FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Of The Securities Exchange Act of 1934
For the month of November, 1999
Worldwide Fiber Inc.
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
#1510-1066 West Hastings Street, Vancouver, British Columbia Canada V6E 3X1
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under Cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes _______ No X
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read along with our Consolidated Financial
Statements for the 9 months ended September 30, 1999 and the year ended December
31, 1999.
General
We are a provider of technologically advanced fiber optic communications
infrastructure in North America using our state-of-the-art fiber optic network.
We recently have begun marketing bandwidth services and intend to provide these
services by the end of the year. We are developing our network to satisfy
increasing demand for fiber optic capacity for the transmission of data, voice
and video generated by high-bandwidth communications and the requirements of new
entrants to the telecommunications business. We currently derive our revenues
from the sale, grant of indefeasible rights-of-use ("IRU") and lease of dark
fiber optic strands and conduit and related infrastructure. We have commenced
the process of adding the necessary optical transmission equipment to enable us
to provide bandwidth services to carriers and other service providers. Our
targeted customers include communications carriers, Internet service providers
("ISPs") and large corporations with enterprise network needs.
The development and build-out of our network will require significant
capital expenditures through 2001, when the network is scheduled to be complete.
Depending upon market demand, we may expand the network and will require
additional capital if we decide to do so.
Sources of Revenue
To date, we have primarily generated revenues from the construction of our
fiber optic network. We will continue to construct fiber optic networks for
third parties on a contract basis when these networks will either allow us to
retain fiber or conduit assets on routes that complement and reduce the costs of
completing our network, or to enhance our ability to make a sale, grant of
indefeasible rights-of-use, lease or swap of network capacity or the provision
of bandwidth services. We anticipate that, as we proceed with the development of
our network, the percentage of revenues which we receive from construction
services will decline from the level reflected in our results of operations to
date.
Revenues from construction contracts to develop fiber optic systems are
calculated on the percentage of completion basis using the cost-to-cost method
over the life of the build. This method is used because we consider costs
incurred to be the best available measure of progress of these contracts. We
make provisions for all potential losses as soon as they become evident.
As a developer, we use a condominium strategy to develop the network. Our
condominium strategy allows multiple participants to purchase, obtain
indefeasible rights-of-use or lease fiber or conduit along a segment of our
network at a fixed price. We generally commence construction of a segment when
we have pre-sold sufficient strands and conduit to cover approximately 50% of
our anticipated construction costs of that segment. Under participation
agreements, we typically receive an initial deposit with the final payment
coming after acceptance by the customer. To expedite route development or
decrease development risk, we may seek a co-developer. Co-developers typically
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make a deposit and progress payments that represent their share of the project
construction costs. They may also enter into co-marketing arrangements with us
to sell the assets along the build.
We recognize revenue for participation agreements on a percentage of
completion basis. Following completion of a build, our retained fiber or conduit
may be sold, granted through an indefeasible right-of-use or leased to a third
party. Revenues and costs for a sale or grant of indefeasible rights-of-use of
these fiber or conduit assets are recognized at the time of the transaction.
Lease revenues are recognized as earned over the life of the lease.
In the future we anticipate a significant amount of our revenues will be
derived from providing bandwidth services, including optical transmission,
private line, virtual voice, IP transport and ATM.
Joint Ventures
Our consolidated balance sheet at September 30, 1999 and December 31, 1998
includes the assets and liabilities of WFI-USA, and a minority interest in it,
reflecting our 75% interest in WFI-USA. A fifty percent interest in WFI-USA was
transferred to us by Ledcor on August 31, 1998, and the additional 25% was
acquired on December 31, 1998 from the treasury of WFI-USA. The consolidated
income statement for the period ended December 1998 accounts for Worldwide
Fiber's initial 50% interest in WFI-USA using the equity method. Worldwide Fiber
Networks, Inc. ("WFNI") will be the primary subsidiary through which we will
develop the U.S. segments of the dark fiber network. Subsequent to December 31,
1998 we also began consolidating WFI-USA's income statement and became
responsible for supplying all of the capital necessary to fund those segments of
the dark fiber network developed through WFNI.
We have entered, and may in the future enter, into joint ventures to
develop particular segments of the network, to secure rights-of-way ("ROW") or
to enable us to provide bandwidth or other services on a more timely or capital
efficient manner or for other reasons. For example, we entered into agreements
with Illinois Central Railroad Company ("IC") and Canadian National Railway
Company ("CN") which allow us to develop our network on both railroads' ROW in
Canada and the United States.
Results of Operations
Worldwide Fiber Inc.
Nine Months Ended September 30, 1999
Revenue for the ninth month period ended September 30, 1999 was
$235,138,100, versus $104,819,000 for the four month period from June 1, 1998
(commencement of operations) to September 30, 1998. Revenue in the current
period was primarily derived from sales of conduit and fiber optic strands along
segments in the Pacific Northwest, northeast U.S. and eastern Canada.
Costs were $163,176,000 (69% of revenue) for the nine month period ended
September 30, 1999, versus $90,909,000 (87% of revenue) for the period from June
1, 1998 (commencement of operations) to September 30, 1998. These reflect the
costs incurred in development of our network which include costs related to
subcontractors, rights-of-way and equipment purchases.
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Gross profit for the nine month period ended September 30, 1999 was
$71,962,000 (31% of revenue), versus $13,910,000 (13% of revenue) for the period
from June 1, 1998 (commencement of operations) to September 30, 1998. These
increases are due to the higher margins achieved in ownership and development of
dark fiber networks, compared to construction services.
General and administrative expenses were $12,222,000 (5% of revenue) for
the nine months ended September 30, 1999, versus $1,318,000 (1% of revenue) for
the period from June 1, 1998 (commencement of operations) to September 30, 1998.
We have completed a majority of the tasks necessary to perform the transition
from Ledcor's management information and accounting systems to our own. General
and administrative expenses are expected to continue to increase as we develop
our systems, hire additional personnel and implement our bandwidth services
strategy.
Interest expense was $28,267,000 for the nine month period ended September
30, 1999 and was principally due to the issue of senior notes in December 1998
and July 1999. Interest income totaled $14,167,000 for this period and arose
from the investment of the proceeds of the senior notes in short-term,
investment grade securities.
Income taxes provided for the nine month period ended September 30, 1999
totaled $20,175,000, versus $5,402,000 for the period from June 1, 1998
(commencement of operations) to September 30, 1998. These consist primarily of
current taxes arising from our U.S. and Canadian operations.
Minority interest for the nine month period ended September 30, 1999
totaled $3,247,000 and represents 25% of WFI-USA's net income.
Liquidity and Capital Resources
At September 30, 1999, we had working capital of $912,207,000 including
$675,175,000 in cash or cash equivalents.
Cash used in operations during the nine months ended September 30, 1999
totaled $156,856,000. We have an aggressive business plan to build out the
network in the United States and Canada that will require a significant
investment in the development of fiber and conduits held for sale, grant of
indefeasible rights-of-use, swap or lease and the purchase of transmission
facilities. We anticipate that we will continue to experience negative cash flow
(after capital expenditures) as we build out the network.
In addition to the fiber assets contributed by Ledcor, we have formed a
capital plan to develop approximately 16,000 route miles. The plan and the
implementation of bandwidth services contemplate capital expenditures of
approximately $1.26 billion through 2001. This plan includes the building of six
intra-city networks ("city rings") in Canada and the installation of electronics
and transmission equipment along our entire terrestrial network, commencing with
the Vancouver-Detroit segment during the third and fourth quarters of 1999. This
plan does not include the Hibernia project, which is discussed below. The
following table describes funding sources contemplated by the plan:
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<TABLE>
<CAPTION>
<S> <C>
Net proceeds from the $500,000,000 12% senior notes due 2009
(the "Notes") ....................................................... $484,000,000
Net proceeds from the $175,000,000 121/2% senior notes due
2005 (the "1998 Notes").............................................. 168,350,000
Credit facilities (1).................................................. 26,650,000
Co-developers and participant sales ................................... 581,000,000
--------------
$1,260,000,000
==============
</TABLE>
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(1) We anticipate that up to $150 million may be available under our planned
bank credit facility.
Consistent with our strategy to create a low-cost position, we have
agreements, subject to terms and conditions we consider customary, with
co-developers and participants. We have received, in the aggregate to date,
commitments of approximately $581,000,000 in cash to fund the completion of
segments of our terrestrial network from co-developers and participants.
Approximately $138,000,000 of the $581,000,000 is associated with revenue from
construction services we are providing to two customers under which we will earn
a specified margin and also retain dark fiber. The remainder of the $581,000,000
is derived from the sale, IRU or lease of fiber and conduit and additional
construction services that we are providing to third parties along our own
network segments. We intend to enter into additional arrangements with
co-developers and participants prior to completion of the network in 2001.
We expect to obtain the balance of the funding necessary to complete our
terrestrial network and to implement our bandwidth services strategy from (1)
the cash remaining from the notes and the 1998 Notes and (2) our planned bank
credit facility. We have accepted a commitment letter from a bank lender which
contemplates that up to $150,000,000 could be made available to us in the form
of revolving credit borrowings. We expect the facility to close in the fourth
quarter of 1999.
We anticipate that these funding sources will provide us with sufficient
capital to complete our terrestrial network and to implement our related
bandwidth services strategy. However, because the cost of developing our network
and implementing our bandwidth services strategy will depend on a variety of
factors, many of which are beyond our control, including changes in the
competitive environment of our current and planned markets, we expect that our
actual costs may vary materially from those currently budgeted. In the event
that our actual costs exceed our current budget or we do not have the funds we
anticipate, we have the ability to adjust the number or sequence of segments we
develop.
On September 9, 1999 we completed a private placement of our convertible
preferred shares for $345,000,000. Of this amount, $45,000,000 was used to
repurchase certain of our shares held by an affiliate of our parent with the
balance to be used in the manner described below.
The plan described above does not include the Hibernia transatlantic fiber
optic cable project. We estimate the total cost of this project to be
approximately $865,000,000. We will use $300,000,000 of the proceeds from our
recently completed private equity placement to fund the equity portion of the
cost of construction of the Hibernia project. We currently expect that the debt
component of the total cost will be approximately $565,000,000, and we have
entered into a project financing commitment letter with Goldman Sachs Credit
Partners LP, DLJ Capital Funding, Inc. and Credit Suisse First Boston. Under the
project financing commitment, it is anticipated that the lenders will provide up
to $600,000,000 in debt financing to one of our subsidiaries, non-recourse to
Worldwide Fiber.
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We expect to pursue opportunities in addition to our planned network.
Accordingly, from time to time we may seek to raise additional capital in the
debt and/or equity capital markets prior to completion of our planned network.
We cannot assure you that we will be successful in raising the capital necessary
for the completion of construction for the remainder of our planned network
development, the implementation of our bandwidth services strategy, the Hibernia
project or for other opportunities on a timely basis or on terms that are
acceptable to us, or at all.
Impact of Year 2000
The Year 2000 problem impacts computer programs and hardware timers using
two digits (rather than four) to define the applicable year. We rely on our
computer systems and software applications in the operations and monitoring of
all major aspects of our business. Any of our computer programs that have
time-sensitive functions may recognize a date using "00" as the year 1900 rather
than 2000, which could result in miscalculations or system failures. A failure
of our computer systems, or those of Ledcor, major vendors, other material
service providers or customers, could have a material adverse effect on our
ability to develop our network and retain customers and on our ability to make
payment on the notes.
Risks of Year 2000 Issues
We can not reasonably estimate the extent to which we may experience Year
2000 problems. We have not experienced any problems to date related to the Year
2000 problem.
Description of our Year 2000 Program
Our Year 2000 program began in 1997 while we were still a division of
Ledcor. We initiated a review of all computer related equipment and software.
This review encompassed all information and processing systems and related
equipment that were critical to the operations of our business. A list of
non-compliant equipment and software was developed and has resulted in the
replacement of certain equipment. This process was completed prior to the
commencement of our operations as Worldwide Fiber. The assets that were
transferred to us in the reorganization in May 1998 are, to the best of our
knowledge, Year 2000 compliant. Since we commenced operations in May 1998, we
have required that all of our equipment purchased be Year 2000 compliant. We are
currently reviewing the work performed by Ledcor and developing our own Year
2000 plan.
We have obtained written confirmation from Ledcor concerning the status of
Year 2000 compliance of Ledcor systems that were transferred to us in 1998. We
have also reviewed and tested all equipment that we currently use. This project
began in the first quarter of 1999 and we expect it to be completed in December
1999.
We have reviewed and documented the systems in use and determined the
possible effect on each system that would result from a systems failure due to
the Year 2000 problem. The critical systems that have been reviewed include, but
are not limited to: purchasing, payables, asset management, equipment
management, payroll, sales and receipts, management information systems,
accounting and project management. The review included an inventory and testing
of equipment that is critical to the operations of our systems. Where testing
was not possible, inquiry letters were sent to major suppliers in order to
assess the Year 2000 status of their systems. Significant suppliers have been
contacted
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with a request for information about their ability to provide services into the
year 2000. The process is expected to be completed in December 1999.
Any equipment or software that was determined to be non-compliant as a
result of this review is being replaced. The projected cost of the Year 2000
assessment project is not expected to be material because substantially all of
the systems we acquired since our commencement were Year 2000 compliant.
The extent to which our vendors, customers and service providers are Year
2000 compliant is not determinable.
Contingency Plans and Costs to Address Year 2000 Issues
We have developed plans, including a contingency plan, to assess the
likelihood of any Year 2000 issues and to address potential Year 2000 problems
caused by a failure of our computer systems or the systems of Ledcor, principal
vendors, service providers and customers. These plans include increased staff
awareness, advance preparation of invoices and payments and backup of potential
systems. Due to the relatively low number of transactions processed by us, we
will consider implementing a manual system for many functions in the case of a
failure of any of our systems.
We have expended $60,000 to date, and we expect to spend no more than an
additional $115,000 to complete our Year 2000 readiness efforts. We may,
however, have to bear costs and expenses relating to the failure of Ledcor,
principal vendors, service providers and customers to be Year 2000 compliant on
a timely basis. No material Year 2000 issues have been identified to date
relating to third parties. Therefore, we cannot reasonably estimate costs which
may be required for remediation or for implementation of our contingency plans.
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<PAGE>
Consolidated Balance Sheets
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
Assets
Current Assets
Cash and cash equivalents $ 675,175 $ 156,366
Short term investments 66,964 -
Accounts receivable 119,301 3,272
Unbilled revenue 112,662 10,582
Inventory 117,249 25,300
Other current assets 5,524 17,342
------------- -------------
1,096,875 212,862
Fixed Assets 105,022 15,475
Deferred income taxes 16,408 1,273
Deferred financing costs 22,416 6,650
------------- -------------
$ 1,240,721 $ 236,260
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
<CAPTION>
WORLDWIDE FIBER INC.
Consolidated Balance Sheets
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
September 30, 1999 December 31, 1998
Liabilities
<S> <C> <C>
Current liabilities
Accounts payable and accrued liabilities $ 139,456 $ 20,296
Advances on contracts 28,689 13,651
Income taxes payable 15,262 7,609
Other liabilities 1,261 --
------------- -------------
184,668 41,556
Senior Notes 675,000 175,000
------------- -------------
859,668 216,556
Minority interest 4,690 1,443
Mandatorily Redeemable Preferred Stock 345,000
Authorized:
100,000,000,000 Series A Non-Voting Preferred Shares,
100,000,000,000 Series B Subordinate Voting Preferred
Shares, 45,000,000 Series C Redeemable Preferred
Shares, no par value
Issued and outstanding:
8,866,808 Series A Non-Voting Preferred Shares
Shareholders' equity
Common stock
Authorized:
Unlimited number of Class A Non-Voting, Class B Sub-
ordinate Voting and Class C Multiple Voting shares, no
par value
Issued and outstanding:
25,000,000 Class B Shares 35,419 7,400
4,500,000 Class C Shares 8,000
Contributed surplus 2,242 2,242
Retained earnings (deficit) (14,633) 9,020
Accumulated other comprehensive income 335 (401)
------------- -------------
31,363 18,261
------------- -------------
$ 1,240,721 $ 236,260
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
WORLDWIDE FIBER INC.
Consolidated Income Statements
For the periods ended September 30, 1999 and 1998
(tabular amounts expressed in thousands of U.S. dollars)
(unaudited)
For the period from February 5,
1998 (date of incorporation)
Nine months ended to September 30, 1998
September 30, 1999 (operations commenced
June 1, 1998)
<S> <C> <C>
Revenue $ 235,138 $ 104,819
Costs 163,176 90,909
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Gross profit $ 71,962 $ 13,910
Expenses:
General & administrative 12,222 1,318
Depreciation 871 260
------------- -------------
13,093 1,578
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58,869 12,332
Interest expense 28,267 --
Interest income 14,167 --
------------- -------------
Income before income taxes, equity income &
minority interest 44,769 12,332
Equity income -- (48)
------------- -------------
Income before income taxes & minority
interest 44,769 12,284
Provision for income taxes 20,175 5,402
--
------------- -------------
24,594 5,402
------------- -------------
Income before minority interest 24,594 6,882
Minority interest 3,247 --
------------- -------------
Net income for the period $ 21,347 $ 6,882
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<TABLE>
<CAPTION>
WORLDWIDE FIBER INC.
Consolidated Statement of Changes in Shareholders' Equity
For the nine month period ended September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(unaudited)
Preferred Stock Common Stock
Series C Redeemable Class B subordinate Voting Common Stock
Preferred shares (formerly Class A Common) Class C Multiple Voting
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-beginning of period - $ 5,000,300 $ 7,400 - $ -
-
Issuance of shares for certain
Ledcor assets with deferred
Tax assets 19,999,700 25,019
Share Capital Re-organization
Series C redeemable preferred
share stock dividend (note 1) 5,000,000 5,000
Repurchase of Class B subordinate
voting shares in exchange for
Class B subordinate voting (25,000,000) (32,419)
shares 40,000,000 - 23,043,500 32,419
and Series C redeemable (note 1)
Redemption of Series C
redeemable Preferred (45,000,000)
shares (note 1) (5,000)
Issuance of Class B subordinate
voting shares for cash ( note 1) 150,000 3,000
Issuance of shares for certain
Ledcor assets with deferred
Tax assets (note 1) 4,500,000 8,000
Comprehensive income
Net Income for the period
Accumulated other
Comprehensive
income-foreign
currency translation
------------------------------------------------------------------------------------
Total comprehensive income - - - - - -
------------- ------------- ------------ ----------- ------------- -----------
Balance-end of period - $ - 23,193,500 $35,419 4,500,000 $ 8,000
============= ============= ============ =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements.
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WORLDWIDE FIBER INC.
Consolidated Statement of Changes in Shareholders' Equity
For the nine month period ended September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(unaudited)
Accumulated
Other Total
Contributed Retained Comprehensive Shareholders'
Surplus Earnings Income equity
-------------------------------------------------------------
Balance-beginning of period $ 2,242 $ 9,020 $ (401) $ 18,261
Issuance of shares for certain
Ledcor assets with deferred
Tax assets 25,019
Share Capital Re-organization
Series C redeemable preferred
share stock dividend (note 1)
Repurchase of Class B subordinate
voting shares in exchange for
Class B subordinate voting (32,419)
shares (5,000) 32,419
and Series C redeemable (note 1)
Redemption of Series C
redeemable Preferred (40,000) (45,000)
shares (note 1)
Issuance of Class B subordinate
voting shares for cash ( note 1) 3,000
Issuance of shares for certain
Ledcor assets with deferred
Tax assets (note 1) 8,000
Comprehensive income
Net Income for the period 21,347 21,347
Accumulated other
Comprehensive
income-foreign 736 736
currency translation
-------------------------------------------------------------
Total comprehensive income - 21,347 736 22,083
--------------- ----------- ----------- ----------------
Balance-end of period $ 2,242 $ (14,633) $ 335 $ 31,363
=============== =========== =========== ================
</TABLE>
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<TABLE>
<CAPTION>
WORLDWIDE FIBER INC.
Consolidated Statements of Cash Flows
For the periods ended September 30, 1999 and 1998
(tabular amounts expressed in thousands of U.S. dollars)
(unaudited)
For the period from February 5,
1998 (date of incorporation)
to September 30, 1998
Nine months ended (operations commenced
September 30, 1999 June 1, 1998)
------------------ -------------------------------
<S> <C> <C>
Cash flows (used in) provided from operating
activities $ (156,856) $ (11,197)
------------ -------------
Cash flows used in investing activities
Fixed asset additions (127,498) --
------------ -------------
Cash flows provided from financing activities 803,000 11,276
------------ -------------
Effect of exchange rate changes on cash 163 --
------------ -------------
Net increase in cash and cash
equivalents 518,809 79
------------ -------------
Cash and cash equivalents, beginning
of period 156,366 20
------------ -------------
Cash and cash equivalents, end of period $ 675,175 $ 99
============ =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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1. The Company
Worldwide Fiber Inc. (the "Company") is indirectly a subsidiary of Ledcor
Inc. (Ledcor). The Company's operations consist of designing, engineering,
constructing and installing terrestrial and marine fiber optic systems for sale
or lease to third parties or for its own use.
These financial statements should be read in conjunction with the
consolidated financial statements of the Company for the period ended December
31, 1998.
Significant Transactions
On March 31, 1999 the Company completed a series of transactions whereby
certain fiber optic network assets were transferred to the Company by Ledcor in
exchange for 19,999,700 Class A common shares. The cost of the assets acquired
at March 31, 1999 amounted to $21,884,000. As a result of the transaction, the
Company also received a deferred tax benefit of $3,136,000 which is reflected as
a deferred tax asset.
On September 9, 1999, the Company amended its share capital by
re-designating 25,000,000 Class A Voting Shares to Class B Subordinate Voting
Shares, cancelling its remaining classes of shares and creating Class A
Non-Voting Shares, Class C Multiple Voting shares, Series A and B Preferred
Shares and Series C Redeemable Preferred Shares. Subsequently, the Company
declared a stock dividend of 5,000,000 Series C Redeemable Preferred Shares for
$5,000,000. Concurrently, the Company repurchased the 25,000,000 outstanding
Class B Subordinate Voting Shares from its parent in exchange for the issuance
of 23,043,500 Class B Subordinate Voting Shares and 40,000,000 Series C
Redeemable Preferred Shares. The Company then redeemed the 45,000,000
outstanding Series C redeemable preferred shares for $45,000,000 cash resulting
in a charge to retained earnings of $40,000,000.
On August 31, 1999 the Company issued 150,000 Class B Subordinate Voting
Shares (re-designated from Class A Voting Shares) for $3,000,000 cash and on
September 9, 1999, the Company issued 8,866,808 Series A Non-Voting Preferred
Shares for $345,000,000 cash (Note 6).
On May 28, 1999, the Company entered into an agreement with affiliates of
Ledcor, whereby the Company would acquire certain fiber optic network assets.
Closing occurred on September 27, 1999. As consideration, the Company issued
4,500,000 Class C Multiple Voting shares to affiliates of Ledcor. In addition,
the Company assumed certain rights and obligations under build agreements with a
third party including obligations relating to the completion of those builds and
certain support structure, maintenance, license and access, and underlying
rights obligations. The cost of the fixed
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assets acquired amounted to $26,000,000, the cost of the assets in the accounts
of Ledcor. As a result of the transaction, the Company also received a deferred
tax benefit of $12,000,000, as a result of a higher tax cost versus accounting
cost of fixed assets. The Company also recorded a liability of $30,000,000,
which is the estimated amount of the liability assumed from Ledcor.
Basis of Presentation
These unaudited interim consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented and include all
adjustments of a normal recurring nature. Certain comparative figures have been
restated to conform with the current period presentation.
Significant accounting policies
Revenue recognition
Revenue for services provided to Ledcor for construction projects is
recognized in the period the construction services are performed based on the
costs incurred.
Revenue and income from construction contracts to develop fiber optic
network assets are determined on the percentage-of-completion basis using the
cost-to-cost method. Provision is made for all anticipated losses as soon as
they become evident. Claims for additional contract compensation are not
recognized until resolved.
Revenue from agreements to construct fiber optic network assets in
connection with sales-type leases are recognized on the percentage-of-completion
basis when the risk of construction is transferred to the lessee.
Stock Option Plan
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and, accordingly, recognizes compensation expense for stock option
grants to the extent that the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. The compensation expense
is charged against operations ratably over the vesting period of the options.
2. Supplemental cash flow information
Nine months ended
September 30, 1999
Cash paid for income taxes $ 12,778
Cash paid for interest 10,451
Issuance of common shares for certain Ledcor assets
with deferred tax asset of $11,136,000 33,019
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3. Balance Sheet components
September 30, 1999
Unbilled revenue
Revenue earned on uncompleted contracts $ 236,575
Less: Billings to date 123,913
--------------
$ 112,662
==============
Inventory
Fiber optic network assets $ 116,700
Construction supplies and small tools 549
--------------
$ 117,249
==============
Fixed assets
Fiber optic network assets $ 96,531
Construction equipment 9,222
Other 622
--------------
106,375
Less: Accumulated depreciation (1,353)
--------------
Fixed assets - net $ 105,022
==============
The Company has not provided for any depreciation on fiber optic network
assets for the period ended September 30, 1999 as these assets were under
construction.
September 30, 1999
Accounts payable and accrued liabilities
Subcontractor and supplier costs $ 98,199
Subcontractor holdbacks payable 23,800
Interest payable 17,457
--------------
$ 139,456
==============
4. Income taxes
Income before income taxes and minority interest
The components of income before income taxes and minority interest are as
follows:
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Nine months ended
September 30, 1999
Canadian $ 17,288
U.S. 27,541
-----------------
$ 44,769
=================
Current income taxes
The provision for income taxes attributable to net earnings consists of the
following:
Nine months ended
September 30, 1999
Canadian $ 9,130
U.S. federal 8,946
U.S. state and local 2,099
-----------------
$ 20,175
=================
Deferred income taxes
Significant components of the Company's deferred tax assets are as follows:
September 30, 1999
Fixed assets $ 16,224
Other 184
Valuation allowance --
-----------------
Net deferred tax assets $ 16,408
=================
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will be fully utilized, therefore, no
valuation allowance has been recorded.
5. Segmented information
The Company operates within a single operating segment, the construction
and installation of fiber optic network assets. These fiber optic network assets
are being constructed in Canada and the United States. Revenues, fixed assets,
and deferred financing costs are located as follows:
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Nine months ended
September 30, 1999 September 30, 1999
Deferred
financing
Revenues Fixed assets costs
Canada $ 102,873 $ 27,302 $ 22,416
U.S. 132,265 77,720 --
------------- ------------- -------------
$ 235,138 $ 105,022 $ 22,416
============= ============= =============
The revenues are based on the location of the construction activities.
6. Mandatorily Redeemable Preferred Stock
On September 9, 1999 the Company authorized the following series of
preferred shares:
100,000,000,000 Series A Non-Voting Preferred Shares
100,000,000,000 Series B Subordinate Voting Preferred Shares
45,000,000 Series C Redeemable Preferred Shares
Series A Non-Voting Preferred Shares
On September 9, 1999 the Company issued 8,866,808 Series A Non-Voting
Preferred Shares for $345,000,000 in cash.
The Series Non-Voting Preferred Shares are entitled to dividends on an
equivalent basis to the Class A Non-Voting Shares into which the Series A
Non-Voting Preferred Shares can be converted. The Series A Non-Voting Preferred
Shares rank senior to all classes of common stock upon liquidation, dissolution
and wind-up and are junior in right of payment of all indebtedness of the
Company and its subsidiaries.
The Series A Non-Voting Preferred Shares have a mandatory redemption on
November 2, 2009 at a liquidation value consisting of the original purchase
price of $38.909 per share plus an adjustment equal to 6% per annum of the
purchase price, plus declared and unpaid dividends and the excess of the market
value of the Class A Non-Voting Shares over the liquidation value.
Upon a qualified underwritten public offering of at least $150,000,000 with
a share price of at least 300% of the purchase price of the Series A Non-Voting
Preferred Shares, each Series A Non-Voting Preferred Share may, at the option of
the Company, be converted into Class A Non-Voting Shares at a ratio equal to one
plus 6% per annum. If a qualified underwritten public offering occurs by
September 9, 2000 the conversion will be on a one for one basis.
The Series A Non-Voting Preferred Shares may be converted by the holders
into Class A Non-Voting Shares, at any time, on the same basis as the Company's
conversion right and may be converted into Series B Non-Voting Preferred Shares
on a one for one basis. In addition, the holders of the Series A Non-Voting
Preferred Shares have anti-dilution protection.
Series B Subordinate Voting Preferred Shares
As at September 30, 1999, there are no Series B Subordinate Voting
Preferred Shares outstanding.
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<PAGE>
The Series B Subordinate Voting Preferred Shares are entitled to dividends
on an equivalent basis to any dividends declared or paid on Class B Subordinate
Voting Shares into which the Series B Subordinate Voting Preferred Shares can be
converted. The Series B Subordinate Voting Preferred Shares rank senior to all
classes of common stock upon liquidation, dissolution and wind-up and are junior
in right of payment of all indebtedness of the Company and its subsidiaries.
The Series B Subordinate Voting Preferred Shares are entitled to one vote
per share.
The Series B Subordinate Voting Preferred Shares are mandatorily redeemable
on November 2, 2009 at a liquidation value of $38.909 per share plus an
adjustment equal to 6% per annum of the purchase price, plus declared and unpaid
dividends and the excess of the market value of the Class B Subordinate Voting
Shares over the liquidation value.
Upon a qualified underwritten public offering of at least $150,000,000 with
a share price of at least 300% of the purchase price of the Series B Subordinate
Voting Preferred Shares, each Series B Subordinate Voting Preferred Share, may
at the option of the Company, be converted into Class B Subordinate Voting
Shares at a ratio equal to one plus 6% per annum. If a qualified underwritten
public offering occurs by September 9, 2000 the conversion will be on a one for
one basis.
The Series B Subordinate Voting Preferred Shares may be converted into
Class B Subordinate Voting Shares, at any time on the same basis as the
Company's conversion right and may be converted into Series A Non-Voting
Preferred Shares on a one for one basis. In addition, the holders of the Series
B Subordinate Voting Preferred Shares have anti-dilution protection
Series C Redeemable Preferred Shares
On September 9, 1999 5,000,000 Series C Redeemable Preferred Shares were
issued pursuant to a stock dividend and 40,000,000 Series C Redeemable Preferred
Shares were issued pursuant to a share re-organization. Subsequently, the
Company repurchased the 45,000,000 issued Series C Redeemable Preferred Shares
for $45,000,000 (note 1). As at September 30, 1999, no Series C Redeemable
Preferred Shares are outstanding.
The holders of Series C Redeemable Preferred Shares are not entitled to
dividends or voting rights and may redeem the Series C Redeemable Preferred
Shares at $1 per share after November 2, 2009.
7. Common stock
On September 9, 1999 the Company authorized the following series of common
stock:
Unlimited number of Class A Non-Voting Shares
Unlimited number of Class B Subordinate Voting Shares
Unlimited number of Class C Multiple Voting Shares
As at September 30, 1999 the following shares are issued and
outstanding:
Class A Non-Voting Shares -
Class B Subordinate Voting Shares 23,193,000
Class C Multiple Voting Shares 4,500,000
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<PAGE>
The holders of the Class A Non-Voting Shares, Class B Subordinate Voting
Shares, and Class C Multiple Voting Shares participate equally on dividends
declared subject to any preference priority on other classes of shares.
The holders of the Class A Non-Voting Shares are not entitled to voting
rights. The holders of Class B Subordinate Voting Shares are entitled to one
vote per share, and the holders Class C Multiple Voting Shares are entitled to
20 votes per share.
In the event of liquidation, dissolution, or wind-up of the Company, any
payment or distribution of assets will be paid or distributed equally share for
share to the holders of the three classes of common stock.
The holders of Class A Non-Voting Shares are entitled to convert their
shares to Class B Subordinate Voting Shares on a one for one basis. The holders
of Class B Subordinate Voting Shares are entitled to convert their shares to
Class A Non-Voting Shares on a one for one basis and at any time prior to
September 9, 2000 and into Series A Non-Voting Preferred Shares on a one for one
basis. The holders of Class C Multiple Voting Shares are entitled to convert
their shares into Class A Non-Voting Shares or Class B Subordinate Voting Shares
on a one for one basis.
During the nine months ended September 30, 1999, the Company granted stock
options to employees and officers to purchase an aggregate 2.6 million shares of
class A common stock of the Company at exercise prices between $10 and $20 per
share. The stock options have terms expiring on or before June 30, 2009.
8. Commitments
Supply Agreements
On June 18, 1999, a subsidiary of the Company entered into a supply
agreement with Tyco Submarine Systems Ltd. ("Tyco") whereby Tyco will serve as
the primary contractor for the Company's transatlantic cable project. The
initial contract price is approximately $607 million. The company has paid $100
million in payments during the nine month period ended September 30, 1999.
The Company has placed purchase orders of approximately $47,600,000 with
Nortel Networks.
IC/CN Agreements
On May 28, 1999, the Company entered into agreements with Canadian National
Railway Company ("CN") and Illinois Central Railroad Company ("IC") to license
rights-of-way ("ROW") along certain of their respective rail transportation
systems (the "Routes"). The Company will pay a license fee, based on the length
of the ROWs, and payable pursuant to a formula based on cash flow generated from
projects developed on the Routes. The Company will also provide a certain number
of fibers as consideration for the license of the ROWs. In connection with these
license agreements, the Company has formed subsidiary companies with CN and IC
(the Company having a 75% interest
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<PAGE>
and CN or IC having the remaining 25% interest) for the purpose of licensing the
ROWs from CN and IC and developing the projects along the Routes.
9. Senior Notes
On July 28, 1999 the Company issued Senior notes (the "Notes") with a face
value of $500,000,000. The Notes are unsecured obligations of the Company
bearing interest at 12% payable semi-annually. The Notes are due August 1, 2009
and may be redeemed by the Company on or after August 1, 2000 at certain
specified redemption prices. Up to 35% of the Notes may be redeemed by the
Company prior to August 1, 2002 with the net proceeds from certain sales of the
Company's common stock.
The Notes contain certain covenants that restrict the ability of the
Company and its subsidiaries to incur additional indebtedness, issue certain
preferred stock, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its subsidiaries, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations.
The interest rate on the Notes is subject to increase if the Company does
not file a registration statement with the Securities and Exchange Commission
within certain time periods specified in the Notes Indenture.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 23, 1999 WORLDWIDE FIBER INC.
By: /s/ Ron Stevenson
------------------------------
Name: Ron Stevenson
Title: President
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