................. $ 22.2 $ 27.9
Eugene A. Rizzo............................. 22.2 26.7
Terje Nordahl............................... 20.0 25.3
Joachim W. Bauer............................ 22.2 26.2
Kees van Ophem.............................. 22.2 25.1
</TABLE>
----------
(d) Pursuant to the equity restructuring, options to purchase Carrier One, LLC
interests, which were granted to each executive in 1998, have been
cancelled and were replaced by the economically equivalent options shown
above as granted in 1999.
(e) Consists of contributions under a defined contribution pension plan.
STOCK OPTION GRANTS AND FISCAL YEAR-END VALUES
The following tables set forth information regarding grants of options
to purchase shares of Carrier1 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 1999 share option plan to replace options to
purchase Carrier One, LLC interests pursuant to a restructuring of our
management equity. The economic terms of these new options are substantially the
same as the terms of the Carrier One, LLC options. Options vest in equal annual
installments over the five years ending on the fifth anniversary of the grant
date of the predecessor options, subject to the executive's continuing
employment.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PRESENT VALUE AT
NAME GRANTED 1999 ($/SHARE) EXPIRATION DATE DATE OF GRANT (A)
---- ---------- ------------ --------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Individual Grants
Stig Johansson............. 355,555 14.4% $ 2.0 March 4, 2008 $ 106,666.65
Eugene A. Rizzo............ 355,555 14.4% 2.0 March 4, 2008 106,666.65
Terje Nordahl.............. 177,777 7.2% 2.0 March 26, 2008 53,333.25
Joachim W. Bauer........... 355,555 14.4% 2.0 March 4, 2008 106,666.65
Kees van Ophem............. 355,555 14.4% 2.0 March 4, 2008 106,666.65
</TABLE>
----------
(a) The fair value of options grants is estimated on the date of the grant of
the economically equivalent predecessor options to purchase Carrier One,
LLC interests, 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.
74
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT
ACQUIRED VALUE DECEMBER 31, 1999 DECEMBER 31, 1999
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stig Johansson...... 0 $ 0 71,111/284,444 $ 2,726,395/10,905,583
Eugene A. Rizzo..... 0 0 71,111/284,444 2,726,395/10,905,583
Terje Nordahl....... 0 0 35,555/142,222 1,363,179/ 5,452,791
Joachim W. Bauer.... 0 0 71,111/284,444 2,726,395/10,905,583
Kees van Ophem...... 0 0 71,111/284,444 2,726,395/10,905,583
</TABLE>
Carrier1 has authorized the issuance of options for up to 2,747,222
shares of Carrier1 pursuant to its 1999 share option plan dated as of
December 30, 1998. As of December 31, 1999, Carrier1 had outstanding options
for a total of 2,478,468 shares under the 1999 share option plan. As of June
30, 2000, Carrier1 had outstanding options for a total of 2,612,718 shares
under the 1999 share option plan. The Board has approved and we are in the
process of implementing our 2000 share option plan and expect to grant
additional options to employees in the future. Carrier1 has also issued
options to acquire 20,000 shares to each of Messrs. Wynne and V. Pelson
outside the scope of the 1999 share option plan.
EMPLOYMENT AGREEMENTS
Each of Stig Johansson, Eugene A. Rizzo, Terje Nordahl, Joachim W.
Bauer and Kees van Ophem has entered into an employment agreement with a wholly
owned subsidiary of Carrier1. The employment agreements provide that the
executive shall serve in his current capacity and that the executive shall be
paid base salary, bonus and pension plan contributions as set forth in the
Summary Compensation Table. Such agreements include, among others, the following
terms:
TERM. The employment agreements continue for an unspecified period of
time and may be terminated by either party upon six months' notice.
NONDISCLOSURE, NONCOMPETITION AND NONSOLICITATION COVENANTS. Each of
the above executives has agreed that during his period of employment and the
eighteen months thereafter he 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
Carrier One, LLC or its subsidiaries. Additionally, each of the above executives
has agreed that during this non-compete period, he will not induce or attempt to
induce any of our employees to leave our employ, nor will he attempt to induce
any of our suppliers, distributors or customers to cease doing business with us.
Each of the above executives has also agreed that he will refrain from
disclosing confidential information. In addition, each of the above executives
is subject to nondisclosure, noncompetition and nonsolicitation covenants
pursuant to deeds of covenant entered into among Carrier One, LLC, Carrier One
Limited, Providence and the executives.
75
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EQUITY INVESTMENTS
As of December 31, 1999, shares of Carrier1 were held by Carrier1's
management and employees, Providence Equity Partners L.P. (which holds one
share) and Carrier One, LLC. Messrs. Johansson, Bauer, Rizzo, van Ophem, Craven
and Nordahl are among the management that have subscribed and paid for
outstanding shares.
Carrier One, LLC is the vehicle through which Providence and Primus
participate in the equity investment in Carrier1. In addition, Thomas J. Wynne
and Victor A. Pelson, who are directors of Carrier1, hold interests in Carrier
One, LLC through arrangements arrived at separately with Providence and Primus.
Mr. Wynne owns (directly or through trusts organized for the benefit of family
members) 400,000 Class A Units in Carrier One, LLC, acquired at a purchase price
of $1.00 per Class A Unit. Mr. Wynne disclaims beneficial ownership of any Class
A Units in any such trusts. Mr. Pelson owns 100,000 Class A Units in Carrier
One, LLC, acquired at a purchase price of $1.00 per Class A Unit. Messrs. Wynne
and Pelson do not directly hold any outstanding shares of Carrier1
International.
In 1999, we completed a restructuring of our management equity
arrangements. Pursuant to this restructuring, each of Messrs. Johansson, Bauer,
Rizzo, van Ophem, Craven and Nordahl in effect exchanged his equity interests
and options that he had held in Carrier One, LLC to acquire an equivalent dollar
amount of shares and options to purchase shares of Carrier1. Each effected this
exchange through a series of transactions with Carrier One, LLC, Providence and
Primus and Carrier1. These individuals' portions of the total equity investment
in Carrier1 did not change significantly as a result of this restructuring, but
each of these individuals holds shares and options to acquire shares of Carrier1
directly. In addition, Carrier1 has granted Thomas J. Wynne and Victor A. Pelson
options to purchase a total of 40,000 shares of Carrier1 (20,000 shares for
each), at $2.00 per share.
SHARE OPTION PLANS
The Board of Carrier1 has adopted the 1999 share option plan, dated as
of December 30, 1998, under which we and related companies of the consolidated
Carrier1 group may grant to any employee or director options for shares of
Carrier1 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. During 1999, the Board
raised the maximum number of shares issuable pursuant to the option plan from
2,222,222 to 2,747,222 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.
Carrier1 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 on the first anniversary of the date of commencement of employment.
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 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
76
<PAGE>
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, arrier1 and certain subsidiaries may be precluded from
exercising such right directly.
As of December 31, 1999, we had granted options pursuant to the option
plan to acquire 2,478,468 shares at exercise prices ranging from $2.00 to
$40.34 per share plus applicable capital duty (currently 1% of the
subscription price payable to Carrier1 International by the subsidiary
granting the applicable option). As of June 30, 2000, we had outstanding
options to acquire a total of 2,612,718 shares.
The Board has approved and we are in the process of implementing the
2000 share option plan, which is substantially similar in terms to the 1999
share option plan. We intend to grant additional options to employees in the
future.
SECURITIES PURCHASE AGREEMENT
Carrier1, Carrier One, LLC and employee investors have entered into the
securities purchase agreement (effective as of March 1, 1999) under which
Carrier One, LLC and each employee investor has purchased, or committed to
purchase, a specified number of shares at prices ranging from $2.00 to $40.34
per share, for an aggregate purchase price of approximately $6.0 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, in effect, exchanged 68,260 Class A Units (at $1.00 per unit) of
Carrier One, LLC to acquire, pursuant to the securities purchase agreement,
34,130 shares (at $2.00 per share). Carrier1 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 completion of the equity investment in Carrier1 by Carrier One,
LLC in which Providence, Primus and Messrs. Wynne and Pelson have membership
interests. The $60 million equity investment by Providence and Primus was
completed in February 1999. Carrier One, LLC has paid in an additional $800,000
to the capital of Carrier1 and received 400,000 shares. The securities purchase
agreement provides that Carrier1 will indemnify Carrier One, LLC and employee
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, Carrier One, LLC, and Messrs. Johansson, Bauer, Rizzo, van
Ophem, Craven, Nordahl, Gross, Poulter, Wynne and Pelson, as the original
investors, have entered into a registration rights agreement, effective as of
March 1, 1999. The registration rights agreement provides that Carrier One, 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 Carrier One, LLC and the original
investors and, at the request of certain original investors, possibly additional
employees party to the securityholders' agreement described below. The
registration rights agreement contains provisions governing the registration
statement filing process. Among other things, it provides that Carrier1 will
bear all registration expenses and expenses for each piggyback registration in
which Carrier One, LLC or any of the original investors participate, other than
underwriting discounts and commissions, in connection with its obligations under
the registration rights agreement.
77
<PAGE>
SECURITYHOLDERS' AGREEMENT
In connection with the securities purchase agreement, Carrier1 has
entered into a securityholders' agreement, effective as of March 1, 1999, with
Messrs. Wynne and Pelson, the employee investors and Carrier One, LLC. This
agreement places restrictions on employee 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 Carrier One, LLC or its transferee. Carrier One, LLC will also benefit from
preemptive rights in certain other circumstances. This agreement also provides
that the employee investors will (i) consent to and raise no objections to a
sale of Carrier1 approved by the Board and (ii) comply with a Board request to
pledge their securities to secure financing to be provided to Carrier1
International. Employee investors have tag-along rights in the event of sales by
Carrier One, LLC or its members of securities if a change of control is
involved. Finally, under this agreement, the employee investors agree not to
disclose confidential information of, compete with, or solicit employees or
customers from Carrier One, LLC or Carrier1.
EPOCH PEERING ARRANGEMENT
We have entered into a peering arrangement with Epoch Networks. The
contract with Epoch Networks provides for the free exchange of Internet traffic
between us and Epoch Networks. A fund managed by Providence that holds a
majority of the Class A Units of Carrier One, LLC and another fund managed by
Providence that also holds an interest in Class A Units of Carrier One, LLC own
a combined 19% of the outstanding equity of Epoch Networks. Glenn Creamer, one
of our directors, is also a director of Epoch.
DATA CENTER FACILITIES JOINT VENTURE
We are developing our network of data centers in major European markets
through our Digiplex joint venture, formerly named the Hubco joint venture.
Digiplex intends to build up to 20 to 25 facilities, generally ranging in size
from 100,000 to 350,000 square feet in major markets in Europe during 2000 and
2001. We expect to have a minimum of between 10,000 and 25,000 square feet for
our use and the use of our customers in each facility. We expect to connect each
facility to our fiber optic network. As a strategic anchor tenant in these
facilities, we will have favorable rents and rights to additional space. We can
opt not to be a strategic anchor tenant in some planned locations and, if we
wish to build data centers in additional locations, we have given Digiplex the
right of first refusal to construct them.
We expect to compete with Digiplex and another of our joint venture
partners in providing data center capabilities. The joint venture agreement
permits us to do so, with some exceptions. Moreover, we will be entitled to
retain the benefits of our strategic anchor tenant status unless we default or
we cease to be a Digiplex shareholder or we acquire or are acquired by a company
that competes with Digiplex.
Our partners in Digiplex include an investment vehicle for funds
managed by Providence and Primus. Glenn Creamer, one of our directors, is a
director of Digiplex.
360NETWORKS INC. AGREEMENTS
In December 1999, we entered into an agreement with a subsidiary of
360Networks inc. (formerly Worldwide Fiber Inc.), a wholesale managed bandwidth
services provider with substantial North American and transatlantic assets,
under which we will provide bandwidth from the point of termination
78
<PAGE>
of its transatlantic capacity in London, to destinations across Europe. We
expect to commence transmission pursuant to this agreement in March 2001 and, as
one of their major providers of European backhaul capacity, expect to deliver a
substantial amount of bandwidth over the 15 year term of the agreement. Under
the agreement, 360Networks has the option to swap excess transatlantic capacity
for four strands of fiber on our German network or a combination of two strands
of fiber and a 10 Gbps wavelength once it has purchased a total of 100 STM-1s.
On May 23, 2000 we entered into a contract with 360Networks pursuant to which we
will acquire trans-Atlantic and North American capacity, as well as a 20 year
IRU for twelve dark fiber strands on 360Networks' diversely-routed 1,150
kilometer UK network between Liverpool and London, connecting Manchester,
Sheffield, Birmingham, Bristol, Nottingham and Cambridge. We will provide and
sell dark fiber on our German network and our Paris and Amsterdam city rings and
broadband capacity on our pan-European network.
A fund managed by Providence owns approximately 4.5% of the outstanding
common stock of 360Networks inc. Glenn Creamer, one of our directors, is also a
director of 360Networks inc.
OTHER TRANSACTIONS
Carrier One, LLC 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 original equity investment in Carrier One, 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. Effective as of March 1, 1999, Carrier1
International GmbH became the creditor with respect to the loan. As of December
31, 1999, Mr. van Ophem owed the principal amount of $68,260 to Carrier1, plus
accrued interest.
During the year ended December 31, 1999 and during the period ended
December 31, 1998, we reimbursed Providence and Primus for expenses incurred in
connection with our formation and the negotiation of certain agreements we
entered into. Such reimbursements totaled $96,000 and $339,000, respectively,
and were expensed as selling, general and administrative expenses.
PRINCIPAL AND SELLING SHAREHOLDERS
BENEFICIAL OWNERSHIP OF CARRIER1 INTERNATIONAL
The following table sets forth information regarding the beneficial
ownership of the shares of Carrier1 International, as of August 1, 2000, 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 us by the respective shareholders of Carrier1 International.
79
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL NUMBER OF PERCENTAGE
OWNER (1) SHARES OF SHARES
------------------------------ --------- ----------
<S> <C> <C>
Carrier One, LLC..................................... 28,272,087 67.76%
c/o Providence Equity Partners Inc.
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Providence Equity Partners L.P.(2) 28,272,088 67.76%
901 Fleet Center 50 Kennedy Plaza
Providence, RI 02903.................................
Jonathan M. Nelson(2)................................ 28,272,088 67.76%
Paul J. Salem(2)..................................... 28,272,088 67.76%
NAME OF EXECUTIVE OFFICER OR DIRECTOR
Stig Johansson(3).................................... 176,352 *
Eugene A. Rizzo(3)................................... 176,352 *
Terje Nordahl(3)..................................... 105,240 *
Joachim Bauer(3)..................................... 176,352 *
Kees van Ophem(3).................................... 176,352 *
Glenn M. Creamer(2).................................. 28,272,088 67.76%
Jonathan E. Dick..................................... - -
Mark A. Pelson....................................... - -
Victor A. Pelson(4).................................. 8,000 *
Thomas J. Wynne(4)................................... 8,000 *
All directors and executive officers as a group (12 persons) 29,275,088 70.17%
</TABLE>
----------
* Less than one percent.
(1) "Beneficial owner" refers to a person who has or shares the power to vote
or direct the voting of a security or the power to dispose or direct the
disposition of the security or who has the right to acquire beneficial
ownership of a security within 60 days. More than one person may be deemed
to be a beneficial owner of the same securities. In computing the number
of shares beneficially owned by a person and the percentage ownership of
that person, shares subject to options and warrants held by that person
that are currently exercisable or exercisable within 60 days of August 1,
2000 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Carrier One, LLC is the direct beneficial owner of 28,272,087 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 Carrier One, LLC, and by virtue of such status may be deemed to
be the beneficial owner of the shares in which Carrier One, 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 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. The address of Messrs. Nelson and Salem is c/o Providence
Equity Partners Inc., 901 Fleet Center, 50 Kennedy Plaza, Providence, RI
02903.
(3) Includes 34,130 shares and an additional 142,222 shares (71,110, 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 exercisable within 60 days that Carrier1 International
has issued to each of Thomas J. Wynne and Victor A. Pelson out of a total
of 40,000 shares (20,000 shares each)
80
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the name of each selling shareholder and
(i) the number of dollar warrants and euro warrants, as the case may be, owned
by each selling shareholder as of August 1, 2000 and (ii) the number of common
shares offered for the account of such selling shareholder upon the exercise of
the warrants. We may from time to time include additional selling shareholders
in supplements to this prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Number of Shares to be
SELLING SHAREHOLDER OWNED PRIOR TO THE OFFERING SOLD IN THE OFFERING(1)
------------------- --------------------------- -----------------------
NUMBER(1) PERCENTAGE(2)
--------- -------------
<S> <C> <C> <C>
</TABLE>
* Less than 1%.
(1) Comprises the number of shares for which the warrants held by such
selling shareholder are exercisable.
(2) Assuming the exercise of all warrants, based on 41,721,178 shares
outstanding as of August 1, 2000.
Because the selling shareholders may, under the terms of the offering,
offer all or some portion of the shares for which the warrants they presently
hold are exercisable, no estimate can be given as to the number of common shares
that will be held by the selling shareholders upon termination of any such
sales. See "Plan of Distribution."
This prospectus also covers the possible resale of the shares by
certain other currently unknown persons who may become owners of such shares as
a result of their acquisition of warrants. Each such transferee of a selling
shareholder is hereby deemed to be a selling shareholder for purposes of making
resales of shares using this prospectus. To the extent required by applicable
law, information about any such transferees shall be set forth in an appropriate
supplement to this prospectus.
On February 12, 1999, we and the warrant agents under the agreements
relating to the euro warrants and the dollar warrants entered into a
registration rights agreement. That agreement requires that we make this
prospectus available to the selling shareholders, subject to the exceptions
described below, until the earliest of:
o the time when all of the shares have been sold under this
prospectus; and
o February 19, 2009.
This time period is referred to as the effectiveness period.
We may require the selling shareholders to suspend the sales of the
shares offered by this prospectus upon the occurrence of any event that makes
any statement in this prospectus or the related registration statement untrue in
any material respect or that requires the changing of statements in these
documents in order to make statements in those documents not misleading.
We will be permitted to suspend the use of this prospectus for:
81
<PAGE>
(a) up to two 30-consecutive-day periods (except during the 30 days
immediately prior to the expiration of the warrants) if our board of directors
determines in good faith that there is a valid purpose for the suspension and
provides notice of such determination to the holders at their addresses
appearing in the register of warrants maintained by the warrant agent; and
(b) five additional, non-consecutive three-day periods (except during
the 30 days immediately prior to the expiration of the warrants) if our board of
directors determines in good faith that we cannot provide adequate disclosure
during such period due to circumstances beyond our control.
Notice of such suspension shall be given in writing, in the case of
clause (a) above, promptly to each applicable holder and, in the case of clause
(b) above, promptly to the warrant agent and the warrant agent shall give such
notice promptly to each holder.
We will pay the expenses of registering the shares being sold pursuant
to this prospectus.
82
<PAGE>
BENEFICIAL OWNERSHIP OF CARRIER ONE, LLC, THE MAJORITY SHAREHOLDER OF
CARRIER1 INTERNATIONAL
The following table sets forth certain information regarding the
beneficial ownership of Class A Units (the "Class A Units") of Carrier One, LLC,
the majority shareholder of Carrier1 International, as of August 1, 2000 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 August 1, 2000, and
(4) each person known to Carrier1 International to own beneficially
more than 5% of Carrier One, LLC's Class A Units.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF DIRECTOR/EXECUTIVE OFFICER 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.................................... 100,000 *
Thomas J. Wynne (3)................................. 400,000 *
All directors and executive officers as a group
(12 persons)........................................ 50,500,000 83.01%
NAME AND ADDRESS OF BENEFICIAL OWNER
Providence Equity Partners, L.P. (2) ............... 49,312,400 81.11%
901 Fleet Center 50 Kennedy Plaza
Providence, RI 02903
Jonathan M. Nelson (2).............................. 50,000,000 82.24%
Paul J. Salem (2)................................... 50,000,000 82.24%
Primus Capital Fund IV Limited Partnership (4)...... 9,600,000 15.79%
5900 Landerbrook Drive Suite 200
Cleveland, OH 44124-4020
</TABLE>
----------
* Less than one percent.
(1) Based upon 60.8 million Class A Units outstanding.
83
<PAGE>
(2) Providence L.P. holds 49,312,400 Class A Units, and another fund managed
by Providence holds 687,600 Class A Units. PEP LLC is the general partner
of Providence L.P. and the other fund, and by virtue of such status may be
deemed to be the beneficial owner of the Class A Units in which Providence
L.P. and the other fund have 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 Class A Units in
which PEP LLC has direct or indirect beneficial ownership. Each of
Jonathan M. Nelson, Glenn M. Creamer, Paul J. Salem and PEP LLC disclaims
such deemed beneficial ownership.
(3) Thomas J. Wynne holds (directly or through trusts organized for the
benefit of family members) 400,000 Class A Units. These Class A Units do
not include additional options that Carrier1 International has issued to
Mr. Wynne for a total of 20,000 shares. Mr. Wynne disclaims beneficial
ownership in any Class A Units held in any such trusts.
(4) Primus Capital Fund IV Limited Partnership ("Primus Capital LP") holds
9,600,000 Class A Units and another fund managed by Primus holds 400,000
Class A Units. Primus Venture Partners IV Limited Partnership ("Primus
Venture LP") is the general partner of Primus Capital LP and the other
fund, and Primus Venture Partners IV, Inc. ("Primus Venture Inc.") is the
General Partner of Primus Venture LP. By virtue of such status, either of
Primus Venture LP or Primus Venture Inc. may be deemed to be the
beneficial owner of the Class A Units in which Primus Capital LP and the
other fund have beneficial ownership. Each of Primus Venture LP and Primus
Venture Inc. disclaims such deemed beneficial ownership.
84
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Our significant outstanding debt financing activity consists of the
following:
13 1/4% SENIOR DOLLAR NOTES AND 13 1/4% SENIOR EURO NOTES
On February 19, 1999, we issued $160 million and euro85 million of
13 1/4% senior notes, with detachable warrants, with a scheduled maturity of
February 15, 2009.
We have 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, we may redeem up to
35% of the aggregate amount of either series of notes with the proceeds of sales
of our capital stock at 113.25% of their principal amount. We 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.
Except for the approximately $79.0 million originally used to secure
the first five interest payments on the notes, the notes were not secured by any
of our assets and rank equally in right of payment with all of our
unsubordinated and unsecured indebtedness. The notes are senior in right of
payment to all of our future subordinated indebtedness.
The indentures governing each series of notes contain affirmative and
restrictive covenants. The affirmative covenants require us, among other things,
to provide information, maintain insurance, pay taxes and maintain our
properties. The restrictive covenants include limitations on the ability of
Carrier1 International and its restricted subsidiaries to:
o incur indebtedness,
o pay dividends,
o prepay subordinated indebtedness,
o repurchase shares,
o make investments,
o engage in transactions with affiliates,
o create liens,
o sell assets, and
o engage in mergers and consolidations.
Events of default under the indentures covering each series of notes
include, among other things:
o payment defaults,
o covenant defaults,
85
<PAGE>
o cross-defaults to certain other indebtedness,
o judgment defaults, and
o events of bankruptcy and insolvency.
86
<PAGE>
DESCRIPTION OF SHARE CAPITAL
SET FORTH BELOW IS A SUMMARY OF CERTAIN INFORMATION CONCERNING CARRIER1
INTERNATIONAL'S SHARE CAPITAL AND CERTAIN MATERIAL PROVISIONS OF CARRIER1
INTERNATIONAL'S ARTICLES OF INCORPORATION AND LUXEMBOURG LAW ON COMMERCIAL
COMPANIES IN EFFECT AS OF THE DATE OF THIS PROSPECTUS. THIS SUMMARY CONTAINS
INFORMATION THAT WE CONSIDER TO BE MATERIAL REGARDING THE SHARE CAPITAL OF
CARRIER1 INTERNATIONAL, BUT IT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO CARRIER1 INTERNATIONAL'S ARTICLES OF
INCORPORATION AND THE LUXEMBOURG LAW ON COMMERCIAL COMPANIES.
As of August 1, 2000, Carrier1 International had outstanding 41,721,178
shares with a par value of $2.00, all of which had been paid in full,
representing a subscribed capital amount of $83,442,356.
The total authorized capital of Carrier1 International, including the
outstanding subscribed capital, is set at $200,000,000, consisting of a total of
100,000,000 shares, par value $2.00. Pursuant to Carrier1 International's
articles of incorporation, the board of directors has been authorized to issue
further shares so as to bring the total capital of Carrier1 International up to
the total authorized capital in whole or in part from time to time. The
authorization lapses five years after the publication in the Luxembourg official
gazette of the amendment to the Articles of Incorporation pursuant to which the
authorized capital was increased, which occurred at the extraordinary
shareholders' meeting on June 13, 2000, and may be renewed by shareholder vote
at an extraordinary meeting. Carrier1 International intends to issue additional
shares, including issuances from authorized capital from time to time to Carrier
One, LLC or its designees and directors and employees of the Carrier1 group as
provided in its 1999 and 2000 share option plans and its securities purchase
agreement. Assuming the exercise of all outstanding warrants, the issued share
capital of Carrier1 International would consist of 43,406,991 shares (not
including additional shares issuable upon exercise of options held by our
directors and employees).
MEETINGS OF SHAREHOLDERS
Meetings of shareholders may be either ordinary or extraordinary. At
ordinary meetings, which do not currently require a quorum, shareholders can
decide on most matters, but they cannot decide matters that entail a
modification of the articles. Only at extraordinary meetings, for which more
stringent quorum and majority conditions apply, can shareholders modify the
articles. Among other things, a merger, liquidation or transformation of
Carrier1 International into another form of company, increases (unless decided
by the board of directors within the limits of the authorized capital) or
decreases of share capital or issuance of a new class of shares would all
require modification of the articles. A quorum of 50% and a vote of two-thirds
of the shares present or represented are required to amend the articles. If the
quorum is not achieved, however, then a second meeting may be called, at which
no quorum is required.
Carrier1 International must hold a general meeting every year at the
place and date indicated in the articles. This annual general shareholders'
meeting is an ordinary meeting. Annual general shareholders' meetings usually
have on their agenda the approval of the annual accounts and related issues,
such as approval of the management report prepared by the board and of the
report of the statutory auditor, and the use of profits shown on the balance
sheet, including the distribution of dividends. See "--Dividends" for further
details about Carrier1 International's dividend policy.
Ordinary and extraordinary shareholders' meetings may be called by the
board or by the statutory auditor. The board and the statutory auditor must
convene a meeting if requested in writing by shareholders representing at least
20% of the subscribed capital of Carrier1 International.
87
<PAGE>
VOTING AND QUORUM REQUIREMENTS
Matters brought before ordinary shareholders' meetings do not require a
quorum but must receive a majority of the votes cast to pass. Extraordinary
meetings, which are required to amend the articles, require a quorum of at least
half of the outstanding shares and may only act with a vote of two-thirds of the
shares present. If the quorum condition is not fulfilled, however, a second
meeting with the same agenda may be called, for which the same two-thirds
majority condition applies but for which no quorum is required.
A "change of nationality," for purposes of Luxembourg law, of Carrier1
International would require approval by all the shareholders. Such a "change of
nationality" would typically consist of a permanent transfer of its registered
office outside of Luxembourg, but would not include a merger with a
non-Luxembourg company in which the non-Luxembourg company survives. An increase
of any obligations of shareholders set forth in the articles would also require
approval of all shareholders affected.
DIRECTORS
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF 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. Carrier1
International, 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 Carrier1 International).
The articles contain such an agreement.
APPOINTMENT AND REMOVAL OF DIRECTORS. The articles provide that directors are
elected by the shareholders at a general meeting for a maximum term of six years
(except in case of a vacancy where the board may provisionally appoint a
director to fill such a vacancy until the next general meeting). Directors may
be re-elected indefinitely for further terms of up to six years. Under the
articles, a minimum of three directors is required but there is no maximum
unless so resolved by the shareholders at a general meeting.
There are no restrictions in the articles or under Luxembourg law as to
nationality, residence or professional qualifications for directors. There is no
age limit nor are directors required to retire by rotation. Directors may be
removed, at any time with or without cause, at any ordinary shareholders'
meeting.
POWERS OF THE BOARD. The board has wide powers to perform all acts necessary or
desirable for accomplishing Carrier1 International's aims. The board may
delegate daily management to one or more directors, officers, executives,
employees or other persons, provided that any delegation to a member of the
board has been previously authorized by the shareholders at a general meeting.
OFFICERS
Under Luxembourg law, an employee of Carrier1 International can only be
liable to Carrier1 International 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 International would be contrary to public
policy. Employees are liable to third parties under general tort law and may
enter into arrangements with Carrier1 International providing for
indemnification against third party claims.
88
<PAGE>
An indemnification arrangement can never cover a willful act or gross
negligence.
DIVIDENDS
Dividends may only be paid out of the distributable profits and
unrestricted reserves of Carrier1 International as shown in Carrier1
International's audited accounts for the most recently completed financial year,
which would consist of the profit (if any) for such year and retained earnings
from prior years after deduction for losses carried over from prior years and
reserves required by law or the articles. The Luxembourg law on companies
requires Carrier1 International to set up a reserve equal to 10% of the
subscribed capital by allocating yearly at least 5% of its profits to the
reserve account until it reaches the 10% threshold. Since Carrier1 International
has not had profits through December 31, 1999, it has not allocated any amount
to the reserve account to date.
Under Luxembourg law, Carrier1 International's board of directors may
pay interim dividends because the articles of incorporation contain a specific
provision to that effect. However, formal and substantive requirements have to
be met in order for Carrier1 International to pay interim dividends. These
include a requirement that Carrier1 International prepare financial statements
showing that funds are available for distribution. The amount of such
distribution may not exceed the profits earned by Carrier1 International since
the end of the last financial year for which the annual accounts have been
approved by the general shareholders' meeting plus retained earnings and
withdrawals from unrestricted reserves and minus carried-forward losses and
amounts to be mandatorily paid to a reserve account. No interim dividends may be
paid out during the first six months of the company's accounting year nor before
the approval of the annual accounts of the previous accounting year by a general
shareholders' meeting.
Carrier1 International's statutory auditor must verify whether the
conditions for the payment of interim dividends are fulfilled.
If an interim dividend exceeds the dividend set by the shareholders at
the annual ordinary shareholders' meeting, the excess is deemed an advance
payment of the next dividend.
Dividends may be paid in U.S. dollars or in shares or otherwise as the
board may determine in accordance with Luxembourg law. Payment of any dividends
will be made to holders of shares at their addresses in the register maintained
by or on behalf of Carrier1 International. Carrier1 International has never
declared or paid any dividends and does not expect to do so in the foreseeable
future. See "Dividend Policy."
Nonresidents of Luxembourg who hold shares or ADSs may be subject to
Luxembourg statutory withholding tax in respect of any cash dividends paid. See
"Taxation--Certain Luxembourg Tax Considerations."
CAPITAL INCREASES; PREEMPTIVE RIGHTS
The subscribed capital and the authorized capital of Carrier1
International may be increased or reduced by the shareholders at a shareholders'
meeting under the same quorum and majority requirements applicable to an
amendment of the articles. The board may issue shares (up to the amount
authorized by the articles) without shareholder approval, and, if so decided by
the board, shareholders will have no pre-emptive rights in connection with such
issuance. Holders of shares outstanding prior to this offering will have no
pre-emptive rights in connection with this offering.
89
<PAGE>
In the event that preemptive rights are not disallowed by the board,
all shareholders will be notified of the period during which preemptive rights
may be exercised, as determined by the board. Under Luxembourg law, this period
must be at least 30 days. Preemptive rights are transferable and may be sold,
prior to exercise.
LIQUIDATION RIGHTS
The shareholders of Carrier1 International may dissolve Carrier1
International under the conditions prescribed for modification of the articles.
If such dissolution were to occur, Carrier1 International would then be
liquidated, and after payment of its debts or consignment of the sums necessary
to pay such debts, the shareholders would be entitled to the remaining assets of
Carrier1 International, in proportion to their holdings.
FORM AND TRANSFER OF SHARES
As a general matter under Luxembourg law, shares may be issued in
registered or bearer form, at the option of the shareholder. As a result of an
amendment to the articles approved by shareholders at the extraordinary meeting
held on June 13, 2000, shares must be issued in registered form, unless the
board of directors determines otherwise.
The shares sold by the selling shareholders, will be in registered
global form and will be delivered into the custody of Clearstream Banking AG,
Frankfurt am Main, or Clearstream, Frankfurt. Clearstream, Frankfurt will be
registered in our share register as the sole shareholder for the shares sold in
this offering. Beneficial interests in the shares can be transferred in
accordance with the rules and regulations of Clearstream, Frankfurt. The shares
are also expected to be accepted for clearance through Clearstream, Frankfurt,
Euroclear and Clearstream Banking, societe anonyme, or Clearstream, Luxembourg.
The shares may be credited at the option of investors either to a German bank's
Clearstream, Frankfurt account or to the accounts of participants with Euroclear
or Clearstream, Luxembourg. The ADSs quoted on the Nasdaq National Market will
be delivered against payment in U.S. dollars through The Depository Trust
Company's book-entry facilities. The shares to be listed on the Neuer Markt
segment of the Frankfurt Stock Exchange will be delivered in book-entry form
against payment in euro through Clearstream, Frankfurt's, Euroclear's and
Clearstream Luxembourg's book entry facilities.
In general, title to shares in bearer form passes by delivery of the
certificates evidencing the shares. Transfers of registered shares require
either (i) an inscription of the transfer in the share register of Carrier1
International signed by the transferor and the transferee or their respective
agents or (ii) a notification of the transfer by the transferor or the
transferee to Carrier1 International which in turn must record such transfer in
the share register maintained by it or on its behalf. Carrier1 International or
its registrar may also enter the transfer in the register on the basis of
correspondence or other documents that establish the existence of an agreement
between the transferor and the transferee.
It is generally held that contractual restrictions on the transfer of
shares are legal provided they do not render the shares inalienable for a
prolonged period of time. Currently, the articles provide that, if the board
determines that a proposed transfer of shares would violate a restriction on
transfer agreed to by the owner of such shares or its predecessor in interest
and brought to the attention of the board, the board may refuse to record such
transfer in the share register of Carrier1 International (with a provision that
such refusal will not result in a situation where a shareholder is forced to
continue to hold shares for an extended period of time).
90
<PAGE>
DESCRIPTION OF THE WARRANTS
GENERAL
In connection with the issuance of the 13 1/4% senior dollar and euro
notes, Carrier1 International issued dollar warrants and euro warrants. The
following summary of certain provisions of the warrant agreements does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the warrant agreements. Wherever particular
defined terms of the warrant agreements, not otherwise defined in this
prospectus, are referred to, those defined terms are incorporated by reference
in this prospectus. A copy of each warrant agreement and the registration rights
agreement referred to below is filed as an exhibit to the registration statement
of which this prospectus is a part.
Each dollar warrant is exercisable to purchase 6.71013 shares at the
exercise price per share equal to the greater of $2.00 and the minimum par value
required by Luxembourg law (currently 50 Luxembourg francs) (excluding a 1%
Luxembourg capital duty which is payable by Carrier1 International), subject to
adjustment. Each euro warrant is exercisable to purchase 7.53614 shares at the
same exercise price. The warrants may be exercised at any time beginning
February 19, 2000, and prior to the close of business on February 19, 2009,
unless redeemed. Warrants that are not exercised by this expiration date will
expire.
As at August 1, 2000, the aggregate number of the warrants outstanding
was 240,823 and the aggregate number of shares for which the warrants may be
exercised was 1,685,813.
Upon the occurrence of a merger with a person in connection with which
the consideration to shareholders of Carrier1 International is not all cash and
where the shares (or other securities) issuable upon exercise of the warrants
are not registered under the Exchange Act, Carrier1 International or its
successor by merger will be required to offer (or cause an affiliate to offer)
to repurchase the warrants for cash in the manner specified in the warrant
agreements.
The shareholders of Carrier1 International may be required to
reauthorize and reserve the shares issuable upon exercise of all outstanding
warrants. To the extent such reauthorization or reservation is required by
applicable law, Carrier1 International has agreed (to the extent permitted by
applicable law) to take any and all actions required, and Carrier One, LLC has
agreed (to the extent permitted by applicable law) to vote any shares held by
it, to reauthorize and reserve the shares for issuance upon exercise of the
warrants at least 31 days prior to the date such reauthorization would be
required under Luxembourg law.
ANTI-DILUTION PROVISIONS
Each warrant agreement contains provisions adjusting the exercise price
and the number of shares or other securities issuable upon exercise of a warrant
of the relevant series under specified circumstances. Each warrant agreement
also contains other provisions that will provide alternative equivalent
adjustments or other protections in the event that the adjustment provisions
would result in a reduction of the exercise price to below either the par value
of the underlying shares or the minimum par value required by Luxembourg law.
Each warrant agreement prohibits Carrier1 International from increasing the par
value of the underlying shares to an amount greater than the exercise price,
except to the extent required by applicable law.
No adjustment in the number of shares purchasable upon exercise of the
warrants is required, however, for certain public offerings or private
placements, for certain grants, or exercises, of options or
91
<PAGE>
other rights to purchase granted to or for the benefit of management investors,
for certain issuances of shares to or for the benefit of management investors,
for grants, or exercises of options, warrants or other rights to purchase
pursuant to agreements existing on the date the warrants were issued, for
issuances of shares pursuant to options, warrants or other agreements or rights
to purchase capital stock of Carrier1 International existing on the date the
warrants were issued and in other circumstances specified in the warrant
agreements, or unless such adjustment would require an increase or decrease of
at least one percent in the number of shares purchasable upon the exercise of a
warrant or if certain other limited exceptions are applicable.
OTHER PROVISIONS
The terms of the warrant agreements also permit the warrant holders to
participate in merger transactions and impose reporting obligations on Carrier1
International. In addition, the warrant holders have registration rights
pursuant to a registration rights agreement. Under the terms of the registration
rights agreement, the holders of the warrants have "piggy-back" registration
rights for the shares or other securities issuable upon exercise of the warrants
in connection with specified public offerings of shares or other securities
issuable upon exercise of the warrants conducted subsequent to this initial
public offering. Carrier1 International is required to use its best efforts to
cause to be declared effective, no later than six months after the closing date
of our initial public offering, a shelf registration statement with respect to
the issuance of or in certain cases, resales of the shares or other securities
issuable upon exercise of the warrants. This prospectus forms a part of that
shelf registration statement. Carrier1 International is required to use
reasonable efforts to maintain the effectiveness of that shelf registration
statement until the earlier of the date all warrants have been exercised and the
expiration date of the warrants. Carrier1 International has the ability to
suspend the availability of this registration statement for specified time
periods.
NO RIGHTS AS SHAREHOLDERS
The holders of unexercised warrants are not entitled to receive
dividends or other distributions, receive notice of any meeting of the
shareholders, consent to any action of the shareholders, receive notice of any
other shareholder proceedings, or to any other rights as shareholders of
Carrier1 International.
92
<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
Bankers Trust Company acts as the depositary for the American
Depositary Shares. The depositary's offices are located at 4 Albany Street, New
York, New York. American Depositary Shares are frequently referred to as ADSs
and represent ownership interests in shares that are on deposit with the
depositary or its custodian. ADSs are normally represented by certificates that
are commonly known as American Depositary Receipts, or ADRs.
We have appointed the depositary pursuant to a deposit agreement. A
copy of the deposit agreement was filed with the United States Securities and
Exchange Commission as an exhibit to a registration statement on Form F-6 (File
No. 333-11440). You may obtain a copy of the deposit agreement from the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549.
We are providing you with a summary description of the ADSs and your
rights as an owner of ADSs. This is only a summary and may not contain all of
the information important to you. For complete information, you should review
the deposit agreement in its entirety, as well as the form of ADR attached to
the deposit agreement.
Each ADS represents 0.2 of one share on deposit with the custodian. An
ADS will also represent any other property received by the depositary or the
custodian on behalf of the owner of the ADS but that has not been distributed to
the owners of ADSs because of legal restrictions or practical considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound by its terms and by the terms of the ADRs
that represent your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as an owner of ADSs and
those of the depositary. The deposit agreement is governed by New York law.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you must
rely on the procedures of your broker or bank to assert your rights as an ADS
owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own the ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder."
DIVIDENDS AND DISTRIBUTIONS
As a holder, you generally have the right to receive the distributions
we make on the shares deposited with the custodian. Your receipt of these
distributions may be limited, however, by practical considerations and legal
limitations. Holders will receive distributions under the terms of the deposit
agreement in proportion to the number of ADSs held as of a specified record
date.
DISTRIBUTIONS OF CASH
If we make a cash distribution for the shares on deposit with the
custodian, we will notify the depositary. Upon receipt of such notice, if the
distribution is not in U.S. dollars, the depositary will arrange for the funds
to be converted into U.S. dollars and for the distribution of the U.S. dollars
to the holders.
93
<PAGE>
The conversion into U.S. dollars will take place only if practicable
and if the U.S. dollars are transferable to the United States. The amounts
distributed to holders will be net of the fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. The
depositary will apply the same method for distributing the proceeds of the sale
of any property (such as undistributed rights) held by the custodian in respect
of shares on deposit.
DISTRIBUTIONS OF SHARES
Whenever we make a free distribution of shares for the shares on
deposit with the custodian, we will notify the depositary. Upon receipt of such
notice, the depositary will either distribute to holders new ADSs representing
the shares deposited or modify the ADS to shares ratio, in which case each ADS
you hold will represent rights and interests in the additional shares so
deposited. Only whole new ADSs will be distributed. Fractional entitlements will
be sold and the proceeds of such sale will be distributed as in the case of a
cash distribution.
The distribution of new ADSs or the modification of the ADS to share
ratio upon a distribution of shares will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the terms of the deposit
agreement. In order to pay such taxes or governmental charges, the depositary
may sell all or a portion of the new shares so distributed.
No such distribution of new ADSs will be made if it would violate a law
(including the U.S. securities laws) or if it is not operationally practicable.
If the depositary does not distribute new ADSs as described above, it will use
its best efforts to sell the shares received and will distribute the proceeds of
the sale as in the case of a distribution of cash.
DISTRIBUTIONS OF RIGHTS
Whenever we intend to distribute rights to purchase additional shares,
we will give prior notice to the depositary and we will assist the depositary in
determining whether it is lawful and reasonably practicable to distribute rights
to purchase additional ADSs to holders.
The depositary will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable such holders to exercise such
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if we provide all of the documentation contemplated in
the deposit agreement (such as opinions to address the lawfulness of the
transaction). You may have to pay fees, expenses, taxes and other governmental
charges to subscribe for the new ADSs upon the exercise of your rights. The
depositary is not obligated to establish procedures to facilitate the
distribution and exercise by holders of rights to purchase new shares directly
rather than new ADSs.
The depositary will not distribute the rights to you if:
o we do not request that the rights be distributed to you or we
ask that the rights not be distributed to you, or
o we fail to deliver satisfactory documents to the depositary,
or
o it is not reasonably practicable to distribute the rights.
The depositary will attempt to sell the rights that are not exercised
or not distributed if such sale is lawful and reasonably practicable. The net
proceeds of such sale will be distributed to holders as in the case of a cash
distribution. If the depositary is unable to sell the rights, it will allow the
rights to lapse.
94
<PAGE>
OTHER DISTRIBUTIONS
Whenever we intend to distribute property other than cash, shares or
rights to purchase additional shares, we will notify the depositary in advance
and will indicate whether we wish such distribution to be made to you. If so, we
will assist the depositary in determining whether such distribution to holders
is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to you and
if we provide all of the documentation contemplated in the deposit agreement,
the depositary will distribute the property to the holders in a manner it deems
practicable.
The distribution will be made net of fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. In order to pay such taxes and governmental charges, the depositary
may sell all or a portion of the property received.
The depositary will not distribute the property to you and will sell
the property if:
o we do not request that the property be distributed to you or
if we ask that the property not be distributed to you, or
o we do not deliver satisfactory documents to the depositary, or
o the depositary determines that all or a portion of the
distribution to you is not reasonably practicable.
The net proceeds of such a sale will be distributed to holders as in
the case of a cash distribution.
CHANGES AFFECTING SHARES
The shares held on deposit for your ADSs may change from time to time.
For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of such shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent
permitted by law, represent the right to receive the property received or
exchanged in respect of the shares held on deposit. The depositary may in such
circumstances deliver new ADSs to you or call for the exchange of your existing
ADSs for new ADSs. If the depositary may not lawfully distribute such property
to you, the depositary may sell such property and distribute the net proceeds to
you as in the case of a cash distribution.
ISSUANCE OF ADSS UPON DEPOSIT OF SHARES
The depositary may issue ADSs on your behalf if you or your broker
deposit shares with the custodian. The depositary will deliver ADRs representing
these ADSs to the person you indicate only after you pay any applicable issuance
fees and any charges and taxes payable for the transfer of the shares to the
custodian.
The issuance of ADSs may be delayed until the depositary or the
custodian receives confirmation that all required approvals have been given and
that the shares have been duly transferred to the
95
<PAGE>
custodian. The depositary will only issue ADSs in whole numbers and will not
accept fractions of shares for deposit.
When you make a deposit of shares, you will be responsible for
transferring good and valid title to the depositary. As such, you will be deemed
to represent and warrant that:
o the shares are duly authorized, validly issued, fully paid,
non-assessable and legally obtained,
o all preemptive (and similar) rights, if any, with respect to
such shares have been validly waived or exercised,
o you are duly authorized to deposit the shares, and
o the shares presented for deposit are not, and the ADSs
issuable upon such deposit will not be, restricted securities
(as defined in the deposit agreement).
If any of the representations or warranties are incorrect in any way,
we and the depositary may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
WITHDRAWAL OF SHARES UPON CANCELLATION OF ADSS
As a holder, you will be entitled to present your ADSs to the
depositary for cancellation and then receive the whole number of underlying
shares represented by such ADSs at the custodian's offices. In order to withdraw
the shares represented by your ADSs, you will be required to pay to the
depositary the fees for cancellation of ADSs and any charges and taxes payable
upon the transfer of the shares being withdrawn. You assume the risk for
delivery of all funds and securities upon withdrawal. Once canceled, the ADSs
will not have any rights under the deposit agreement.
The withdrawal of the shares represented by your ADSs may be delayed
until the depositary receives satisfactory evidence of compliance with all
applicable laws and regulations. Please keep in mind that the depositary will
only accept ADSs for cancellation that represent a whole number of securities on
deposit.
You will have the right to withdraw the shares represented by your ADSs
at any time except, among other things, for:
o temporary delays that may arise because (i) the transfer books
for the shares or ADSs are closed, or (ii) shares are
immobilized on account of a shareholders' meeting or a payment
of dividends,
o obligations to pay fees, taxes and similar charges, and
o restrictions imposed because of laws or regulations applicable
to ADSs or the withdrawal of shares on deposit.
The deposit agreement may not be modified to impair your right to
withdraw the shares represented by your ADSs except to comply with mandatory
provisions of law.
96
<PAGE>
VOTING RIGHTS
As a holder, you generally have the right under the deposit agreement
to instruct the depositary to exercise the voting rights for the whole shares
represented by your ADSs.
At our request, the depositary will mail to registered holders of ADSs
any notice of shareholders' meeting received from us together with information
explaining how to instruct the depositary to exercise the voting rights of the
shares represented by ADSs. To the extent you are not a registered holder of
ADSs, you will need to look to the financial institution with whom you hold your
ADSs for voting materials.
If the depositary receives timely voting instructions from a holder of
ADSs, it will endeavor to vote the shares represented by the holder's ADSs in
accordance with such voting instructions.
Please note that the ability of the depositary to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the shares on deposit. We cannot assure you that you will receive voting
materials in time to enable you to return voting instructions to the depositary
in a timely manner. Shares for which no voting instructions have been received
will not be voted.
FEES AND CHARGES
As an ADS holder, you will be required to pay the following service
fees to the depositary:
<TABLE>
<CAPTION>
SERVICE FEES
------- ----
<S> <C>
Issuance of ADSs Up to $.05 per ADS issued
Cancellation of ADSs Up to $.05 per ADS canceled
Exercise of rights to purchase additional ADSs Up to $.05 per ADS issued
Distribution of cash upon sale of rights and other Up to $.02 per ADS held
entitlements
</TABLE>
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary and certain taxes and governmental charges
such as:
o fees for the transfer and registration of shares (upon deposit
and withdrawal of shares),
o expenses incurred for converting foreign currency into U.S.
dollars,
o expenses for cable, telex and fax transmissions and for
delivery of shares, and
o taxes and duties upon the transfer of shares (when shares are
deposited or withdrawn from deposit).
We have agreed to pay certain other charges and expenses of the
depositary. Note that the fees and charges you may be required to pay may vary
over time and may be changed by us and by the depositary. You will receive prior
notice of such changes.
97
<PAGE>
AMENDMENTS AND TERMINATION
We may agree with the depositary to modify the deposit agreement at any
time without your consent. We undertake to give holders 30 days' prior notice of
any modifications that would prejudice any of their substantial rights under the
deposit agreement (except in very limited circumstances enumerated in the
deposit agreement).
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs for 30 days after notice of the modifications to the
deposit agreement are given to you. The deposit agreement cannot be amended to
prevent you from withdrawing the shares represented by your ADSs (except as
permitted by law).
We have the right to direct the depositary to terminate the deposit
agreement. Similarly, the depositary may in certain circumstances on its own
initiative terminate the deposit agreement. In either case, the depositary must
give notice to the holders at least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
o You will be able to request the cancellation of your ADSs and
the withdrawal of the shares represented by your ADSs and the
delivery of all other property held by the depositary in
respect of those shares on the same terms as prior to the
termination. During such six months' period, the depositary
will continue to collect all distributions received on the
shares on deposit but will not distribute any such property to
you until you request the cancellation of your ADSs.
o After the expiration of such six months' period, the
depositary may sell the shares held on deposit. The depositary
will hold the proceeds from such sale and any other funds then
held for the holders of ADSs in a non-interest bearing
account. At that point, the depositary will have no further
obligations to holders other than to account for the funds
then held for the holders of ADSs still outstanding.
BOOKS OF DEPOSITARY
The depositary will maintain ADS holder records at its depositary
office. You may inspect such records at such office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to the ADSs and the deposit agreement.
The depositary will maintain in New York facilities to record and
process the issuance, cancellation, combination, split-up and transfer of ADRs.
LIMITATIONS ON OBLIGATIONS AND LIABILITIES
The deposit agreement limits our obligations and the depositary's
obligations to you. Please note the following:
o We and the depositary are obligated only to take the actions
specifically stated in the depositary agreement without
negligence or bad faith.
98
<PAGE>
o The depositary disclaims any liability for any failure to
carry out voting instructions, for any manner in which a vote
is cast or for the effect of any vote, provided it acts
without negligence, in good faith and in accordance with the
terms of the deposit agreement.
o We and the depositary disclaim any liability if we are
prevented, delayed or forbidden from acting on account of any
law or regulation, any provision of our articles of
incorporation, any provision of any securities on deposit or
by reason of any act of God or war or other circumstances
beyond our control.
o We and the depositary disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided
for the deposit agreement.
o We and the depositary further disclaim any liability for any
action or inaction in reliance on the advice or information
received from legal counsel, accountants, any person
presenting shares for deposit, any holder of ADSs or
authorized representative of any holder, or any other person
believed by either of us in good faith to be competent to give
such advice or information.
o We and the depositary also disclaim liability for the
inability by a holder to benefit from any distribution,
offering, right or other benefit which is made available to
holders of shares but is not, under the terms of the deposit
agreement, made available to you.
o We and the depositary may rely without any liability upon any
written notice, request or other document believed to be
genuine and to have been signed or presented by the proper
parties.
PRE-RELEASE TRANSACTIONS
The depositary may, in certain circumstances, issue ADSs before
receiving a deposit of shares or release of shares before receiving ADSs. These
transactions are commonly referred to as pre-release transactions. The deposit
agreement limits the aggregate size of pre-release transactions and imposes a
number of conditions on such transactions (for example, the need to receive
collateral, the type of collateral required or the representations required from
brokers). The depositary may retain any compensation received from the
pre-release transactions.
TAXES
You will be responsible for the taxes and other governmental charges
payable on the ADSs and the shares represented by the ADSs. We, the depositary
and the custodian may deduct from any distribution the taxes and governmental
charges payable by holders and may sell any and all property on deposit to pay
the taxes and governmental charges payable by holders. You will be liable for
any deficiency if the sale proceeds do not cover the taxes that are due.
The depositary may refuse to issue ADSs, to deliver transfer, split and
combine ADRs or to release shares on deposit until all taxes and charges are
paid by the applicable holder. The depositary and the custodian may take
reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required
to provide to the depositary and to the custodian proof of taxpayer status and
residence and such other information as the depositary and the custodian may
require to fulfill legal obligations. You are required to indemnify us, the
99
<PAGE>
depositary and the custodian for any claims with respect to taxes based on any
tax benefit obtained for you.
FOREIGN CURRENCY CONVERSION
The depositary will arrange for the conversion of all foreign currency
received into U.S. dollars if such conversion is practicable, and it will
distribute the U.S. dollars in accordance with the terms of the deposit
agreement. You may have to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with currency exchange
controls and other governmental requirements.
If the conversion of foreign currency is not practicable or lawful, or
if any required approvals are denied or not obtainable at a reasonable cost or
within a reasonable period, the depositary may take the following actions in its
discretion:
o convert the foreign currency to the extent practicable and
lawful and distribute the U.S. dollars to the holders for whom
the conversion and distribution is lawful and practicable.
o distribute the foreign currency to holders entitled to receive
such foreign currency.
o hold the foreign currency (uninvested without liability for
interest) for the holders entitled to receive such foreign
currency.
100
<PAGE>
TAXATION
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
consequences of the ownership and disposition of common shares or ADSs, which we
collectively refer to in this discussion as shares, to U.S. Holders (as defined
below). The discussion is based upon provisions of the U.S. Internal Revenue
Code of 1986, as amended, known as the Code, its legislative history, judicial
authority, current administrative rulings and practice, and existing and
proposed Treasury regulations, all as in effect and existing on the date of this
prospectus. 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 share is or
will be held as a capital asset (as defined in Section 1221 of the Code) by the
holders of the share. Except as otherwise described in this prospectus, this
discussion applies only to a person who is an initial holder or other beneficial
owner of shares purchased pursuant to this offering and who is for U.S. federal
income tax purposes (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 of the United States or the District of Columbia, (iii)
an estate that is not a foreign estate for U.S. federal income tax purposes 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 the acquisition, ownership and
disposition of shares. 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 Carrier1 International, financial
institutions, insurance companies, dealers in securities or foreign currency,
tax-exempt organizations, foreign corporations or nonresident alien individuals,
or persons that hold shares 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
PURCHASER IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF SUCH PURCHASER'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 SHARES.
SHARES
GENERAL
For purposes of the Code, holders of ADSs will be treated as the
beneficial owners of the common shares represented by those ADSs.
Carrier1 International has not paid any dividends on its shares and
does not intend to pay dividends in the foreseeable future. See "Dividend
Policy". However, if a U.S. Holder receives a dividend on shares generally it
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from the current or accumulated
earnings and profits of Carrier1 International as determined under U.S. federal
income tax principles. Distributions in excess of the
101
<PAGE>
earnings and profits of Carrier1 International generally will first be treated,
for U.S. federal income tax purposes, as a nontaxable return of capital to the
extent of the U.S. Holder's basis in the shares and then as gain from the sale
or exchange of a capital asset, provided that the shares constitute a capital
asset in the hands of the U.S. Holder. Dividends received on shares by U.S.
corporate shareholders will not be eligible for the corporate dividends received
deduction.
A U.S. Holder will be entitled to claim a foreign tax credit with
respect to income received from Carrier1 International only for foreign taxes
(such as withholding taxes), if any, imposed on dividends paid to such U.S.
Holder, and not for taxes, if any, imposed on Carrier1 International or on any
entity in which Carrier1 International has made an investment. For so long as
Carrier1 International is a "United States-owned foreign corporation,"
distributions with respect to shares that are taxable as dividends generally
will be treated as foreign source passive income (or, for U.S. Holders that are
"financial service entities" as defined in the Treasury Regulations, financial
service income) or U.S. source income for U.S. foreign tax credit purposes, in
proportion to the earnings and profits of Carrier1 International in the year of
such distribution allocable to foreign and U.S. sources, respectively. For this
purpose, Carrier1 International will be treated as a United States-owned foreign
corporation so long as stock representing 50% or more of the voting power or
value of Carrier1 International is owned, directly, or indirectly, by "United
States persons." 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.
With certain exceptions, gain or loss on the sale or exchange of shares
will be treated as U.S. source capital gain or loss (if such shares are held as
a capital asset). Such capital gain or loss will be long-term capital gain or
loss if the U.S. Holder has held the shares for more than one year at the time
of the sale or exchange.
Various provisions contained in the Code impose special taxes in
certain circumstances on U.S. or foreign corporations and their stockholders.
The following is a summary of certain provisions which could have an adverse
impact on Carrier1 International and the U.S. Holders.
PERSONAL HOLDING COMPANY
A corporation that is a personal holding company ("PHC") is subject to
a 39.6% tax on its undistributed personal holding company income (generally,
U.S. taxable income with certain adjustments, reduced by distributions to
shareholders). A corporation which is neither a foreign personal holding company
nor a passive foreign investment company (each of which is discussed below)
generally is a PHC if (i) more than 50% of the stock of which measured by value
is owned, directly or indirectly (taking into account certain ownership
attribution rules), by five or fewer individuals (without regard to their
citizenship or residence) and (ii) which receives 60% or more of gross income,
as specifically adjusted, from certain passive sources. For purposes of this
gross income test, a foreign corporation generally only includes taxable income
derived from U.S. sources or income that is effectively connected with a U.S.
trade or business.
More than 50% of the outstanding shares of Carrier1 International, by
value, may be currently treated as owned (through attribution) by five or fewer
individuals, and Carrier1 International believes that the stockholder test may
be met on a going forward basis. Carrier1 International anticipates, however,
that neither it nor its foreign subsidiaries should be classified as a PHC. In
addition, since it is anticipated that Carrier1 International's U.S.
subsidiaries will derive most or all of their income from non-passive sources,
it further believes that none of such subsidiaries will satisfy the foregoing
income test and, thus, will not be classified as a PHC. While Carrier1
International currently believes that neither it nor any of its subsidiaries
would be classified as a PHC, it is possible that Carrier1 International or one
or more of its
102
<PAGE>
subsidiaries would meet the foregoing income test and would qualify as a PHC for
that year. Carrier1 International intends to manage its affairs and the affairs
of its subsidiaries so as to attempt to avoid or minimize the imposition of the
personal holding company tax, to the extent such management of its affairs is
consistent with its other business goals.
FOREIGN PERSONAL HOLDING COMPANY
In general, if Carrier1 International or any of its foreign corporate
subsidiaries were to be classified as a foreign personal holding company
("FPHC"), the undistributed foreign personal holding company income (generally,
taxable income with certain adjustments) of Carrier1 International or such
subsidiary would be imputed to all of the U.S. Holders who were deemed to hold
Carrier1 International's stock or the stock of such subsidiary on the last day
of its taxable year. Such income would be taxable to such persons as a dividend,
even if no cash dividend were actually paid. U.S. Holders who dispose of their
shares prior to such date generally would not be subject to tax under these
rules. If Carrier1 International were treated as an FPHC, U.S. Holders who
acquire shares from decedents would, in certain circumstances, be denied the
step-up of the income tax basis for such shares to fair market value at the date
of death which would otherwise have been available and instead would have a tax
basis equal to the lower of the fair market value or the decedent's basis.
A foreign corporation will be classified as an FPHC if (i) five or
fewer individuals, who are U.S. citizens or residents, directly or indirectly
(taking into account certain ownership attribution rules), own more than 50% of
the corporation's stock (measured either by voting power or value) (the
"stockholder test") and (ii) the corporation receives at least 60% of its gross
income (regardless of source), as specifically adjusted, from certain passive
sources (the "income test"). After a corporation becomes an FPHC, the income
test percentage for each subsequent taxable year is reduced to 50%.
Five or fewer individuals who are U.S. citizens or residents currently
may be treated as owning a beneficial interest of more than 50% of the voting
power of the outstanding shares of Carrier1 International and its foreign
corporate subsidiaries for purposes of the FPHC rules, and Carrier1
International believes that the stockholder test may be met on a going forward
basis. Carrier1 International believes, however, that neither Carrier1
International nor its foreign corporate subsidiaries, should be classified as an
FPHC because Carrier1 International and each of the subsidiaries should not
satisfy the foregoing income test.
While Carrier1 International currently believes that neither it nor any
of its foreign corporate subsidiaries would be classified as an FPHC, it is
possible that Carrier1 International or one or more of such subsidiaries would
meet the foregoing income test in a given taxable year and would qualify as an
FPHC for that year. If Carrier1 International concludes that it or any of its
foreign corporate subsidiaries would be classified as an FPHC for any profitable
taxable year, Carrier1 International intends to manage its affairs and the
affairs of the subsidiaries so as to attempt to avoid or minimize having income
imputed to the U.S. shareholders under these rules, to the extent such
management of its affairs is consistent with its other business goals.
PASSIVE FOREIGN INVESTMENT COMPANY
In general, a foreign corporation is a "passive foreign investment
company" ("PFIC") if either (i) 75% or more of its gross income constitutes
"passive income," or (ii) 50% or more of the average value of its assets produce
passive income or are held for the production of passive income. Carrier1
International intends to manage its affairs and the affairs of its subsidiaries
so as to avoid or minimize the chances that Carrier1 International will be
classified as a PFIC following this offering, to the extent consistent with its
other business goals.
103
<PAGE>
If, however, Carrier1 International becomes a PFIC for any taxable
year, U.S. Holders of shares (including certain indirect U.S. Holders) may be
subject to reporting requirements and special tax and interest charge upon a
sale or other disposition of such shares, or upon the receipt of certain
distributions from Carrier1 International, unless such U.S. Holder elected to be
taxed annually on its pro rata share of the ordinary earnings and net capital
gain of the PFIC or, under certain circumstances, on the difference between the
fair market value and the adjusted basis of such shares as described below.
The special tax is computed by assuming that the gain, if any, with
respect to the shares was earned in equal portions throughout the holder's
period of ownership. The portion allocable to the year of the disposition is
taxed as ordinary income. The portion allocable to each year prior to the year
of the disposition is taxed as ordinary income at the maximum marginal tax rate
applicable for each such period. The interest charge is imposed on the amount of
the special tax in each such prior year that is deemed to arise from the
allocation of the gain to such prior year and is charged at the applicable rates
imposed on underpayments of U.S. federal income tax for the period commencing on
the due date of the tax return for each prior period and ending on the due date
of the tax return for the year of the gain. These rules would also apply to the
receipt of an "excess distribution" with respect to shares. In general, a
shareholder of a PFIC is treated as having received an excess distribution to
the extent that the amount of the distribution is more than 125% of the average
annual distributions with respect to its shares during the three preceding
taxable years (or shorter period during which the taxpayer held the shares).
If Carrier1 International were a PFIC, U.S. Holders who acquire shares
from decedents could be denied the step-up of the income tax basis for such
shares which would otherwise have been available.
Under certain circumstances, a shareholder of a PFIC may elect to treat
a PFIC as a "qualified electing fund" (a "QEF"), in which case the electing
shareholder would generally not be subject to the special tax rules discussed
above. Instead, the electing shareholder would include in its income each year
its pro rata share of the PFIC's ordinary earnings and net capital gain, whether
or not distributed. If Carrier1 International determines that it is a PFIC,
Carrier1 International will provide the requisite information to a shareholder
upon reasonable request of such shareholder to enable such shareholder to make
the "QEF" election if the shareholder so desires.
As an alternative election, a mark-to-market election may be made by a
U.S. person who owns marketable stock in a PFIC at the close of such person's
taxable year. An electing U.S. Holder would, in general, include as ordinary
income in each taxable year an amount equal to the increase, if any, in value of
its shares for that year (measured at the close of the U.S. Holder's taxable
year) and would be allowed a deduction for any decrease in the value of its
shares for that year, but only to the extent of previously included
mark-to-market income. The mark-to-market election is made with respect to
marketable stock in a PFIC on a shareholder-by-shareholder basis and, once made,
can only be revoked with the consent of the IRS. Under applicable Treasury
regulations, the term "marketable stock" includes stock of a PFIC that is
"regularly traded" on a qualified exchange or other market. For these purposes,
a class of stock is regularly traded on a qualified exchange or other market for
any calendar year during which such class of stock is traded (other than in de
minimis quantities) on at least 15 days during each calendar quarter. It is
expected that the shares will be treated as marketable stock for these purposes,
but no assurances can be given.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE
EFFECT OF THE PFIC RULES (INCLUDING THE PROPOSED REGULATIONS) ON THE OWNERSHIP,
SALE OR OTHER DISPOSITION OF THE SHARES.
104
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payment of
dividends on shares and the proceeds of certain sales of shares in respect of
U.S. Holders other than certain exempt persons (such as corporations.) Further,
a 31% backup withholding tax will apply to such payment if the U.S. Holder fails
to report in full all dividend income and the IRS notifies the payor of such
under-reporting or fails to satisfy certain other reporting requirements.
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 payments made after December 31, 2000, modify certain of the certification
requirements for backup withholding. It is possible that Carrier1 International
and other withholding agents may request a new withholding exemption
certification 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
PURCHASER IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX CONSULTANTS TO DETERMINE
POSSIBLE LUXEMBOURG TAX CONSEQUENCES OF A PURCHASE OF SHARES.
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 shares. It does not examine tax consequences to
residents or to some extent, former residents.
COMMON STOCK
Non-Resident Holders of shares are not liable for Luxembourg tax on
capital gains on any such shares; PROVIDED, HOWEVER, that if they hold more than
25% of the share capital of Carrier1 International, they are subject to tax on
capital gains on the disposal of shares held for not more than six months.
Dividends paid on shares to Non-Resident Holders are subject to a
withholding tax of 25%. Under certain circumstances, European Union Non-Resident
Holders may benefit from an exemption of withholding tax. Reductions of the
withholding rate may also be provided by tax treaties. In the case of the
current treaty between Luxembourg and the United States, the withholding tax is
reduced to 12.5% or less, and in the new proposed treaty the rate will be
reduced to 15%, PROVIDED that the holder is entitled to claim treaty benefits.
No inheritance tax is payable by a non-resident holder of shares except
if the deceased holder was a resident of Luxembourg at the time of death.
The issuance of shares will trigger the levy of a capital duty payable
by Carrier1 International of 1% of the subscription price.
105
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders may sell their common shares that they
purchase upon exercise of their warrants, from time to time. The selling
shareholders will act independently of us in making decisions regarding the
timing, manner and size of each sale. The sale may be made on the Neuer Markt
segment of the Frankfurt Stock Exchange, the Nasdaq National Market or in the
over-the-counter market or otherwise, at prices and at terms then prevailing or
at prices related to the then current market price, or in negotiated
transactions. The selling shareholders may effect such transactions by selling
the shares to or through broker-dealers. The shares may be sold by one or more
of, or a combination of, the following:
o a block trade in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction,
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus,
o an exchange distribution in accordance with the rules of such
exchange,
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers, or
o in privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in the resales. The selling shareholders may enter
into hedging transactions with broker-dealers in connection with distributions
of the shares or otherwise. In these transactions, broker-dealers may engage in
short sales of the shares in the course of hedging the positions they assume
with selling shareholders. The selling shareholders also may sell shares short
and redeliver the shares to close out such short positions. The selling
shareholders may enter into option or other transactions with broker-dealers
which require the delivery to the broker-dealer of the shares. The broker-dealer
may then resell or otherwise transfer such shares under this prospectus. The
selling shareholders also may lend or pledge the shares to a broker-dealer. The
broker-dealer may sell the share so lent, or upon a default the broker-dealer
may sell the pledged shares under this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares for
whom they act as agents or to whom they sell as principals, or both.
Compensation as to a particular broker-dealer might be in excess of customary
commissions and will be in amounts to be negotiated in connection with the sale.
Broker-dealers or agents and any other participating broker-dealers or the
selling shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933 (the "Securities Act") in connection
with sales of the shares. Accordingly, any such commission, discount or
concession received by them and any profit on the resale of the shares purchased
by them may be deemed to be underwriting discounts or commissions under the
Securities Act. Because selling shareholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
shareholders will be subject to the prospectus delivery requirements of the
Securities Act. In addition, any securities covered by this prospectus which
qualify for sale under Rule 144 promulgated under the Securities Act may be sold
under Rule 144 rather than under this prospectus. We have not been advised by
any selling shareholders that they have entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
106
<PAGE>
the sale of their securities. There is no underwriter or coordinating broker
acting in connection with the proposed sale of shares by the selling
shareholders.
To comply with the securities laws of certain jurisdictions, the shares
will be sold only through registered or licensed brokers or dealers if required.
In addition, in certain jurisdictions the shares may not be sold unless they
have been registered or qualified for sale in the applicable jurisdiction or an
exemption from the registration or qualification requirement is available and is
complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the shares may not simultaneously engage
in market making activities with respect to our common shares for a period of
two business days prior to the commencement of such distribution. In addition,
each selling shareholder will be subject to applicable provisions of the
Exchange Act and the associated rules and regulations under the Exchange Act,
including Regulation M, which provisions may limit the timing of purchases and
sales of shares of our common shares by the selling shareholders. We will make
copies of this prospectus available to the selling shareholders and have
informed them of the need to deliver copies of this prospectus to purchasers at
or prior to the time of any sale of the shares.
We will file a supplement to this prospectus, if required, to comply
with Rule 424(b) under the Securities Act upon being notified by a selling
shareholder that any material arrangements have been entered into with a
broker-dealer for the sale of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a broker or
dealer. Such supplement will disclose:
o the name of each such selling shareholder and of the
participating broker-dealer(s),
o the number of shares involved,
o the price at which such shares were sold,
o the commissions paid or discounts or concessions allowed to
such broker-dealer(s), where applicable,
o that such broker-dealer(s) did not conduct any investigation
to verify the information set out or incorporated by reference
in this prospectus, and
o other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling shareholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. We have agreed
to indemnify the selling shareholders against certain civil liabilities,
including certain liabilities under the Securities Act and the selling
shareholders have agreed to indemnify us against certain civil liabilities,
including certain liabilities under the Securities Act.
LEGAL MATTERS
Bonn & Schmitt & Steichen, our special Luxembourg counsel, will pass
upon the validity of the shares.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998,
and for the year ended December 31, 1999, and for the period from February 20,
1998 (date of inception) to December 31, 1998,
107
<PAGE>
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte &
Touche Experta AG, independent auditors, as stated in their reports appearing
herein and elsewhere in the registration statement, and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Act of
1934 and, accordingly, file annual and quarterly and other information with the
United States Securities and Exchange Commission. You may read and copy at
prescribed rates any reports, statements and other information we file at the
Commission's public reference rooms located at: Room 1024, 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. You may also obtain information
about us from the following regional offices of the Commission: 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. 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. Copies of the information we
file with the Commission may also be read at the offices of the National
Association of Securities Dealers at 1735 K Street, N.W., Washington, D.C.
20006. We are also subject to periodic reporting requirements in the
Netherlands. Accordingly, we file information with the Securities Board of the
Netherlands.
We have filed a registration statement on Form S-1 to register with the
Commission the shares and ADSs being offered by the selling shareholders
pursuant to this prospectus. 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. You should read the registration
statement, together with any prospectus supplement we may file, for further
information with respect to the shares and ADSs.
108
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT....................................................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998:
Consolidated Balance Sheets.....................................................................................F-3
Consolidated Statements of Operations...........................................................................F-4
Consolidated Statement of Shareholders' Equity (Deficit)........................................................F-5
Consolidated Statements of Cash Flows...........................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-8
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND JUNE 30, 1999:
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999..........................................................................................F-26
Unaudited Consolidated Statements of Operations................................................................F-27
Unaudited Consolidated Statement of Shareholders' Equity (Deficit).............................................F-28
Unaudited Consolidated Statements of Cash Flows................................................................F-29
Notes to Unaudited Consolidated Financial Statements...........................................................F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CARRIER1 INTERNATIONAL S.A.
We have audited the accompanying consolidated balance sheets of
Carrier1 International S.A. and subsidiaries (collectively, the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the year ended
December 31, 1999 and 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Carrier1 International S.A.
and subsidiaries as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the year ended December 31, 1999 and 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
/s/ David Wilson /s/ Aniko Smith
David Wilson Aniko Smith
Erlenbach, Switzerland
February 11, 2000
(March 1, 2000 as to the initial public offering described in Note 14)
F-2
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 28,504 $ 4,184
Restricted cash ............................................ 5,512 1,518
Restricted investments held in escrow ...................... 61,863 --
Accounts receivables, net of allowance for doubtful accounts
of $840 and $0 at December 31, 1999 and 1998, respectively 26,795 1,217
Unbilled receivables ....................................... 18,226 1,645
Value-added tax refunds receivable ......................... 20,499 3,014
Prepaid expenses and other current assets .................. 9,873 3,179
--------- ---------
Total current assets .................................... 171,272 14,757
RESTRICTED INVESTMENTS HELD IN ESCROW .......................... 28,314 --
PROPERTY AND EQUIPMENT-Net (See Notes 5, 7 and 8) .............. 213,743 31,091
INVESTMENTS IN JOINT VENTURES (See Note 6) ..................... 4,691 4,675
OTHER ASSETS ................................................... 19,635 911
--------- ---------
TOTAL .......................................................... $ 437,655 $ 51,434
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ........................................... $ 46,338 $ 27,602
Accrued network costs ...................................... 22,154 516
Accrued refile costs ....................................... 18,234 1,515
Accrued interest ........................................... 12,984 --
Other accrued liabilities .................................. 17,020 2,612
Short-term debt (See Note 7) ............................... 12,658 --
--------- ---------
Total current liabilities ............................... 129,388 32,245
DEFERRED REVENUE ............................................... 5,020 --
LONG-TERM DEBT (See Note 7):
Senior notes ............................................... 243,415 --
Other long-term debt ....................................... 94,341 --
--------- ---------
Total long-term debt .................................... 337,756 --
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 8)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $2 par value, 55,000,000 and 30,000,000 shares
authorized, respectively, 33,010,700 and 18,885,207 issued
and outstanding, respectively ............................ 66,021 37,770
Additional paid-in capital ................................. 2,524 --
Accumulated deficit ........................................ (107,734) (19,235)
Accumulated other comprehensive income ..................... 4,688 654
Common stock held in treasury, 4,083 shares at December 31,
1999 ..................................................... (8) --
--------- ---------
Total shareholders' equity (deficit) .................... (34,509) 19,189
--------- ---------
TOTAL .......................................................... $ 437,655 $ 51,434
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
FEBRUARY 20, 1998
(DATE OF INCEPTION)
YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1999 1998
--------- ---------
<S> <C> <C>
REVENUES ................................................... $ 97,117 $ 2,792
OPERATING EXPENSES:
Cost of services (exclusive of items shown separately
below) ............................................. 113,809 11,669
Selling, general and administrative ................... 18,369 8,977
Depreciation and amortization ......................... 13,849 1,409
--------- ---------
Total operating expenses ............................ 146,027 22,055
--------- ---------
LOSS FROM OPERATIONS ....................................... (48,910) (19,263)
OTHER INCOME (EXPENSE):
Interest expense ...................................... (29,475) (11)
Interest income ....................................... 5,859 92
Currency exchange loss, net ........................... (15,418) (53)
Other, net ............................................ (555) --
--------- ---------
Total other income (expense) ........................ (39,589) 28
--------- ---------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) ................... (88,499) (19,235)
INCOME TAX EXPENSE (BENEFIT)-Net of valuation allowance (See
Note 10) .............................................. -- --
--------- ---------
NET LOSS ................................................... $ (88,499) $ (19,235)
========= =========
EARNINGS (LOSS) PER SHARE:
Net loss:
Basic ................................................. $ (2.97) $ (2.61)
========= =========
Diluted ............................................... $ (2.97) $ (2.61)
========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER COMMON STOCK
PAID-IN ACCUMULATED COMPREHENSIVE HELD IN
COMMON STOCK CAPITAL DEFICIT INCOME TREASURY TOTAL
------------ ------- ------- ------ -------- -----
<S> <C> <C> <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
Issuance of shares
(14,125,493 shares) 28,251 $ 220 28,471
Issuance of warrants 2,304 2,304
Repurchase of shares
(4,083 shares). $ (8) (8)
Comprehensive income
(loss):........
Net loss....... (88,499) (88,499)
Other comprehensive
income, net of
tax:...........
Currency
translation
adjustments.... 4,034 4,034
--------
Total comprehensive
loss........... (84,465)
-------- ---------- ----------- ------ ----- --------
BALANCE-
December 31,
1999........... $ 66,021 $ 2,524 $ (107,734) $4,688 $ (8) $(34,509)
======== ========== ============ ====== ====== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM FEBRUARY 20, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
FEBRUARY 20, 1998
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (88,499) $ (19,235)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 13,849 1,409
Amortization of financing costs ................... 987 --
Changes in operating assets and liabilities:
Restricted cash ................................ (3,994) (1,518)
Receivables .................................... (61,641) (5,838)
Prepaid expenses and other current assets ...... (6,266) (3,165)
Other assets ................................... (5,626) (898)
Accounts payable and accrued liabilities ....... 67,811 14,804
Deferred revenue ............................... 5,020 --
--------- ---------
Net cash used in operating activities .......... (78,359) (14,441)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from maturity of restricted investments .... 53,071 --
Purchases of property and equipment ................. (160,485) (15,191)
Purchases of restricted investments held in escrow .. (145,817) --
Investment in joint ventures ........................ (16) (4,675)
--------- ---------
Net cash used in investing activities ........... (253,247) (19,866)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt ...................... 339,185 --
Payments on debt .................................... (1,776) --
Proceeds from issuance of common stock and warrants . 30,775 37,770
Proceeds from subscription of stock ................. 465 --
Purchase of treasury stock .......................... (8) --
Cash paid for financing costs ....................... (15,191) --
--------- ---------
Net cash provided by financing activities ....... 353,450 37,770
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND ............ CASH
EQUIVALENTS ......................................... 2,476 721
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............. 24,320 4,184
CASH AND CASH EQUIVALENTS:
Beginning of period ................................. 4,184 --
--------- ---------
End of period ....................................... $ 28,504 $ 4,184
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................. $ 16,491
=========
F-6
<PAGE>
<CAPTION>
FEBRUARY 20, 1998
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH
OPERATING, INVESTING AND FINANCING
ACTIVITIES:
At December 31, 1999 and 1998, equipment purchases of
approximately $39,720 and $17,315, respectively, are
included in accounts payable and accrued network costs.
During 1999, Carrier1 acquired property and equipment of
$7,944 by entering into a capital lease. In addition,
Carrier1 acquired $15,746 of equipment by entering into a
long-term financing agreement with a vendor.
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 AND 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"), operate in the telecommunications
industry offering voice, Internet and bandwidth and related telecommunications
services. Carrier1 offers these services primarily to other telecommunications
service providers. Carrier1 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. ORGANIZATION
In February 1998, the investors of Carrier1 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, Carrier1 reorganized the ownership structure of all of its subsidiaries.
SA, 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 Carrier1'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 generally
accepted accounting principles in the United States of America 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,
long-term customer contracts, allowances for uncollectible receivables,
investments, costs of services, depreciation and amortization, employee benefit
plans and taxes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Carrier1 are prepared in
accordance with generally accepted accounting principles in the United States of
America. The financial statements include the consolidated accounts of Carrier1
with all significant intercompany balances and transactions eliminated.
Investments in joint ventures are accounted for using the equity method.
F-8
<PAGE>
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is Carrier1's functional and reporting currency. The
financial statements of Carrier1'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 (deficit).
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
Carrier1 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.
Bandwidth sales in the form of grants of indefeasible rights of use
("IRUs") of fiber and fiber capacity, in exchange for cash, are accounted for as
leases. IRUs are evaluated for sales-type lease accounting which resulted in
certain lease transactions being accounted for as sales at the time of
acceptance of the fiber by the customer. IRUs that do not meet the criteria for
a sales-type lease are accounted for as an operating lease, and the cash
received is recognized as revenue over the term of the IRU. IRUs exchanged for
cash entered into after June 30, 1999 are accounted for as operating leases. See
"New Accounting Pronouncements" below.
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 year
ended December 31, 1999 and 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 warrants, 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. Carrier1 considers all highly-liquid
investments with a maturity of 90 days or less at the time of 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.
F-9
<PAGE>
RESTRICTED CASH
At December 31, 1999 and 1998, $5,512 and $1,518, respectively, of cash
was pledged as collateral on outstanding letters of credit and guarantees to
telecommunication companies that provide refile services to Carrier1.
RESTRICTED INVESTMENTS HELD IN ESCROW
Restricted investments held in escrow in connection with the line of
credit securing certain construction commitments (see Note 6) and the terms of a
long-term debt agreement (see Note 7) are classified as held-to-maturity. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," securities
are classified as held-to-maturity when Carrier1 has the positive intent and
ability to hold the securities to maturity. Held-to-maturity investments are
stated at cost, adjusted for amortization of premiums or discounts to maturity.
At December 31, 1999, such investments had an aggregate amortized cost
of $90,177 and a fair value of $91,738.
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, which are treated as capital
leases, 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 because management believes that, due to anticipated advances in
technology, Carrier1's IRUs are not likely to be productive assets beyond 15
years. During the period from February 20, 1998 (date of inception) to December
31, 1998, Carrier1 acquired a 25-year IRU on a transatlantic cable. This IRU is
being amortized over a useful life of 15 years. Maintenance, repairs, and
reengineering costs are charged to expense as incurred.
LONG-LIVED ASSETS
Carrier1 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
F-10
<PAGE>
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 necessary. The write-down would be measured as the
difference between the discounted estimated future operating cash flows from
such asset and the carrying value.
OTHER ASSETS
At December 31, 1999, other assets included deferred financing costs of
$14,204, net of accumulated amortization of $987, incurred in connection with
the issuance of the senior notes, the Nortel financing facility, and the interim
credit facility (see Note 7). Amortization of deferred financing costs is
recognized as interest expense. Also included in other assets are licenses of
$3,554, net of accumulated amortization of $40.
NONMONETARY EXCHANGES
Carrier1 accounts for swaps of IRUs for fiber and fiber wavelength
capacity as nonmonetary exchanges in accordance with Accounting Principles Board
("APB") Opinion No. 29, "Accounting for Nonmonetary Transactions."
PENSION PLANS
Carrier1 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 Carrier1'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. Carrier1 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
Carrier1 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.
F-11
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the carrying amounts of Carrier1's
financial instruments approximate their fair value, except for notes payable and
certain other long-term debt. The fair values of the dollar and euro notes
payable was determined using quoted market prices. Fair value for the seller
financing for the German Network was estimated using discounted cash flows
analyses based on Carrier1's estimated borrowing rate at December 31, 1999.
Based on these methods, fair values of these financial instruments at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Notes payable:
Dollar $ 160,000 $ 160,800
Euro 85,541 90,887
Other long-term debt:
Seller financing 15,746 14,296
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB
Statement No. 66." The interpretation is effective for sales of real estate with
property improvements or integral equipment entered into after June 30, 1999.
Under this interpretation, fiber is considered integral equipment and
accordingly title must transfer to a lessee in order for a lease transaction to
be accounted for as a sales-type lease. After June 30, 1999, the effective date
of FASB Interpretation No. 43, sales-type lease accounting will no longer be
appropriate for fiber leases and, therefore, these transactions will be
accounted for as operating leases unless title to the fibers under lease
transfers to the lessee or the agreement was entered into prior to June 30,
1999. During the second quarter of 1999, Carrier1 recognized revenue of
approximately $3.2 million and cost of services of approximately $1.9 million
from one bandwidth IRU contract that was treated as a sales-type lease. In the
future, similar revenues and expenses will be recognized over the term of the
related contracts, typically 15 to 20 years.
In June 1998, the FASB issued 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 balance sheet 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 the first quarter of Carrier1's fiscal year ending December 31, 2001.
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.
F-12
<PAGE>
4. EARNINGS PER SHARE
The following details the earnings per share calculations for the year
ended December 31, 1999 and the period from February 20, 1998 (date of
inception) to December 31, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, 1998
(DATE OF
YEAR ENDED DECEMBER INCEPTION) TO
31, 1999 DECEMBER 31, 1998
------------------- -----------------
<S> <C> <C>
Loss from operations.......................................... $ (48,910) $ (19,263)
=============== ==============
Net loss...................................................... $ (88,499) $ (19,235)
=============== ==============
Total number of shares used to compute basic earnings
(loss) per share 29,752,000 7,367,000
=============== ==============
Loss from operations:
Basic loss per share....................................... $ (1.64) $ (2.61)
============ ============
Diluted loss per share..................................... $ (1.64) $ (2.61)
============ ============
Net loss:
Basic loss per share....................................... $ (2.97) $ (2.61)
============ ============
Diluted loss per share..................................... $ (2.97) $ (2.61)
============ ============
</TABLE>
Potential dilutive securities have been excluded from the computation
for the year ended December 31, 1999 and the period from February 20, 1998 (date
of inception) to December 31, 1998 as their effect is anti-dilutive. Had
Carrier1 been in a net income position for the year ended December 31, 1999 or
the period from February 20, 1998 (date of inception) to December 31, 1998, the
number of weighted-average shares used to compute diluted earnings per share
would have included an additional 4,288,000 and 2,822,000 shares, respectively,
related to outstanding warrants, stock options and stock subscriptions
(determined using the treasury stock method at the estimated average market
value).
F-13
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Network equipment.................................. $ 81,220 $ 14,613
Indefeasible right of use investments.............. 49,099 11,106
Leasehold improvements............................. 10,333 1,712
Furniture, fixtures and office equipment........... 8,652 709
Construction in progress........................... 78,549 4,353
------------- ------------
227,853 32,493
Less: accumulated depreciation and amortization.... (14,110) (1,402)
------------- ------------
Property and equipment, net................... $ 213,743 $ 31,091
============= =============
</TABLE>
6. INVESTMENT IN JOINT VENTURE
Carrier1 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 set 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 agreed to form a company (the "Developer")
to act as their agent to arrange construction of the German Network.
As of December 31, 1998, the parties were in negotiations with respect
to the legal structure of the Developer and the definitive project terms. Until
such development agreement was negotiated and executed by the parties, Viatel
provided such services as the Developer is obligated to provide under the LOI.
Each of the parties had contributed $4.05 million for incremental costs, and
their pro-rata share of $2.5 million for pre-development costs. Each party was
obligated to provide the Developer with a $75 million letter of credit,
conditional upon the ability of each of Carrier1 and Metromedia to raise at
least $75 million through financing or equity. 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.
On February 19, 1999, the parties executed a development agreement. In
accordance with the development agreement, Carrier1 provided a 109.5 million
German Mark letter of credit (approximately $64.8 million) to the Developer to
fund Carrier1's share of construction costs. Pursuant to the development
agreement, all decisions required to be made by Viatel, Metromedia and Carrier1
will be made by a majority in interest, except for major decisions specified in
the development agreement. Most specified major decisions, such as those
approving budgets, significant cost increases and delays, or changes in network
cities shall be approved by unanimous vote. Other major decisions, such as
related-party transactions, require the vote of at least two owners. During
1999, the Developer entered into a construction contract for which each party,
and not the Developer, is severally liable. As each portion of the network is
completed and delivered, each party will own its own network. The parties have
agreed to take all actions necessary or desirable to obtain and maintain
separate ownership of all components of their respective networks. The
development agreement contains contingency provisions for the possibility in
limited circumstances of joint ownership of particular assets, such as rights of
way, licenses and permits. The owners will have equal access rights to use
transmission equipment sites in each network city, but the specific form of
legal ownership at each such site will be determined on a case-by-case basis.
F-14
<PAGE>
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 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.
As of December 31, 1999, Carrier1 estimates that its share of the
development costs of the German Network will be up to approximately $105
million, including the fiber deployed, and is expected to be incurred before
December 31, 2000. The network is expected to be completed in the first quarter
of 2000.
7. DEBT
LONG-TERM DEBT
On February 19, 1999, Carrier1 issued $160 million and euro85 million
of 13 1/4% senior notes (the "Notes") with detachable warrants with a scheduled
maturity of February 15, 2009. Each dollar warrant is initially exercisable to
purchase 6.71013 shares of common stock and each euro warrant is initially
exercisable to purchase 7.53614 shares of common stock. Holders will be able to
exercise the warrants at a per share price equal to the greater of $2.00 per
share and the minimum par value required by Luxembourg law (currently 50
Luxembourg francs), subject to adjustment.
Carrier1 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, Carrier1 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. Carrier1 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 Carrier1'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.
As required by the terms of the Notes, Carrier1 used approximately
$49.2 million of the net proceeds to purchase a portfolio of U.S. government
securities and approximately euro26.9 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.
F-15
<PAGE>
Other long-term debt as of December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Seller financing................................... $ 90,749
Network fiber lease................................ 3,592
---------
$ 94,341
=========
</TABLE>
Approximately $15.7 million of other long-term indebtedness is
attributable to seller financing of fiber optic cable for Carrier1's German
Network. Pursuant to the terms of the financing agreement, the seller will
either provide financing for the entire amount of the purchase with the contract
value to be repaid over three years in equal annual installments beginning on
December 31, 2001 together with interest, or will allow 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.
Carrier1 entered into a financing facility with Nortel Networks Inc.
("Nortel"), a major equipment supplier, on June 25, 1999. The Nortel facility
allows Carrier1 to borrow money to purchase network equipment from Nortel and,
in limited amounts, other suppliers. Under this facility, Carrier1 may borrow up
to $75 million or the actual amount paid or payable by Carrier1 for network
equipment supplied prior to December 31, 1999, whichever is less. Advances under
the facility bear interest at a floating rate tied to LIBOR, and interest
payments are payable periodically from the date of the relevant advance. At
Carrier1's option, it may pledge assets to secure the Nortel facility and
receive a lower interest rate. Carrier1 may not borrow additional funds under
this facility after December 31, 2000. Advances are to be repaid in sixteen
equal quarterly installments beginning March 31, 2001. As of December 31, 1999,
Carrier1 has borrowed approximately $75 million under this agreement on an
unsecured basis. These borrowings bear interest at a weighted-average rate of
11.04% per annum as of December 31, 1999.
Approximately $3.6 million of other long-term indebtedness is
attributable to a lease of capacity Carrier1 entered into on April 1, 1999. The
lease requires Carrier1 to make monthly payments of $274, including operating
and maintenance costs, for 36 months, after which Carrier1 will obtain a 15 year
IRU in the capacity underlying the lease. Carrier1 will be required to pay an
annual operating and maintenance fee of $250 for the term of the IRU. Minimum
lease payments under this arrangement are due as follows:
<TABLE>
<S> <C>
FISCAL YEAR ENDING DECEMBER 31:
2000............................................ $ 3,038
2001............................................ 3,038
2002............................................ 759
6,835
Amounts representing interest................... (666)
------------
$ 6,169
============
</TABLE>
SHORT-TERM DEBT
At December 31, 1999, short-term debt consists of the following:
<TABLE>
<S> <C>
Interim credit facility.......................... $ 10,081
Current portion of capital lease obligation...... 2,577
------------
$ 12,658
============
</TABLE>
On December 21, 1999, Carrier1 entered into an interim credit facility
with Morgan Stanley Senior Funding, Inc. and Citibank N.A. as lead arrangers. As
of December 31, 1999, Carrier1 had drawn
F-16
<PAGE>
euro10 million under the facility. The facility allows Carrier1 to draw up to a
maximum amount of $200 million, or its equivalent in euros, for purposes of
refinancing the $75 million Nortel facility, financing the acquisition and
installation of telecommunications equipment and other general corporate
purposes. The facility is available until November 30, 2000 and has a scheduled
maturity of December 20, 2000. Advances will bear interest at LIBOR plus a
margin to be determined by reference to factors including the value of the
security delivered by Carrier1 and any default in payment. At December 31, 1999,
such interest rate was 6.72%. Interest is payable periodically, at the time of
any repayment and at maturity. Carrier1 may make voluntary pre-payments of
amounts drawn under the facility without penalty and is required to apply
specified proceeds, including the net cash proceeds from the initial public
offering of equity securities and the issuance of any additional debt or equity
securities, subject to exceptions, to prepay amounts outstanding under the
facility and then to reduce the commitments under the facility. The facility
contains covenants and events of default similar to those in the indentures
governing the 13 1/4% senior notes.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Carrier1 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 Carrier1
to pay additional amounts for operating and maintenance costs. As of December
31, 1999, future minimum lease payments under operating leases with remaining
terms in excess of one year are as follows:
<TABLE>
<S> <C>
FISCAL YEAR ENDING DECEMBER 31:
2000............................................... $ 13,454
2001............................................... 7,038
2002............................................... 6,812
2003............................................... 6,560
2004............................................... 4,229
Thereafter......................................... 11,959
-----------
Total minimum lease payments....................... $ 50,052
===========
</TABLE>
Total rental expense under operating leases was $24,712 and $5,171,
respectively, during the year ended December 31, 1999 and the period from
February 20, 1998 (date of inception) to December 31, 1998.
PURCHASE AND SUPPLY COMMITMENTS
During the period from February 20, 1998 (date of inception) to
December 31, 1998, Carrier1 entered into an agreement to purchase a Multiple
Investment Unit ("MIU") that gives Carrier1 rights to a portion of a
trans-Atlantic cable scheduled for completion in early 2000. Currently, Carrier1
estimates its remaining share of development and construction costs to be
$11,013. Carrier1 has also entered into various contracts with vendors to
provide network set-up and maintenance services.
On April 16, 1999, Carrier1 signed an agreement to swap wavelengths on
the basis of a 15-year IRU. Carrier1 is to receive two unprotected wavelengths
on diverse routes between Hamburg, Copenhagen and Malmo and provide two
unprotected wavelengths on the routes between Hamburg and Frankfurt, Hamburg and
F-17
<PAGE>
Berlin, and Berlin and Frankfurt in exchange. The wavelengths are expected to be
exchanged by the third quarter of 2000.
On April 29, 1999, Carrier1 signed a letter of intent with Nortel for
the purchase of network equipment to light up dark fiber in Germany and the
United Kingdom. The value of the purchases and the associated services to be
performed before December 31, 2000 amounts to $22 million. Through December 31,
1999, Carrier1 had not received any equipment or services under this contract.
On May 7, 1999, Carrier1 signed a contract to swap a 10-year IRU for
wavelength capacity from London to Amsterdam, Frankfurt, Paris and Brussels for
a 10-year IRU for wavelength capacity from London to Frankfurt, Amsterdam and
Paris. In addition, Carrier1 paid $3.0 million on the date of acceptance. The
capacity was received in August 1999. Carrier1 expects to deliver capacity to
the other party in the first quarter of 2000.
On August 17, 1999, Carrier1 signed a contract to swap 12 strands of
dark fiber on Carrier1's German Network for 12 strands of dark fiber covering
substantially all of the major cities in France. The French fiber infrastructure
will become available in phases throughout 2000. Each party will provide certain
network maintenance services for the other party in their respective countries.
On September 3, 1999, Carrier1 signed a swap agreement under which it
will provide Internet services for a total amount of $20.7 million in exchange
for bandwidth capacity connecting Stockholm, Malmo, Oslo and Gothenburg. The
bandwidth capacity is scheduled to be provided in August 2000. Carrier1 has the
right to convert the wavelength any time after May 31, 2000 to an 18-year IRU of
one fiber pair.
On September 29, 1999, Carrier1 contracted to build a 44-kilometer,
multiple duct city ring connecting major telecommunications points-of-presence
in Amsterdam. The ring will pass much of Amsterdam's business and financial
district, and is scheduled to be completed in the second quarter of 2000. Parts
of the ring are expected to be usable in the first quarter of 2000. The
construction cost is estimated to be approximately $4.8 million.
On October 1, 1999, Carrier1 entered into an agreement to acquire fiber
capacity on the basis of a 10-year IRU on the route connecting Paris, Kehl,
Milan, Geneva and Zurich for a total purchase price of $6.8 million. Carrier1
received access to this capacity in December 1999. In addition, Carrier1 will be
required to pay an annual operating and maintenance charge of $380. The contract
also contains options which allow Carrier1 to purchase additional capacity with
a value of $3.8 million and to sell certain capacity back to the seller after
November 30, 2000 for 70% of its original value. If Carrier1 exercises its
option to acquire additional capacity, the annual operating and maintenance
charge will increase to $440.
On October 19, 1999, Carrier1 signed an agreement to swap one of the
ducts of the Amsterdam city ring for one duct on a city ring connecting
Amsterdam south with the business centers in Amsterdam-Schiphol and
Amsterdam-Hoofddorp.
During November 1999, Carrier1 entered into a joint venture to form
Hubco S.A. to build facilities in which Carrier1 will house and manage both its
own and its customers' telecommunications equipment. Carrier1 has committed
$23.25 million to this $155 million project. An affiliate of Providence Equity
Partners L.P., the majority unitholder of LLC, is expected to be one of the
partners in the venture.
F-18
<PAGE>
Based on Carrier1's current network development plans, the costs of the
MIU and network services are expected to be paid as follows:
<TABLE>
<CAPTION>
NETWORK
FISCAL YEAR ENDING DECEMBER 31: MIU SERVICES TOTAL
--- -------- -----
<S> <C> <C> <C>
2000.................................. $ 10,061 $ 9,360 $ 19,421
2001.................................. 952 - 952
---------- ---------- ----------
$ 11,013 $ 9,360 $ 20,373
========== ========== ==========
</TABLE>
9. 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 options to be issued under the Stock
Option Plan is the lesser of 4,444,444 options 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 Carrier1's
cash bonus plan (the "Cash Bonus Plan").
In connection with the recapitalization of Carrier1 during December
1998, Carrier1 canceled the 1998 Share Option Plan and replaced it with the new
1999 Share Option Plan (the "1999 Option Plan"), under which SA and related
companies of the consolidated Carrier1 group (the "Related Corporations") may
grant to any employee of Carrier1 or Related Corporations options in equity
securities (the "Options") issued by Carrier1. This effectively reduced the
number of outstanding shares of Carrier1 by half and, therefore, reduced the
number of options under the 1998 Share Option Plan by half and increased the per
share exercise price value to $2 per share.
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 Carrier1
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 March 1, 1999. 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 commencement of
employment. 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. During 1999, Carrier1 canceled the options
granted under the 1998 Stock Option Plan and issued replacement options under
the 1999 Option Plan.
As of September 9, 1999, the number of shares granted exceeded the
amount authorized under the plan by 37,940 options. The Board approved the
overrun and increased the number of shares available under the 1999 Option Plan
to 2,747,222.
In addition, Carrier1 has granted to two directors options to purchase
a total of 40,000 shares at an exercise price of $2.00 per share.
F-19
<PAGE>
The status of Carrier1's stock option plans, reflecting the effects of
the option replacement in 1999 as of December 31, 1998, is summarized below as
of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
<S> <C> <C>
Outstanding at December 31, 1998............ 2,022,221 $ 2.00
Granted.................................. 456,997 12.55
Exercised................................ - -
Canceled................................. (750) 2.00
------------
Outstanding at December 31, 1999............ 2,478,468 $ 3.95
============
Options exercisable at December 31, 1999.... 808,888 $ 2.00
============
</TABLE>
As required by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), Carrier1 has determined the pro-forma information as if Carrier1
had accounted for stock options under the fair value method of SFAS 123. The
weighted-average fair value of options granted during the year ended December
31, 1999 and the period from February 20, 1998 (date of inception) to December
31, 1998 was $3.12 and $0.15 per option, respectively. During the year ended
December 31, 1999, the fair value of option grants is estimated on the date of
grant using the following assumptions: dividend yield of 0%, risk-free interest
rate range of 5.5% to 5.8%, expected option life of 3 years, and volatility
factor of 25%. During the period from February 20, 1998 (date of inception) to
December 31, 1998, the fair value of option grants was 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.
Had compensation cost for Carrier1's stock option plans been determined
under SFAS 123, based on the fair market value at the grant dates, Carrier1's
pro-forma net loss and net loss per share for the year ended December 31, 1999
and the period from February 20, 1998 (date of inception) to December 31, 1998
would have been reflected as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss:
As reported.................................... $ (88,499) $ (19,235)
=========== ===========
Pro forma...................................... $ (88,778) $ (19,461)
=========== ===========
Net loss per share-basic basis:
As reported.................................... $ (2.97) $ (2.61)
=========== ===========
Pro forma...................................... $ (2.98) $ (2.64)
=========== ===========
</TABLE>
In March 1998, Carrier1 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 Carrier1 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 share 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 shares
F-20
<PAGE>
with an aggregate value of approximately $1.4 million. 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 Carrier1 in December
1998, Carrier1 amended the Stock Purchase Plan so that employees will be issued
shares of common stock of Carrier1 rather than shares of LLC. This effectively
reduced the number of shares to be issued under the previous plan by half and
increased the par value of the shares to $2 per share. Carrier1 collected the
amounts due from employees under the Stock Purchase Plan at December 31, 1998
during 1999 and issued the related shares in 1999. During the year ended
December 31, 1999, employees committed to purchase approximately 2,354,000
additional shares with an aggregate value of approximately $5.3 million,
including 400,000 shares sold at $2.00 per share to LLC for the benefit of two
directors.
10. INCOME TAXES
The income tax expense (benefit) for the year ended December 31, 1999
and the period from February 20, 1998 (date of inception) to December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current................................ $ - $ -
Deferred............................... 24,037 5,378
----------- -----------
24,037 5,378
Valuation allowance.................... (24,037) (5,378)
----------- ------------
Total.................................. $ - $ -
=========== ===========
</TABLE>
Carrier1 has tax loss carryforwards of approximately $29,415 and $5,378
at December 31, 1999 and 1998, respectively. The ability of Carrier1 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 - $67; 2004 - $341;
2005 - $4,753; 2006 - $13,636; 2013 - $46; 2014 - $79. Net operating losses
totaling $10,493 do not expire. Due to its limited history, Carrier1 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, 1999 and 1998.
11. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999 and the period from February
20, 1998 (date of inception) to December 31, 1998, Carrier1 reimbursed certain
companies, which are shareholders in LLC, for expenses incurred in connection
with the formation of Carrier1 and the negotiation of certain agreements entered
into by Carrier1. Such reimbursements totaled $96 and $339, respectively, during
1999 and 1998 and were expensed as selling, general and administrative expenses.
Carrier1 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.
F-21
<PAGE>
This agreement is automatically renewable unless it is terminated by either
party with appropriate notice as required by the agreement.
Carrier1 has loaned an officer of the company approximately $68. The
loan bears interest at 12% per annum and will be repaid in five equal
installments of principal and interest of approximately $19 beginning July 1,
2001.
In December 1999, Carrier1 entered into an agreement with an affiliate
of Worldwide Fiber Inc. ("Worldwide Fiber") under which it will sell bandwidth
capacity in the form of IRUs to Worldwide Fiber beginning in March 2001. Under
the agreement, Worldwide Fiber also has the option to swap excess trans-Atlantic
capacity for capacity on Carrier1's German Network once it has purchased a
certain amount of capacity. A fund managed by Providence Equity Partners L.P.
invests in Worldwide Fiber. In addition, one of Carrier1's directors is also a
director of Worldwide Fiber.
12. EMPLOYEE BENEFIT PLANS
Carrier1 contributes to defined contribution pension plans in
accordance with the laws and practices of the countries in which it operates.
During the year ended December 31, 1999 and the period from February 20, 1998
(date of inception) to December 31, 1998, Carrier1 recorded pension expense
totaling $770 and $267, respectively.
13. SEGMENT AND RELATED INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires Carrier1 to disclose certain information related to
segments and geographic areas in which Carrier1 operates and its major
customers.
SEGMENT INFORMATION
Carrier1 has identified two reportable operating segments as defined in
SFAS No. 131: voice services and Internet and bandwidth 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 Internet and bandwidth services segment
provides telecommunications services to Internet service providers and other
telecommunications companies.
Carrier1'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. Carrier1 evaluates
performance of segments based on its fixed cost contribution, which is defined
as segment revenues less direct variable costs incurred directly by the segment.
Certain direct costs, such as network and transmission costs, are shared by the
segments and are not allocated by management to the segments. 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 year ended December 31, 1999 or the period from February
20, 1998 (date of inception) to December 31, 1998.
Summarized financial information concerning Carrier1's reportable
segments as of December 31, 1999 and 1998, and for the year ended December 31,
1999 and the period from February 20, 1998 (date
F-22
<PAGE>
of inception) to December 31, 1998 is shown in the following table. The "Other"
column includes unallocated shared network and corporate-related assets which
are all assets other than network equipment that has been identified as relating
to a specific segment. As of December 31, 1999 and 1998, network equipment with
a cost basis of $42,857 and $12,008, respectively, has been identified as
relating to a specific segment and network equipment of $38,363 and $2,605,
respectively, is shared by the segments. The remaining assets, including but not
limited to IRU investments and construction in progress, are not allocated to
segments since such assets are considered to be either shared or
corporate-related.
YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
INTERNET AND
BANDWIDTH
VOICE SERVICES SERVICES OTHER CONSOLIDATED
-------------- -------- ----- ------------
<S> <C> <C> <C> <C>
Revenues................................ $ 87,619 $ 9,498 $ - $ 97,117
Fixed cost contribution................. 12,614 7,561 - 20,175
Identifiable assets..................... 33,984 3,482 400,189 437,655
Depreciation and amortization........... 4,406 614 8,829 13,849
Capital expenditures.................... 28,587 2,262 164,527 195,376
</TABLE>
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998:
<TABLE>
<CAPTION>
INTERNET AND
BANDWIDTH
VOICE 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>
The following table reconciles the fixed cost contribution for
reportable segments to the loss before income tax expense (benefit) for the year
ended December 31, 1999 and the period from February 20, 1998 (date of
inception) to December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Total fixed cost contribution for reportable segments............. $ 20,175 $ 118
Unallocated amounts:
Unallocated cost of services (exclusive of items shown separately (36,867) (8,995)
below)........................................................
Selling, general and administrative expenses.................. (18,369) (8,977)
Depreciation and amortization................................. (13,849) (1,409)
Other income (expense)........................................ (39,589) 28
---------- ----------
Loss before income tax expense (benefit).......................... $ (88,499) $ (19,235)
=========== ==========
</TABLE>
Unallocated cost of services include network and transmission costs
that are shared by the voice and Internet and bandwidth services segments.
F-23
<PAGE>
The following table provides detail of the other identifiable assets as
of December 31, 1999 and 1998 in the table shown above:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash and cash equivalents (including restricted cash).. $ 34,016 $ 5,702
Receivables............................................ 65,520 5,876
Prepaid expenses and other current assets.............. 9,873 3,179
Restricted investments................................. 90,177 -
Investment in joint ventures........................... 4,691 4,675
Other noncurrent assets................................ 19,635 911
Property and equipment:
Unallocated network equipment...................... 38,363 2,605
Indefeasible right of use investments.............. 49,099 11,106
Leasehold improvements............................. 10,333 1,712
Furniture, fixtures and office equipment........... 8,652 709
Construction in progress........................... 78,549 4,353
Accumulated depreciation and amortization.......... (8,719) (794)
--------- ---------
Total other identifiable assets $ 400,189 $ 40,034
========= =========
</TABLE>
GEOGRAPHIC INFORMATION
The following table provides detail of Carrier1's revenues for the year
ended December 31, 1999 and the period from February 20, 1998 (date of
inception) to December 31, 1998 and long-lived assets as of December 31, 1999
and 1998 on a geographic basis. Revenues have been allocated based on the
location of the customer. IRU investments are included based on the entity which
owns the investment. Carrier1 did not earn any revenues in its country of
domicile, Luxembourg.
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Germany............ $ 40,235 $ 91,115 $ 878 $ 10,369
Switzerland........ 6,240 72,052 108 14,186
United Kingdom..... 26,549 25,582 1,768 7,399
United States...... 3,299 4,582 - 3,006
Netherlands........ 7,985 9,713 38 725
France............. 6,627 3,924 - 407
Luxembourg......... - 14,294 - -
Other countries.... 6,182 16,807 - 585
---------- ---------- ---------- ----------
$ 97,117 $ 238,069 $ 2,792 $ 36,677
========== ========== ========== ==========
</TABLE>
MAJOR CUSTOMERS
During the year ended December 31, 1999 and the period from February
20, 1998 (date of inception) to December 31, 1998, Carrier1 earned 14% and 69%,
respectively, of its revenues from major customers. During 1999, revenues earned
from one major customer amounted to approximately 14% of total revenues. During
1998, revenues earned from one major customer amounted to approximately 46% of
total revenues, to another major customer, approximately 13% of total revenues,
and to a third major customer, approximately 10% of total revenues.
F-24
<PAGE>
14. SUBSEQUENT EVENTS
SHORT-TERM DEBT
As of February 11, 2000, Carrier1 had borrowed an additional euro15
million under the interim credit facility with Morgan Stanley Senior Funding,
Inc. and Citibank N.A.
INVESTMENT IN JOINT VENTURE
In February 2000, Carrier1 provided a euro20 million (approximately
$20 million) letter of credit to the Developer to fund Carrier1's share of
additional project costs for the German Network. The letter of credit is fully
cash collateralized.
INITIAL PUBLIC OFFERING
On March 1, 2000, Carrier1 completed its initial public offering of
8,625,000 shares of common stock (including the underwriters' overallotment of
1,125,000 shares) at a price of euro87 per share (approximately $87.42 per
share). Carrier1 received proceeds of approximately $712 million, net of
underwriting discounts and commissions and listing fees. Carrier1's shares are
quoted and traded in the Federal Republic of Germany of the Neuer Markt segment
of the Frankfurt Stock Exchange. In the United States of America, Carrier1's
shares are traded in the form of American Depositary Shares ("ADSs"). Each ADS
represents the right to receive 0.2 shares of common stock. The ADSs are quoted
and traded in the U.S. on the NASDAQ National Market.
F-25
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 2000 DECEMBER 31, 1999*
------------- -----------------
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................................ $ 508,814 $ 28,504
Restricted cash.................................................. 21,202 5,512
Restricted investments held in escrow............................ 34,477 61,863
Accounts receivable, net of allowance for doubtful accounts of
$1,981 and $840 at June 30, 2000 and December 31, 1999,
respectively................................................... 44,229 26,795
Unbilled receivables............................................. 22,208 18,226
Value-added tax refunds receivable............................... 26,562 20,499
Prepaid expenses and other current assets........................ 17,966 9,873
----------- -----------
Total current assets.......................................... 675,458 171,272
PROPERTY AND EQUIPMENT-NET (See Note 4).............................. 277,435 213,743
INVESTMENT IN AND ADVANCES TO JOINT VENTURES......................... 27,931 4,691
RESTRICTED INVESTMENTS HELD IN ESCROW................................ 12,769 28,314
OTHER ASSETS......................................................... 14,446 19,635
----------- -----------
TOTAL................................................................ $ 1,008,039 $ 437,655
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable........................................... $ 32,313 $ 46,338
Accrued network costs............................................ 22,157 22,154
Accrued refile costs............................................. 30,364 18,234
Accrued interest................................................. 11,981 12,984
Other accrued liabilities........................................ 23,781 17,020
Short-term deferred revenue...................................... 6,038 --
Short-term debt (See Note 5)..................................... 28,805 12,658
----------- -----------
Total current liabilities..................................... 155,439 129,388
DEFERRED REVENUE..................................................... 25,595 5,020
LONG-TERM DEBT (See Note 5):
Senior notes..................................................... 239,126 243,415
Other long-term debt............................................. 2,207 94,341
----------- -----------
Total long-term debt.......................................... 241,333 337,756
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $2 par value, 100,000,000 and 55,000,000 shares
respectively authorized, 41,719,218 and 33,010,700, respectively
issued and outstanding at June 30, 2000 and December 31, 1999.. 83,438 66,021
Additional paid-in capital....................................... 667,178 2,524
Accumulated deficit.............................................. (168,487) (107,734)
Accumulated other comprehensive income........................... 4,109 4,688
Common stock held in treasury.................................... (566) (8)
----------- -----------
Total shareholders' equity (deficit).......................... 585,672 (34,509)
----------- -----------
TOTAL................................................................ $ 1,008,039 $ 437,655
=========== ===========
</TABLE>
----------
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements.
F-26
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED ENDED JUNE 30,
2000 1999 JUNE 30, 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES ...................................... $ 57,531 $ 20,194 $ 108,798 $ 32,487
OPERATING EXPENSES:
Cost of services (exclusive of items shown
separately below) ...................... 58,467 22,346 113,003 39,361
Selling, general and administrative ...... 9,165 3,147 16,803 6,465
Depreciation and amortization ............ 7,228 2,298 13,379 3,634
--------- --------- --------- ---------
Total operating expenses ............... 74,860 27,791 143,185 49,460
--------- --------- --------- ---------
LOSS FROM OPERATIONS .......................... (17,329) (7,597) (34,387) (16,973)
OTHER INCOME (EXPENSE):
Interest expense ......................... (5,712) (8,400) (19,625) (12,605)
Interest income .......................... 6,406 2,099 9,090 3,078
Currency exchange gain (loss), net ....... 3,862 (4,721) (15,825) (7,149)
Other, net ............................... (3) (413) (6) (413)
--------- --------- --------- ---------
Total other income (expense) ........... 4,553 (11,435) (26,366) (17,089)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT ................ (12,776) (19,032) (60,753) (34,062)
INCOME TAX BENEFIT-Net of valuation allowance . -- -- -- --
--------- --------- --------- ---------
NET LOSS ...................................... $ (12,776) $ (19,032) $ (60,753) $ (34,062)
========= ========= ========= =========
LOSS PER SHARE:
Net loss:
Basic .................................... $ (0.31) $ (0.63) $ (1.56) $ (1.23)
========= ========= ========= =========
Diluted .................................. $ (0.31) $ (0.63) $ (1.56) $ (1.23)
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-27
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
PAID-IN ACCUMULATED COMPREHENSIVE HELD IN
COMMON STOCK CAPITAL DEFICIT INCOME TREASURY TOTAL
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE-
December 31, 1999 $ 66,021 $ 2,524 $(107,734) $ 4,688 $ (8) $ (34,509)
Issuance of shares
(8,708,518 shares) 17,417 664,654 682,071
Repurchase of
shares........... (558) (558)
Comprehensive
income (loss):
Net loss......... (60,753) (60,753)
Other comprehensive
income, net of tax:
Currency
translation
adjustments...... (579) (579)
---------
Total
comprehensive loss (61,332)
--------- --------- --------- --------- --------- ---------
BALANCE-
June 30, 2000.... $ 83,438 $ 667,178 $(168,487) $ 4,109 $ (566) $ 585,672
========= ========= ========== ========= ========== =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-28
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (60,753) $ (34,062)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 13,379 3,634
Amortization and write-off of capitalized financing
costs................................................ 4,776 -
Changes in operating assets and liabilities:
Restricted cash.................................... (748) (1,297)
Receivables........................................ (30,773) (24,875)
Prepaid expenses and other current assets.......... (8,366) (4,347)
Other assets....................................... 478 (13,262)
Accounts payable and accrued liabilities........... 33,327 21,799
Deferred revenue................................... 25,753 -
------------ ------------
Net cash used in operating activities.............. (22,927) (52,410)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of restricted investments held in escrow..... _ (135,486)
Purchase of property and equipment..................... (111,742) (51,460)
Investments in joint ventures.......................... (23,480) (6)
Receipts from maturity of restricted investments....... 42,931 -
------------ ------------
Net cash used in investing activities.............. (92,291) (186,952)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt.............. 48,490 -
Proceeds from issuance of long-term debt............... - 253,858
Proceeds from issuance of common stock and warrants.... 682,067 26,571
Payment on debt........................................ (124,858) -
Purchase of treasury stock............................. (558) -
Cash pledged for letter of credit...................... (19,318) -
Receipts from cash pledged for letter of credit........ 4,376 -
------------ ------------
Net cash provided by financing activities.......... 590,199 280,429
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 5,329 2,854
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 480,310 43,921
CASH AND CASH EQUIVALENTS:
Beginning of period.................................... 28,504 4,184
------------ ------------
End of period.......................................... $ 508,814 $ 48,105
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING
ACTIVITIES:
At June 30, 2000 and June 30, 1999, equipment purchases of
approximately $16,486 and $24,982, respectively, are included
in accounts payable and accrued network costs.
</TABLE>
See notes to unaudited consolidated financial statements.
F-29
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(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 voice, Internet and bandwidth and related
telecommunication services. Carrier1 offers these services primarily to other
telecommunications companies. Carrier1 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 and six months ended June 30, 2000 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 June 30, 2000 and June 30, 1999 and for the six months ended June
30, 2000 and June 30, 1999 (in thousands of U.S. dollars, except share
information):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Loss from
operations......... $(17,329) $(7,597) $(34,387) $(16,973)
========= ======== ========= =========
Net loss................ $(12,776) $(19,032) $(60,753) $(34,062)
========= ========= ========= =========
Total number of shares used
to compute basic
earnings (loss) per
share............... 41,663,000 30,170,000 39,047,000 27,618,000
========== ========== ========== ==========
Loss from operations:
Basic and diluted loss
per share......... $(0.42) $(0.25) $(0.88) $(0.61)
======= ======= ======= =======
Net Loss:
Basic and diluted loss
per share......... $(0.31) $(0.63) $(1.56) $(1.23)
======= ======= ======= =======
</TABLE>
Potential dilutive securities have been excluded from the computation
for the three and six months ended June 30, 2000 and June 30, 1999 as their
effect is antidilutive. Had the Company been in a net income position for the
three and six months ended June 30, 2000 and June 30, 1999, diluted earnings per
share would have included an additional 4,507,429 and 4,288,000 shares,
respectively, related to outstanding warrants, stock options and stock
subscriptions.
F-30
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000, consist of the following:
<TABLE>
<S> <C>
Network equipment ............................................ $ 93,193
Indefeasible right of use investments ........................ 60,335
Leasehold improvements ....................................... 13,398
Furniture, fixtures and office equipment ..................... 12,118
Construction in progress ..................................... 124,992
---------
304,036
Less: accumulated depreciation and amortization .............. (26,601)
---------
Property and equipment, net ............................. $ 277,435
=========
</TABLE>
5. DEBT
The details of other long-term debt are as follows:
<TABLE>
<S> <C>
Network fiber lease .............................................. $ 2,207
---------
Total ............................................................ $ 2,207
=========
</TABLE>
Approximately $26.1 million of other long term debt was reclassified to
short term debt during June 2000 since the Company decided to repay a vendor
financing agreement early. This loan was repaid on July 5, 2000.
6. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
On April 1, 2000, Carrier1 signed a contract with Nortel for the
provision of a first line maintenance, technical support and spares management
service for 3 years for a total cost of $8.6 million.
We have secured an extensive UK network as part of an agreement
announced during the second quarter with 360networks. In this agreement, we have
agreed to purchase approximately $85 million of infrastructure and bandwidth
capacity from 360networks and 360networks in turn has agreed to purchase
approximately $150 million of infrastructure and bandwidth capacity from us. As
a part of this agreement, 360networks will provide us with trans-Atlantic and
North American capacity, as well as 12 strands of dark fiber on its
diversely-routed 1,150-kilometer UK network between Liverpool and London,
connecting Manchester, Sheffield, Birmingham, Bristol, Nottingham and Cambridge.
7. INCOME TAXES
The Company has tax loss carry forwards of approximately $49,031 at
June 30, 2000. 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 lapse. 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-31
<PAGE>
8. INITIAL PUBLIC OFFERING
On March 1, 2000, Carrier1 completed its initial public offering of
8,625,000 shares of common stock (including the underwriters' overallotment of
1,125,000 shares) at a price of (U)87 per share (approximately $87.42 per
share). Carrier1 received proceeds of approximately $682.1 million, net of
underwriting discounts and commissions, listing fees, and offering-related
expenses. Carrier1's shares are quoted and traded in the Federal Republic of
Germany on the Neuer Market segment of the Frankfurt Stock Exchange. In the
United States of America, Carrier1's shares are traded in the form of American
Depositary Shares ("ADSs"). Each ADS represents the right to receive 0.2 shares
of common stock. The ADS's are quoted and traded in the U.S. on the NASDAQ
National Market.
9. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments for the six months ended June 30, 2000 and 1999 is shown in the
following table. The "Other" column includes unallocated shared and corporate
related assets.
SIX MONTHS ENDED JUNE 30, 2000:
<TABLE>
<CAPTION>
INTERNET AND
BANDWIDTH
VOICE SERVICES SERVICES OTHER CONSOLIDATED
-------------- -------- ----- ------------
<S> <C> <C> <C> <C>
Revenues.................... $95,635 $13,163 $108,798
Fixed cost contribution..... 9,453 10,925 20,378
Identifiable assets......... 29,642 6,421 $971,976 1,008,039
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999:
INTERNET AND
BANDWIDTH
VOICE SERVICES SERVICES OTHER CONSOLIDATED
-------------- -------- ----- ------------
<S> <C> <C> <C> <C>
Revenues.................... $27,748 $4,739 $32,487
Fixed cost contribution..... 5,384 4,739 10,123
Identifiable assets......... 18,252 2,962 $304,075 325,289
</TABLE>
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred
by Carrier1 International S.A. in connection with the issuance and distribution
of the shares, par value $2.00 per share, offered hereby.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 18,430
Legal Fees and Expenses.......................................... 150,000
Accounting Fees.................................................. 60,000
Printing and Engraving Costs..................................... 30,000
Transfer Agent and Registration Fees............................. 50,000
Miscellaneous Expenses........................................... 50,000
-----------
Total........................................................ $ 358,430
===========
</TABLE>
-----------
ITEM 14. 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's articles of incorporation provide 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
II-1
<PAGE>
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 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.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the quarterly period ended June 30, 2000, we did not sell or
issue securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-4 (No.
333-75195) (the "Registrant's Form S-4"))*
4.2 Form of 13 1/4% Senior Dollar Note (included in Exhibit 4.1 to
this registration statement)
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 (filed as Exhibit 4.3 to the Registrant's Form
S-4)*
4.4 Form of 13 1/4% Senior Euro Note (included in Exhibit 4.3 to
this registration statement)
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. (filed as Exhibit 4.5 to the
Registrant's Form S-4)*
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 (filed as Exhibit 4.6 to the
Registrant's Form S-4)*
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 (filed as Exhibit 4.7 to the
Registrant's Form S-4)*
4.8 Loan Agreement, dated June 25, 1999, between Carrier1
International S.A. as Borrower, the Lenders and Financial
Institutions named therein, and Nortel Networks Inc. as Agent
(filed as Exhibit 4.8 to the Registrant's Form S-4)*
4.9 Credit Agreement, dated as of December 21, 1999, among
Carrier1 International S.A., certain of its subsidiaries as
Borrowers and certain of its subsidiaries as Guarantors, the
Lenders and Financial Institutions named therein, and Morgan
Stanley Senior Funding, Inc. and Citibank, N.A. as Lead
Arrangers and Morgan Stanley Senior Funding, Inc. as
Administrative Agent and Security Agent (filed as Exhibit 4.9
to the Registrant's Registration Statement on Form S-1 (No.
333-94541) (the "Registrant's Form S-1"))*
II-3
<PAGE>
5.1 Opinion of Bonn & Schmitt & Steichen
10.1 Dollar Warrant Agreement, dated as of February 19, 1999,
between Carrier1 International S.A. and The Chase Manhattan
Bank, as Warrant Agent (filed as Exhibit 10.1 to the
Registrant's Form S-4)*
10.2 Euro Warrant Agreement, dated as of February 19, 1999, between
Carrier1 International S.A. and The Chase Manhattan Bank, as
Warrant Agent (filed as Exhibit 10.2 to the Registrant's Form
S-4)*
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 (filed as Exhibit 10.3 to the
Registrant's Form S-4)*
10.4 Carrier1 International S.A. 1999 Share Option Plan (filed as
Exhibit 10.4 to the Registrant's Form S-4)*
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 (filed as
Exhibit 10.5 to the Registrant's Form S-4)*
10.6 Form of Option Agreement (filed as Exhibit 10.6 to the
Registrant's Form S-4)* 10.7 Employment Agreement, dated as of
March 4, 1998, between Carrier One AG and Stig Johansson
(filed as Exhibit 10.7 to the Registrant's Form S-4)*
10.8 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Eugene A. Rizzo (filed as Exhibit 10.8 to
the Registrant's Form S-4)*
10.9 Employment Agreement, dated as of March 26, 1998, between
Carrier One AG and Terje Nordahl (filed as Exhibit 10.9 to the
Registrant's Form S-4)*
10.10 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Joachim Bauer (filed as Exhibit 10.10 to
the Registrant's Form S-4)*
10.11 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Kees van Ophem (filed as Exhibit 10.11 to
the Registrant's Form S-4)*
10.12 Securities Purchase Agreement, dated as of March 1, 1999,
among Carrier1 International S.A., Carrier One LLC and the
employee investors named therein (filed as Exhibit 10.12 to
the Registrant's Form S-4)*
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 (filed as Exhibit
10.13 to the Registrant's Form S-4)*
10.14 Securityholders' Agreement, dated as of March 1, 1999, among
Carrier1 International S.A. and the employee investors named
therein (filed as Exhibit 10.14 to the Registrant's Form S-4)*
10.15 Development Agreement, dated as of February 19, 1999 by and
among ViCaMe Infrastructure Development GmbH, Viatel German
Asset GmbH, Carrier1 Fiber Network GmbH & Co. oHG, Metromedia
Fiber Network GmbH, Viatel, Inc. and Metromedia Fiber Network,
Inc. (filed as Exhibit 10.15 to the Registrant's Form S-4)* ++
10.16 Amendment No. 1 to Securityholders' Agreement and Registration
Rights Agreement, dated as of March 1, 1999 (filed as Exhibit
10.16 to the Registrant's Form S-4)*
10.17 Amendment No. 2 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.17 to the Registrant's
II-4
<PAGE>
Form S-4)*
10.18 Amendment No. 3 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.18 to the Registrant's Form S-4)*
10.19 Amendment No. 4 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.19 to the Registrant's Form S-4)*
10.20 Amended and Restated Shareholders Agreement, dated as of
January 13, 2000, among Carlyle Hubco International Partners,
L.P., iaxis B.V., Carrier1 International S.A., Providence
Equity Hubco (Cayman) L.P., and Hubco S.A. (filed as Exhibit
10.1 to the Registrant's periodic report filed on Form 8-K /A
dated January 4, 2000 (the "Registrant's Form 8-K/A"))* ++
10.21 Strategic Anchor Tenant Agreement, dated November 23, 1999,
between Carrier1 International S.A. and Hubco S.A., (filed as
Exhibit 10.3 to the Registrant's Form 8-K /A)* ++
10.22 Registration Rights Agreement, dated November 23, 1999, by and
among The Carlyle entities named therein, iaxis B.V., Carrier1
International S.A., Providence Equity Partners III L.P.,
Providence Equity Operating Partners III L.P. and Hubco S.A.
(filed as Exhibit 10.2 to the Registrant's periodic report
filed on Form 8-K/A dated February 17, 2000 (the "Registrant's
Revised Form 8-K/A"))*
10.23 Amendment No. 1 to Registration Rights Agreement, dated as of
January 13, 2000, by and among Hubco S.A. and the Persons
listed on the signature pages thereto (filed as Exhibit 10.4
to the Registrant's Revised Form 8-K/A)*
21.1 List of Subsidiaries of Carrier1 International S.A. (filed as
Exhibit 21.1 to the Registrant's Form S-1)*
23.1 Consent of Deloitte & Touche Experta AG
23.2 Consent of Bonn & Schmitt & Steichen (included in Exhibit 5.1
to this registration statement)
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 W. Bauer
24.8 Certified Resolution as to Power of Attorney
----------
* Previously filed.
++ Previously filed under a request for confidential treatment.
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS EXPENSES BALANCE AT
BEGINNING OF AND TO OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
ADDITIONS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
<S> <C> <C> <C> <C> <C>
1999:
Reserves deducted from assets to which
they apply:
Allowance for doubtful accounts
receivable...................... $ - $870 $ - $30(1) $ 840
====== ==== ====== ===== ======
</TABLE>
----------
(1) Deductions consist entirely of currency translation adjustments.
All other 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 17. 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 after
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)
(ss.230.424(b) of this chapter) 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;
II-6
<PAGE>
(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.
The undersigned registrant hereby further undertakes, 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-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ZURICH ON
AUGUST 17, 2000.
CARRIER1 INTERNATIONAL, S.A.
*
By:___________________________
Name: Stig Johansson
Title: Chief Executive Officer and President
II-8
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
<S> <C> <C>
Director, Chief Executive Officer and President August 17, 2000
* (Principal Executive Officer)
---------------------------------
Stig Johansson
Chief Financial Officer (Principal Financial August 17, 2000
* Officer and Principal Accounting Officer)
---------------------------------
Joachim W. Bauer
Director August 17, 2000
*
---------------------------------
Glenn M. Creamer
Director August 17, 2000
*
---------------------------------
Jonathan E. Dick
Director August 17, 2000
*
---------------------------------
Mark A. Pelson
Director August 17, 2000
*
---------------------------------
Victor A. Pelson
Director August 17, 2000
*
---------------------------------
Thomas J. Wynne
CARRIER1, INC. Authorized Representative in the U.S.
*
By:
------------------------------
Joachim W. Bauer, ITS SECRETARY August 17, 2000
*By: /s/ Kees van Ophem
-----------------------------
by Power of Attorney August 17, 2000
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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 (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-4 (No.
333-75195) (the "Registrant's Form S-4"))*
4.2 Form of 13 1/4% Senior Dollar Note (included in Exhibit 4.1 to
this registration statement)
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 (filed as Exhibit 4.3 to the Registrant's Form
S-4)*
4.4 Form of 13 1/4% Senior Euro Note (included in Exhibit 4.3 to
this registration statement) 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. (filed as Exhibit 4.5 to the Registrant's Form S-4)*
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 (filed as Exhibit 4.6 to the
Registrant's Form S-4)*
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 (filed as Exhibit 4.7 to the
Registrant's Form S-4)*
4.8 Loan Agreement, dated June 25, 1999, between Carrier1
International S.A. as Borrower, the Lenders and Financial
Institutions named therein, and Nortel Networks Inc. as Agent
(filed as Exhibit 4.8 to the Registrant's Form S-4)*
4.9 Credit Agreement, dated as of December 21, 1999, among
Carrier1 International S.A., certain of its subsidiaries as
Borrowers and certain of its subsidiaries as Guarantors, the
Lenders and Financial Institutions named therein, and Morgan
Stanley Senior Funding, Inc. and Citibank, N.A. as Lead
Arrangers and Morgan Stanley Senior Funding, Inc. as
Administrative Agent and Security Agent (filed as Exhibit 4.9
to the Registrant's Registration Statement on Form S-1 (No.
333-94541) (the "Registrant's Form S-1")*
5.1 Opinion of Bonn & Schmitt & Steichen
10.1 Dollar Warrant Agreement, dated as of February 19, 1999,
between Carrier1 International S.A. and The Chase Manhattan
Bank, as Warrant Agent (filed as Exhibit 10.1 to the
Registrant's Form S-4)*
<PAGE>
10.2 Euro Warrant Agreement, dated as of February 19, 1999, between
Carrier1 International S.A. and The Chase Manhattan Bank, as
Warrant Agent (filed as Exhibit 10.2 to the Registrant's Form
S-4)*
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 (filed as Exhibit 10.3 to the
Registrant's Form S-4)*
10.4 Carrier1 International S.A. 1999 Share Option Plan (filed as
Exhibit 10.4 to the Registrant's Form S-4)*
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 (filed as
Exhibit 10.5 to the Registrant's Form S-4)*
10.6 Form of Option Agreement (filed as Exhibit 10.6 to the
Registrant's Form S-4)* 10.7 Employment Agreement, dated as of
March 4, 1998, between Carrier One AG and Stig Johansson
(filed as Exhibit 10.7 to the Registrant's Form S-4)*
10.8 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Eugene A. Rizzo (filed as Exhibit 10.8 to
the Registrant's Form S-4)*
10.9 Employment Agreement, dated as of March 26, 1998, between
Carrier One AG and Terje Nordahl (filed as Exhibit 10.9 to the
Registrant's Form S-4)*
10.10 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Joachim Bauer (filed as Exhibit 10.10 to
the Registrant's Form S-4)*
10.11 Employment Agreement, dated as of March 4, 1998, between
Carrier One AG and Kees van Ophem (filed as Exhibit 10.11 to
the Registrant's Form S-4)*
10.12 Securities Purchase Agreement, dated as of March 1, 1999,
among Carrier1 International S.A., Carrier One LLC and the
employee investors named therein (filed as Exhibit 10.12 to
the Registrant's Form S-4)*
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 (filed as Exhibit
10.13 to the Registrant's Form S-4)*
10.14 Securityholders' Agreement, dated as of March 1, 1999, among
Carrier1 International S.A. and the employee investors named
therein (filed as Exhibit 10.14 to the Registrant's Form S-4)*
10.15 Development Agreement, dated as of February 19, 1999 by and
among ViCaMe Infrastructure Development GmbH, Viatel German
Asset GmbH, Carrier1 Fiber Network GmbH & Co. oHG, Metromedia
Fiber Network GmbH, Viatel, Inc. and Metromedia Fiber Network,
Inc. (filed as Exhibit 10.15 to the Registrant's Form S-4)* ++
10.16 Amendment No. 1 to Securityholders' Agreement and Registration
Rights Agreement, dated as of March 1, 1999 (filed as Exhibit
10.16 to the Registrant's Form S-4)*
10.17 Amendment No. 2 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.17 to the Registrant's Form S-4)*
<PAGE>
10.18 Amendment No. 3 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.18 to the Registrant's Form S-4)*
10.19 Amendment No. 4 to Securityholders' Agreement and Securities
Purchase Agreement, dated as of March 1, 1999 (filed as
Exhibit 10.19 to the Registrant's Form S-4)*
10.20 Amended and Restated Shareholders Agreement, dated as of
January 13, 2000, among Carlyle Hubco International Partners,
L.P., iaxis B.V., Carrier1 International S.A., Providence
Equity Hubco (Cayman) L.P., and Hubco S.A. (filed as Exhibit
10.1 to the Registrant's periodic report filed on Form 8-K /A
dated January 4, 2000 (the "Registrant's Form 8-K/A"))* ++
10.21 Strategic Anchor Tenant Agreement, dated November 23, 1999,
between Carrier1 International S.A. and Hubco S.A., (filed as
Exhibit 10.3 to the Registrant's Form 8-K /A)* ++
10.22 Registration Rights Agreement, dated November 23, 1999, by and
among The Carlyle entities named therein, iaxis B.V., Carrier1
International S.A., Providence Equity Partners III L.P.,
Providence Equity Operating Partners III L.P. and Hubco S.A.
(filed as Exhibit 10.2 to the Registrant's periodic report
filed on Form 8-K/A dated February 17, 2000 (the "Registrant's
Revised Form 8-K/A"))*
10.23 Amendment No. 1 to Registration Rights Agreement, dated as of
January 13, 2000, by and among Hubco S.A. and the Persons
listed on the signature pages thereto (filed as Exhibit 10.4
to the Registrant's Revised Form 8-K/A)*
21.1 List of Subsidiaries of Carrier1 International S.A. (filed as
Exhibit 21.1 to the Registrant's Form S-1)*
23.1 Consent of Deloitte & Touche Experta AG
23.2 Consent of Bonn & Schmitt & Steichen (included in Exhibit 5.1
to this registration statement)
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 W. Bauer
24.8 Certified Resolution as to Power of Attorney
----------
* Previously filed.
++ Previously filed under a request for confidential treatment.
