PROSPECTUS
Subject to Completion, dated January 21, 2000
WORLDWIDE FIBER
[GRAPHIC OMITTED]
Worldwide Fiber Inc.
o Offer to Exchange our 12% senior notes due 2009, which have been registered
under the Securities Act,
for our 12% senior notes due 2009, which have not been registered
Terms of the Exchange Offer:
o Offer to exchange up to $500,000,000 aggregate principal amount of our new
12% senior notes, which will mature in 2009, for an equal amount of our old
12% senior notes, which will mature in 2009.
o Expires 5:00 p.m., New York City time, on February 22, 2000 unless
extended.
o You may withdraw your tender of old notes any time before the exchange
offer expires.
o We will accept any and all old notes validly tendered and not withdrawn for
exchange before the exchange offer expires.
o Not subject to any condition, other than that the exchange offer not
violate applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission and certain other customary conditions.
o We will not receive any proceeds from the exchange offer. o The exchange of
notes will not be a taxable exchange for U.S. federal income tax purposes.
o The terms of the new notes and the old notes are identical in all material
respects, except for certain transfer restrictions relating to the old
notes.
o The new notes will be evidence of the same indebtedness as the old notes
and will be issued under, and entitled to the benefits of, the same
indenture that governs the old notes.
The New Notes:
o Interest Payment: semiannually in arrears on February 1 and August 1,
beginning on February 1, 2000.
o Redemption: The new notes will be redeemable on or after August 1, 2004. Up
to 35% of the new notes will be redeemable before August 1, 2002, from the
net proceeds of one or more Public Equity Offerings.
See "Risk Factors," which begins on page 11, for a discussion of certain
factors that should be considered by holders before tendering their old notes in
the exchange offer.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
The date of this prospectus is January 21, 2000.
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TABLE OF CONTENTS
Page
Available Information........................................................i
Prospectus Summary...........................................................1
Risk Factors................................................................11
Capitalization..............................................................30
Selected Financial Data.....................................................31
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.................................................34
Business....................................................................40
Management..................................................................57
Transactions With Our Parent................................................59
Regulation..................................................................62
Description Of WFI-USA Agreements...........................................73
Description Of IC And CN Agreements.........................................75
Description Of Our Recently Completed Private Equity Placements.............77
The Exchange Offer..........................................................80
Description Of Notes........................................................88
Description Of Other Indebtedness..........................................127
Book-Entry, Delivery And Form..............................................130
Material United States And Canadian Income Tax Considerations..............133
Plan Of Distribution.......................................................135
Legal Matters..............................................................138
Experts....................................................................138
Enforceability Of Civil Liabilities Against Foreign Persons................139
Currency Translation.......................................................139
Glossary...................................................................A-1
Index to Pro Forma Financial Information..................................PF-1
Index to Financial Statements .............................................F-1
AVAILABLE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form F-4, including amendments and exhibits, under the Securities
Act concerning the new notes offered by this prospectus. This prospectus, which
forms a part of the registration statement, does not contain all of the
information included in or annexed as exhibits or schedules to the registration
statement. This additional information, and other information filed by Worldwide
Fiber, may be inspected and copied at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Any statements made in this prospectus concerning the
provisions of certain documents may be incomplete and, in each instance, you
should refer to the copy of the document filed as an exhibit to the registration
statement otherwise filed with the Securities and Exchange Commission.
We are a "foreign private issuer" as defined in Rule 405 of the Securities
Act. As a foreign private issuer, we are exempt from provisions of the Exchange
Act which prescribe the furnishing and content of proxy statements to
shareholders and relating to short swing profits reporting and liability. We
have agreed that for so long as any notes remain outstanding we will furnish to
the holders of notes the information required to be delivered under Rule
144A(d)(4) under the Securities Act. Whether or not we are subject to Section
13(a) or 15(d) of the Exchange Act, we will file with the Securities and
Exchange Commission and furnish to the holders of notes and the trustee (1)
within 140 days after the end of each fiscal year, annual reports on Form 20F or
40F, as applicable (or any successor form), containing the required information,
or required in the successor form, and (2) (a) within 45 days after the end of
each of the first three fiscal quarters of each fiscal year, reports on Form 10Q
or (b) within 60 days after
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the end of each of the first three fiscal quarters of each fiscal year, reports
on Form 6K (or any successor form) which, regardless of applicable requirements,
shall, at a minimum, contain a "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Copies of any documents referred to in this prospectus and filed with the
Securities and Exchange Commission can be obtained without charge to any holders
of notes by contacting Stephen Stow c/o Worldwide Fiber Inc., 1510-1066 West
Hastings Street, Vancouver, BC Canada V6E 3X1. Telephone number: (604) 681-1994.
In order to obtain timely delivery of these documents holders of notes must
request this information no later than five business days before the date on
which they would like to receive their documents.
FOR PENNSYLVANIA RESIDENTS ONLY:
NEW NOTES OFFERED IN THIS EXCHANGE OFFER TO PENNSYLVANIA RESIDENTS MAY
ONLY BE EXCHANGED FOR ORIGINAL NOTES HELD BY PENNSYLVANIA RESIDENTS WHO ARE: (1)
"QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") ("QIBs")); (2) INSTITUTIONAL
"ACCREDITED INVESTORS" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT); AND (3) INSTITUTIONAL INVESTORS AS DEFINED BY ss. 102(k) OF THE
PENNSYLVANIA SECURITIES ACT OF 1972 AND RULE 102.111 OF THE PENNSYLVANIA CODE,
AS AMENDED.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the related notes, appearing elsewhere
in this prospectus. Industry and market data in this prospectus are based on or
derived from sources that we believe are reliable. There can be no assurance,
however, as to the accuracy of the industry or market data. As used in this
prospectus, unless the context indicates otherwise, "we" or "us" refers to the
combined business of Worldwide Fiber Inc. (and its predecessor) and all of its
subsidiaries. In this prospectus, except where otherwise indicated, all dollar
amounts are expressed in U.S. dollars. Certain terms used in this prospectus are
defined in Annex A--Glossary or elsewhere in this prospectus.
The Exchange Offer
Purpose and Effect........... Worldwide Fiber sold the old notes on July 28,
1999 to Donaldson Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and TD Securities
(USA) Inc., the initial purchasers, who
privately placed the old notes with certain
institutional investors. In connection with this
sale, we executed and delivered for the benefit
of the holders of the old notes a registration
rights agreement providing for, among other
things, the exchange offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Terms of the Exchange Offer.. New notes are being offered in exchange for
an equal amount of old notes. Old notes may be
exchanged only in integral multiples of $1,000.
We will issue the new notes on or promptly after
the expiration of the exchange offer. See "Risk
Factors--Consequences of Failure to Exchange."
Minimum Condition............ The exchange offer is not conditioned upon any
any minimum total amount of old notes being
tendered or accepted for exchange. See "The
Exchange Offer--Certain Conditions to the
Exchange Offer."
Expiration Date.............. 5:00 p.m., New York City time, on February 22,
2000, unless the exchange offer is extended,
in which case the expiration date means the
latest date and time to which the exchange offer
is extended. See "The Exchange Offer--Terms of
the Exchange Offer."
Conditions................... The exchange offer is subject to certain
customary conditions, which may be waived by us.
We reserve the right to terminate or amend the
exchange offer at any time before the expiration
date if these conditions occur. The exchange
offer is also subject to the terms and
provisions of the registration rights agreement.
See "The Exchange Offer--Certain Conditions to
the Exchange Offer."
Procedures for Tendering Old If you wish to tender your old notes through the
Notes...................... exchange offer, you must either (1) complete,
sign and date the letter of transmittal, or a
facsimile of it, according to the instructions
contained in this prospectus and in the letter
of transmittal or (2) send an agent's message to
the exchange agent, which is a message that
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indicates you have agreed to the contents of the
letter of transmittal and the letter of
transmittal may be enforced against you. You
must mail or otherwise deliver the letter of
transmittal, or a facsimile of it, or the
agent's message with the old notes or a
Book-Entry Confirmation (as defined) and any
other required documentation to the exchange
agent at the address listed in this prospectus.
The method of delivery of this documentation is
at your election and risk. By executing the
letter of transmittal, or sending the agent's
message you will represent to us, among other
things, that:
o the new notes acquired through the
exchange offer by you and any beneficial
owners of old notes are being obtained
in the ordinary course of business of
the person receiving the new notes;
o neither you nor the beneficial owner is
participating in, intends to participate
in or has an arrangement or
understanding with any person to
participate in the distribution of the
notes; and
o neither you nor the beneficial owner is
an affiliate, as defined under Rule 405
of the Securities Act, of Worldwide
Fiber.
Each broker-dealer that receives new notes for
its own account in exchange for old notes, where
the old notes were acquired by the broker or
dealer as a result of market-making activities
or other trading activities (except for old
notes acquired directly from us), must
acknowledge in the letter of transmittal that it
will deliver a prospectus for any resale of the
new notes. See "The Exchange Offer--Procedures
for Tendering Old Notes" and "Plan of
Distribution."
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender your old notes in the
exchange offer, you should contact the
registered holder promptly and instruct the
registered holder to tender on your behalf. If
you wish to tender on your own behalf, you must,
before completing and executing the letter of
transmittal and delivering your old notes,
either make appropriate arrangements to register
ownership of the old notes in your name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed before the expiration
date. See "The Exchange Offer--Procedures for
Tendering Old Notes."
Book-Entry Transfer.......... Any financial institution that is a participant
in the Book-Entry Transfer Facility's (as
defined) system may make book-entry delivery of
old notes by causing the Book-Entry Transfer
Facility to transfer these old notes into the
exchange agent's account at the
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Book-Entry Transfer Facility in accordance with
the Book-Entry Transfer Facility's procedures
for transfer. See "The Exchange Offer--Book
Entry Transfer."
Withdrawal Rights............ Tenders may be withdrawn at any time before 5:00
p.m., New York City time, on the expiration
date. See "The Exchange Offer--Withdrawal of
Tenders."
Acceptance of Old Notes and
Delivery of New Notes......... Upon satisfaction or waiver of all conditions
of the exchange offer, we will accept for
exchange any and all old notes which are
properly tendered and not withdrawn before 5:00
p.m., New York City time, on the expiration
date. The new notes issued through the exchange
offer will be delivered promptly following
acceptance of the old notes by us after the
expiration date. See "The Exchange
Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
U.S. Federal Income Tax
Consequences............... The exchange of old notes for new notes by
tendering holders will not be a taxable
exchange for United States federal income tax
purposes as a result of the exchange. See
"Material United States and Canadian Federal
Income Tax Considerations--United States."
Regulatory Approvals......... We do not believe that the receipt of any
material federal or state regulatory approvals
will be necessary for the exchange offer. See
"The Exchange Offer--Regulatory Approvals."
Use of Proceeds.............. We will not receive any proceeds from the
exchange offer.
Exchange Agent............... HSBC Bank USA is serving as exchange agent in
the exchange offer. See "The Exchange
Offer--Exchange Agent."
Resales of the New Notes..... The new notes are being offered by this
prospectus to satisfy certain obligations
contained in the registration rights agreement.
Based on positions of the Securities and
Exchange Commission and no-action or
interpretive letters issued to others, we
believe that the new notes issued through the
exchange offer may be offered for resale, resold
and otherwise transferred by you, without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that:
o you are acquiring the new notes in the
ordinary course of your business;
o you are not participating, do not intend
to participate and have no arrangement
or understanding with any person to
participate in the distribution of the
new notes; and
o you are not an affiliate of Worldwide
Fiber.
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If you acquire new notes in the exchange offer
to distribute or participate in a distribution
of new notes, you cannot rely on the position of
the staff of the Securities and Exchange
Commission contained in its no-action and
interpretive letters and must comply with the
registration and prospectus delivery
requirements of the Securities Act concerning a
secondary resale transaction, unless an
exemption from registration is otherwise
available. Each broker-dealer that receives new
notes for its own account through the exchange
offer must acknowledge that:
o old notes tendered by it in the exchange
offer were acquired in the ordinary
course of its business as a result of
market-making or other trading
activities; and
o it will deliver a prospectus in
connection with any resale of new notes
received in the exchange offer.
This prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with any resale of
the new notes received in exchange for old notes
where the old notes were acquired by a
broker-dealer as a result of market-making or
other trading activities, except for old notes
acquired directly from us. We have agreed that,
for a period of 180 days following the
consummation of the exchange offer, we will make
this prospectus available to any broker-dealer
for use with resale. See "The Exchange
Offer--Resales of the New Notes" and "Plan of
Distribution."
Summary Description of New Notes
Securities Offered........... $500,000,000 aggregate principal amount of
12% senior notes that will mature in 2009.
Issuer....................... Worldwide Fiber Inc.
Maturity Date................ August 1, 2009.
Interest..................... Interest on the new notes will accrue from the
last interest payment date on which interest was
paid on the old notes surrendered in exchange
for new notes or, if no interest has been paid
on the old notes, from the date of original
issuance of the old notes and will be payable in
cash in arrears semiannually on February 1 and
August 1 of each year, commencing on February 1,
2000.
Ranking of the New Notes..... The new notes are senior debts and will rank
ahead of all our future debts that expressly
provide that they are subordinated to the new
notes. They will effectively rank behind all of
our secured debts to the extent of the value of
the assets securing our debts and all existing
and future debts and other liabilities of our
subsidiaries.
They will rank equally with all of our existing
and future unsubordinated, unsecured debts that
do not expressly provide that they are
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subordinated to the new notes, including any old
notes not exchanged.
On September 30, 1999 the notes were effectively
subordinated to approximately $158.0 million of
liabilities of our subsidiaries. No debt of ours
having an equal ranking with the new notes or
which is subordinate to the new notes would have
been outstanding at this date.
Optional Redemption.......... On or after August 1, 2004, we may redeem some
or all of the new notes at any time at the
redemption prices, and subject to certain
limitations, described in the section
"Description of Notes" under the heading
"Optional Redemption."
Upon a change in the withholding tax laws of
Canada, we may redeem all of the new notes at
any time at the face amount of the new notes.
Before August 1, 2002, we may redeem up to 35%
of the new notes with the proceeds of certain
public offerings of our equity at the price
listed in the section "Description of Notes"
under the heading "Optional Redemption."
Mandatory Offer to
Repurchase................... If in certain circumstances we sell certain
assets, receive certain excess cash flows, or
experience specific kinds of changes in control,
we must offer to repurchase the new notes at the
prices listed in the section "Description of
Notes" under the heading "Repurchase at the
Option of Holders."
Basic Covenants of Indenture. The indenture governing the new notes contains
contains certain limitations on our ability, and
the ability of some of our subsidiaries, to: o
borrow money,
o pay dividends on stock or repurchase stock, o
make investments,
o use assets as security in other transactions,
and
o sell certain assets or merge with or into
other companies.
For more details, see the section "Description
of Notes" under the heading "Certain Covenants."
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The Company
We are a provider of technologically advanced fiber optic communications
infrastructure and services in North America using our state-of-the-art fiber
optic network. We recently have begun providing bandwidth services.
Our current and targeted customers include new and incumbent
telecommunication providers, Internet service providers and large corporations
with enterprise network needs.
We believe that these customers have a limited choice of service providers
capable of offering high-capacity, reliable, secure and cost-effective services.
To meet our customers' demands, we offer a broad range of services on a scalable
basis, including:
o bandwidth services such as optical channels, private line
transmission, virtual voice trunking, Internet transport, Internet
protocol transport and packet-based data services, including IP
Transport and Asynchronous Transfer Mode,
o network infrastructure such as dark fiber and conduit for sale or
grant of IRU, and dark fiber and conduit for lease, and
o construction services supporting the development of our network.
We also intend to expand our business and network to include additional
facilities, including carrier hotels that will enable us to provide services
such as:
o applications hosting,
o electronic commerce services,
o web hosting services,
o video transport services,
o independent Internet access for transport and peering,
o management services that allow carriers to migrate from
circuit-switched technologies to packet-based technologies, and
o co-location services.
Business Strategy
To exploit the growing demand for bandwidth, we have developed a business
strategy to:
o provide connectivity to major global population centers,
o develop and operate a technologically advanced, high capacity, low
cost fiber network,
o utilize fiber swaps and strategic relationships to extend the reach of
our network,
o continue to expand our marketing capabilities,
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o increase the number of products and services that we offer to our
customers, and
o capitalize on management experience and relationships and pursue
additional strategic alliances.
Recent Developments
Management
o Appointment of Chief Executive Officer. Mr. Gregory Maffei joined
us as Chief Executive Officer in January 2000. He was previously employed by
Microsoft Corporation for seven years, most recently, as Chief Financial
Officer. Prior to joining us, Mr. Maffei purchased equity in Worldwide Fiber
Inc. equal to approximately 8% of our total equity outstanding after such
purchase on a fully diluted basis. Certain of Mr. Maffei's shares are subject to
repurchase by us in the event his employment ceases.
Network
o PSINet. In December 1999 we signed a contract with PSINetworks
Canada Limited and PSINetworks Co. for fiber optic capacity between Vancouver
and Chicago to be delivered by the end of March 2000. In addition, we will
provide PSINet with operation and maintenance services at set rates. Certain
terms of this agreement are subject to finalization.
o Europe. In December 1999 we signed contracts with Telia AB(publ),
Telewest Communications Group Limited and CARRIER1. We are swapping fiber on
part of our North American network for fiber on significant parts of Telia's
European network, which is expected to be complete in the fourth quarter of
2000. We will develop with Telewest a multi-conduit network from London to
Liverpool along diverse routes that pass through seven major population centers
in England. We expect this network to be complete by the fourth quarter of 2000.
CARRIER1 has agreed to provide us with wholesale capacity from London to 18
major European cities, and an option to swap for dark fiber strands in Germany
and/or wavelengths in France.
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Summary Financial Data
The summary historical financial data for the year ended March 31, 1996,
the five months ended August 31, 1996, the year ended August 31, 1997 and the
nine months ended May 31, 1998 of our predecessor, the telecommunications
division of Ledcor, are derived from the audited financial statements of the
predecessor division, which have been audited by Deloitte & Touche LLP,
independent auditors. Worldwide Fiber was incorporated on February 5, 1998 and
acquired certain assets of the predecessor division on May 31, 1998. Before May
31, 1998, Worldwide Fiber was a shell company. The summary consolidated
historical financial data for the period from February 5, 1998 to December 31,
1998 of Worldwide Fiber are derived from our audited consolidated financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
auditors. The unaudited pro forma financial data for the year ended December 31,
1998 are derived from the audited consolidated financial statements of Worldwide
Fiber, the financial statements of the predecessor division, and the
consolidated financial statements of Worldwide Fiber (USA), Inc. included
elsewhere in this prospectus. The summary consolidated historical financial data
as of and for the periods ended September 30, 1999 and 1998 are derived from
Worldwide Fiber's unaudited consolidated financial statements and include, in
the opinion of Worldwide Fiber's management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the data for those
periods. The unaudited pro forma financial data for the nine months ended
September 30, 1999 are derived from the unaudited interim consolidated financial
statements for the nine month period ended September 30, 1999 of Worldwide Fiber
included elsewhere in this Prospectus. Our consolidated financial statements and
the divisional financial statements of the predecessor division have been
prepared in accordance with U.S. GAAP. The results of operations for the
predecessor division are not comparable to our results of operations after the
Reorganization. You should read the following information along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes included
elsewhere in this prospectus.
Capital expenditures represent actual cash expenditures incurred during
the period and do not include acquisitions of assets for non-cash consideration.
Route miles represent the number of miles spanned by fiber optic cable owned at
the end of the period, calculated without including physically overlapping
segments of cable. Fiber miles represent the number of strands of fiber in a
length of fiber optic cable owned at the end of the period, multiplied by the
length of the cable in miles.
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<TABLE>
<CAPTION>
Summary Financial Data
(Dollars in thousands)
Predecessor Division Worldwide Fiber
-------------------- ---------------
Five Nine Pro Forma Nine Pro Forma
Year Months Year Months February 5, February 5, Year Ended Months Nine Months
Ended Ended Ended Ended 1998 to 1998 to December Ended Ended
March August August May 31, September December 31, 1998 September September
31, 1996 31, 1996 31, 1997 1998 30, 1998 31, 1998 (1)(3) 30, 1999 30, 1999(2)(3)(6)
Income Statement
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........... $3,824 $7,373 $58,008 $54,634 $104,819 $164,319 $207,038 $235,138 $235,138
Operating
expenses:
Costs........... 3,440 5,739 48,474 44,919 90,909 147,621 182,518 165,263 165,263
General &
administrative. 57 91 863 710 1,318 2,274 8,140 17,263 18,138
Depreciation.... 24 15 112 317 260 464 639 871 871
Amortization of
goodwill...... -- -- -- -- -- -- 4,875 -- 3,656
Total operating
expenses.......... 3,521 5,845 49,449 45,946 92,487 150,359 196,172 183,397 187,928
Operating income.. 303 1,528 8,559 8,688 12,332 13,960 10,866 51,741 47,210
Interest expense, -- 15 600 86 -- 225 85,352 12,448 49,248
net...............
Equity income..... -- -- -- -- (48) 928 -- -- --
Earnings (loss)
before income
taxes........... 303 1,513 7,959 8,602 12,284 14,663 (74,486) 39,293 (2,038)
Income tax
expense 139 686 3,620 3,909 5,402 5,643 (26,710) 20,175 3,571
(recovery)......
164 827 4,339 4,693 6,882 9,020 (47,776) 19,118 (5,609)
Income
attributable
to minority -- -- -- -- -- -- 464 5,747 3,247
interest........
Net income (loss). $164 $827 $4,339 $4,693 6,882 $9,020 $(48,240) $13,371 $(8,856)
Other Financial
Data:
EBITDA (4)........ $327 $1,543 $8,671 $9,005 $12,544 $15,352 $16,380 $52,612 $51,737
Capital
expenditures...... $72 $ 181 $1,119 $6,828 -- $1,065 -- $61,214 --
Ratio of earnings
to fixed 24.3x 45.5x 10.3x 17.7x 374.7x 26.8x -- 2.0x --
charges (5).....
Statement of Cash
Flows Data:
Operating $666 $(3,078) $(3,921) $(2,502) 79 $(13,059) $ -- $(138,614) $ --
activities........
Investing (72) (181) (1,119) (6,828) -- 1,177 -- (129,740) --
activities........
Financing $(595) $3,259 $5,040 $9,330 -- $168,350 $ -- $787,000 $ --
activities........
===============================================================================================================
September 30, 1999
------------------
Actual Pro Forma (6)
------ -------------
Balance Sheet Data:
<S> <C> <C>
Cash and cash equivalents...................................................... $ 675,175 $ 675,175
Fixed assets, net.............................................................. 107,264 107,264
Total assets................................................................... 1,216,194 1,313,694
Total debt..................................................................... 675,000 675,000
Redeemable Convertible preferred stock........................................ 345,157 345,157
Shareholder's equity........................................................... $ 30,806 130,806
</TABLE>
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(1) Gives pro forma effect to (1) the transfer on May 31, 1998 of certain
of the operations of the predecessor division and the Construction
Services, Management Services and Employee Services Agreements between
Worldwide Fiber and affiliates of Ledcor, (2) the consolidation of
WFI-USA as a result of Worldwide Fiber's agreement to increase its
interest in WFI-USA from 50% to 75% on December 31, 1998, (3) the
effect of the interest expense, including amortization of deferred
financing costs, relating to the $175,000,000 12 1/2% senior notes
issued December 23, 1998 and the $500,000,000 12% senior notes issued
July 28, 1999, and (4) the amortization of goodwill arising on the
acquisition of the minority interest shares of WFI-CN Fiber Inc. and
Worldwide Fiber IC LLC.
(2) Gives pro forma effect to (1) the interest expense, including
amortization of deferred financing costs, on the $500,000,000 12%
senior notes issued July 28, 1999 and (2) the amortization of goodwill
arising on the acquisition of the minority interest shares of WFI-CN
Fiber Inc. and Worldwide Fiber IC LLC.
(3) The initial annual interest expense on the $500,000,000 12% senior
notes is $62,400,000 and the initial annual interest expense on the
$175,000,000 12 1/2% senior notes is $23,200,000.
(4) EBITDA consists of net income (loss) before interest expense, net of
interest income, income tax expense (recovery), depreciation,
amortization of goodwill and income attributable to minority interest.
EBITDA is presented because we believe it is a useful indicator of a
company's ability to meet debt service and capital expenditure
requirements. It is not intended as an alternative measure of operating
results or cash flow from operations (as determined in accordance with
generally accepted accounting principles). EBITDA is not necessarily
comparable to similarly titled measures for other companies and does
not necessarily represent amounts of funds available for management's
discretionary use.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consists of earnings (loss) before equity income, income tax
expense (recovery), amortization of goodwill, income attributable to
minority interest and fixed charges. Fixed charges consists of interest
expensed and capitalized, plus the portion of rental expense which we
believe to be representative of interest (assumed to be one-third of
rental expense). Pro forma loss for the year ended December 31, 1998
would have been insufficient to cover fixed charges by $74,486,000 and
pro forma loss for the nine month period ended September 30, 1999 would
have been insufficient to cover fixed charges by $9,832,000.
(6) Gives pro forma effect to (1) the issuance of a note receivable in the
amount of $77,500,000 provided by the Company to an executive officer
of the Company and the issuance on December 22, 1999 of 26,080,000
Class A Non-Voting shares and 4,920,000 Class C Multiple Voting Shares
to the executive officer for consideration of $77,500,000 and (2) the
acquisition of the minority interest shares of WFI-CN Fiber Inc. and
Worldwide Fiber IC LLC in exchange for Class A Non-Voting Shares of the
Company.
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RISK FACTORS
In addition to the other matters described in this prospectus, you should
carefully consider the following risk factors before making an investment in the
notes.
Limited History of Operations--Given our limited operating history while our
network is being built, you should consider the notes to be a highly speculative
investment.
You have very limited historical financial information upon which to base
your evaluation of our performance and an investment in the notes. We began
operations as an independent company in May 1998 and have a limited operating
history. Before that time we conducted business as the telecommunications
division of Ledcor. We believe our financial results are not directly comparable
to theirs. You must consider our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in an early stage of
development.
Negative Cash Flows--Given our negative cash flows while our network is being
built, you should consider the notes to be a highly speculative investment.
Continued negative cash flow may restrict our ability to pursue our
business strategy. In addition, if we cannot achieve profitability or positive
cash flows from operating activities, we may not be able to meet our debt
service obligations, including our obligations under the notes, capital
expenditure requirements or working capital needs.
We intend to use most of the proceeds from the sale of these notes and a
significant amount of additional capital to develop and construct our network.
Until the principal segments of the network are complete, we will spend more
money building the network than we will earn from exploiting it. Accordingly, we
expect to experience negative cash flows after capital expenditures during
network development. We cannot assure you that the exploitation of our network,
including the sale of our fiber and bandwidth services, will result in an
adequate revenue base to meet our debt service obligations or that we will ever
generate profitability or positive cash flow.
Substantial Leverage--Our substantial debt could adversely affect our financial
health and prevent us from fulfilling our obligations under the notes.
We have substantial debt and debt service requirements.
Our substantial indebtedness could have important consequences to you. For
example, it could:
o make it more difficult for us to satisfy our obligations under
the notes,
o increase our vulnerability to general adverse economic and industry
conditions,
o limit our ability to fund future capital expenditures, working capital
and other general corporate requirements,
o require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our
indebtedness, reducing the availability of our cash flow to fund
capital expenditures, working capital, and other general corporate
purposes,
o make it more difficult for us to make interest and principal payments
on our other indebtedness, which would be a default under the
indenture,
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate, and
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o place us at a competitive disadvantage compared to our competitors
that have less debt.
We intend to obtain credit facilities from one or more institutional
lenders in an aggregate amount of up to $115 million. Borrowings under these
credit facilities may be secured by certain of our assets. See "Description of
Other Indebtedness." We also intend to obtain other sources of financing for the
construction of the network, including project financing for individual segments
of our network. This project financing would also be secured by the assets being
financed. The following chart shows certain important credit statistics as of
the date or for the periods specified below:
As of September 30, 1999
---------------------------
Actual Pro Forma (1)(2)
------ ----------------
Total indebtedness........................... $675,000,000 $675,000,000
Shareholder's equity......................... $30,806,000 $130,806,000
Debt to equity ratio......................... 21.9x 5.2x
(1) Gives pro forma effect to (1) the issuance of a note receivable in the
amount of $77,500,000 provided by the Company to an executive officer of
the Company and the issuance on December 22, 1999 of 26,080,000 Class A
Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares for
consideration of $77,500,000 and (2) the acquisition of the minority
interest shares of WFI-CN Fiber Inc. and Worldwide Fiber IC LLC in exchange
for Class A Non-Voting Shares of the Company.
(2) Shareholders' equity does not include $345,157,000 in redeemable
convertible preferred shares.
The initial annual interest expense on the $500,000,000 12% senior notes
is $62,400,000 and the initial annual interest expense on our $175,000,000 12
1/2% senior notes is $23,200,000.
Pro forma loss for the year ended December 31, 1998 would have been
insufficient to cover fixed charges by $74,486,000 and pro forma loss for the
nine month period ended September 30, 1999 would have been insufficient to cover
fixed charges by $9,832,000.
Additional Borrowings Required--Despite our current debt level, we and our
subsidiaries plan to incur substantially more debt. Increased debt could worsen
the risks described above, but failure to obtain the debt needed could prevent
the completion of the network.
If additional debt is incurred, the risks mentioned above that are
associated with high leverage will increase. We expect to need significant
amounts of additional capital to complete the build-out of our planned network
and fulfill our long-term business strategies. The terms of the indenture
generally permit us and our restricted subsidiaries to incur additional debt to
finance the cost of designing and building or acquiring our network. The
indenture also allows us to incur additional indebtedness for other purposes,
subject to certain limitations. In addition, the indenture permits us to create
"unrestricted subsidiaries" that will be allowed to incur debt without regard to
the limitations on debt incurrence contained in the indenture. Our ability to
arrange financing and the cost of financing depend upon many factors, including:
o general economic and capital markets conditions, and in particular the
non-investment grade debt market,
o conditions in the telecommunications industry,
o regulatory developments,
o investor confidence and credit availability from banks or other
lenders,
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o the success of our network, and
o provisions of tax and securities laws that affect raising capital.
Our inability to raise additional funds would have an adverse effect on
our ability to complete the network. If we decide to raise additional funds
through the incurrence of debt, we may become subject to additional or more
restrictive financial covenants. In addition, we expect to incur additional debt
that is secured by our assets and therefore those assets will be available to
other creditors before they are available to you.
We are funding a portion of our anticipated investment in Hibernia from
our recently completed private sale of our equity securities. We also expect the
indebtedness to finance that project to be incurred by our subsidiary without
recourse to Worldwide Fiber Inc. We estimate that approximately $565,000,000 of
indebtedness will be required for the Hibernia project. Hibernia will be owned
by one or more subsidiaries created for the purpose of owning the project. They
will not hold any assets unrelated to Hibernia. We currently expect that these
subsidiaries will not be restricted subsidiaries under the indenture. If we were
to incur additional debt at the Worldwide Fiber Inc. level in order to
contribute to the financing of Hibernia, however, it would further increase the
risks associated with high leverage.
Ability to Service Debt--To service our debt we will require significant amounts
of cash and our ability to generate sufficient cash will depend on many factors
beyond our control.
We cannot assure you that we will be successful in implementing our
strategy or in realizing our anticipated financial results. You should be aware
that our ability to repay or refinance the notes and any other debt we incur
will depend on our successful financial and operating performance and on our
ability to successfully implement our business strategy. You should also be
aware that our financial and operating performance depends upon a number of
factors, many of which are beyond our control. These factors include:
o our ability to complete our network on time and in a cost-effective
manner,
o the economic and competitive conditions in the telecommunications
industry, including the demand for fiber-optic systems,
o any construction or operating difficulties, increased operating costs
or pricing pressures we may experience,
o the passage of legislation or other regulatory developments that may
adversely affect us, and
o any material delays in implementing any strategic projects.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay the notes and any other debt we may incur in the future, or
that we will be successful in obtaining alternative financing. If we are unable
to repay our debts, we may be forced to reduce or delay the completion or
expansion of our network, sell some of our assets, obtain additional equity
capital or refinance or restructure our debt. If we are unable to meet our debt
service obligations or comply with our covenants, a default under our debt
agreements would result. To avoid a default, we might need waivers from third
parties, which might not be granted.
Holding Company Structure--We will depend on the cash flow of our subsidiaries
to satisfy our obligations under the notes.
Our operating cash flow and our ability to service our indebtedness,
including the notes, depends upon the operating cash flow of our subsidiaries
and their payments to us in the form of loans, dividends or otherwise. Our
subsidiaries are separate legal entities and have no obligation to pay any
amounts due on the notes or to make
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any funds available for that purpose, whether by dividends, interest, loans,
advances or other payments. In addition, our subsidiaries' payment of dividends
and the making of loans, advances and other payments to us may be subject to
regulatory and contractual restrictions. These restrictions include requirements
to maintain minimum levels of working capital and other assets. Subsidiary
payments are contingent upon earnings and various business and other
considerations.
Restrictions Imposed by Terms of Our Indebtedness--We may be unable to repay the
notes and our other indebtedness if there is an event of default.
If an event of default occurs under any of our credit facilities or the
indenture, the lenders under the credit facilities and the holders of our notes
could elect to declare all amounts outstanding under the credit facilities and
the notes, along with accrued and unpaid interest, to be immediately due and
payable. The indenture will limit, and the indenture for our $175,000,000 12
1/2% senior notes due 2005 does limit, among other things, our ability to incur
additional indebtedness, pay dividends and make certain other restricted
payments, incur liens, enter into certain transactions with affiliates and
consummate asset sales and does impose restrictions on our ability to merge or
consolidate with or into, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of our assets. In addition, credit
facilities that we may enter into in the future may contain other and more
restrictive covenants, including concerning debt incurrence and the making of
capital expenditures and may require us to meet or maintain specified financial
ratios and tests. Our ability to meet these financial ratios could be affected
by events beyond our control, and no assurance can be given that we will be able
to comply with these provisions. A breach of any of these covenants could result
in a default under these credit facilities and/or the indenture. If we were
unable to repay any of these amounts, the lenders could proceed against any
collateral securing the indebtedness, which could include security interests, in
all future accounts receivable and inventory of Worldwide Fiber and other
assets. If the lenders under potential credit facilities were to accelerate the
payment of the indebtedness under these credit facilities, there would be no
assurance that our assets at the time would be sufficient to repay in full the
indebtedness and our other indebtedness, including the notes.
Failure to Exchange or Comply with the Exchange Offer--This will result in
continuing transfer restrictions or result in the inability to exchange.
There has previously been only a limited secondary market, and no public
market, for the old notes. To the extent that old notes are tendered and
accepted in the exchange offer, the trading market, if any, for the old notes
not so tendered could be adversely affected. We cannot assure the future
development of a market for the old notes or the ability of holders of the old
notes to sell their old notes or the price at which the old notes may be sold.
If you do not exchange your old notes for new notes under the exchange offer,
you will continue to be restricted from transferring your old notes.
In general, the old notes may not be offered or sold, unless registered
under the Securities Act, except under an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not currently anticipate that we will register the old notes under the
Securities Act. Based on interpretations by the staff of the Securities and
Exchange Commission contained in no-action letters issued to third parties, we
believe that the new notes issued to you under the exchange offer in exchange
for old notes may be offered for resale, resold or otherwise transferred by any
holder of them, except for any holder which is an affiliate of Worldwide Fiber
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act, if
the new notes are acquired in the ordinary course of the holder's business and
the holder is not participating, does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of the new notes. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer for any resale of new notes
received in exchange for old notes where the old notes were acquired by this
broker-dealer as a result of market-making activities or other trading
activities, except for old notes acquired from us. We have agreed that, for a
period of 180 days following the completion of the exchange offer, we will make
this prospectus available to any broker-
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dealer for use in any resale. However, your ability to resell the new notes is
subject to applicable state securities laws. See "The Exchange Offer" and "Plan
of Distribution."
To participate in the exchange offer and avoid the restrictions on
transfer of the old notes, you must deliver a properly completed letter of
transmittal, including all other documents required by the letter of
transmittal, to the exchange agent at one of the addresses listed below under
"The Exchange Offer--Exchange Agent" on or before the expiration date. In
addition, either
o certificates for the old notes must be received by the exchange agent
along with the letter of transmittal,
o a timely confirmation of a book-entry transfer of the old notes, if
this procedure is available, into the exchange agent's account at the
Book-Entry Transfer Facility under the procedure for book-entry
transfer described in this prospectus must be received by the exchange
agent before the expiration date, or
o the holder must comply with the guaranteed delivery procedures
described in this prospectus and in the letter of transmittal. You may
elect to choose method of delivery of the old notes and the letter of
transmittal and all other required documents to the exchange agent but
it is at your own risk. See "The Exchange Offer."
Effective Subordination--Although your notes are referred to as "senior notes,"
they will be effectively subordinated to our secured debt and the debt of our
subsidiaries.
The notes are unsecured and therefore will be effectively subordinated to
any secured debt we may incur to the extent of the value of the assets securing
it. In the event of a bankruptcy or similar proceeding involving us, our assets
which serve as collateral will be available to satisfy the obligations under any
secured debt before any payments are made on the notes. In addition, our
subsidiaries will not guarantee the notes. In the event of a bankruptcy,
liquidation or reorganization of any of our subsidiaries, creditors of our
subsidiaries will generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us, except to the extent we may also have a claim as a creditor.
Risks Associated with Construction and Expansion of Our Network--Our inability
to implement our business strategy and manage our growth could cause significant
delays in the completion of our network.
Successful implementation of our business strategy depends on numerous
factors beyond our control, including economic, competitive and other conditions
and uncertainties, the ability to obtain licenses, permits, franchises and
rights-of-way on reasonable terms and conditions and the ability to hire and
retain qualified management personnel. Adverse economic or competitive
conditions or the failure to obtain the necessary authorizations or to hire and
retain qualified management personnel could prevent or delay the completion of
all or part of our network or increase completion costs. In order to implement
our proposed business strategy, we must accomplish the following in a timely
manner at a reasonable cost to us and on conditions acceptable to us:
o obtain continued access to capital markets,
o design and engineer fiber networks,
o install fiber optic facilities, transmission equipment and related
infrastructure,
o acquire additional rights-of-way,
o attract and retain high-quality operating personnel and management,
and
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o continue to implement and improve our operational, financial and
accounting systems.
In addition, construction of future networks entails significant risks,
including:
o management's ability to effectively control and manage these projects,
o shortages of materials or skilled labor,
o unforeseen engineering, environmental or geological problems, and
o work stoppages, weather interference, floods and unanticipated cost
increases.
We cannot assure you that the anticipated costs of our current and future
projects will not be exceeded or that these projects will commence operations
within the contemplated schedules, if at all.
Our ability to implement our business plan depends, to a significant
degree, upon our ability to secure a market for our fiber capacity and obtain
and maintain contractual and other relationships with communications carriers
and corporate customers. If we are unable to enter into contracts, comply with
the terms of contracts or maintain relationships with these constituencies, our
operations would be materially and adversely affected. Certain of our current
contracts to supply fiber capacity allow the buyer or lessee to terminate the
contracts and provide for liquidated damages if we do not supply the stated
fiber capacity by a specified time. Terminating any of these contracts could
adversely affect our operations.
Additionally, we expect to significantly expand the range of services that
we offer. This expansion includes providing various bandwidth services to
carriers and other service providers. We may enter into joint ventures where we
supply customers with dark fiber and our partners supply the appropriate optical
transmission equipment by facilitating the involvement of third party suppliers,
vendors and contractors. We cannot assure you that a market will develop for our
new services, that implementing these services will be technically or
economically feasible, that we can successfully develop or market them or that
we can operate and maintain our new services profitably.
In order to reach our operating and financial goals, we must substantially
increase the current volume of voice, data, Internet and video transmission on
our network. If we do not develop long-term commitments with new large-volume
customers as well as maintain our relationships with current customers, we will
be unable to increase traffic on our network, which would adversely affect our
profitability.
Need for Rights-of-Way--A failure to obtain or maintain appropriate
rights-of-way could delay the completion of the network and increase its cost.
We cannot assure you that we will be successful in obtaining additional
rights-of-way and other permits required to install underground conduit from
parties such as railroads, utilities, highway authorities and local governments
and transit authorities. After we have obtained rights-of-way, we may not be
able to maintain them. Some of our rights-of-way agreements may be short-term or
revocable at will. Certain rights-of-way may require regulatory filings or may
be subject to legal challenge by third parties such as municipal governments,
aboriginal citizens or land owners concerning rights-of-way granted for specific
purposes. For example, one of our subsidiaries is seeking an order from the
Canadian telecommunications regulatory authority which will prescribe the terms
and conditions of access to street crossings and other municipal properties in
the City of Vancouver. See "--Extensive Regulation--Canada--CRTC Applications."
In addition, landholders who granted rights-of-way to certain railroad companies
in the past have filed class action lawsuits against communications carriers
that received rights-of-way from railroad companies in order to develop their
fiber optic networks. The rights-of-way challenged in these class action
lawsuits are similar to some of the rights-of-way that we use to develop our
network, including the rights-of-way granted to us in the agreements with
Illinois Central Railroad Company and
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Canadian National Railway Company. Loss of substantial rights and permits or
loss of the ability to use these rights-of-way or the failure to enter into or
maintain required arrangements for the network could have a material adverse
effect on our business, financial condition and results of operations, if, as a
result, the completion of our network is delayed or becomes more costly. See
"Business--General."
Limited Experience--We have little experience in the offering of bandwidth
services and this could increase our risk of failure.
We expect an increasing portion of our revenues to be derived through our
offering of bandwidth and other services. We have limited experience offering
these services. Presently, we derive substantially all of our revenues from the
sale, grant of indefeasible rights-of-use or lease of dark fiber and conduit and
construction services. See "Business--Customers" and "--Competition."
Pricing Pressures--We anticipate that prices for fiber assets and bandwidth
services will start to decline.
We anticipate that prices for our products and services specifically, and
network transmission capacity in general, will continue to decline over the next
several years, due primarily to the following:
o price competition as various network providers complete construction
of networks that might compete with our network,
o installation by us and our competitors of excess fiber capacity,
o recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber optic networks,
and
o strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among certain Regional Bell Operating
Companies, that increase the parties' purchasing power.
Risk of Network Failure--Network disruptions could adversely affect our
operating results.
Our success will require that our network provide competitive reliability,
capacity and security. Some of the risks to our network and infrastructure
include:
o physical damage,
o power loss,
o capacity limitations,
o software defects,
o excessive sustained or peak user demand,
o breaches of security, and
o disruptions beyond our control.
These disruptions may cause interruptions in service or reduced capacity
for customers, any of which could have an adverse effect on our ability to
retain customers.
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The sale or lease of bandwidth services will require the addition of
transmission equipment to our network. The network will use a combination of
communications equipment, software, operating protocols and proprietary
applications for the high speed transportation of large quantities of digital
signals among multiple locations. Given the complexity of our network, digital
signals may become lost or distorted, which may cause significant losses to our
customers. The network may also contain undetected design faults and software
"bugs" that, despite our testing, may be discovered only after the network has
been completed and is in use. The failure of any equipment or facility on our
network could result in the interruption of customer service until we make
necessary repairs or install replacement equipment and have an adverse impact on
our ability to secure customers in the future. We do not possess adequate
insurance to guard against the losses we could incur as a result of the factors
enumerated above.
Risks Associated with Joint Ventures--Our business strategy contemplates
investments in joint ventures to leverage our fiber assets. These investments
may involve significant risks and our capital or assets may not be returned.
We are continually evaluating potential joint ventures and strategic
opportunities. An affiliate of Michels Pipeline Construction Inc., a U.S.
pipeline construction company, has a 25% interest in Worldwide Fiber (USA), Inc.
Illinois Central Railroad Company and Canadian National Railway Company have
minority interests in our subsidiaries which will construct our network along
the rights-of-way of these railroads. Although, except as described in this
prospectus, we do not have any definitive commitment or agreement concerning any
material investment, strategic alliance or related effort, we may seek
additional arrangements of this sort. Any investments, strategic alliances or
related efforts are accompanied by risks such as:
o the difficulty of identifying appropriate joint venture partners or
opportunities,
o the time our senior management must spend negotiating agreements and
monitoring joint venture activities,
o potential regulatory issues applicable to telecommunications
businesses,
o the investment of our capital or fiber assets and the loss of control
over the return of this capital or assets,
o the inability of management to capitalize on the growth opportunities
presented by joint ventures, and
o the insolvency of any joint venture partner.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with these joint ventures, strategic alliances
or related efforts.
Risks Associated with International Markets--We will encounter additional risks
as we pursue international business opportunities.
Our strategy includes expanding our services to provide fiber optic
networks and bandwidth services outside of North America. In particular, we have
recently entered into an agreement for a transatlantic cable project called
Hibernia. We also recently announced the expansion of our Network into Europe.
We are still evaluating all of the risks associated with these new projects. We
expect that the risks associated with Hibernia include:
o activities from our competitors which could limit the market share
obtained by Hibernia,
o pricing pressures which could reduce profitability,
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o risk that there will be delay under our supply agreement as a result
of the highly concentrated nature of the cable manufacturing and
installation industry, and
o inability to obtain sufficient pre-construction sales commitments and
post-construction sales below targets.
Other risks associated with our international plans, including our
expansion into Europe, include:
o regulatory limitations restricting or prohibiting us from providing
our services,
o additional regulatory requirements, tariffs, customs, duties and other
trade barriers,
o difficulties in staffing and managing foreign operations,
o problems in collecting accounts receivable,
o political risks,
o fluctuations in the currency exchange and restrictions on the
repatriation of earnings,
o delays from customs brokers or government agencies, and
o potentially adverse tax consequences resulting from operating in
multiple countries with different laws and regulations.
Furthermore, the international rates customers are charged are likely to
decrease in the future for many reasons, including increased competition between
existing carriers, increased competition with new carriers in the international
markets and additional strategic alliances or joint ventures among large
international carriers that facilitate targeted pricing and cost reductions. We
cannot assure you that we will be successful in overcoming these risks or any
other problems arising from operating in international markets.
Dependence on Third Parties, Including Suppliers--The loss of key sources of
supply could adversely affect us.
We are dependent upon third party suppliers, including Pirelli Cables and
Systems Inc., for a number of components and parts used in the network,
including optical equipment. Recently, some companies have experienced a
shortage of fiber optic cable. We cannot ensure you that we will not experience
such a shortage. We are also dependent on Nortel Networks, Newbridge Networks
and Marconi plc for the transmission equipment we will need to offer bandwidth
services. We believe that there are alternative suppliers or alternative
components for all of the components and transmission equipment contained in the
network or required to offer bandwidth services. However, any delay or extended
interruption in the supply of any of the key components, changes in the pricing
arrangements with our suppliers and manufacturers or delay in transitioning a
replacement supplier's product into the network could disrupt our operations. If
the disruption continued for an extended period of time, it could have a
material adverse effect on our business, financial condition and results of
operations. In addition, we have contracted with Tyco Submarine Systems Ltd. as
our primary contractor for our transatlantic cable project. See "Prospectus
Summary--Recent Developments--International Expansion." We plan to continue to
use third party contractors on various segments of the network. The failure of
the contractors to complete their activities in a timely manner, within
anticipated budgets and in accordance with our quality standards and performance
criteria could have a material adverse effect on our business, financial
condition and results of operations, if, as a result, the completion of our
network is delayed or becomes more costly.
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Competition--Our business is very competitive and increased competition could
adversely affect us.
The telecommunications industry is extremely competitive, particularly
concerning price and service. We face competition from existing and planned
telecommunications systems on each of our planned routes. Our competitors
include:
o interexchange carriers, including AT&T Corp., MCI WorldCom, Inc. and
Sprint Corporation,
o wholesale providers, including Qwest Communications International
Inc., Williams Communications Group, Inc., IXC Communications, Inc.,
DTI Holdings, Inc., Global Crossing Ltd. and Level 3 Communications,
Inc.,
o incumbent local exchange carriers, which currently dominate their
local telecommunications markets, including Ameritech Corporation and
GTE Corporation,
o competitive local exchange carriers, including GST Telecommunications,
Inc. and Metromedia Fiber Network, Inc., and
o potential competitors capable of offering services similar to those
offered by us, including communications service providers, cable
television companies, electric utilities, microwave carriers,
satellite carriers, wireless telephone operators and large end-users
with private networks.
Some of our competitors have already made substantial long term
investments in the construction of fiber optic networks and the acquisition of
bandwidth. Some of these competitors have substantially greater resources and
more experience than us and could directly compete with us in the market for
fiber assets or bandwidth services.
In addition, some communications carriers and local cable companies have
extensive networks in place that could be upgraded to fiber optic cable, as well
as numerous personnel and substantial resources to begin construction to equip
their networks. If communications carriers and local cable companies decide to
equip their networks with fiber optic cable, they could become significant
competitors of ours in a short period of time.
Other companies may choose to compete with us in our current or planned
markets, by selling or leasing fiber assets or bandwidth to our targeted
customers. A significant increase in industry capacity or reduction in overall
demand would adversely affect our ability to maintain or increase prices.
Additional competition could materially and adversely affect our operations. See
"Business--Competition."
Rapid Technological Change--New technologies could reduce the demand for fiber
optic systems.
The telecommunications industry generally is subject to rapid and
significant changes in technology that may adversely affect the continued use of
fiber optic cable. Although we have been able to capitalize on certain recent
technological advances, such as the use of dense wave division multiplexing to
greatly expand the capacity of our network at constant construction costs, we
cannot assure you that the introduction of new products or the emergence of new
technologies will not enable competitors to install competing systems at a lower
per-circuit cost on routes currently targeted by us. Moreover, these potential
competitors may be able to expand capacity on existing competitive systems,
which could render our network and bandwidth services uncompetitive from a cost
perspective. We cannot predict the likelihood of these changes and we cannot
assure you that any technological changes will not materially and adversely
affect our business and operating results.
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Potential Conflicts of Interest with Ledcor--We are controlled by Ledcor and
rely on it for certain things. Its interests may conflict with your interests.
As of the date of this prospectus, Ledcor holds shares in us which entitle
Ledcor to approximately 90% of the votes attached to our shares and Ledcor has
the ability to control our affairs and business. It is possible that Ledcor's
interests could conflict with your interests. In addition, Ledcor may have an
interest in causing us to pursue transactions that, in its judgment, enhance the
value of its equity investment in us, even though these transactions may involve
greater risks to you. There can be no assurance that any of these conflicts of
interests will be resolved in your favor.
Ledcor has agreed not to compete with us in the business of developing or
constructing fiber optic communications infrastructure for a period ending on
the earlier of May 31, 2008 and six months after a change of control of
Worldwide Fiber. Ledcor has also agreed to grant to us a worldwide exclusive
license for the use and other exploitation of the railplow technology. The
license will cease to be exclusive six months after a change of control of
Worldwide Fiber. As a result, if a change of control of Worldwide Fiber were to
occur, Ledcor would be legally entitled to compete with us and to grant a
license for the use and other exploitation of the railplow technology to
competitors of ours. Either of these events could have a material adverse effect
on our business, financial condition and results of operations. See
"Transactions with Our Parent--Description of Reorganization and Related
Agreements."
We also rely on Ledcor to provide us with administrative and other
services. Ledcor has the right to cease providing these services at any time.
See "Transactions with Our Parent--Description of Reorganization and Related
Agreements."
Extensive Regulation--Regulatory matters could impact our ability to conduct our
business.
Existing and future governmental regulation may substantially affect the
way in which we conduct business, and the procedural and substantive regulatory
requirements with which we must comply. These regulations may increase the cost
of doing business or may restrict the way in which we offer products and
services. There is no way to predict the future regulatory framework of our
business. These regulations are summarized in more detail in the section
entitled "Regulation."
United States
Federal telecommunications law directly shapes the telecommunications
market. Consequently, regulatory requirements and/or changes could adversely
affect our operations by increasing our costs or restricting the way in which we
offer products and services. Federal telecommunications law imposes special
legal requirements on "common carriers" who engage in "interstate or foreign
communication by wire or radio," and on "telecommunications carriers." The
different ways we intend to offer fiber-optic supported services could trigger
four alternative types of regulatory requirements: (1) non-communications
services, (2) private carrier services, (3) telecommunications services or
common carriage, and (4) competitive local exchange carrier offerings. The law
establishing these alternative regulatory requirements is often unclear, so it
is impossible to predict in many instances how the Federal Communications
Commission will classify our services. Risks associated with each type of
offering are described below.
Non-communications Services
The provision of dark fiber can be viewed as a non-communications service
in that it is not a service, but rather the provision of a physical facility
that is indistinguishable from other non-communications offerings such as the
construction of an office building. Many providers of dark fiber are currently
operating on the assumption that they are providing unregulated facilities.
Nevertheless, the Federal Communications Commission had previously found that
when an incumbent local exchange carrier provided dark fiber it was providing a
common carrier
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service. A federal appeals court reversed and remanded this decision to the
agency for further proceedings. The Federal Communications Commission's action
in response to this remand could affect our position that dark fiber is not a
communications service.
Private Carrier Services
Even if some of our offerings are treated as communications services, they
could be viewed as a private carrier offering. Private carrier offerings
typically entail the offering of telecommunications, but are provided to a
limited class of users on the basis of individually negotiated terms and
conditions that do not meet the definition of a telecommunications service under
the Telecommunications Act of 1996. If our services are treated as private
carriage, they are generally unregulated by the Federal Communication
Commission, but would be subject to universal service payments based on the
gross revenues from end users. See "Regulation--United
States--Federal--Telecommunications Service--Universal Service." Private
carriers may also be subject to access charges if they interconnect with local
exchange carriers.
Telecommunications Services
Some of our services, such as the provision of bandwidth capacity and lit
fiber, may be treated as telecommunications services by the Federal
Communications Commission. If any of our services are treated as
telecommunications services, we could be subject to a number of new and
potentially burdensome regulations.
The precise parameters of the definition of a telecommunications service
are currently unclear. The Federal Communications Commission has held that
telecommunications and common carrier services are essentially the same. Certain
railroad, power and telecommunications providers have asked the Federal
Communications Commission to clarify the status of fiber providers. If the
Federal Communications Commission decides that these companies are
telecommunication carriers, we would be subject to certain regulatory
requirements which may impose substantial administrative and other burdens on
us. If any of our services are treated as telecommunications services, we may be
subject to a number of new and potentially burdensome regulations. These general
regulations include the obligation not to charge unreasonable rates or engage in
unreasonable practices, the obligations not to unreasonably discriminate in our
service offerings, the need to tariff our services (subject to the proceeding
described below), the potential obligation to permit others to offer their
services for resale under certain circumstances, and the fact that third parties
may file complaints against us at the Federal Communications Commission for
violations of the Communications Act of 1934 or the Federal Communications
Commission's regulations. Certain statistical reporting requirements may also
apply. Telecommunications carriers are also required to interconnect, either
directly or indirectly, with the facilities of other telecommunications carriers
and to ensure that they do not install network features, functions or
capabilities that do not comply with Federal Communications Commission
guidelines on accessibility by disabled persons and regulations promoting
interconnectivity of networks. In addition, Federal Communications Commission
rules require that telecommunications carriers contribute to universal service
support mechanisms, the Telecommunications Relay Services fund, the number
portability fund and the North American Numbering Plan Administrator fund. Also,
the Communications Assistance for Law Enforcement Act requires
telecommunications carriers to provide law enforcement officials with
call-related information and reserved circuits. We cannot assure you that the
cost of compliance with these various programs will not have a material adverse
effect upon our results of operations and financial condition and our ability to
meet our obligations under the notes.
The continuation of tariff filing requirements for interstate domestic
services provided by nondominant carriers is in dispute. The Federal
Communications Commission has ordered that all nondominant carriers, the
classification we would qualify for, may not file tariffs with the Federal
Communications Commission for domestic service. The D.C. Circuit has stayed the
effect of this decision. Filing tariffs can entail increased costs and may lead
to intrusive regulation by the Federal Communications Commission, although to
date the Federal Communications Commission has engaged in only minor regulation
of nondominant carriers. On the other hand, if tariffs are no longer required,
telecommunications carriers will no longer be able to rely on the filing of
tariffs
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with the Federal Communications Commission as a means of providing notice to
customers of prices, terms and conditions on which they offer interstate
services, since tariff provisions limit carriers' liability for defects in
service and consequential damages from such defects. The FCC has ruled that
non-dominant interexchange carriers must post on their Internet web site their
rates, terms and conditions for all of their interstate, domestic services if
they have an Internet web site. This ruling is to be effective when the decision
to mandate de-tariffing takes place. In addition, if tariffs are eliminated, we
may become subject to significantly increased liability risks, and there can be
no assurance that the liabilities will not have a material adverse effect on our
results of operations and financial conditions and our ability to meet our
obligations under the notes.
The Federal Communications Commission adopted rules which govern the use
of customer proprietary network information by telecommunications carriers.
These rules may impede our ability to effectively market integrated packages of
services and to expand existing customers' use of our offerings.
Competitive Local Exchange Carrier Offerings
It is also possible that some of our lit fiber or bandwidth capacity
services could be viewed as the provision of local exchange service. See
"Regulation--United States--Federal--CLEC Offerings." To the extent that any of
our offerings are treated as competitive local exchange carrier services, we
would also be subject to a number of interconnection obligations under the
Telecommunications Act of 1996. We would be required to offer our services for
resale at retail prices, provide number portability if technically feasible,
provide dialing parity to competing providers, and nondiscriminatory access to
telephone numbers, directory assistance, operator services and directory
listings, provide access to poles, ducts, conduits and rights-of-way, and
establish reciprocal compensation arrangements for the transport and termination
of telecommunications. Although CLEC interstate access charges are generally
regulated as non-dominant carrier offerings and subject to minimal burdens, the
FCC recently adopted a Notice of Proposed Rulemaking that asks whether it should
regulate the terminating access charges of such providers.
The Federal Communications Commission determined that Internet traffic is
interstate in nature, not local, and has initiated a proceeding to determine
appropriate carrier-to-carrier compensation. At the same time, the Federal
Communications Commission declined to overturn a multitude of state decisions
requiring incumbent local exchange carriers to pay competitive local exchange
carriers compensation for delivering Internet traffic to Internet service
providers. To the extent we are treated as a competitive local exchange carrier,
this ruling would adversely affect the revenues that we might expect to receive
from the carriage of Internet service provider-bound traffic.
International Facilities
The Company is required to obtain regulatory approval to construct and
operate facilities used to provide international telecommunications services. If
any of our services are treated as international telecommunications services, we
may be required to obtain regulatory approvals and file tariffs to offer these
international services. Although these facilities authorizations and tariffs are
regulated on a streamlined basis subject to minimal regulation, there is a risk
that the Federal Communications Commission may deny or place burdensome
conditions on authorizations and tariff filings.
Other Federal Communications Regulations
With limited exceptions, the current policy of the Federal Communications
Commission prohibits incumbent local exchange carriers from lowering prices to
some customers without also lowering charges for the same service to all
similarly situated customers in the same geographic area. The Federal
Communications Commission, however, modified this constraint on incumbent local
exchange carriers who have specified levels of competition from competing local
exchange service providers and permit them to offer special rate packages to
certain customers, as it has done in a few cases, and permit other forms of rate
flexibility. The rules contemplate
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an increasing level of flexibility on a city-by-city basis as competitors have
facilities in place to compete for local exchange services in those markets.
Once such facilities attain 50% coverage the rules contemplate only minimal
regulation of carrier access offerings. This added flexibility could have a
material adverse effect on our ability to compete in providing facilities or
services that compete with incumbent local exchange carrier interstate access
services.
The Telecommunications Act of 1996 currently requires Regional Bell
Operating Companies to obtain Federal Communications Commission authorization
prior to providing inter-LATA telecommunications. None has received such
authority to date. Bell Atlantic received such authorization for New York in
December 1999. It is anticipated that additional Regional Bell Operating
Companies may receive authorization in some states to provide inter-LATA
telecommunications during 2000. Such authority if granted could increase
competition from Regional Bell Operating Companies in providing fiber and fiber
services, which could adversely affect our business operations.
The Federal Communications Commission has the responsibility under the
Telecommunications Act of 1996 to determine what elements of an incumbent local
exchange carrier's network must be provided to competitors on an unbundled
basis. In August 1999, the Federal Communications Commission required dark fiber
to be offered as an unbundled element. In addition, the Federal Communications
Commission had previously allowed state commissions to establish additional
unbundling requirements, and some states have required that incumbent local
exchange carriers unbundle dark fiber. The decisions by the Federal
Communications Commission to require unbundling of incumbent local exchange
carriers' dark fiber could increase the supply of dark fiber and decrease the
demand for our dark fiber, and thereby have an adverse effect on the results of
our operations.
The FCC recently instituted a proceeding that could impose obligations on
telecommunication carriers' obligation to provide access to competitors or
customers to their wiring located in multi-tenant residential and business
buildings. It is unknown at this time how the FCC will rule in this proceeding
so it is impossible to evaluate its impact on our operations.
State Regulation
Each state in the United States, as well as the District of Columbia and
U.S. territories, which are treated as states for the purpose of regulation of
telecommunications services, has its own laws for regulating providers of
certain telecommunications-related services as "common carriers," as "public
utilities," or under similar rubrics. We believe that the sale or lease of dark
fiber facilities is not subject to this type of regulation in most jurisdictions
in which we plan to construct facilities. However, our offering of transmission
services, as distinct from dark fiber capacity, likely will be subject to
regulation in each of these jurisdictions to the extent that these services are
offered for intrastate use, and the regulation may have an adverse effect on the
results of our operations.
Local Regulation
In addition to federal and state laws, local governments exercise legal
authority that may affect our business. For example, some local governments
retain the ability to license public rights-of-way, subject to the federal
limitation that local authorities may not prohibit entities from entering
telecommunications markets. Compliance with local requirements may delay entry
and increase our costs of doing business.
Canada
Regulation under the Telecommunications Act (Canada)
We intend to retain fiber assets in our network which will be available
for sale, grant of indefeasible rights-of-use, lease or swap. To the extent that
we engage in these activities, particularly when we provide dark or lit fiber on
a leased basis, we will be subject to the provisions of the Telecommunications
Act (Canada) and to
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regulation by Canada's telecommunications regulatory authority, the Canadian
Radio-television and Telecommunications Commission. Although we do not believe
that these activities will be subject to extensive regulation, there can be no
assurance that the underlying policies of the Canadian Radio-television and
Telecommunications Commission, which generally foster competition in Canada's
local and long distance telecommunications services markets, will not change in
the future.
In a 1995 decision, the Canadian Radio-television and Telecommunications
Commission concluded that telecommunications services provided by non-dominant
carriers should not be subject to extensive regulation. We believe that all of
the telecommunications services that we will provide qualify under this decision
as non-dominant carrier services. As such, we do not believe that our operations
in Canada will be subject to extensive regulation by the Canadian
Radio-television and Telecommunications Commission. However, the Canadian
Radio-television and Telecommunications Commission's view as to the need for and
extent of regulation over non-dominant carriers may change. As a result, there
can be no assurance that the regulatory environment in Canada will continue to
be favorable to non-dominant carriers. Any change in the Canadian
Radio-television and Telecommunications Commission's policies or regulations
relating to non-dominant carriers could have a material adverse effect on our
business, financial condition and results of operations if, as a result of those
changes, our services, rates or operations become subject to greater regulatory
oversight and intervention by the Canadian Radio-television and
Telecommunications Commission.
Restrictions on Foreign Ownership
Under the Canadian ownership provisions of the Telecommunications Act, a
"Canadian carrier" is not eligible to operate as a telecommunications common
carrier in Canada unless it is Canadian owned and controlled. Furthermore, no
more than 20% of the members of the board of directors of a Canadian carrier may
be non-Canadians, and no more than 20% of the voting shares of a Canadian
carrier may be beneficially owned by non-Canadians. In addition, no more than
33-1/3% of the voting shares of a non-operating parent corporation holding a
Canadian carrier may be beneficially owned or controlled by non-Canadians and
neither the Canadian carrier nor its parent may be otherwise controlled in fact
by non-Canadians.
To the extent that we make available the retained fiber in our network in
Canada on an indefeasible rights-of-use or lease basis, we will be subject to
the Canadian ownership provisions of the Telecommunications Act. Although we
believe that we are in compliance with the relevant legislation, there can be no
assurance that a future Canadian Radio-television and Telecommunications
Commission determination or events beyond our control will not result in us
ceasing to comply with the ownership provisions of the Telecommunications Act.
Should this occur, our ability to operate as a Canadian carrier under the
Telecommunications Act could be jeopardized and our business could be materially
adversely affected.
On October 1, 1998, the Canadian Radio-television and Telecommunications
Commission issued Telecom Decision CRTC 98-17, which established a framework for
competition in Canada's international telecommunications services market to
coincide with the Government of Canada's decision to terminate the monopoly of
Teleglobe Canada Inc. over telecommunications facilities linking Canada to
overseas destinations. In that decision, the Canadian Radio-television and
Telecommunications Commission determined that a party acquiring an indefeasible
rights-of-use interest in an international submarine cable would not necessarily
fall within the definition of a telecommunications common carrier. As a result,
acquirors of indefeasible rights-of-use in international submarine cables need
not be Canadian owned and controlled. However, given the fact that the Canadian
Radio-television and Telecommunications Commission's findings in Decision 98-17
were limited to indefeasible rights-of-use interests held in international
submarine cables, as well as the fact that indefeasible rights-of-use
arrangements can involve varying degrees of ownership and control over fiber
facilities, there can be no assurance that holders of indefeasible rights-of-use
acquired in domestic fiber facilities, including those constructed by us, would
be exempt from the Canadian ownership provisions contained in the
Telecommunications Act.
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International Traffic
In addition to determining the status of indefeasible rights-of-use under
the Telecommunications Act, the Canadian Radio-television and Telecommunications
Commission made a determination in Decision 98-17 to eliminate Canada's "bypass"
rules, which had prohibited the routing of Canada-Canada and Canada-overseas
traffic through the United States. Effective October 1, 1998, telecommunications
service providers and users in Canada may route basic telecommunications traffic
which either originates or terminates in Canada through the United States. Given
the fact that a decision to bypass Canadian network facilities may be based on a
variety of factors, including, but not limited to, cost, technology, traffic
patterns, and the availability of suitable facilities, there is a risk that
prospective customers for segments of the network in Canada may choose to
purchase, lease or obtain indefeasible rights-of-use in dark or lit fiber in the
United States rather than in Canada. There can be no assurance that we will be
able to attract and retain a sufficient number of customers for the Canadian
portions of our network, which could have a material adverse effect on our
business, financial condition and results of operations.
Contribution
The Canadian Radio-television and Telecommunications Commission is
considering reform of the current contribution regime. The Canadian
Radio-television and Telecommunications Commission's contribution regime was
originally established in 1992 as a means of ensuring that rates for local
residential telephone service remain affordable. Under the regime, providers of
certain types of long distance voice and data services are required to pay a
subsidy or "contribution" on each minute of traffic that is originated or
terminated on local switched telephone networks or on cross-border or overseas
access circuits. These contribution payments are pooled within each incumbent
local exchange carrier's territory and are paid out to incumbent local exchange
carriers and competitive local exchange carriers serving residential local
customers, based on the number of residential network access services they serve
and the level of the subsidy available in the rate band being served. On March
1, 1999, the Canadian Radio-television and Telecommunications Commission
initiated a proceeding to consider possible reforms to the current contribution
mechanism. In the public notice that initiated the proceeding, the Canadian
Radio-television and Telecommunications Commission invited interested parties to
submit proposals on other mechanisms which could be used to collect
contribution. Although this public notice proceeding is not yet closed, some
parties in the proceeding have advocated that the current contribution regime be
converted into a revenue-based regime under which contribution would be paid on
a percentage of a telecommunications service provider's revenues (regardless of
the types of services offered by the service provider), rather than on certain
types of telecommunications traffic.
We do not believe that our operations in Canada would be subject to the
requirement to pay contribution under the current contribution regime, except
with the possible exception of fiber which we may lease on a lit basis. However,
given that the current contribution regime is under review by the Canadian
Radio-television and Telecommunications Commission, there can be no assurance
that we would be exempt from the requirement to pay contribution in the future,
particularly if the Canadian Radio-television and Telecommunications Commission
decides to adopt a revenue-based regime.
CRTC Proceedings
On March 19, 1999, we filed an application with the Canadian
Radio-television and Telecommunications Commission seeking orders under the
Telecommunications Act which would permit us to continue to have access to
street crossings and other municipal properties in the City of Vancouver for the
purpose of constructing, testing and operating our network facilities within
that city. In an answer to our application, the City of Vancouver took the
position that we were not eligible to apply to the Canadian Radio-television and
Telecommunications Commission for relief under the Telecommunications Act. On
the same day, the City filed an application with the Canadian Radio-television
and Telecommunications Commission requesting orders which would permit certain
of the carriers that have obtained indefeasible rights-of-use from us to
continue to construct, operate and maintain those facilities on a zero rate,
interim basis, until the Canadian Radio-television and Telecommunications
Com-
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mission has made a determination on the appropriate terms, conditions and
compensation that should be payable to the City for the use of municipal
property. In a ruling issued on October 27, 1999, the Canadian-Radio-television
and Telecommunications Commission granted the City's request for an interim
order directing each of the carriers that obtained indefeasible rights-of-use
from us to pay the City $1.00 for the right to access the City's municipal
property during the period of time before the Canadian-Radio-television and
Telecommunications Commission makes a determination for the appropriate terms,
conditions and compensation that should be payable to the City for the use of
municipal property. On December 3, 1999, the Canadian-Radio-television and
Telecommunications Commission issued a public notice which invited interested
parties to comment on what the terms and conditions of access by Canadian
carriers to municipal property in Vancouver should be for the purposes of
constructing, maintaining and operating transmission lines. We anticipate that
the Canadian-Radio-television and Telecommunications Commission will render a
decision on our March 19, 1999 application against the City at the same time
that it renders a decision on the matters raised by its public notice
proceeding. Failure to obtain the orders we have requested in our initial
application to that Canadian Radio-television and Telecommunications Commission
could have a material adverse effect on our business, financial condition and
results of operations.
We have operations based in Canada and anticipate operations in Ireland,
France and other foreign jurisdictions. We are exposed to risks inherent in
international operations, including the following:
o general economic, social and political conditions
o the difficulty of enforcing agreements and collecting receivables
through certain foreign legal systems
o tax rates in some foreign countries may exceed those in the United
States and foreign earnings may be subject to withholding requirements
or the imposition of tariffs, exchange controls or other restrictions
o required compliance with a variety of foreign laws and regulations
o changes in United States laws and regulations relating to foreign
trade and investment.
Bankruptcy and Related Laws--Your rights concerning the notes could be adversely
affected in a United States or Canadian bankruptcy proceeding.
Canadian courts have exercised their powers under the Bankruptcy and
Insolvency Act, and particularly under the Companies' Creditors Arrangement Act,
broadly to protect a restructuring entity from actions taken by creditors and
other parties. Accordingly, it is impossible to predict if payments under the
notes would be made during these proceedings, whether or when the trustee could
exercise rights under the indenture or whether and to what extent you would be
compensated for any delays in payments, if any, of principal and interest.
There could also be a bankruptcy filing by or against us in the United
States. U.S. bankruptcy courts typically have jurisdiction over a debtor's
property, wherever it is located, including property located in other countries.
However, courts outside of the United States might not recognize the U.S.
bankruptcy court's jurisdiction. Accordingly, difficulties may arise in
administering a United States bankruptcy case involving a Canadian debtor with
property located outside of the United States. Orders or judgments of a
bankruptcy court in the United States may not be enforceable against third
parties outside the United States.
We are organized under the laws of Canada. At present, a significant
portion of our assets is located in Canada. The notes and the indenture will be
governed by New York law. The rights of the trustee under the indenture to
enforce remedies could be significantly impaired by the restructuring provisions
of applicable Canadian or United States federal bankruptcy, insolvency and other
restructuring legislation if the benefit of this legislation
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is sought concerning us. For example, in Canada, both the Bankruptcy and
Insolvency Act (Canada) and the Companies' Creditors Arrangement Act (Canada)
contain provisions enabling "an insolvent person" to obtain a stay of proceeding
against its creditors and others and to prepare and file a proposal for
consideration by all or some of its creditors to be voted on by the various
classes of its creditors. This restructuring proposal, if accepted by the
requisite majorities of creditors and if approved by the court, would be binding
on all creditors who fall within one of the classes of creditors contemplated by
the restructuring proposal. Moreover, this "proposal" legislation permits, in
certain circumstances, the insolvent debtor to retain possession and
administration of its property, even though it may be in default under the
applicable debt instruments.
If there were a filing by or against us in the United States, the U.S.
Bankruptcy Code provides for an automatic stay of virtually all proceedings
against a debtor which stay continues until a bankruptcy plan of reorganization
is confirmed or the stay is lifted under a noticed motion. Similar to the
Canadian laws, the U.S. Bankruptcy Code provides that a plan of reorganization,
if accepted by the requisite majorities of creditors and if approved by the
court, would be binding on all creditors who fall within one of the classes of
creditors contemplated by the plan of reorganization. Moreover, the U.S.
Bankruptcy Code also generally permits the insolvent debtor to retain possession
and administration of its property, even though it may be in default under the
applicable debt instruments. Accordingly, it is also impossible to predict if
payments under the notes would be made during a U.S. bankruptcy proceeding,
whether or when the trustee could exercise its rights under the indenture or
whether and to what extent you would be compensated for any delays in payments,
if any, of principal and interest.
Financing Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change of control offer required by the
indenture.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
credit facilities or other indebtedness will not allow these repurchases. In
addition, certain important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would not
constitute a change of control under the indenture. See "Description of
Notes--Repurchase at the Option of Holders."
There may be no public market for the new notes.
There has previously been only a limited secondary market, and no public
market, for the old notes. The new notes are a new issue of securities, have no
established trading market, and may not be widely distributed. Worldwide Fiber
does not intend to list the new notes on any national securities exchange or the
Nasdaq Stock Market or to apply for the trading of the notes on any automated
quotation system. No assurance can be given that an active public or other
market will develop for the new notes or as to the liquidity of or the trading
market for the new notes. If a trading market does not develop or is not
maintained, holders of the new notes may experience difficulty in reselling the
new notes or may be unable to sell them at all. If a market for the new notes
develops, this market may be discontinued at any time. If a public trading
market develops for the new notes, future trading prices of the new notes will
depend on many factors, including, among other things, prevailing interest
rates, our results of operations and the market for similar securities, and the
price at which the holders of new notes will be able to sell the new notes is
not assured and the new notes could trade at a premium or discount to their
purchase price or face value. Depending on prevailing interest rates, the market
for similar securities and other factors, including our financial condition, the
new notes may trade at a discount from their principal amount.
You may not be able to rely on forward-looking statements.
The information contained in this prospectus includes some forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could cause our actual results, performance, achievements or industry results to
be very different from the results, performance or achievements expressed or
implied by our forward-looking statements. These factors include, but are not
limited to:
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o general economic and business conditions, both nationally and in the
markets in which we operate or will operate,
o our ability to access markets, design effective fiber optic routes,
install cable and facilities, and obtain rights-of-way, building
access rights and any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions,
o demographic change,
o competition,
o existing government regulations and changes in, or the failure to
comply with, government regulations,
o the loss of any significant number of customers,
o changes in business strategy or development plans,
o technological developments,
o the ability to attract and retain qualified personnel, and
o other factors we refer to throughout this prospectus.
Certain of these factors are discussed in more detail elsewhere in this
prospectus including, without limitation, under the captions "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, forward-looking statements depend upon assumptions, estimates
and dates that may not be correct or precise and involve known and unknown
risks, uncertainties and other factors. Accordingly, a forward-looking statement
in this prospectus is not a prediction of future events or circumstances and
those future events or circumstances may not occur. Given these uncertainties,
you are warned not to rely on the forward-looking statements. Neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. A forward-looking statement is usually identified by our use of
certain terminology, including "believes," "expects," "may," "will," "should,"
"seeks," "pro forma," "anticipates" or "intends" or by discussions of strategy
or intentions. We are not undertaking any obligation to update these factors or
to publicly announce the results of any changes to our forward-looking
statements due to future events or developments.
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CAPITALIZATION
The following table sets forth our actual and pro forma consolidated cash
and capitalization as of September 30, 1999. This table should be read along
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations", the consolidated financial statements and related notes
and the Pro Forma Financial Information included elsewhere in this prospectus.
As of September 30, 1999
------------------------
Actual Pro Forma(1)
------ ---------
(In thousands)
(unaudited)
Cash and cash equivalents.......................... $675,175 $675,175
Debt (including current portion):
12 1/2% senior notes due 2005...................... 175,000 175,000
12% senior notes due 2009.......................... 500,000 500,000
---------- ---------
675,000 675,000
Redeemable convertible preferred stock............. 345,157 345,157
Shareholders' equity:
Common stock ...................................... 46,528 224,028
Note receivable ................................... -- (77,500)
Other shareholders' equity......................... 7,742 7,742
Deficit............................................ (23,799) (23,799)
Accumulated other comprehensive income............. 335 335
---------- ---------
Total shareholders' equity......................... 30,806 130,806
---------- ---------
Total capitalization............................... $1,050,963 1,150,963
========== =========
- ---------------------
(1) Gives pro forma effect to (1) the issuance of a note receivable in the
amount of $77,500,000 provided by the Company to an executive officer of
the Company and the issuance on December 22, 1999 of 26,080,000 Class A
Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares for
consideration of $77,500,000 and (2) the acquisition of the minority
interest shares of WFI-CN Fiber Inc. and Worldwide Fiber IC LLC in exchange
for Class A Non-Voting Shares of the Company.
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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the year ended March 31,
1996, the five months ended August 31, 1996, the year ended August 31, 1997 and
the nine months ended May 31, 1998 of our predecessor, the telecommunications
division of Ledcor, are derived from the audited financial statements of the
predecessor division, which have been audited by Deloitte & Touche LLP,
independent auditors. Worldwide Fiber was incorporated on February 5, 1998 and
acquired certain assets of the predecessor division on May 31, 1998. Before May
31, 1998, Worldwide Fiber was a shell company. The selected historical financial
data presented for the period February 5, 1998 through December 31, 1998 of
Worldwide Fiber are derived from our audited consolidated financial statements,
which have been audited by PricewaterhouseCoopers LLP, independent auditors. The
unaudited pro forma financial data for the year ended December 31, 1998 are
derived from the audited consolidated financial statements of Worldwide Fiber,
the financial statements of the predecessor division, and the consolidated
financial statements of Worldwide Fiber (USA), Inc. ("WFI-USA") included
elsewhere in this prospectus. The selected historical financial data presented
for the periods ended September 30, 1999 and 1998 are derived from Worldwide
Fiber's unaudited consolidated financial statements and include, in the opinion
of Worldwide Fiber's management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the data for those periods.
The unaudited pro forma financial data for the nine months ended September 30,
1999 are derived from the unaudited interim consolidated financial statements
for the nine month period ended September 30, 1999 of Worldwide Fiber included
elsewhere in this Prospectus. Our consolidated financial statements and the
divisional financial statements of the predecessor division are not comparable
to our results of operations after the Reorganization. You should read the
following information along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and the financial
statements and the related notes included elsewhere in this prospectus.
Capital expenditures represent actual cash expenditures incurred during
the period and do not include acquisitions of assets for non-cash consideration.
Route miles represent the number of miles spanned by fiber optic cable owned at
the end of the period, calculated without including physically overlapping
segments of cable. Fiber miles represent the number of strands of fiber in a
length of fiber optic cable owned at the end of the period, multiplied by the
length of the cable in miles.
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<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Dollars in thousands)
Predecessor Division Worldwide Fiber
Pro Forma
Nine
Five Nine February February Pro Forma Nine Months
Year Months Year Months 5, 1998 5, Year Ended Months Ended
Ended Ended Ended Ended to 1998 to December Ended September
March August August May 31, September December 31, September 30,
31, 1996 31, 1996 31, 1997 1998 30, 1998 31, 1998(1)(3) 30, 1999 1999(2)(3)(6)
1998
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $3,824 $7,373 $58,008 $54,634 $104,819 $164,319 $207,038 $235,138 $235,138
Operating expenses:
Costs............ 3,440 5,739 48,474 44,919 90,909 147,621 182,518 165,263 165,263
General &
administrative.. 57 91 863 710 1,318 2,274 8,140 17,263 18,138
Depreciation..... 24 15 112 317 260 464 639 871 871
------- ------ ------- ------- -------- -------- -------- -------- ---------
Amortization of
goodwill......... -- -- -- -- -- -- 4,875 -- 3,656
------- ------ ------- ------- -------- -------- -------- -------- ---------
Total operating
expenses........... 3,521 5,845 49,449 45,946 92,487 150,359 196,172 176,269 187,926
------- ------ ------- ------- -------- -------- -------- -------- ---------
Operating income... 303 1,528 8,559 8,688 12,332 13,960 10,866 51,741 47,210
Interest expense, -- 15 600 86 -- 225 85,352 12,448 49,248
net................
Equity income...... -- -- -- -- (48) 928 -- -- --
------- ------ ------- ------- -------- -------- -------- -------- ---------
Earnings (loss)
before income 303 1,513 7,959 8,602 12,284 14,663 (74,486) 39,293 (2,038)
taxes............
Income tax expense
(recovery)....... 139 686 3,620 3,909 5,402 5,643 (26,710) 20,175 3,571
------- ------ ------- ------- -------- -------- -------- -------- ---------
164 827 4,339 4,693 6,882 9,020 (47,776) 19,118 (5,609)
Income attributable
to minority -- -- -- -- -- -- 464 5,747 3,247
interest.........
------- ------ ------- ------- -------- -------- -------- -------- ---------
Net income (loss).. $164 $827 $4,339 $4,693 6,882 $9,020 $(48,240) $13,371 (8,856)
======= ====== ======= ======= ======== ======== ======== ======== ========
Other Financial
Data:
EBITDA (4)......... $327 $1,543 $8,671 $9,005 $12,544 $15,352 $16,380 $52,612 $51,737
Capital $72 $181 $1,119 $6,828 -- $1,065 -- $61,214 --
expenditures.......
Ratio of earnings
to fixed 24.3x 45.5x 10.3x 17.7x 374.7x 26.8x -- 2.0x --
charges (5)......
Statement of Cash
Flows Data:
Operating $666 $(3,078) $(3,921) $(2,502) 79 $(13,059) $ -- $(138,614) $ --
activities.........
Investing (72) (181) (1,119) (6,828) -- 1,177 -- $(129,740) --
activities.........
Financing $(595) $3,259 $5,040 $9,330 -- $168,350 $ -- $787,000 $ --
activities.........
Balance Sheet Data:
Cash and cash
equivalents........ $ -- $-- $-- $ -- -- $156,366 $ -- $675,175 $675,175
Fixed assets, net.. -- 464 1,471 7,982 -- 15,475 -- 107,264 107,264
Total assets....... -- 6,476 32,268 39,549 -- 236,260 -- 1,216,194 1,313,694
Total debt......... -- 2,067 6,774 10,933 -- 175,000 -- 675,000 675,000
Redeemable
Convertible -- -- -- -- -- -- -- 345,157 345,157
Preferred Stock....
Shareholder's equity $ -- $1,473 $5,825 $8,870 -- $18,261 $ -- $130,806 $ 130,806
</TABLE>
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<PAGE>
- ----------------------
(1) Gives pro forma effect to (1) the transfer on May 31, 1998 of certain of
the operations of the predecessor division and the Construction Services,
Management Services and Employee Services Agreements between Worldwide
Fiber and affiliates of Ledcor, (2) the consolidation of WFI-USA as a
result of Worldwide Fiber's agreement to increase its interest in WFI-USA
from 50% to 75% on December 31, 1998, (3) the effect of the interest
expense, including amortization of deferred financing costs, relating to
the $175,000,000 12 1/2% senior notes issued December 23, 1998 and the
$500,000,000 12% senior notes issued July 28, 1999, and (4) the
amortization of goodwill arising on the acquisition of the minority
interest shares of WFI-CN Fiber Inc. and Worldwide Fiber IC LLC.
(2) Gives pro forma effect to (1) the interest expense, including amortization
of deferred financing costs, on the $500,000,000 12% senior notes issued
July 28, 1999 and (2) the amortization of goodwill arising on the
acquisition of the minority interest shares of WFI-CN Fiber Inc. and
Worldwide Fiber IC LLC.
(3) The initial annual interest expense on the $500,000,000 12% senior notes is
$62,400,000 and the initial annual interest expense on the $175,000,000 12
1/2% senior notes is $23,200,000.
(4) EBITDA consists of net income (loss) before interest expense, net of
interest income, income tax expense (recovery), depreciation, amortization
of goodwill and income attributable to minority interest. EBITDA is
presented because we believe it is a useful indicator of a company's
ability to meet debt service and capital expenditure requirements. It is
not intended as an alternative measure of operating results or cash flow
from operations (as determined in accordance with generally accepted
accounting principles). EBITDA is not necessarily comparable to similarly
titled measures for other companies and does not necessarily represent
amounts of funds available for management's discretionary use.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consists of earnings (loss) before equity income, income tax
expense (recovery), amortization of goodwill, income attributable to
minority interest and fixed charges. Fixed charges consists of interest
expensed and capitalized, plus the portion of rental expense which we
believe to be representative of interest (assumed to be one-third of rental
expense). Pro forma loss for the year ended December 31, 1998 would have
been insufficient to cover fixed charges by $74,486,000 and pro forma loss
for the nine month period ended September 30, 1999 would have been
insufficient to cover fixed charges by $9,832,000.
(6) Gives pro forma effect to (1) the issuance of a note receivable in the
amount of $77,500,000 provided by the Company to an executive officer of
the Company and the issuance on December 22, 1999 of 26,080,000 Class A
Non-Voting shares and 4,920,000 Class C Multiple Voting Shares to the
executive officer for consideration of $77,500,000 and (2) the acquisition
of the minority interest shares of WFI-CN Fiber Inc. and Worldwide Fiber IC
LLC in exchange for Class A Non-Voting Shares of the Company.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read along with our Consolidated Financial
Statements and the Divisional Financial Statements of the telecommunications
division of Ledcor Industries Limited, including the related notes, included
elsewhere in this prospectus.
We were incorporated on February 5, 1998. However, we did not commence
operations until May 31, 1998. As of May 31, 1998 we entered into a series of
agreements whereby Ledcor transferred the construction equipment, certain fiber
optic strands and certain other assets of Ledcor's telecommunications division
(the "Reorganization"). On September 27, 1999, we acquired additional fiber
optic network assets from Ledcor. Because this series of transactions was
between entities under common control, the assets have been reflected in our
financial statements using the carrying amounts recorded in Ledcor's accounts.
We believe that the fair market value of the fiber assets we received is
significantly greater than their carrying amounts.
We entered into two Construction Services Agreements in which we agreed to
fulfill Ledcor's fiber optic network construction commitments concerning certain
builds along the fiber optic transmission system across Canada and the Northern
United States (the "FOTS"). In return, Ledcor paid us an amount equal to our
costs incurred plus 15%. Our obligations under these agreements were
substantially performed by January 1999. We also entered into a Management
Services Agreement and two Employee Services Agreements with Ledcor. See
"Transactions with Our Parent--Description of Reorganization and Related
Agreements."
Prior to the Reorganization, we were a shell company created for the
purpose of continuing the business of Ledcor's telecommunications division and
did not have any operations or material assets. Accordingly, two sets of
financial information are included in this prospectus. The Divisional Financial
Statements of Ledcor's telecommunications division prior to May 31, 1998 reflect
the operations of our predecessor as a contractor and network developer for the
FOTS. Our Consolidated Financial Statements for the period from the date of
incorporation through December 31, 1998 primarily reflect our operating results
due to the Construction Services Agreements. Since January 1, 1999, the impact
of the Construction Services Agreement has not been significant on our
consolidated financial statements.
Since December 31, 1998 our revenues have been primarily generated from
the sale, lease or grant of IRU of network infrastructure. We anticipate a
significant amount of our future revenues will be derived from providing
bandwidth services, including optical channels, private line transmission,
virtual voice trunking, Internet transport, IP transport and packet based data
services, including IP transport and ATM. We anticipate that, as we proceed with
the development of our network, the percentage of revenues which we receive from
bandwidth services will increase as a percentage of our total revenue and that
by 2001 our bandwidth services will provide our largest percent of revenue on a
consolidated basis and be a significant source of income.
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.
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.
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<PAGE>
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 statements for the periods ended September 30, 1998 and December 1998
account 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 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. See
"Business--Description of WFI-USA Agreements."
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. See "Business--Description of IC and CN
Agreements."
We are currently in negotiations to acquire the minority interests in
WFI-USA and in two joint ventures related to the IC and CN ROW.
Results of Operations
Worldwide Fiber Inc.
Nine Months Ended September 30, 1999 and the period from February 5, 1998
to September 30, 1998 (operations commenced June 1, 1998)
Revenue for the nine 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 $165,263,000 (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.
Gross profit for the nine month period ended September 30, 1999 was
$69,875,000 (30% 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 $17,263,000 (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.
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<PAGE>
Interest expense was $20,468,000 for the nine months ended September 30,
1999 and was principally due to the issue of senior notes in December 1998 and
July 1999. Interest income totaled $8,020,000 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 $5,747,000 and represents 25% of WFI-USA's and CN/IC's net income.
Period from February 5, 1998 to December 31, 1998
(Operations commenced June 1, 1998)
Revenue for the period from February 5, 1998 to December 31, 1998 was
$164,319,000. Revenue for this period was principally derived from the
Construction Services Agreements to complete the FOTS for Ledcor. This project
was completed in January 1999.
Costs were $147,621,000 for the period from February 5, 1998 to December
31, 1998. Costs reflect primarily the costs incurred in completing the FOTS.
Costs as a percentage of revenue for the period were 90%, reflecting the costs
incurred plus 15% earned under the Construction Services Agreements. A portion
of the costs related to the FOTS were reimbursed without the 15% earned margin,
including costs associated with marine subcontractors.
General and administrative expenses for the period from February 5, 1998
to December 31, 1998 were $2,274,000, representing 1.4% of our revenues, and
consisting of the monthly fee of Cdn. $200,000 and direct costs reimbursed by
Ledcor under the Management Services Agreement.
Income taxes for the period from February 5, 1998 to December 31, 1998 of
$5,643,000 consist primarily of current taxes arising from Worldwide Fiber's
Canadian and U.S. taxes of $2,599,000 and $3,044,000, respectively.
Telecommunications Division -- Ledcor Industries Limited
Nine Months Ended May 31, 1998
Revenues generated from contracts for the nine months ended May 31, 1998
were $54,633,888. The revenues for this period were principally derived from
developing the FOTS for Ledcor Industries Limited ("LIL").
Contract costs were $45,321,566 for the nine months ended May 31, 1998.
Contract costs primarily represent the costs associated with engineering,
designing and building the FOTS and managing third party construction contracts.
Contract costs as a percentage of revenue for the nine months ended May 31, 1998
were 83%.
General and administrative expenses for the nine months ended May 31, 1998
were $710,240 representing 1.3% of revenues for the period. General and
administrative expenses for the nine month period ended May 31, 1998 are
primarily derived from overhead to accommodate progress on the FOTS and
management of builds for third parties.
Income tax expense (recovery) for the nine months ended May 31, 1998
represents a current expense of $5,509,000 and a recovery, on a deferred basis,
of $1,600,000 using an effective tax rate of 45%. As a division, we would not in
fact report taxes, but would have been consolidated within the tax return filed
by LIL. The dif-
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<PAGE>
erence between current tax expense and deferred tax recovery is due to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
Telecommunications Division -- Ledcor Industries Limited
Year Ended August 31, 1997
Revenues generated from contracts for the year ended August 31, 1997 were
$58,007,652. The revenues for this period are principally derived from the
commencement of building the FOTS and management of the Alaska Fiber Star build
in Alaska.
Contract costs were $49,184,985 for the year ended August 31, 1997.
Contract costs for this period are primarily derived from the costs associated
with engineering, design and building of the FOTS and management of the Alaska
Fiber Star build in Alaska. Contract costs as a percentage of revenue for the
year ended August 31, 1997 were 85%. Contract revenues and contract costs for
the year ended August 31, 1997 increased significantly due to the business in
which LIL had entered into, which was the building of the FOTS and selling of
its components to third-parties. This was a different business than the business
previously conducted by the telecommunications division in which LIL would
construct and develop fiber optic systems on a contract basis for specific
telecommunications clients. Since this was a new business for LIL the gross
margin compared to prior years is not comparable.
General and administrative expenses for the year ended August 31, 1997
were $863,373, representing 1.5% of revenues for the period. The general and
administrative expenses for this period are primarily comprised of the overhead
necessary to accommodate the commencement of FOTS and management of the Alaska
Fiber Star build in Alaska.
Income tax expense for the year ended August 31, 1997 represents a current
expense of $338,000 and a deferred expense of $3,282,000 using an effective tax
rate of 45%. As a division, we would have been included within the tax return
filed by LIL. The difference between current tax expense and deferred tax
expense is due to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Telecommunications Division -- Ledcor Industries Limited
Five Months Ended August 31, 1996
Revenues generated from contracts for the five months ended August 31,
1996 were $7,372,942. The revenues for this period are principally derived from
the fiber optics development between Calgary and Edmonton, Alberta.
Contract costs were $5,768,543 for the five months ended August 31, 1996.
Contract costs for this period are primarily comprised of the design,
engineering and construction costs associated with the development project
between Calgary and Edmonton. Contract costs as a percentage of revenue for the
five months ended August 31, 1996 were 78%.
General and administrative expenses for the five months ended August 31,
1996 were $90,993, representing 1.2% of revenues for the period. The general and
administrative expenses for this period are primarily derived from the overhead
necessary to commence the Calgary-Edmonton project.
Income tax expense for the year ended August 31, 1997 represents a current
expense of $5,000 and a deferred expense of $681,000, using an effective tax
rate of 46%. As a division, we would have been consolidated within the tax
returns filed by LIL. The difference between current tax expense and deferred
tax expense is due to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
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<PAGE>
Liquidity and Capital Resources
At September 30, 1999, we had working capital of $816 million, including
$675 million in cash or cash equivalents. Cash used in operations during the
nine months ended September 30, 1999 totaled $139 million.
We have an aggressive business plan to build out our network. Our
currently planned network will provide us with 37,800 total route miles and span
two continents, and we intend to further expand this network to provide global
connectivity. Building out the network 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 equipment to establish
transmission facilities. We anticipate that we will continue to experience
negative cash flow (after capital expenditures) as we build out the network
which is expected to be completed in the first quarter of 2001.
We estimate that the total cost of building and lighting our currently
planned network will be approximately $2.8 billion. Such costs are:
o We estimate that the total cost to build out and light our network in
North America will be approximately $1.6 billion.
o We estimate that the total cost to build out and light our network in
Europe will be $320 million. In addition to the sources of funds set
forth below, in order to expeditiously build out our network in
Europe, we recently signed an agreement with Telia under which we will
swap multiple fiber strands on part of our North American network in
exchange for an IRU for approximately 4,000 miles on Telia's European
network.
o We estimate the total cost of the Hibernia undersea cable project to
be approximately $865 million.
In order to finance our network development:
o We have issued $675 million of senior notes and plan to issue an
additional one billion dollars in the first half of 2000.
o We intend to make a public offering of our Class A Non-Voting Shares
in the first half of 2000.
o We intend to consummate the $565 million Hibernia credit facility. The
credit facility is being provided on a project finance basis to a
group of our subsidiaries and is non-recourse to us.
o We have issued $345 million of our Series A Non-Voting Preferred Stock
to a number of private equity investors. A significant portion of the
proceeds from this issuance will fund the equity portion of the
Hibernia project.
We anticipate that these funding sources will provide us with sufficient
capital to complete our terrestrial and undersea 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.
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 serv-
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<PAGE>
ces strategy, the Hibernia project or for other opportunities on a timely basis
or on terms that are acceptable to us, or at all.
Accounting Pronouncements
We adopted the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5) effective January 1, 1999. SOP 98-5 requires that all start-up costs be
expensed and that the effect of adopting SOP 98-5 be reported as the cumulative
effect of a change in accounting principle. The effect of adopting SOP 98-5 on
our results of operations was immaterial.
We adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
the fourth quarter of 1998. SFAS No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers.
In June 1999, the Financial Accounting Standards Board (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, after June 30, 1999, title must transfer to a lessee in order
for a lease transaction to be accounted for as a sales-type lease. Transactions
will be accounted for as operating leases where title is not transferred to the
lessee or if the agreement was entered into after June 30, 1999.
Market Risk Disclosures
Interest Rate Risk
We have interest rate exposure related to our senior notes which have a
fixed interest rate. The senior notes will be subject to interest rate risk
resulting from a future decrease in interest rates on obligations with
comparable terms below the interest rate on the senior notes. We currently do
not mitigate the risk of interest rate covenants through the use of interest
rate swaps or other derivative instruments. However, we may choose to manage our
risk associated with interest rate movement through an appropriate balance of
fixed and variable rate obligations. To maintain an effective balance of fixed
and variable obligations, we may elect to enter into specific interest rate
swaps or other derivative instruments as we deem necessary.
The senior notes are comprised of $175,000,000 12.5% notes due December
15, 2005 with interest paid quarterly and $500,000,000 12.0% notes due August 1,
2009 with interest paid quarterly. These senior notes have provisions which may
permit or obligate the Company to redeem all or part of the notes before their
redemption dates.
Foreign Currency Risk
We presently do not utilize derivative or other financial instruments to
hedge the risk associated with the movement in foreign currencies. However,
management continually monitors fluctuations in these currencies and will
consider the use of derivative financial instruments or employment of other
investment alternatives if cash flows or investment returns so warrant.
-39-
<PAGE>
BUSINESS
General
We are a provider of technologically advanced fiber optic communications
infrastructure and services in North America using our state-of-the-art fiber
optic network. Our present and targeted customer group is communications
carriers, ISPs and large corporations with enterprise network needs. In January
1999 we completed construction of the FOTS, a 5,068 route mile fiber optic
network development across Canada and the Northern United States. Our interests
include: (1) a 2,735 route mile segment (approximately 36,000 fiber miles) of
the FOTS from Vancouver to Detroit, via Calgary, Winnipeg, Minneapolis/St. Paul
and Chicago and (2) an additional 2,333 route miles (approximately 38,000 fiber
miles) along the FOTS extending from Seattle to Detroit and Edmonton to Toronto.
In May 1999, we completed construction of the segment of our network that
extends from Seattle to Portland. Together this fiber forms the initial backbone
of our high-bandwidth fiber optic communications network and related
infrastructure in North America.
Our currently planned network will provide us with 35,400 route miles and
span two continents and we intend to further expand this network to provide
global connectivity. Our network will consist of fiber optic strands installed
in protective conduit buried along diverse rights-of-way and strands acquired
from other developers and carriers through swaps, and related infrastructure
such as regeneration shelters. We plan to further develop and expand our network
to meet customer needs. Our network is expected to cover approximately 24,000
route miles in North America and encompass both long haul and intra-city route
miles (comprising in excess of 1,000,000 fiber miles) and provide connectivity
between approximately 50 major population centers. Our network in Europe is
currently expected to cover approximately 6,200 route miles (assuming the
exercise of our CARRIER1 option) on a long-haul basis between approximately 20
major population centers. We also intend to further develop and expand our
network in Europe. Our 7,600 mile Trans-Atlantic cable will utilize a
high-speed, high-capacity, self-healing ring that currently connects landing
sites in Boston, Halifax, Dublin and Liverpool to serve the continuing growth of
demand for bandwidth in the Trans-Atlantic market. In addition to continued
expansion to other North American and European cities, we are reviewing
opportunities to expand the geographic reach of our network to encompass Asia
and Latin America.
We believe that these customers have a limited choice of service providers
capable of offering high-capacity, reliable, secure and cost-effective services.
To meet our customers' demands, we offer a broad range of services on a scalable
basis, including bandwidth services, such as optical channels, private line
transmission, virtual voice tracking, Internet transport, IP transport, packet
switch services, including MPLS, IP and ATM. We also offer network
infrastructure, such as dark fiber and conduit for sale, lease or IRU.
We also intend to expand our business to include carrier hotels that will
enable us to provide services such as:
o applications hosting,
o electronic commerce services,
o web hosting services,
o video transport services,
o independent Internet access for transport and peeving.
o management services that allow carriers to migrate from circuit-switched
technologies to packet-based technologies, and
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o co-location services.
We believe that our network's transmission capacity, route diversity,
national route design and connectivity, together with our status as an
independent developer and carrier's carrier, will enhance the marketability of
the network as a primary or redundant route.
We generally reduce the capital risk necessary to build and develop the
network by pre-selling sufficient strands and conduit to cover approximately 50%
of our anticipated construction cost on a condominium or co-development basis.
We also exploit certain construction, technological and ROW expertise and
agreements. The "condominium" concept comes from the construction development
industry. Our condominium development strategy allows multiple participants to
purchase or lease fiber or conduit from an experienced developer capable of
delivering a pre-designed fiber optic system on schedule at a fixed price.
Generally, we install more fiber along any specific route than one customer
would typically install for its own use. Our condominium style of development
encourages participants to commit to purchasing or leasing fiber or conduit
during the initial stages of construction. If participants commit to a build
early enough, they may have more flexibility with regard to choice of fiber and
other infrastructure decisions. This development strategy reduces our risk and
may allow participants favorable pricing for fiber assets. To expedite route
development or decrease development risk, we may enter into co-development or
swap arrangements. Under a co-development arrangement, the co-developer funds a
portion of the project in exchange for receiving fiber or conduit assets or an
equity position in that segment.
We will continue to construct fiber optic networks for third parties on a
contract basis when a project will allow us to retain fiber or conduit assets,
including through IRUs. We plan to construct these networks only on routes that
complement and reduce the costs of completing our network or enhance our ability
to make a sale, grant of IRU, lease or swap of network capacity or the provision
of bandwidth services.
Network Construction Experience
We have been designing, engineering and constructing telecommunications
networks for 12 years, first as the telecommunications division of, and since
May 1998 as a separate subsidiary, of our parent, Ledcor. The FOTS was
originally engineered, designed and partly constructed by our predecessor. As
the successor to Ledcor's telecommunications division, we have acquired all of
its construction assets, certain fiber assets and construction contracts, its
management and personnel and the expertise gained from various
telecommunications network construction projects. In addition to the
construction and development of the FOTS, Ledcor, through its telecommunications
division, has a long history of successfully designing, engineering and
constructing networks for third parties. Ledcor's telecommunications division
has installed more than 10,000 route miles of telecommunications networks for
major telecommunications carriers. In the summer of 1996, Ledcor began its first
project as a developer of fiber optic networks by designing, engineering and
building a fiber optic network from Calgary to Edmonton. In addition to
retaining six fibers for its own account, Ledcor pre-sold the remaining fibers
on the project to Sprint Canada, AT&T Canada Corp. and fONOROLA, Inc.
Market Opportunity
The North American telecommunications industry has been characterized by
significant demand for high-bandwidth communications services. According to an
industry survey by The Yankee Group:
o voice and data telecommunications services revenue in the United
States is expected to grow at a compounded annual growth rate of
approximately 8%, from approximately $167 billion in 1997 to
approximately $241 billion in 2002,
o data telecommunications services revenue is expected to grow at a
compounded annual growth rate of approximately 26%, from approximately
$15 billion in 1997 to approximately $47 billion in 2002, and
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o carriers' carrier telecommunications services revenue, which our
bandwidth services strategy is specifically intended to target, is
expected to grow at a compounded annual growth rate of approximately
60%, from approximately $1.2 billion in 1997 to approximately $12.3
billion in 2002.
Our network is designed to provide our customers with secure, independent
transmission facilities and sufficient capacity on a local, regional or national
basis to accommodate their increasing demand and plans for expansion. According
to The Yankee Group and other industry sources, growth in the high-bandwidth
telecommunications industry is expected to continue due to a number of factors,
which include:
o Innovations and advances in transmission technology. Technological
innovations are increasing both the supply of and demand for
high-bandwidth telecommunications transmission capacity while the
desire to obtain services from a reduced number of vendors and the
trend towards providing end-to-end digital services continue to drive
increased integration of voice, data and video services. Innovations
in optics technology have increased the capacity and speed of advanced
fiber optic networks while decreasing the cost of transmission,
allowing for continued growth in Internet usage and increases in the
number of network users. This increased capacity and speed has
resulted in the development of bandwidth-intensive applications. We
are developing our advanced fiber optic network to meet the increasing
demand for high-bandwidth capacity.
o Increasing demand for high-bandwidth applications, largely driven by
the increase in Internet traffic. There is and will continue to be a
significant growth in demand for Internet, long distance, local loop
data and video services. The increase in computer power and usage, as
well as the continued demand for and development of faster Internet
connection speeds, are driving significant increases in communications
use for Internet and data services. Prices for cellular services have
decreased, resulting in increased demand for these services. It is
expected that video conferencing, digital television and other
multimedia applications being developed will continue to increase
demand for bandwidth. We believe our high-bandwidth network is well
positioned to capture some of this growing demand.
o Deregulation of the telecommunications industry, which has resulted in
a proliferation of service providers. The telecommunications industry
continues to experience liberalization on a global basis. Although the
Federal Communications Commission ("FCC") has not granted any Regional
Bell Operating Companies ("RBOCs") the authority to provide in-region
inter-LATA telecommunications services and it is uncertain when it
will do so, the Telecommunications Act of 1996 has opened local
markets to competition and defined a path for the RBOCs to compete in
long distance markets. Our high-bandwidth platform allows both new
entrants to compete in this market and existing service providers to
expand into new markets. We believe our network will offer an
attractive alternative to network construction and ownership for these
carriers.
In addition to further North American development and our announced
transatlantic fiber optic cable project and European network assets, future
network development locations could include South America and Asia. We have
developed our marine capability through our activities as contract manager on
the NorthStar submarine cable build from Anchorage, Alaska to Pacific City,
Oregon. We believe that these further developments will enhance the connectivity
and value of our network.
We believe that Hibernia represents an opportunity to connect our existing
North American terrestrial network to future European customers because it will
allow us to provide an undersea cable system link between and among Halifax,
Canada; Boston, Massachusetts; Dublin, Ireland, and Liverpool, England.
For Hibernia we have applied for licenses with the governing authorities
in each of Ireland, Canada, the United Kingdom and the United States. The
licenses have been granted in Ireland, the United Kingdom and the United States.
One license for which we applied in Canada has been approved and a second
license application in
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Canada is pending. We also applied for various permits and consents for Hibernia
in Ireland, Canada, the United Kingdom and the United States. Approximately 40%
of these permits and consents have been granted and the remaining 60% are
pending. While there can be no assurance that the remaining licenses, permits
and consents will be granted, we do not anticipate any problems at this time.
In June 1999, we entered into a turnkey supply agreement with Tyco
Submarine Systems Ltd. ("Tyco") whereby Tyco will serve as the primary
contractor for Hibernia. The contract price is approximately $634 million. The
Company has paid over $100 million in advance payments to Tyco. Tyco is required
to deliver Hibernia in the first quarter of 2001.
We also believe there is an opportunity to operate, for multiple network
participants, carrier hotel facilities and other network infrastructure near
points-of-presence ("POPs") that are presently at or near capacity.
Business Strategy
Our strategy is to be a leading independent provider of technologically
advanced dark fiber and related infrastructure and high-bandwidth fiber optic
transmission capacity. The key elements of our business strategy include:
o Developing and building a technologically advanced fiber optic
network. The network is designed with the most advanced, commercially
available technology to provide the highest levels of reliability,
security and flexibility demanded by our customers. We intend to use
our fiber optic design, engineering and construction expertise to
enhance and broaden the desirability of our network.
o Maximizing route diversity and connectivity of the network. The
footprint of our network is designed with the input of our customers
and will connect many of the major population centers in North
America. We believe that route diversity and connectivity increase the
network's inherent value. We intend to participate in international
cable construction projects to expand the reach, connectivity and
attractiveness of our network. Further, our expanding footprint should
enhance the value of the network by enabling us to target a broad
range of customers by offering participation on a local, regional,
national or international basis.
o Reducing capital risks and creating low cost position. We generally
commence construction of a network segment when we have pre-sold
sufficient strands and conduit to cover approximately 50% of our
anticipated cost of that segment. In some segments, we may seek a
co-developer to fund a portion of the project in exchange for
receiving fiber or conduit assets or an equity position in that
segment. We believe that our network will have a low cost basis for
the following reasons:
o as a result of our condominium development strategy, we generally
install 144 fibers (or a significantly higher number of fibers in
high demand areas), reducing the per fiber mile cost to construct
and operate our network,
o we use a patented railplow to install fiber optic cable along
rail lines quickly and cost effectively,
o we retain fiber assets for our own use along routes where we
complete third party construction, and
o we believe that certain of our current ROW, licenses, permits and
franchises are, and others currently being negotiated will be,
valuable assets that would be costly and difficult for others to
procure or replicate in the future.
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o Realizing value of the network. As an independent provider of fiber or
conduit, we believe that telecommunications carriers will be more
likely to purchase or lease facilities from us than from their
competitors that are telecommunications carriers or are affiliated
with one. We intend to realize the value of our network through:
o sales, grants of IRU, leases on a short or long term basis, or
swaps of network assets, and
o the provisioning of bandwidth services.
o Providing bandwidth capacity. We have commenced the process of adding
the necessary transmission equipment to provide bandwidth services to
carriers, ISPs and large corporations with enterprise network needs.
We offer our customers low cost bandwidth and the flexibility to
control their own service platforms so that they choose to buy
services from us rather than build these service capabilities
themselves or purchase them from another bandwidth provider.
o Allowing for technological upgrades and additional capacity. We
generally install at least one additional conduit along each segment
that we develop, allowing for network expansion and permitting
technological upgrades. Our network's optical design will enable us to
upgrade installed equipment or to add new technology to any segment of
the network.
o Capitalizing on management experience. We have assembled and will
continue to build a strong management team comprised of executives
with extensive experience in the design, engineering construction and
maintenance of fiber optic networks, general telecommunications
infrastructure and telecommunications bandwidth services. The
management team also has considerable experience in the development
and financing of growth stage international companies.
The Network
Our currently planned network will cover approximately 37,800 route miles
and will encompass long-haul and intra-city routes and Trans-Atlantic fiber
optic cable. Our network will consist of fiber optic assets which we have
installed along diverse rights-of-way or acquired from other developers and
carriers through swaps. We plan to further develop and expand our network and
its reach in response to customer demand.
North America
Our North American network is expected to cover approximately 24,000 route
miles and encompass both long-haul and intra-city route miles (comprising in
excess of 1,000,000 fiber miles) by the first quarter of 2001. We intend to
further develop, swap or purchase additional long haul route miles and intra
city rings in North America. The footprint will consist of the following:
o a North American long-haul fiber optic network including: (1)
three primary east-west routes, and (2) three primary north-south
routes, running along the West Coast, the Mississippi River
valley and the East Coast; and
o a series of intra-city networks in Toronto, Vancouver, Montreal,
Ottawa and Calgary, in addition to the city ring currently under
construction in Seattle.
Undersea Cable
Our 7,600 route mile Trans-Atlantic cable project utilizes a high-speed,
high-capacity, self-healing ring design that will connect landing sites in
Boston, Halifax, Dublin and Liverpool to serve the continuing growth of demand
for bandwidth in the Trans-Atlantic market. In June, 1999, we entered into a
supply agreement with Tyco
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whereby Tyco will serve as the primary contractor for Hibernia, taking
responsibility for the design, construction, installation and testing of the
cable. Tyco is a leading supplier of undersea communications systems and
services to various projects around the world. Hibernia's self-healing ring
design will have a capacity of 1.92 Terabits per second on each segment using 4
fiber pair with state-of-the-art, 48-wave length technology on each fiber pair.
Tyco is required to complete the construction of Hibernia by the first quarter
of 2001.
Europe
Our network in Europe is currently expected to cover approximately 6,200
route miles (assuming the exercise of our CARRIER1 option) linking approximately
20 European cities by the first quarter of 2001.
The fiber we acquired via the Telewest, Telia and CARRIER1 transactions
places our assets in seven European countries. The current planned footprint
will consist of the following five rings:
o Liverpool, Manchester, Birmingham, Bristol, London, Cambridge,
Sheffield, Liverpool
o London, Paris, Strasbourg, Frankfurt, Dusseldorf, Hamburg,
Amsterdam, London
o Hamburg, Kolding, Copenhagen, Hamburg
o Copenhagen, Stockholm, Oslo, Copenhagen
o Frankfurt, Stuttgart, Munich, Dresden, Berlin, Hamburg, Cologne,
Frankfurt
These routes were acquired through the following agreements:
o Telewest. In December 1999, we signed a co-development agreement
with Telewest to purchase an IRU on Telewest's approximately
777-mile ring network which will connect Liverpool to London via
Manchester, Birmingham, Bristol and via Sheffield and Cambridge.
In addition, we have an option to require Telewest to provide
access to existing dark fiber on two diverse routes connecting
Liverpool to London on a backup network with common regeneration
sites if the co-development assets are not delivered on schedule.
o Telia. In December 1999, we signed a contract with Telia under
which we will swap for a twenty-year period an IRU for multiple
fiber strands on part of our North American network in exchange
for an IRU for approximately 4,000 route miles of multiple fiber
strands of Telia's European network covering Germany, France, the
United Kingdom, the Netherlands, Denmark, Sweden and Norway. We
will deliver fibers to Telia by the end of the first quarter of
2001 and Telia will deliver the fibers to us by the end of the
fourth quarter of 2000. In addition, Telia and we will provide
each other with co-location services, regeneration sites, points
of presence in main cities and operations and maintenance
activities.
o CARRIER1. In December 1999, we signed a contract with CARRIER1
under which we have the option to order wholesale capacity on
their network connecting London to 18 European cities. The option
provides us with wholesale capacity on CARRIER1's network
beginning March 1, 2001. In addition, the contract provides us
with the option to acquire multiple strands in Germany and
wavelength channels in France.
Future Network Development
We believe that there may be further opportunities in North America and
Europe to continue the type of network development we are currently deploying.
In addition to continued expansion to other North American
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and European cities, we are reviewing opportunities to expand the geographic
reach of our network to encompass Asia and Latin America. We believe that these
further developments will enhance the connectivity and value of our network.
Network Development Plan
We expect to complete the development of our Network in 2001. Although the
following tables summarize our current plans for completing the terrestrial
network in North America and Europe and Hibernia, the segments, scheduled
completion dates and proposed participants/co-developers/swaps/joint ventures
listed below may change due to market and other circumstances, some of which may
be beyond our control:
<TABLE>
<CAPTION>
North America
---------------------------------------------------------------------------------------------------------------------
Completed
Route Miles as Scheduled Proposed Participant/
Estimated of December Completion Major Population Co-developer/Swaps/Joint
Segment Route Miles 31, 1999 Date Centers Connected Ventures
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Transcontinental FOTS: 7,118 6,311 Fourth Vancouver, Edmonton, Call-Net, Bell Canada,
Quarter 2000 Calgary, Winnipeg, AT&T Canada and Telus
Minneapolis,
Chicago, Toronto and
Detroit
---------------------------------------------------------------------------------------------------------------------
West Coast Build: 4,102 1,286 Fourth Edmonton, Vancouver, Telus, Call-Net, FTV,
Quarter 2000 Seattle, Portland, GST, Level 3,
Sacramento, Los Metromedia, NEXTLINK,
Angeles, San Diego, Qwest and Williams
Phoenix and San
Antonio
---------------------------------------------------------------------------------------------------------------------
Northeast Build: 3,314 1,611 Fourth New York, Boston, AT&T Canada, BCT Telus,
Quarter 2000 Buffalo, Albany, CN, Level 3 and Williams
Detroit, Toronto,
Montreal, Quebec
City and Halifax
---------------------------------------------------------------------------------------------------------------------
East Coast Build: 3,616 2,601 First Quarter New York, Washington Metromedia and Qwest
2001 DC, Atlanta,
Jacksonville,
Memphis, Miami and
New Orleans
---------------------------------------------------------------------------------------------------------------------
Central Build: 1,120 - Fourth Chicago and New IC
Quarter 2000 Orleans
---------------------------------------------------------------------------------------------------------------------
Mid-America Build: 4,330 408 First Quarter Chicago, Denver, New Pathnet
2001 Orleans, Omaha and
Sacramento
---------------------------------------------------------------------------------------------------------------------
Intra-City Networks: 511 - Fourth Calgary, Montreal, GST, Level 3,
---
Quarter 2000 Ottawa, Seattle, Metromedia, Qwest and
Toronto, Vancouver NEXTLINK
and Edmonton
---------------------------------------------------------------------------------------------------------------------
Total Route Miles 24,111 12,217
====== ======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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Hibernia and Europe
----------------------------------------------------------------------------
Scheduled Proposed
Estimated Completion Major Population Participant/
Segment Route Miles Date Centers Connected Co-developer/
Swaps/Joint
Ventures
-------------------------------------------------------------------------------
UK 796 Q3 2000 London, Telewest, Telia
Liverpool,
Manchester
-------------------------------------------------------------------------------
Germany 2,612 Q2 2001 Strasbourg, Telia, CARRIER1
Frankfurt,
Hamburg, Munich,
Dusseldorf
-------------------------------------------------------------------------------
Holland/France 1,053 Q4 2000 Amsterdam, Paris Telia
-------------------------------------------------------------------------------
Scandinavia 1,628 Q4 2000 Copenhagen, Telia
Stockholm, Oslo
-------------------------------------------------------------------------------
Hibernia 7,600 Q1 2001 Dublin,
(trans-Atlantic) Liverpool,
Boston, Halifax
------------------------------------------------------------------------------
Network Design and Infrastructure
Network Technology
The network uses state-of-the-art fiber optic strands which allow for the
high speed, high quality transmission of data, video and voice communications.
Fiber optic systems use laser-generated light waves to transmit data, video and
voice in digital formats through ultra-thin strands of glass. Fiber optic
systems are generally characterized by large circuit capacity, good sound
quality, resistance to external signal interference and direct interface to
digital switching equipment or digital microwave systems. We plan to install an
average of 144 fiber optic strands on major builds throughout the network. In
high demand areas, we may install 264 fibers or more in order to meet
anticipated demand.
Each fiber optic strand is capable of transmitting significantly greater
bandwidth than traditional copper cables or older fibers. The advanced technical
operating characteristics of the network will enable us to provide
technologically advanced dark fiber to our customers at low cost by permitting
higher capacity transmission over longer distances between regeneration and
amplifier facilities than can be provided by less advanced fiber systems. Using
current dense wave division multiplexing ("DWDM") fiber optic transmission
technology, a single pair of fiber optic strands used in the network can
transmit up to 320 gigabits of data per second ("gbps"), the equivalent of
approximately 4.2 million simultaneous voice conversations.
We anticipate that continuing developments in compression technology and
multiplexing equipment will increase the capacity of each fiber optic strand,
providing more bandwidth carrying capacity at relatively low incremental cost.
Our network is compatible with the highest commercially available transmission
capacity, i.e., OC-192, and can accommodate advanced capacity-intensive data
applications such as Frame Relay, ATM, multimedia and Internet-related
applications. Our network will allow us to offer end-to-end fiber optic capacity
compatible with SONET Ring architecture. This design routes customer traffic in
either direction around its ring design, assuring that fiber cuts do not
interrupt service to network customers. Our network is also capable of
supporting DWDM.
Bandwidth Services Technology
The provision of bandwidth services requires optical and ATM-packet
switching technology. A backbone of DWDM optical equipment provides optical
services as well as the transport for the lower speed services that are
delivered on an ATM-packet switching technology.
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Optical Technology
Our network's optical design will enable us to upgrade installed equipment
or to add new technology to any segment of the network. Our initial optical
platform will have a capacity of 32 wavelengths at 2.5 gbps or 10 gbps
expandable to 160 wavelengths within twelve months. We intend to utilize optical
ring protection devices where a customer requires redundant services.
ATM-Packet Switching Technology
We believe that most of our bandwidth services customers will use our
state-of-the-art high availability ATM layered architecture. The initial layers
will consist of high capacity core switches and a number of multi-service
platform ("MSP") switches located at each POP along the network.
The initial core switches will have a throughput capacity of 40 gbps and
network link speed of 2.5 gbps. We anticipate these switches will be upgradeable
to 10 gbps network links and total throughput capacity of 480 gbps at major POP
locations.
The core switches will provide:
o ATM customer link connections at speeds of 155 megabits of data
per second ("mbps") to 2.5 gbps,
o network to network interface ("NNI") links to the MSP switches,
and
o high speed private line services at 155 mbps, 622 mbps and 2.5
gbps.
The MSP switches will be linked to the core switch via redundant 622 mbps
ATM NNI connections. The initial MSP switches will have a capacity of 12 gbps
and may be upgraded to 50 gbps to meet customer requirements. These switches
will allow us to provide a wide range of voice and data services. The inherent
capabilities of the MSP will support the following services:
o low speed ATM at DS-3,
o private line services at DS-3, OC-1 and OC-3 (155 mbps),
o IP Internet connectivity,
o video services,
o transparent switched voice (64 kilobits of data per second
("kbps")),
o compressed switched voice (8-16 kbps),
o LAN interconnect,
o high speed Internet delivery via xDSL, and
o digital wireless services such as local multipoint communication
services.
Network Operations Center
Our Network Operations Center ("NOC") is the human service connection
between our customers and the technology that ultimately delivers their
services. We have completed construction of our NOC in Vancouver,
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which operates 24 hours a day, 365 days a year. We are in the process of
designing our NOC in Dublin. Our Dublin NOC will be primarily responsible for
European operations and is scheduled to be on line in October 2000. Each of the
NOCs will serve as a back up to the other. In addition, Nortel will continue to
provide redundant network services to us through June 2000.
In addition to the two main NOCs in Vancouver and Dublin, we are also
designing support centers in Denver to maintain cable operations and in Halifax
to maintain the Hibernia cable. The NOCs allow us to provide the following
services:
o directing the repair efforts of cable restoration, optical and
ATM system repairs and maintenance,
o providing network management for the optical and ATM elements,
o providing POP and customer record management, and
o providing circuitry for customer and internal circuits.
We are using a design based on IP technology that will integrate all of
the alarm and monitoring of the network elements into an adaptive fabric to
satisfy our service level agreements. With this technology, access to the
network management layer is not restricted to the physical NOC as full
operations capabilities may be located at multiple locations. This allows us to
extend certain management services to our customers in a secure and reliable
way.
Network Construction
The network is designed to access areas of significant end user
telecommunications traffic, as well as the POPs of most interexchange carriers
("IXCs") and the principal incumbent local exchange carrier ("ILEC") central
offices in each city on the network, in a cost-efficient manner.
Upon commencement of the development of a network segment, our development
staff is responsible for obtaining the necessary permits and ROW. In certain
jurisdictions, a construction permit is required. We strive to obtain ROW on
favorable terms that afford us the opportunity to expand the network as business
develops. ROW are typically leased or licensed under multi-year agreements with
renewal options and are generally non-exclusive. We obtain ROW from entities
such as railroads, pipeline owners, local government transit authorities,
municipalities, highway authorities, and other utilities.
We establish general requirements for the design of each segment of the
network. In-house or external engineers render drawings of the contemplated
segment and the required deployment. Construction and installation may be
completed by us or provided by independent subcontractors. Our personnel provide
project management services, including contract negotiation, construction, and
testing and certification of all facilities. The construction period for a
segment varies, depending upon the number of route miles to be installed.
Testing and delivery of a new segment typically takes place within 30 days of
the completion of construction.
Our network installation process along railroad ROW combines traditional
railroad activities and modern engineering and building techniques. We generally
install conduit and fiber on railroad ROW with the patented railplow. When the
railplow is in use, a plow car travels along the railroad track and
simultaneously plows a slot to bury multiple conduit with approximately 42
inches of cover, buries a warning tape approximately one foot from the surface,
and returns the land to its original contour. A railplow can cover between five
and ten miles a day, depending on the availability of track time and the
severity of the terrain. Other loaders on rail carry the conduit and other
construction materials needed to construct the fiber route and are designed to
continuously feed supplies to the railplow. Installation of conduit and fiber
utilizing a railplow is completed by an installation team.
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The team may consist of numerous specialized crews, such as a pre-rip crew, a
plow crew, a cable jetting crew, and a splicing crew. These crews, in aggregate,
may include 60 or more persons.
Ledcor developed the railplow because traditional plow trains are both
expensive to purchase or lease and inefficient when attempting to install fiber
on busy railroad routes where available track time comes in small blocks and on
relatively short notice. The plow train and supply cars frequently must travel
several miles down the route into sidings to permit regular railway traffic to
pass, during which time the fiber optic cable must be unrolled and then
re-rolled to avoid a splice. The railplow allows us to move on and off the
tracks on short notice. Each of Ledcor and us currently owns 50% of the common
shares of a holding company that owns the patent to the railplow and we have
received a commitment that a royalty-free, exclusive worldwide license to use
the railplow will be granted to us. In certain circumstances, our ownership of
this company would be subject to change and our license would become
non-exclusive. See "Transactions with Our Parent--Description of Reorganization
and Related Agreements."
For routes not using railroad ROW, we use tractor plows. Tractor plows are
tractor pulled plow vehicles equipped to plow trenches and install conduit.
Tractor plows also may be used in certain places along railroad ROW, depending
on space, availability of track time and other factors. These tractor plows
generally perform the same functions as railplows. Many of the skills developed
in connection with the installation of fiber optic cable along railways are
transferable to non-rail installations.
If fiber or conduit must be laid across a bridge or through a tunnel, we
typically place the conduit in a galvanized steel pipe that is attached to the
side of the bridge or along the tunnel floor or wall. When necessary to install
fiber or conduit under rivers or other obstructions, we use directional boring
techniques to bore small tunnels underneath the river or obstruction and feed
the conduit through the tunnel.
After the conduit has been buried (or attached to a bridge or tunnel), and
as a segment nears completion, the fiber optic cable is installed or "jetted"
through the conduit. We accomplish this through the use of access boxes that are
installed along the network at approximately four to five mile intervals. The
access boxes also allow us to make repairs, replace fiber and install additional
fiber. The access boxes typically contain an additional loop of fiber optic
cable to provide slack in the system to accommodate displacement, disruption or
movement of the conduit as a result of digging or excavation activities, floods,
earthquakes or other events. The presence of additional fiber optic cable
reduces the risk that the cable will be cut or broken.
We design and manufacture regeneration shelters that are installed along
our network at 40-75 mile intervals. These shelters are secure, climate
controlled structures with an individual compartment for each participant to
install its optical transmission equipment and related electronics.
The optical system electronics are installed in the shelter compartments
described in the preceding paragraph. Each route includes several spans that use
Optical Terminals at each end of the span and Optical Line Amplifiers,
regeneration shelters, and Optical Add/Drop between Optical Terminals. The
current generation of equipment may be upgradeable to 160 separate OC-192 (10
gbps) transponder channels per fiber, or 1.6 terabits per second ("tbps") of
capacity per fiber pair. Each linear route includes a redundant system for
reliability and maintenance. In the case of diverse parallel routes, one of the
parallel routes will include a redundant system for additional reliability and
system maintenance.
The ATM-packet switching elements use multiple, diverse or redundant
optical channels to connect the core switches together. A hierarchical source
routing protocol called Private Network--Network Interface ("PNN") has been
adopted to provide the scalability and restoration capabilities required to
deliver the highest levels of reliability and availability. With this
implementation we are able to utilize the redundant path between the switches to
deliver a secondary set of services that do not require the high reliability, or
may be scaled down in the event of a link or nodal failure.
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Rights-of-Way
To implement our business plan successfully, we must obtain licenses and
permits from third party landowners and governmental authorities and complete
certain regulatory filings to permit us to install conduit and fiber. ROW are
generally non-exclusive. Where possible, we lease them under multi-year
agreements with renewal options. We may lease underground conduit and other ROW
from entities such as utilities, railroads, highway authorities, local
governments and transit authorities. ROW agreements and permits provide us with
a contractual interest and do not create an interest in land. See "Risk
Factors--Need for ROW."
In the ordinary course of business each build requires us to either
obtain, lease, cure (or condemn) ROW or design re-routes, on a daily basis. For
example, to complete the Seattle-Portland segment of the West Coast Build we
obtained ROW agreements and permits from more than 700 individual landowners and
local authorities. Many ROW will be obtained just prior to the arrival of crews
and contractors. Alternative ROW for certain route miles must be identified,
negotiated and obtained in the event that the original route cannot be secured.
It is also possible to obtain ROW in bulk. The majority of the ROW for the
FOTS was obtained from two Canadian railways. In June 1999, we announced
agreements with IC and CN which provide access to over 950 track miles in the
United States and 2,900 track miles in Canada which we believe will
substantially satisfy the ROW and permit requirements for the Central and
Northeast Builds. See "Description of IC and CN Agreements." We believe these
ROW will be valuable to us, particularly with the advantages of the railplow and
the ROW's geographic location. The ROW obtained from IC and CN may be subject to
legal challenge. See "Risk Factors -- Need for ROW."
Products and Services
In connection with the development of our network, we offer customers a
range of products and services which enable us to provide customized solutions.
Our products and services include:
Dark fiber and conduit for sale or grant of IRU. During the
pre-development and development stages of the network, we generally enter into
contracts with participants for the sale, lease or grant of IRUs for dark fiber
or conduit along one or more segments of the network. A typical contract for
sale currently provides for a sale price of $1,500 to $2,000 per fiber mile
(depending on geography and number of strands bundled together in the sale) and
requires a deposit upon execution of the contract. See "Risk Factors-Pricing
Pressures." Upon completion of the build, the participant is usually entitled to
a short period of time to test the system specifications and inspect the
shelters and other facilities (generally 15 to 20 days) prior to paying the
balance of the purchase price. In the case of a sale, title to the fiber or
conduit passes to the participant. An IRU is a long-term lease, usually of 10 to
20 years, with an option period for the lessee to renew at lower rates. The
present value of the initial contract term and extensions of an IRU usually
equates to the comparable sale price per fiber mile, which amount is generally
paid in full at commencement of the IRU.
Dark fiber and conduit for lease. We lease dark fiber or conduit for a
term less than the period for which IRUs are typically granted. Leases are
normally structured with monthly payments over the term of the lease. We
generally realize a premium in lease pricing for bearing the risk that the lease
will not be renewed for the balance of the life of the asset.
Dark fiber and conduit for swap. We swap some of our excess fiber or
conduit with other developers and carriers for fiber assets along routes where
excess fiber assets exist and where we believe it is more economical or time
efficient to swap for, rather than construct, fiber assets.
Construction services supporting the development of our network. We are
continuing to construct fiber optic networks for third parties on a contract
basis. We focus on projects where we can retain fiber or conduit
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assets on routes that complement and reduce the costs of completing the network
or where our construction services are connected to a sale of network capacity.
Bandwidth services. The services we offer through our sale of bandwidth
capacity include:
Optical Transmission Services. DWDM technology in our network will allow
us to sell a customer exclusive long-term use of a portion of the transmission
capacity of a fiber optic strand rather than the entire strand. We expect to be
able to derive up to 160 individual wavelength channels at either OC-48 or
OC-192 per fiber pair. A purchaser of a wavelength will install its own
switching and routing equipment and will have the choice of installing its own
protection equipment or use optical protection supplied as part of our service.
We offer the following services:
o transparent OC-48 and OC-192 under IRU or lease,
o optical ring protection, and
o linear routes available, add/drop along route.
Private line transmission. We offer fixed amounts of point-to-point
connectivity. Our service has an advantage due to a low price point and flexible
commitment levels with higher reliability than is currently available on
traditional multiplexed services. We will offer these services through the sale
or lease of transparent connectivity up to OC-12.
Virtual voice trunking. We offer customers voice trunking services that
can be configured for sale as minutes of use. These services enable these
customers to originate and terminate long distance telephone calls connecting to
LECs with switched transport through our network. In addition, we will provide
our customers service on an as needed basis with simple billing. The services we
intend to offer include:
o DS-1 to OC-3 structured services,
o DS-0 switching and billing for usage,
o transparent local interface,
o SS7 signaling transport, and
o advanced services, including compression.
Packet-based data services (IP Transport and ATM). We offer customers
variable capacity across our network to connect multiple service locations into
a single "Virtual Network" specific for each customer. Specific packet-based
services include ATM and IP transport.
ATM service includes the following service attributes:
o DS-3 to OC-48 interface rates,
o all 5 classes of ATM service: UBR, ABR, VBRrt, VBRnrt and CBR,
and
o switched virtual circuits available on customer premises
equipment edge.
IP transport includes the following service attributes:
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o protocol supports including PNN, ATM and packet over SONET,
o nodes in all major Internet-network access points, and
o IP voice and modem transport and distribution, including virtual
switching and compression.
Sales and Marketing
Network
Our approach is to market to customers on a local, regional and national
basis. We market participation in segments of our network through personal
contacts and relationships with prospective customers, who consist primarily of
large telecommunications companies. Our current targeted customer base is
comprised of approximately 200 companies. We believe that we are known to most
of our target customer group and that we have good relations with them. Our
relationships are cultivated and maintained by a marketing and sales staff based
in 15 offices across North America. Most of our marketing and sales team have
prior industry experience with telecommunications companies such as MCI
Worldcom, Sprint, AT&T, Qwest and US West. In addition, as a result of our more
than ten years of experience in constructing fiber optic networks, our
management also has long standing relationships in the telecommunications
industry. We believe that relationships established by our sales team and
management result in interactive exchanges that help us to design and market our
network in response to the needs of our potential customers. We are also able to
identify potential participant and co-development customers who initially
approach us because of our reputation and experience in the design, construction
and development of fiber optic facilities.
Bandwidth Services
We commenced marketing our bandwidth services in the second quarter of
1999 to targeted customers through a number of focused direct sales methods. Our
strategy is to target customers who have a need for bandwidth services in areas
covered by those portions of our network on which we initially will be
installing transmission equipment. As this equipment is deployed across our
network, we expect that the number of our target customers will become larger
than for our network services. We will be marketing a broad and technically
advanced range of bandwidth products and services. Consequently, we are
developing a dedicated sales and marketing team with the necessary distinct
expertise. This team is expected to grow to 15 members by the first quarter of
2000 and will be located in offices throughout North America.
We are in the process of building our European and Hibernia sales teams.
In addition to our direct sales efforts, contacts made when marketing our
network services identify highly qualified prospective bandwidth customers. We
also receive referenced introductions from our suppliers when bandwidth
requirements are identified while they are making customer contacts in the
process of doing their business. Our experienced sales team will qualify
potential customers from their personal contacts and direct sales efforts.
Customers
We are focused on providing our broadband fiber optic network and
bandwidth services to communications carriers, ISPs and large corporations with
enterprise network needs. Our targeted customers include a broad range of
companies, such as:
o ILECs,
o CLECs,
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o ISPs,
o long distance companies (North American and international),
o RBOCs,
o IXCs,
o multi-service operators,
o local multipoint distribution service providers, and
o large corporations with enterprise network needs.
Customers typically buy or lease fiber optic capacity with which they
develop their own communications networks or satisfy a need for redundant
capacity. The network provides such customers with a low-cost alternative to
building their own infrastructure or purchasing metered services from
communications carriers. Our customers can buy or lease fiber optic capacity on
a segmented basis or along our entire network.
As of September 30, 1999, we had finalized, or were in the final stages of
negotiating, agreements for the sale, lease or IRU of dark fiber or conduit with
more than 30 communications carriers and owners of corporate networks. In
addition, we are currently in various stages of negotiating similar agreements
with a number of other potential customers.
Suppliers
The principal components of our network are fiber optic cable and conduit,
which are purchased from third party suppliers. Fiber optic cable suppliers
generally require three to six months lead time for large orders, while conduit
is generally available on a spot basis from numerous suppliers. Although in the
past we have purchased cable from a single supplier, there are a number of
alternative suppliers from whom we regularly obtain quotes which are competitive
on price, delivery, and specifications.
We currently purchase the optical components from a single vendor. A
number of alternative suppliers have been identified from which it would be
possible to purchase the optics required to complete a new system with only
minor changes to the design of the NOC. With respect to the provision of ATM
switches, we have adopted a dual supplier approach.
Competition
Fiber optic systems are currently under construction or development
throughout North America and Europe. The construction of these networks enables
their owners to sell or lease access to their networks to other communications
entities or large corporate or government customers. In addition, various
communications carriers already own fiber optic cables as part of their
communications networks. Accordingly, each of these parties could, and some do,
compete directly with us in the market for selling and leasing fiber capacity.
There are currently at least four principal long distance fiber optic
networks in North America. We are aware that others are planning networks that,
if constructed, could employ advanced technology similar to that of the network.
These competitors may also sell fiber to other carriers and thus compete
directly with us for customers.
Bandwidth services is an area that has seen a number of new entrants who
initially focus on the provision of bandwidth and other services on a wholesale
basis, promising independence from traditional or incumbent sup-
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pliers that compete directly in the market at the retail customer level. In the
recent past, carriers such as Williams, Qwest, Global Crossing and Level 3, who
initially focused on the wholesale market, have entered the retail segment of
the market, or closely aligned themselves with a major retail service provider.
These companies continue to market wholesale services to their current customers
while also pursuing new customer opportunities.
We anticipate that competition for our bandwidth services in North America
and Europe will come from the above companies as well as other incumbents. We
believe our competitive advantage will be our ability to enable our customers to
establish and maintain a strong competitive position in providing services to
their end users. We believe independence, services designed for the wholesale
market and simple billing systems will enable us to gain a significant position
in this market niche.
Our undersea cable will compete with existing and announced trans-Atlantic
cable systems, including a global network recently announced by Tyco.
In the future, we may be subject to additional competition due to the
development of new technologies and increased supply of domestic and
international transmission capacity. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite transmission capacity for
services similar to those provided by us. For instance, recent technological
advances permit substantial increases in transmission capacity of both new and
existing fiber, and the introduction of new products or emergence of new
technologies may reduce the cost or increase the supply of certain services
similar to those provided by us. We cannot predict which of many possible future
products and service offerings will be important to maintain our competitive
position or what expenditures will be required to develop and provide such
products and services.
Employees
As of December 31, 1999, we employed approximately 1,000 full-time and
seasonal people. Depending upon the level of development or construction
activity, we will increase or decrease our work force. Generally, non-management
employees from Canada are covered by a collective bargaining agreement with the
Christian Labor Association of Contractors which expires on February 28, 2001
and is automatically renewable unless either party gives prior notice. We
believe that our work force is highly capable and motivated and that our
relations with our employees are good. In connection with the construction and
maintenance of our fiber optic networks, we may use third-party contractors to
meet excess demand and harness local construction knowledge, some of whose
employees may be represented by other unions or covered by collective bargaining
agreements.
Properties
Our executive and administrative offices are located in Vancouver, British
Columbia. Our principal sales, engineering and operations offices are located in
Toronto and Denver.
Ledcor leases our Vancouver offices to us under agreements that expire in
2002. Ledcor also leases our facilities in Toronto to us. We lease space in
Denver under a short term lease with a third party. The office of our Chief
Executive Officer is in Seattle, Washington. We also currently lease offices or
property in several other states or provinces.
Legal Proceedings
From time to time, we may be a party to various legal proceedings arising
in the ordinary course of our business.
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Patents
The patent for the railplow is owned by a company which is 50% owned by
Ledcor and 50% owned by us. We have a non-exclusive license in North America for
the use of the railplow. Ledcor has committed to cause a worldwide exclusive
license to be granted to a subsidiary of ours. This license would cease to be
exclusive after a change of control of Worldwide Fiber. See "Transactions with
Our Parent--Description of Reorganization and Related Agreements--Railplow."
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MANAGEMENT
Directors and Officers
Our directors and executive officers are listed below:
Name Age Position
- ---- --- --------
David Lede................. 52 Chairman of the Board
Gregory Maffei............. 39 Chief Executive Officer
Clifford Lede.............. 44 Vice Chairman
Larry Olsen................ 50 Vice Chairman and Chief Financial Officer
Ron Stevenson.............. 48 President and Director
Stephen Stow............... 45 Executive Vice President and Director
William Ramsey............. 48 Director and Treasurer
Jim Voelker................ 46 Director
Glenn Creamer.............. 37 Director
Neil Garvey................ 44 Director
Robert Gheewalla........... 32 Director
Andrew Rush................ 41 Director
David Lede has served as Chairman and Chief Executive Officer since our
inception and as Chairman of the Board and Chief Executive Officer of Ledcor
Inc. since 1983. Mr. Lede has been with Ledcor for 31 years and, before becoming
Chairman of the Board and Chief Executive Officer of Ledcor, he held positions
such as President, Vice President, Operations Manager and Superintendent.
Gregory Maffei has served as Chief Executive Officer since January 18, 2000
and will be elected to our Board later this month. Prior to joining us Mr.
Maffei served as the chief financial officer of Microsoft Corporation. Mr.
Maffei joined Microsoft in 1991 and, prior to becoming chief financial officer,
served as treasurer and vice president, Corporate Development. Mr. Maffei serves
as a director of Avenue A, Inc., CORT Business Services Corporation, Expedia,
Inc. , Ragen MacKenzie Group Incorporated and Starbucks Corporation.
Clifford Lede has served as Vice Chairman since our inception and as Vice
Chairman and President and Chief Operating Officer of Ledcor Inc. since 1983.
Mr. Lede has been with Ledcor for 24 years and, before becoming President and
Chief Operating Officer of Ledcor, he held positions such as Vice President,
Operations Manager and Superintendent. Clifford Lede and David Lede are
brothers.
Larry Olsen has served as Vice Chairman and Chief Financial Officer since
our inception. Mr. Olsen is also a member of the Board and Executive Committee
of First Heritage Savings, a Canadian financial institution. Mr. Olsen was
previously involved in several international business ventures throughout Asia,
Australia and the Middle East. He has held the position of Managing Director,
Chief Executive Officer and Executive Chairman of Crownhampton International
Limited and Promet Petroleum and various other public and private companies
involved in several different industries including offshore oil petroleum and
exploration, offshore work vessels, high technology manufacturing, construction
development and marketing for major technology companies.
Ron Stevenson has served as President and a Director since our inception
and is a director of Ledcor Inc. Before joining us, Mr. Stevenson spent 28 years
with Ledcor. From 1989 to 1998, Mr. Stevenson was Senior Vice President of
Operations for Ledcor's telecommunications and civil divisions and was
responsible for construction and project development.
Stephen Stow has served as Executive Vice President, Corporate Development
and a Director since our inception. Mr. Stow previously served as a principal in
various venture capital activities. From 1992 to 1995,
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Mr. Stow was co-head and Director of Corporate Finance for National Westminster
Bank's Asian investment banking operations.
William Ramsey has been with us since September 1998 with responsibility
for treasury functions. He was previously Chief Financial Officer, for 13 years,
of WIC Western International Communications Ltd., a publicly traded Canadian
broadcasting company.
Jim Voelker joined us as an independent director in July 1999. Mr.
Voelker's career in telecommunications spans almost 20 years and includes
experience in many different segments of the industry in a variety of executive
positions. Before joining us, Mr. Voelker was most recently President of
NEXTLINK Communications Inc. He has also been Vice Chairman and Chief Executive
Officer of US Signal Inc., a director of Phoenix Network Inc., and Vice Chairman
of ALTS, the industry Association of Local Telephone Service providers.
Glenn Creamer joined us as a director in September 1999. Mr. Creamer is a
managing director of Providence Equity Partners Inc. where he has served in that
capacity since its inception in 1996. Mr. Creamer is also a general partner of
Providence Ventures L.P. and a Vice President of Narragansett Capital Inc. Mr.
Creamer is a director of American Cellular Corporation, Carrier 1 International
S.A., Celpage, Inc., Epoch Networks Inc., and Wireless One Network L.P.
Neil Garvey joined us as a director in September 1999. Mr. Garvey is
President of Tyco Submarine Systems Ltd.'s Telecommunications Group. This group
includes Tyco Submarine Systems Ltd., Simplex Technologies Inc., The Rochester
Corporation, Tyco Printed Circuit Group, Transoceanic Cable Ship Company and
Temasa. Before being named President of Tyco's Telecommunications Group, Mr.
Garvey was president of Simplex Technologies, a subsidiary of Tyco
International. Mr. Garvey has also held positions including Vice President in
the areas of Finance and Marketing.
Robert Gheewalla joined us as a director in September 1999. Mr. Gheewalla
is Vice President, Principal Investment for Goldman Sachs & Co. Mr. Gheewalla is
also a director of Diginet Americas, Group Telecom, Tunes.com, and North
American Railnet.
Andrew Rush joined us as a director in September 1999. Mr. Rush has been a
Managing Director of DLJ Merchant Banking Partners, L.P. since January 1997.
From 1992 to 1997 Mr. Rush was an officer of DLJ Merchant Banking Partners, L.P.
and its predecessors. Mr. Rush currently serves as a member of the advisory
board of Triax Midwest Associates, L.P., and as a member of the board of
directors of Societe d'Ethanpol de Synthese, Nextel Partners Inc., and American
Tissue Inc. Mr. Rush previously served as a director of Doane Products Company.
Executive Compensation
The total remuneration received by our officers and directors for their
services to us and our predecessor for the period from January 1, 1998 through
December 31, 1998 was approximately $1.7 million. We do not currently, and have
not in the past, set aside any amounts for pension, retirement or other similar
benefits for our directors and officers.
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TRANSACTIONS WITH OUR PARENT
Description of Reorganization and Related Agreements
Effective May 31, 1998, we entered into a series of agreements with Ledcor
to purchase the equipment, fiber optic strands and certain other assets related
to the business of Ledcor's telecommunication division. As part of the
Reorganization, we also entered into the Construction Services Agreements to
complete the FOTS. Effective August 31, 1998, Ledcor transferred to us their 50%
interest in WFI-USA and, on December 31, 1998, we increased our interest in
WFI-USA to 75%.
The material agreements we entered into with Ledcor in connection with the
Reorganization are described below.
Railplow
Effective May 31, 1998, the patent for the railplow which we use in
connection with the construction of our network was transferred to a subsidiary
of Ledcor ("Patent Co.") and we were concurrently granted a non-exclusive
license for its use. Effective December 1, 1998, one of our subsidiaries
acquired 50% of the shares of Patent Co. Ledcor has agreed to cause Patent Co.
to grant to us a royalty-free worldwide exclusive license for the use and other
exploitation of the plow technology. The license will cease to be exclusive six
months after a change of control of Worldwide Fiber. The Shareholders Agreement
relating to Patent Co. provides that Ledcor and our subsidiary have the option
to acquire the other party's shares of Patent Co. if the other party becomes
insolvent, bankrupt or subject to a change of control.
Management Services Agreement; Employee Services Agreements
We have entered into a Management Services Agreement and two Employee
Services Agreements with Ledcor. Under the Management Services Agreement, Ledcor
provides us with management staff and administrative and other support services.
We reimburse Ledcor for certain costs and, through December 31, 1999, paid a
monthly fee of Cdn. $200,000 under the agreement. Under the Employee Services
Agreements, Ledcor provides us with personnel for the design, engineering,
construction and installation of the network and we reimburse Ledcor for the
direct costs of these personnel. These agreements are terminable at any time by
either party. On January 1, 1999, the personnel covered by the Employee Services
Agreements, together with the officers involved in our day-to-day management,
became our employees.
Construction Services Agreements
We entered into Construction Services Agreements with Ledcor under which we
agreed to provide fiber optic network construction services to Ledcor and
fulfill Ledcor's fiber optic network construction commitments for certain
builds. We also agreed to procure the requisite insurance necessary for these
builds and perform all work in strict compliance with the appropriate contract
and applicable laws. In addition, we agreed to indemnify Ledcor for certain
losses, liabilities, damages and claims that may arise under the agreement. In
return, Ledcor will pay us an amount equal to costs incurred plus 15% of our
total costs. Either party may terminate this agreement at any time. Our
obligations under these agreements were complete by the end of January 1999.
Non-compete Agreement
Ledcor has agreed not to compete with us in the business of developing or
constructing fiber optic communications infrastructure for a period ending on
the earlier of May 31, 2008 and six months after a change of control of
Worldwide Fiber.
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Sale and Transfer Agreements
We entered into a series of agreements that transferred equipment and other
assets of Ledcor's telecommunications division including a minimum of 12 strands
of dark fiber along the FOTS.
Effective August 31, 1998, each of Ledcor and Mi-Tech Communications LLC
transferred their 50% interest in WFNI to WFI-USA, a newly-incorporated Nevada
corporation. In exchange, each of Ledcor and Mi-Tech acquired 50% of the common
shares of WFI-USA. At the same time, Ledcor exchanged with WFI-USA a promissory
note in the amount of $3,915,000 payable by WFNI to Ledcor for a promissory note
of the same face value payable by WFI-USA to Ledcor. In addition, Mi-Tech
exchanged with WFI-USA a promissory note in the amount of $7,231,230 payable by
WFNI to Mi-Tech for a promissory note of the same face value payable by WFI-USA
to Mi-Tech.
In a subsequent series of transfers, also effective August 31, 1998, Ledcor
transferred to us their shares of WFI-USA and the $3,915,000 promissory note
payable by WFI-USA to Ledcor. In exchange, we issued additional shares and a
promissory note of the same face value to Ledcor.
Acquisition of Fiber Optic Network Assets
On September 27, 1999, we concluded a transaction with affiliates of Ledcor
whereby we acquired certain fiber optic network assets in consideration of the
issue of 4,500,000 of our Class C Multiple Voting shares. Each Class C Multiple
Voting share entitles the holder to 20 votes per share. In addition, we assumed
certain rights and obligations of the affiliates under their 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.
Background of Ledcor
Ledcor, established in 1947, is among the largest diversified construction
companies in Canada and has substantial experience as a construction contractor
in the United States. Ledcor's core business activities, in addition to the
activities of the telecommunications division, are pipeline and civil
construction and diversified contracting, including major commercial and
industrial buildings and industrial and mining projects. Ledcor reported
revenues of more than Cdn. $700 million for the fiscal year ended August 31,
1998 from all activities, with significant contribution from the
telecommunications division.
Ledcor began designing, engineering and constructing buried long distance
power generation and fiber optic telecommunications systems more than ten years
ago and has installed fiber optic cable networks on a contract basis for
numerous telecommunications companies, including Bell Canada (532 miles), MTS
Netcom Inc. (45 miles), AT&T (50 miles), AT&T Canada (227 miles), Alaska Fiber
Star (410 miles), Call-Net (200 miles), Bell Canada, AT&T Canada and Call-Net
(5,200 miles), Mi-Link Communications, LLC and Champlain Telephone (245 miles)
and World Net Communications Inc. (2,400 miles).
In 1996, Ledcor installed its first fiber optic cable as a developer
between the cities of Edmonton and Calgary, Alberta. Ledcor sold fiber strands
of this cable, on a "condominium" basis prior to construction, to Call-Net,
Sprint Canada and AT&T. After the successful completion of this project, Ledcor
began, as a developer, the FOTS, the first trans-Canadian fiber optic cable
network. To date, approximately 50% of the capacity on the FOTS available for
sale to third parties has been sold for an aggregate price of approximately Cdn.
$400 million to Bell Canada and AT&T Canada. Call-Net received a portion of
these proceeds as an owner of certain of these strands.
The foundation of Ledcor's success and growth over the last 50 years has
been built on the strength of its dedicated people, ability to control costs and
its conservative but entrepreneurial approach to business. Ledcor
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believes it has maintained an excellent reputation for the quality of its
products and services in its markets and enjoys substantial repeat business from
major customers.
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REGULATION
We do not believe our dark fiber offering is currently subject to extensive
regulation that would have a material adverse effect on our business, financial
condition, or operations. See "Risks Factors--Extensive Regulation." However, we
are part of an industry that is highly regulated by federal, state and local
governments whose actions are often subject to regulatory, judicial, or
legislative modification. In addition, to the extent that any bandwidth capacity
and lit fiber offerings are treated as private carriage, telecommunications
services or CLEC offerings in the United States, additional federal and state
regulation would apply to those offerings. Accordingly, there can be no
assurance that regulations, current or future, will not have a material adverse
effect on us.
United States
Federal
U.S. Federal regulation has a significant impact on the telecommunications
industry. Federal regulations have undergone major changes in the last two years
as the result of the enactment of the Telecommunications Act of 1996 (the "1996
Act") on February 8, 1996. The 1996 Act is the most comprehensive reform of the
U.S. telecommunications law since the Communications Act was enacted in 1934.
For example, the 1996 Act imposes a number of interconnection and access
requirements on telecommunications carriers and on all local exchange carriers,
including ILECS and CLECs.
The different ways we intend to offer fiber-optic supported services could
trigger four alternative types of regulatory requirements: (1)
non-communications services, (2) private carrier services, (3)
telecommunications services or common carriage, and (4) CLEC offerings. The law
establishing these alternative regulatory requirements is often unclear, so it
is impossible to predict in many instances how the FCC will classify our
services. Regulations associated with each type of offering are described below.
Non-communications Services
The provision of dark fiber can be viewed as a non-communications service
in that it is not a service, but rather the provision of a physical facility
that is indistinguishable from other non-communications offerings such as
constructing an office building. Many providers of dark fiber are currently
operating on the assumption that they are providing unregulated facilities.
Although the FCC attempted to regulate dark fiber as a common carrier service,
this position was vacated by the U.S. Court of Appeals for the District of
Columbia Circuit in 1994. The FCC has not addressed the issue since that time
and, thus, we believe that dark fiber is not regulated as a common carrier
service at this time. However, there is no assurance that the FCC, on remand,
may not take the position again that dark fiber offerings are subject to common
carrier regulation.
Private Carrier Services
Even if some of our offerings are treated as a communications service, they
could be viewed as a private carrier offering. Private carrier offerings
typically entail the offering of telecommunications, but are provided to a
limited class of users on the basis of individually negotiated terms and
conditions that do not meet the definition of a telecommunications service under
the 1996 Act. If our services are treated as private carriage, they are
generally unregulated by the FCC, but would be subject to universal service
payments based on the gross revenues from end users. See "Regulation--United
States--Federal--Telecommunications Service--Universal Service." Private
carriers may also be subject to access charges if interconnected to local
exchange carriers.
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Telecommunications Services
Some of our services, such as the provision of bandwidth capacity and lit
fiber, may be treated as telecommunications services by the FCC. If some of our
services are treated as telecommunications services a significant number of
federal regulatory requirements will be applicable to those services.
The law essentially defines telecommunications carriers to include entities
offering telecommunications services for a fee directly to the public or to
classes of users so as to be effectively available directly to the public,
regardless of the facilities used. "Telecommunications" is defined as the
transmission, between or among points specified by the user, of information of
the user's choosing, without change in the form or content of the information as
sent and received. For the reasons stated above regarding our belief that we are
not a common carrier, we also believe that we are not a telecommunications
carrier concerning our dark fiber offerings. The FCC has ruled that the term
"telecommunications carrier" is the same as the definition of common carrier
and, therefore, a company providing fiber facilities on an individualized and
selective basis, as we propose, is probably not a telecommunications carrier.
Certain railroad, power and telecommunications associations--none of which are
affiliated with us--have petitioned the FCC to clarify the status of fiber
providers in this regard. The FCC's pending court remand, described above, might
also address the application of these requirements to us. If the FCC decides
that these companies are telecommunications carriers, we would be subject to
certain regulatory requirements which may impose substantial administrative and
other burdens on us.
If the FCC finds some of our services to be a telecommunications service,
we may be regulated as a nondominant common carrier. The FCC imposes regulations
on common carriers such as the RBOCs that have some degree of market power
("dominant carriers"). The FCC imposes less regulation on common carriers
without market power ("nondominant carriers"). Under the FCC's rules, we would
be a nondominant carrier and as such do not need authorization to provide
domestic services and can file tariffs on one day's notice. The FCC requires
common carriers to obtain an authorization to construct and operate
telecommunication facilities, and to provide or resell telecommunications
services, between the United States and international points.
General Obligations of All Telecommunications Carriers. To the extent that
any of our offerings are treated as telecommunications services, we would be
subject to a number of general regulations at the federal level that apply to
all telecommunications carriers, including the obligation not to charge
unreasonable rates or engage in unreasonable practices, the obligation to not
unreasonably discriminate in our service offerings, the need to tariff our
services, the potential obligation to allow resale of our services in certain
circumstances, and the fact that third parties may file complaints against us at
the FCC for violations of the Communications Act of 1934 or the FCC's
regulations. Certain statistical reporting requirements may also apply. In
addition, FCC rules require that telecommunications carriers contribute to
universal service support mechanisms, the Telecommunications Relay Service fund,
the number portability fund, and the North American Number Plan Administrator
fund.
Interconnection Obligations of All Telecommunications Carriers. All
telecommunications carriers have the basic duty to interconnect, either directly
or indirectly, with the facilities of other telecommunications carriers. This is
the minimum level of interconnection required and is generally viewed to impose
only minimal requirements as compared with the interconnection obligations
imposed on ILECs and CLECs described in the next section. All telecommunications
carriers must also ensure that they do not install network features, functions
or capabilities that do not comply with guidelines and standards established by
the FCC to implement requirements to ensure accessibility for individuals with
disabilities and to regulations designed to promote interconnectivity of
networks. These regulations could be burdensome or expensive and could adversely
affect us. The FCC adopted regulations recently that clarify these statutory
requirements.
If the FCC takes the position that some or all of our fiber offerings are
subject to common carrier regulation, we nonetheless believe that we could
provide facilities in the United States. To do so we would be obligated to
obtain Section 214 authorization to provide fiber between Canada and the United
States and to disclose, among other things, the extent to which we are owned or
controlled by non-U.S. entities. However, FCC policy permits
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100 percent direct or indirect non-U.S. investment in common carriers that do
not hold radio licenses. Thus, we believe that we could obtain Section 214
authority to provide international common carrier services despite our foreign
ownership. Nevertheless, compliance with these regulatory requirements may
impose additional administrative and other burdens on us that could have a
material adverse effect on our business, financial condition or operations.
Tariffs and Pricing Requirements. In October 1996, the FCC adopted an order
in which it eliminated the requirements that nondominant interstate
interexchange carriers maintain tariffs on file with the FCC for domestic
interstate services. The order does not apply to the switched and special access
services of the RBOCs or other local exchange carriers. The FCC order was issued
pursuant to authority granted to the FCC in the 1996 Act to "forbear" from
regulating any telecommunications services provider under certain circumstances.
After a nine-month transition period, relationships between interstate carriers
and their customers would be set by contract. At that point, long distance
companies would be prohibited from filing tariffs with the FCC for interstate,
domestic, interexchange services. Carriers have the option to immediately cease
filing tariffs. Several parties filed notices for reconsideration of the FCC
order and other parties have appealed the decision. On February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
implementation of the FCC order pending its review of the order on its merits.
Currently, that stay remains in effect and interstate long distance telephony
companies are therefore still required to file tariffs. A requirement to file
tariffs could lead to regulation of our offerings at the federal level, although
the FCC's regulation of nondominant carriers' tariff filings has been minimal to
date. Competitive access providers do not have to file tariffs for their
exchange access services, but may if they choose to do so.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers will no longer be able to rely on the filing of
tariffs with the FCC as a means of providing notice to customers of prices,
terms and conditions on which they offer their interstate services. The FCC has
required that nondominant interexchange carriers post their rates, terms and
conditions for all their interstate, domestic services on their Internet web
sites if they have one; this rule is effective once its mandatory detariffing
order takes effect. The obligation to provide non-discriminatory, just and
reasonable prices remains unchanged under the Communications Act of 1934.
Tariffs also allow a carrier to limit its liability to its customers, including
in connection with service interruptions. If tariffs are eliminated, we may
become subject to liability risks that we would have been able to limit through
tariff filings, and there can be no assurance that potential liabilities will
not have a material adverse effect on our results of operations and financial
condition and ability to meet our obligations under the notes. In addition, we
must obtain prior FCC authorization for installation and operation of
international facilities and the provision (including resale) of international
long distance services. We are considering whether to file tariffs for these
services and would have to file tariffs to the extent our international services
are treated as telecommunications services. There has been no proposal to
detariff international services.
With limited exceptions, the current policy of the FCC for most interstate
access services dictates that ILECs charge all customers the same price for the
same service. Thus, the ILECs generally cannot lower prices to some customers
without also lowering charges for the same service to all similarly situated
customers in the same geographic area, including those whose telecommunications
requirements would not justify the use of the lower prices. The FCC in 1999,
however, modified this constraint on the ILECs when they face specified levels
of competition, which permits them to offer special rate packages to certain
customers, as it has done in few cases, and other forms of rate flexibility. The
rules contemplate an increasing level of flexibility on a city-by-city basis as
competitors have facilities in place to compete for local exchange services in
those markets. Once such facilities attain 50% coverage the rules contemplate
only minimal regulation of carrier access offerings.
Customer Proprietary Network Information. In February 1998, the FCC adopted
rules implementing Section 222 of the Communications Act of 1934, which governs
the use of customer proprietary network information by telecommunications
carriers. Customer proprietary network information generally includes any
information regarding a subscriber's use of a telecommunications service, where
it is obtained by a carrier solely by virtue of the carrier-customer
relationship. Customer proprietary network information does not include a
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scriber's name, telephone number, and address, if that information is published
or accepted for publication in any directory format. Under the FCC's rules, a
carrier may only use a customer's proprietary network information to market a
service that is "necessary to, or used in," the provision of a service that the
carrier already provides to the customer, unless it receives the customer's
prior oral or written consent to use that information to market other services.
The Court of Appeals for the Tenth Circuit recently invalidated the FCC's rules
with respect to how a carrier must obtain customer authorization for the use of
customer proprietary network information. The FCC is expected to further
challenge this court decision. In addition, the FCC recently relaxed a number of
the requirements it originally adopted, which gives some flexibility to carriers
on how to comply with these rules. These rules, either as adopted or as
modified, may impede our ability to effectively market integrated packages of
services and to expand existing customers' use of our services.
Universal Service. On May 8, 1997, the FCC released an order establishing a
significantly expanded federal universal service subsidy regime. For example,
the FCC established new subsidies for telecommunications and certain information
services provided to qualifying schools and libraries and for services provided
to rural health care providers. The FCC also expanded or revised the federal
subsidies for local exchange telephony services provided to low-income consumers
and consumers in high-cost areas. Providers of interstate telecommunications
services, as well as certain other entities, such as private carriers offering
excess capacity to end user customers, must pay for these programs. Our share of
these federal subsidy funds would be calculated based on end-user revenues. The
schools and libraries and rural health care support mechanisms are assessed
against interstate, international, and intrastate end-user revenues. Currently,
the FCC is calculating assessments based on the prior year's revenues and has
recently increased the size of the schools and libraries fund by 50 percent.
Assuming that the FCC continues to calculate contributions based on the prior
year's revenues, we believe that we will not be liable for subsidy payments in
any material amount during 1999 because we had no significant end user revenues
in 1998. With respect to subsequent years, however, we are currently unable to
quantify the amount of subsidy payments that we will be required to make or the
effect that these required payments will have on our financial condition. In the
May 8th order, the FCC also announced that it would revise its rules for
subsidizing service provided to consumers in high-cost areas. The FCC has
recently adopted the cost model which it will use to determine the subsidies
needed for high-cost areas. The FCC also established the mechanism which will be
used starting January 1, 2000 to determine the level of high cost support
non-rural carriers will receive. This decision is expected to increase the fund
by only a modest amount. In addition, the Court of Appeals for the Fifth Circuit
recently affirmed the FCC's universal service program in large part, except that
contributions must be based entirely on interstate and international services of
interstate carriers (except for carriers providing predominately international
services). This decision could substantially affect the level of contributions
depending on the jurisdictional nature of the services provided by a carrier.
Several petitions for administrative reconsideration of the original FCC order
are pending.
CALEA. We might incur significant expenses to assure that our networks
comply with the requirements of CALEA. Under CALEA, telecommunications carriers
are required to: (1) provide law enforcement officials with call content and
call identifying information pursuant to a valid electronic surveillance warrant
("assistance capability requirements"), and (2) reserve a sufficient number of
circuits for use by law enforcement officials in executing court authorized
electronic surveillance ("capability requirements"). To the extent that we
provide facilities-based services, we may incur costs in meeting both of these
requirements. In particular, regarding the assistance capability requirements,
the government is only required to compensate carriers for the costs of making
equipment installed or deployed before January 1, 1995 CALEA complaint. While
the telecommunications industry is attempting to negotiate legislative and
administrative changes to this reimbursement cut-off date, as it stands today,
we will be financially responsible for ensuring that our post-1995 equipment is
in compliance. Regarding the capacity requirements, the government will finance
any necessary increases in capacity for equipment installed or deployed prior to
September 8, 1998, and we are responsible for paying for any necessary increases
in capacity for equipment installed or deployed after that date.
Wiring in Multi-tenant Buildings. The FCC recently instituted a proceeding
that could impose obligations on telecommunication carriers' obligation to
provide access to competitors or customers to their wiring lo-
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cated in multi-tenant residential and business buildings. It is unknown at this
time how the FCC will rule in this proceeding so it is impossible to evaluate
its impact on our operations.
CLEC Offerings
It is unclear whether we would be viewed as a local exchange carrier with
respect to the provision of some of our services. A local exchange carrier is
defined as a provider of telephone exchange service, which is an interconnected
service of the character ordinarily furnished by a single exchange, covered by
the local exchange charge, or comparable service provided through a system of
switches, transmission equipment, or other facilities, or combination thereof,
by which a subscriber can originate and terminate a telecommunications service.
The full parameters of what carriers are classified as a CLEC have never been
fully defined by the FCC. We do not intend to operate as a CLEC. However, the
FCC may disagree with this position. If we are classified as a CLEC, obligations
described below that are applicable to CLECs would apply.
Interconnection Obligations. The 1996 Act is intended to increase
competition. The act opens the local services market by requiring ILECs and
CLECs, including us to the extent we are treated as a common carrier providing
local exchange service, to permit interconnection to their networks and
establishing obligations with respect to:
Reciprocal Compensation. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements. The prices
charged by ILECs for terminating calls originated on a CLEC's network must
be based on a reasonable approximation of additional cost or through mutual
exchange of traffic without explicit payment.
Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, ILECs are required to offer all retail
telecommunications services to other carriers for resale at discounted
rates, based on the costs avoided by the ILEC in the offering.
Interconnection. Requires all ILECs and CLECs to permit their competitors
to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a
reasonable profit). At the option of the carrier seeking interconnection,
collocation of the requesting carrier's equipment on the ILEC's premises
must be offered, except where an ILEC can demonstrate space limitations or
other technical impediments to collocation.
Unbundled Access. Requires all ILECs to provide nondiscriminatory access to
unbundled network elements (including network facilities, features,
functions, and capabilities) at any technically feasible point within their
networks, on nondiscriminatory terms, at prices based on cost (which may
include a reasonable profit). In response to the Supreme Court's decision
in AT&T v. Iowa Utilities Board that required the FCC to reconsider which
elements should be unbundled, the FCC has adopted an order on remand that
affirms its original decision in all significant respects.
Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
local exchange carrier to another.
Dialing Parity. Requires all ILECs and CLECs to provide nondiscriminatory
access to telephone numbers, operator services, directory assistance, and
directory listing with no unreasonable dialing delays. They must also
provide dialing parity for inter-LATA services and for intra-
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LATA toll services. LECs are required to implement dialing parity for
intra-LATA toll services during 1999.
Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and ROW at reasonable and
nondiscriminatory rates, terms and conditions.
ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
In August 1996, the FCC released a decision (the "Interconnection
Decision") establishing rules implementing the 1996 Act requirements that ILECs
negotiate interconnection agreements and providing guidelines for review of
these agreements by state public utilities commissions. On July 18, 1997, the
Eighth Circuit vacated certain portions of the Interconnection Decision,
including provisions establishing a pricing methodology and a procedure
permitting new entrants to "pick and choose" among various provisions of
existing interconnection agreements between ILECs and their competitors. On
October 14, 1997, the Eighth Circuit issued a decision vacating additional FCC
rules. The Supreme Court has reversed the Eighth Circuit's decision on the
pricing and "pick and choose" rules. The Eighth Circuit recently issued its
mandate to implement the Supreme Court's decision and established procedures for
deciding the remaining issues on appeal that were not addressed by the Eighth
Circuit or the Supreme Court. These regulations impose added obligations on
potential competitors of the company that we would not have to comply with if we
were not classified as a CLEC. To the extent that the FCC changes these
regulations to be less burdensome, we could face added competition from these
companies in the provision of our own services that could adversely affect us.
To the extent that carriers may obtain low-priced access to CLEC and ILEC
networks, this could reduce the demand for our fiber services. Changes to these
interconnection obligations that reduce the interconnection obligations of our
competitors could also adversely affect our business.
In addition, the FCC has the responsibility under the 1996 Act to determine
what elements of an ILEC's network must be provided to competitors on an
unbundled basis. In August 1999, the FCC required fiber to be offered as an
unbundled element. In addition, the FCC had previously allowed state commissions
to establish additional unbundling requirements, and some states have required
that ILECs unbundle fiber. These decisions to unbundle fiber may decrease the
demand for our offerings.
Other Federal Communications Requirements. CLECs are also subject to other
FCC filing requirements. Compliance with these obligations, individually and in
the aggregate, may cause us to incur substantial expenses. There can be no
assurance that these expenses will not have a material adverse effect upon our
results of operations and financial condition and our ability to meet our
obligations under the notes. CLECs may, but are not required to, file tariffs
for their interstate access services and these rates are regulated as previously
described for non-dominant carriers. See "Regulation--United
States-Federal-Telecommunications Services--Tariffs and Pricing Requirements".
However, the FCC recently issued a Notice of Proposed Rulemaking asking whether
it should regulate the terminating access changes of such providers.
To the extent we provide interexchange telecommunications service, we are
required to pay access charges to ILECs when we use the facilities of those
companies to originate or terminate interexchange calls. The interstate access
charges of ILECs are subject to extensive regulation by the FCC, while those of
CLECs or non-CLECs are subject to a lesser degree of FCC regulation but remain
subject to the requirement that all charges be just, reasonable, and not
unreasonably discriminatory. With limited exceptions, the current policy of the
FCC for most interstate access services dictates that ILECs charge all customers
the same price for the same service. Thus, the ILECs generally cannot lower
prices to some customers without also lowering charges for the same service to
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all similarly situated customers in the same geographic area. The FCC recently,
however, modified this constraint on the ILECs when specified levels of
competition from local exchange providers occur and permitted them to offer
special rate packages to certain customers, as it has done in a few cases,
permitted other forms of rate flexibility. The rules contemplate an increasing
level of flexibility on a city-by-city basis as competitors have facilities in
place to compete for local exchange services in those markets. Once such
facilities attain 50% coverage the rules contemplate only minimal regulation of
carrier access offerings. In two orders released on December 24, 1996, and May
16, 1997, the FCC made major changes in the interstate access charge structure.
The FCC removed restrictions on ILECs' ability to lower access charges and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. The May 16th order increased the
costs that price cap LECs recover through monthly, non-traffic sensitive access
charges and decreased reliance on traffic-sensitive charges. In the May 16th
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules that may grant price cap
LECs increased pricing flexibility if the ILEC demonstrates that it faces
increased competition (or potential competition) in relevant markets. The manner
in which the FCC implements this approach to lowering access charge levels could
have a material adverse effect on our ability to compete in providing interstate
access services. On appeal, the court upheld the FCC's May 16th order in a
decision issued on August 19, 1998.
Under the 1996 Act, RBOCs are currently prohibited from providing
inter-LATA telecommunication services until they can demonstrate that they have
opened their local markets to competition. Bell Atlantic in New York received
such approval in December 1999. RBOCs are reported to have made substantial
progress in achieving compliance with the requirements for such approvals and
one or more RBOCs may receive inter-LATA approval in some states within the next
year. In anticipation of receiving inter-LATA approval, certain RBOCs have made
investment in fiber providers that compete with us, e.g., Qwest and Williams. If
regulators grant widespread inter-LATA approvals, we could be adversely affected
through added competition because of these regulatory approvals.
Reciprocal Compensation. All ILECs and CLECs must complete calls originated
by other carriers under reciprocal compensation arrangements. That is, the LEC
terminating a local call is entitled to payment from the LEC originating a call.
Charges assessed by the ILECs for terminating calls originated on a CLEC's
network must be based on a reasonable approximation of additional cost or
through mutual exchange of traffic without explicit payment. The FCC determined
that Internet traffic is interstate in nature, not local, and has initiated a
proceeding to determine appropriate carrier-to-carrier compensation. At the same
time, the FCC declined to overturn a multitude of state decisions requiring
ILECs to pay CLECs compensation for delivering Internet traffic to ISPs. The
FCC's decision is on appeal, and ILECs are expected to ask states or federal
courts to reverse the existing state determinations.
Regulation of Cable
The FCC has the responsibility under the Act Relating to the Landing and
Operation of Submarine Cables in the United States, 47 U.S.C. ss.ss. 34-39
("Cable Landing Act"), to issue licenses for the landing and operation of
submarine cables in the United States. The FCC routinely grants cable landing
licenses to applicants, similar to us, from WTO Member countries subject to U.S.
State Department approval. However, applicants must disclose the extent to which
they are owned or controlled by non-U.S. entities. Although the FCC retains the
right to restrict foreign ownership of cable landing licenses that raise
national security concerns, it has not yet done so. We already hold one
submarine cable landing license and believe that the FCC is unlikely to restrict
our ownership of additional cable landing licenses despite our foreign
ownership. Nevertheless, there can be no assurance that the FCC would not deny,
or condition, any application by us to provide common carrier services. No later
than 90 days prior to construction of the cable, however, applicants for cable
landing licenses must also provide ownership information with respect to the
cable landing station. The FCC may restrict non-U.S. ownership of cable landing
stations to protect the national security of the United States. The construction
of new submarine cable systems is categorically excluded from environmental
processing rules.
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State
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
entity from providing any interstate or intrastate telecommunications service.
In addition, under current FCC policies, any dedicated transmission service or
facility that is used more than 10% of the time for interstate or foreign
communication is generally subject to FCC jurisdiction rather than state
regulation.
Despite these prohibitions and limitations, telecommunications services are
subject to various state regulations. Among other things, the states may:
o require the certification of telecommunications service providers,
o regulate the rates of intrastate offerings and the terms and
conditions of both intrastate and certain interstate service
offerings, and
o adopt regulations necessary to preserve universal service, ensure the
continued quality of communications services, safeguard the rights of
consumers, and protect public safety and welfare. Accordingly, state
involvement in telecommunications services may be substantial.
In addition, state law may not recognize "private carriage" and, therefore,
even if certain of our offerings are treated as "private carriage" at the
federal level, they may be regulated as telecommunications or common carrier
services at the state level. At present, we, through various subsidiaries, have
tariffs on file with , and/or has obtained various certificates of operating
authority from, approximately 25 states that were necessary under state laws to
gain authorizations needed to operate as a carrier or to construct fiber
facilities in those states, even though a company does not operate as a common
carrier. Those tariffs provide that prices, terms and conditions of an offering
will be set based upon individual determinations for each customer. These
tariffs may be subject to challenge, but usually are not. None of our tariffs
has been changed to date. Various state regulators may attempt to regulate the
Company's rates or practices, but generally, state regulators do not actively
regulate the offerings of non-dominant carriers such as us.
The state regulatory environment varies substantially from state to state.
For example, our pricing flexibility for products or services which are
intrastate in nature may be limited by regulation in some jurisdictions. In
addition, in arbitrating interconnection agreements under the 1996 Act between
ILECs and their potential competitors, some state commissions have considered
whether fiber should be an unbundled network element. The New York Public
Service Commission determined that it would not require NYNEX Corporation to
provide fiber as an unbundled network element. State commissions in Florida,
Maryland, North Carolina, and Virginia have either refused to require the ILECs
to offer fiber to competitors or have stated that the issue would be addressed
at a later time. On the other hand, state commissions in Illinois,
Massachusetts, Arizona, Georgia, Minnesota, Ohio, Oregon and Tennessee have
found fiber to be a network element and required the ILECs to offer it on an
unbundled basis to CLECs. There can be no assurance that these requirements, and
the associated pricing methodologies, where applicable will not reduce the
demand for our offerings.
Local
In addition to federal and state laws, local governments exercise legal
authority that may affect our business. For example, some local governments
retain the ability to license public ROW, subject, however, to the federal
limitation that local authorities may not prohibit entities from entering the
telecommunications market. Compliance with local requirements may delay and
increase the costs of our use of public ROW. Accordingly, these requirements
could impose substantial burdens on us.
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Canada
Companies that own or operate transmission facilities in Canada used to
offer telecommunications services to the public for compensation, are classified
as "telecommunications common carriers" ("TCCs") under Canada's
Telecommunications Act and, with the exception of telecommunications carriers in
the Province of Saskatchewan, are subject to the regulatory authority of the
Canadian Radio-television and Telecommunications Commission ("CRTC"), Canada's
federal telecommunications regulator. Unlike the dual jurisdictional arrangement
in the United States, there is no equivalent in Canada to U.S. state regulation
of telecommunications services. Consequently, both the local and long distance
operations of Canadian facilities-based telecommunications service providers are
subject to exclusive CRTC regulatory jurisdiction.
Historically, the Canadian telecommunications industry has been
characterized by a number of regionally-based ILECs. In a series of decisions
beginning in 1979, the CRTC has gradually opened each telecommunications
services market in Canada to competition, including the private line voice and
data markets in 1979, the enhanced and cellular services markets in 1984, the
domestic long distance voice market in 1992, the local telephony market in 1997,
and the international long distance and local pay telephone markets in 1998.
The CRTC has the power to forbear from regulating the services of Canadian
carriers where it finds that a telecommunications service or class of service is
or will be subject to competition sufficient to protect the interests of users.
Some Canadian carriers, such as the ILECs, are classified by the CRTC as
"dominant" because of their market power and control over the supply of local
services and certain long distance services. Carriers classified as
"non-dominant" by the CRTC are subject to less regulation than dominant carriers
and include facilities-based long distance providers such as AT&T Canada and
Call-Net Technology Services Inc. and CLECs, such as MetroNet Communications
Group Inc. (now AT&T Canada). The CRTC has forborne from regulating the long
distance services, private line services, dedicated access services and local
switched telephony services provided by carriers that are not affiliated with
the ILECs. In December 1997, the CRTC also forbore from regulating discount long
distance services and certain private line services offered by the ILECs finding
them to no longer possess significant market power in these market segments.
We intend to retain fiber assets in our network which will be available for
sale, IRU or lease. In providing dark or lit fiber on a leased basis, we are
subject to the provisions of the Telecommunications Act and to regulation by the
CRTC. However, in a 1995 decision, the CRTC concluded that telecommunications
services provided by non-dominant carriers should not be subject to extensive
regulation. We believe that all of the telecommunications services that we will
provide qualify under this decision as non-dominant carrier services. As such,
we do not believe that our operations in Canada will be subject to extensive
regulation by the CRTC. However, the CRTC's view as to the need for and extent
of regulation over non-dominant carriers may change.
The CRTC is considering reform of the current contribution regime. The
CRTC's contribution regime was originally established in 1992 as a means of
ensuring that rates for local residential telephone service remain affordable.
Under the regime, providers of certain types of long distance voice and data
services are required to pay a subsidy or "contribution" on each minute of
traffic that is originated or terminated on local switched telephone networks or
on cross-border or overseas access circuits. These contribution payments are
pooled within each ILEC territory and are paid out to ILECs and CLECs serving
residential local customers, based on the number of residential network access
services they serve and the level of the subsidy available in the rate band
being served. On March 1, 1999, the CRTC initiated a proceeding to consider
possible reforms to the current contribution mechanism. In the public notice
that initiated the proceeding, the CRTC invited interested parties to submit
proposals on other mechanisms which could be used to collect contribution.
Although, this public notice proceeding is not yet closed, some parties in the
proceeding have advocated that the current contribution regime be converted into
a revenue-based regime under which contribution would be paid on a percentage of
a telecommunications service provider's revenues (regardless of the types of
services offered by the service provider), rather than on certain types of
telecommunications traffic.
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We do not believe that our activities in Canada would be subject to the
requirement to pay contribution under the current contribution regime, except
with the possible exception of fiber which we may lease on a "lit" basis.
However, given that the current contribution regime is under review by the CRTC,
there can be no assurance that we would be exempt from the requirement to pay
contribution in the future, particularly if the CRTC decides to adopt a
revenue-based regime.
Restrictions on Foreign Ownership
Under the Canadian ownership provisions of the Telecommunications Act, a
"Canadian carrier" is not eligible to operate as a Canadian telecommunications
common carrier unless it is Canadian-owned and controlled. Furthermore, no more
than 20% of the members of the board of directors of a Canadian carrier may be
non-Canadians, and no more than 20% of the voting shares of a Canadian carrier
may be beneficially owned by non-Canadians. In addition, no more than 33 1/3% of
the voting shares of a non-operating parent corporation holding a Canadian
carrier may be beneficially owned or controlled by non-Canadians and neither the
Canadian carrier nor its parent may be otherwise controlled in fact by
non-Canadians.
To the extent that we make available the retained fiber in our network in
Canada on an IRU or lease basis, we will be subject to the Canadian ownership
provisions of the Telecommunications Act. Although we believe that we are in
compliance with the relevant legislation, there can be no assurance that a
future CRTC determination or events beyond our control will not result in us
ceasing to comply with the ownership provisions of the Telecommunications Act.
Should this occur, our ability to operate as a Canadian carrier under the
Telecommunications Act could be jeopardized and our business could be materially
adversely affected.
International Traffic
On October 1, 1998, the CRTC issued Telecom Decision CRTC 98-17 ("Decision
98-17") which established a framework for competition in Canada's international
telecommunications services market to coincide with the Government of Canada's
decision to terminate the monopoly of Teleglobe Canada Inc. over
telecommunications facilities linking Canada to overseas destinations. In that
decision, the CRTC determined that a party acquiring an IRU interest in an
international submarine cable would not necessarily fall within the definition
of a telecommunications common carrier. As a result, acquirors of IRUs in
international submarine cables need not be Canadian-owned and controlled. We
believe that this determination by the CRTC will create greater opportunities
for foreign owned telecommunications service providers to purchase IRUs and
other types of wholesale bandwidth capacity in the Canadian portion of our
network. However, given the fact that the CRTC's findings in Decision 98-17 were
limited to IRU interests held in international submarine cables, as well as the
fact that IRU arrangements can involve various degrees of ownership and control
over fiber facilities, there can be no assurance that holders of IRUs acquired
in domestic fiber facilities, including those constructed by us, would be exempt
from the Canadian ownership provisions contained in the Telecommunications Act.
In addition to determining the status of IRU under the Telecommunications
Act, the CRTC made a determination in Decision 98-17 to eliminate Canada's
"bypass" rules, which had prohibited the routing of Canada-Canada and
Canada-overseas traffic through the United States. Effective October 1, 1998,
telecommunications service providers and users in Canada may route basic
telecommunications traffic which either originates or terminates in Canada
through the United States. Given the fact that a decision to bypass Canadian
network facilities may be based on a variety of factors, including, but not
limited to, cost, technology, traffic patterns, and the availability of suitable
facilities, there is a risk that prospective customers for segments of the
network in Canada may choose to purchase, lease or obtain IRU in dark or lit
fiber in the United States rather than in Canada. There can be no assurance that
we will be able to attract and retain a sufficient number of customers for the
Canadian portions of our network, which could have a material adverse effect on
our business, financial condition and results of operations.
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CRTC Proceedings
On March 19, 1999, we filed an application with the Canadian
Radio-television and Telecommunications Commission seeking orders under the
Telecommunications Act which would permit us to continue to have access to
street crossings and other municipal properties in the City of Vancouver for the
purpose of constructing, testing and operating our network facilities within
that city. In an answer to our application, the City of Vancouver took the
position that we were not eligible to apply to the Canadian Radio-television and
Telecommunications Commission for relief under the Telecommunications Act. On
the same day, the City filed an application with the Canadian Radio-television
and Telecommunications Commission requesting orders which would permit certain
of the carriers that have obtained indefeasible rights-of-use from us to
continue to construct, operate and maintain those facilities on a zero rate,
interim basis, until the Canadian Radio-television and Telecommunications
Commission has made a determination on the appropriate terms, conditions and
compensation that should be payable to the City for the use of municipal
property. In a ruling issued on October 27, 1999, the Canadian-Radio-television
and Telecommunications Commission granted the City's request for an interim
order directing each of the carriers that obtained indefeasible rights-of-use
from us to pay the City $1.00 for the right to access the City's municipal
property during the period of time before the Canadian-Radio-television and
Telecommunications Commission makes a determination for the appropriate terms,
conditions and compensation that should be payable to the City for the use of
municipal property. On December 3, 1999, the Canadian-Radio-television and
Telecommunications Commission issued a public notice which invited interested
parties to comment on what the terms and conditions of access by Canadian
carriers to municipal property in Vancouver should be for the purposes of
constructing, maintaining and operating transmission lines. We anticipate that
the Canadian-Radio-television and Telecommunications Commission will render a
decision on our March 19, 1999 application against the City at the same time
that it renders a decision on the matters raised by its public notice
proceeding. Failure to obtain the orders we have requested in our initial
application to that Canadian Radio-television and Telecommunications Commission
could have a material adverse effect on our business, financial condition and
results of operations.
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DESCRIPTION OF WFI-USA AGREEMENTS
On December 31, 1998, we increased our percentage shareholding in WFI-USA
from 50% to 75% under the terms of an agreement between, among others, Ledcor,
Michels, Mi-Tech, WFI-USA and us. To facilitate the purchase of the additional
25% interest, we funded the reimbursement by WFI-USA to Mi-Tech of a note for
shareholder advances in the aggregate amount of $10,188,230. A note for similar
advances by us in the amount of $3,915,000 was surrendered in exchange for the
issuance of additional shares of WFI-USA to us. We, Ledcor, Ledcor Industries
Inc., WFI-USA, WFNI, Mi-Tech and Michels entered into a shareholders agreement
(the "Shareholders Agreement") in which WFNI hired all Mi-Tech employees and
assumed all leases for facilities, office equipment and vehicles and other
obligations and liabilities of Mi-Tech, in each case located in Denver and
associated with the operations of WFNI. WFI-USA agreed to indemnify, release and
hold Mi-Tech harmless for any costs or liabilities related to these obligations
and agreements concerning these transactions.
Commitments of Michels and Us
Each of Michels and us have committed to support and assist WFI-USA in its
strategy to become a developer of fiber optic systems in the continental United
States. We will act as prime project construction manager for all projects of
WFI-USA, except to the extent that WFI-USA identifies an alternative source of
appropriate services local to the particular ROW to be developed for that
project. Any construction services provided by Michels or us to WFI-USA shall be
provided at a cost to WFI-USA equal to the actual cost of providing these
services plus 25%. Despite this commitment to support and assist, neither
Michels nor us will be required (1) to provide any services until WFI-USA has
used its best efforts to exhaust any and all other alternatives or (2) to
suspend or otherwise delay any work on any other project for any customer in
order to provide these services. Furthermore, Michels' and our respective
obligations to provide these services will be subject to the availability of
necessary personnel, equipment and supplies.
Exclusivity; Non-Competition
The parties to the Shareholders Agreement agreed that for a period of four
years, neither they nor their affiliates would compete directly with WFI-USA in
the continental United States, except for any segment which may be constructed
on ROW currently owned by CN or its subsidiaries, including IC.
Transfer of Shares; Put Option of Mi-Tech
The Shareholders Agreement restricts both Michels and us from selling,
transferring, assigning or otherwise encumbering or divesting any interest in or
control of WFI-USA to a third party. In addition, the Shareholders Agreement
provides for "tag-along" rights to Michels in the event of a sale by us of our
shares of WFI-USA. The Shareholders Agreement further provides that (1) in the
event of certain proposed transfers which would result in a change of control of
WFI-USA or (2) after the ten-year anniversary of the Shareholders Agreement,
Michels has the option to require WFI-USA to purchase all of the shares of
WFI-USA stock owned by Mi-Tech or its affiliates at the fair market value of the
shares. If Michels exercises the option described in (2) above, we can elect to
sell all of the shares or assets of WFI-USA whereupon WFI-USA will not be
required to purchase the shares. If we decide to sell WFI-USA in these
circumstances, the Shareholders Agreement contains certain provisions relating
to the price at which shares or assets of WFI-USA may be sold.
Additional Fiber Options
The Shareholders Agreement grants WFI-USA an option to purchase from
Mi-Tech 24 strands of dark fiber along the existing Montreal to Albany fiber
optic route owned by Mi-Tech and its affiliates. The Shareholders Agreement also
grants WFI-USA an option to purchase from us 24 strands of dark fiber along the
IC fiber optic build.
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Other Provisions
If we commence a public offering of our common stock having an aggregate
value of at least $20 million, Mi-Tech has the option to convert all (but not
part) of its shares of WFI-USA stock into shares of our stock to be offered in
that public offering. The number of shares that Mi-Tech and its affiliates would
receive in a conversion would be the pre-offering fair market value of their
ownership interest in WFI-USA, divided by the offering price per share of stock
in that offering. The pre-offering fair market value would be determined by a
single appraiser selected by WFI-USA and Mi-Tech. If they could not agree on a
single appraiser, WFI-USA and Mi-Tech would each select an appraiser and the
pre-offering fair market value would be determined by averaging the fair market
values assigned by the two appraisers. In connection with this conversion,
Mi-Tech will be granted certain registration rights as provided in the
Shareholders Agreement.
The Shareholders Agreement provides that the Board of Directors of WFI-USA
will initially consist of up to 10 directors, three of whom will be appointed by
Mi-Tech and the balance of whom will be appointed by us.
Funding Commitments
The Shareholders Agreement provides that we, or our affiliates will provide
the capital to fund WFI-USA's operations. Mi-Tech has retained an option to
contribute additional capital to WFI-USA to fund projects outside its scope of
business.
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DESCRIPTION OF IC AND CN AGREEMENTS
As of May 28, 1999, we formed, jointly with IC and CN, several subsidiaries
in which IC or CN own 25% equity interests. These subsidiaries are parties to
licenses of the ROW over which IC and CN operate their rail transportation
system. We are currently in negotiations to acquire the minority interest in
WFI-USA in exchange for the issue of our Shares. We are currently in
negotiations to acquire the minority interests of CN and IC in exchange for the
issue of our Shares.
Scope and Duration of License
Beginning May 28, 1999, IC and CN have granted some of our subsidiaries the
right to construct and operate fiber optic cable telecommunications facilities
upon almost all of the railroads' ROW. The licenses terminate on the first to
occur of May 28, 2059, the discontinuance by our subsidiaries of the use of the
facilities or upon the parties' mutual agreement.
Exclusivity
Generally, these licenses are exclusive, subject to (1) legal requirements,
(2) the rights of parties having existing telecommunications systems on the ROW
and (3) construction delays not having occurred. In addition, in some cases, and
subject to our right of first refusal, if either IC or CN receive an offer from
third parties to construct fiber optic telecommunications facilities on
specified portions of the ROW, that have not been previously designated as
portions on which we intend to construct, the railroads may grant a license to
such third parties.
Consideration
As consideration for the license, our subsidiaries have agreed to pay a
license fee for each facility equal to a per mile or per kilometer rate, as
applicable, multiplied by the length of the ROW upon which such facility is
constructed. This fee is payable from the cash flow relating to each such
facility, net of marketing, operations, maintenance, financing and other costs.
As additional consideration for the grant of the license, IC and CN were granted
equity in our subsidiaries and the subsidiaries have agreed to grant (for
railroad purposes only), (1) two strands of fiber optic cable along the entire
length of the facilities to major traffic centers to IC and (2) four strands of
fiber optic cable between Quebec City and Halifax to CN. At the request and
expense of the railroads, our subsidiaries will be required to light these
fibers.
Security Interest
In order to secure the license fee for each facility, our subsidiaries will
grant to IC or CN, as applicable, a first priority lien upon and security
interest in such facility and related property. No lien on any one facility will
secure the license fee owed on another facility. Furthermore, these liens are
subordinated to any security granted for project financing if (1) the aggregate
amount of the financing does not exceed 65% of the approved budgeted cost of
constructing the facility and (2) the project financing is provided on a
stand-alone basis, is not cross-collateralized and can not accelerate other
obligations of the subsidiary by cross-default.
Sublicensing
Our subsidiaries generally have the right to sublicense, and permit its
sublicensees to sublicense, all or portions of the facilities on the ROW to
third parties for a term of up to 40 years.
Equity Interests
IC and CN, as long as they own 10% of the respective subsidiaries described
above, have the right to appoint 25% of the members of each Board of the company
in which they hold their respective interest. Further-
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more, modifying the bylaws, settling litigation, granting of security interests
and entering into contracts not in the ordinary course for more than $100,000
are examples of some activities which require unanimous consent of IC or CN or
their representatives. We have also agreed to provide financing for the
construction of fiber optic cable facilities along the ROW or guarantee, to the
extent necessary, any project financing with respect to such construction. These
agreements also include customary provisions regarding the termination and the
transfer of equity interests, as well as provisions which grant IC and CN the
right and obligation to exchange their interests for shares in WFI in the event
that we make an initial public offering of our common stock. The number of
shares that IC and CN would receive in a conversion would be the pre-offering
fair market value of their respective ownership interests in the subsidiaries
described above, divided by the offering price per share of stock in that
offering.
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DESCRIPTION OF OUR RECENTLY COMPLETED
PRIVATE EQUITY PLACEMENTS
On September 9, 1999, we completed a private placement of our convertible
preferred shares for $345 million to affiliates of Tyco International Ltd. and
to Providence Equity Partners Inc., DLJ Merchant Banking II Inc. and GS Capital
Partners III, LP (collectively, the "Private Investor Group"). We will use $300
million of the proceeds from the equity placements to provide funding for our
subsidiary which is undertaking our Hibernia project while the balance of $45
million was used to repurchase certain of our shares held by an affiliate of our
parent, Worldwide Fiber Holdings Ltd. Concurrent with the completion of the
equity placements, we also reorganized our share capital.
Share Capital Reorganization
Our share capital now consists of four classes of shares: Class A
Non-Voting Shares; Class B Subordinate Voting Shares; Class C Multiple Voting
Shares and Preferred Shares. The Preferred Shares have been further divided into
three separate series of Preferred Shares: Series A Non-Voting Preferred Shares;
Series B Subordinate Voting Preferred Shares; and Series C Redeemable Preferred
Shares. Only the Class B Subordinate Voting Preferred Shares, Class C Multiple
Voting Shares and Series B Subordinate Voting Preferred Shares carry rights to
vote in all circumstances. In addition, while the Class B Subordinate Voting
Shares and Series B Subordinate Voting Preferred Shares carry one vote per
share, the Class C Multiple Voting Shares carry voting rights of 20 votes per
share. On September 27, 1999, 4.5 million of our Class C Multiple Voting Shares
were issued to affiliates of our parent in connection with our acquisition of
certain fiber optic network assets. See "Transactions with our Parent -
Acquisition of Fiber Optic Network Assets".
The Private Investor Group purchased Series A Non-Voting Preferred Shares.
Our parent, through its affiliates, presently holds shares which provides it
with over 99% of the votes attached to our shares. However, the Private Investor
Group was provided with certain supermajority rights in the shareholders
agreement (the "Shareholders Agreement") entered into concurrently with the
closing of the private equity placements.
Attributes of the Series A Non-Voting Preferred Shares
The attributes of the Series A Non-Voting Preferred Shares purchased by the
Private Investor Group, which are found in the share rights of our Articles of
Incorporation, include:
o The Series A Non-Voting Preferred Shares are convertible at the option
of the holder into Class A Non-Voting Shares on a one-for-one basis
provided that the conversion ratio will be adjusted upward by 6% per
annum if, by September 9, 2000, we have not completed an initial
public offering of $150 million at a price of at least 300% of the
Private Investor Group purchase price (a "Qualified IPO").
o The Series A Non-Voting Preferred Shares are convertible at our option
into Class A Non-Voting Shares at the same conversion ratio if a
Qualified IPO has occurred and in certain other circumstances.
o The Series A Non-Voting Preferred Shares are also convertible on a
one-for-one basis into Series B Subordinate Voting Preferred Shares
which are, in turn, convertible into Class B Subordinate Voting Shares
on the same terms upon which our Series A Non-Voting Preferred Shares
are convertible into Class A Non-Voting Shares.
o The Series A Non-Voting Preferred Shares which have not previously
been surrendered for conversion must be redeemed by us on November 2,
2009. We must redeem the Series A Non-Voting
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Preferred Shares at their market price paid in (1) cash up to a set
liquidation value and (2) Class A Non-Voting Shares for any excess of
market price over liquidation value.
o The holders of our Preferred Shares have anti-dilution protection
which is customary for convertible securities.
o The holders of our Preferred Shares receive a preference over other
classes of shares upon our liquidation, dissolution or winding-up.
The ability of the Private Investor Group to convert their Preferred Shares
into our shares which vote in all circumstances is also limited by the
provisions of the Shareholders Agreement as well as the "constrained share
provisions" contained in our share rights which are designed to ensure that we
will continue to comply with the foreign ownership restrictions under the
Telecommunications Act (Canada). Specifically, in order for holders of the
Series A Non-Voting Preferred Shares to convert their shares into voting shares,
there must have been either a public offering of voting shares by us or our
shareholders having gross proceeds of at least $150 million, we must have issued
or distributed any additional voting shares (with certain exceptions) or there
must have been an elimination of the restrictions on ownership of voting shares
and on the control in fact of the Company by non-Canadians under the
Telecommunications Act (Canada) and the rules and regulations promulgated
thereunder. These actions are not in the control of the holders of the Series A
Non-Voting Preferred shares, nor do we contemplate or anticipate these actions
within the next 60 days. In addition, under the terms of the Purchase Agreement
for the Series A Non-Voting Preferred Shares, additional anti-dilution
protection was provided to the Private Investor Group which is triggered upon
the issue of options to purchase our shares as well as upon the issue of our
shares to Michels, CN or IC in exchange for the transfer of their interest in
our subsidiaries. The Series A Non-Voting Preferred Shares represent a minority
of our shares on a fully-diluted basis.
Shareholders Agreement
In connection with the private placement to the Private Investor Group, we
entered into a Shareholders Agreement with the Private Investor Group, our
parent and its affiliate and our directors. The Shareholders Agreement generally
provides for:
o prescribed board of directors composition.
o "supermajority" rights with respect to prescribed matters.
o restrictions on the issue and conversion of our shares.
o other matters including restrictions on transferability.
The Shareholders Agreement specifically restricts the ability of the
holders of the Series A Preferred Shares to convert their shares into voting
shares. See "--Attributes of the Series A Non-Voting Preferred Shares."
Board of Directors Composition
Under the Shareholders Agreement, each of the four members of the Private
Investor Group is entitled to name one person to our Board of Directors and our
Board must consist of not more than 18 directors. Messrs. Creamer, Garvey,
Gheewalla and Rush were nominated pursuant to this provision.
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Supermajority Rights of the Private Investor Group
Until we complete an initial public offering of at least $150 million, we
must not undertake certain major transactions if three of the four members of
the Private Investor Group provide us with a notice of their election to
disapprove of that major transaction. Major transactions subject to the
supermajority rights include: mergers or other similar business combinations;
acquisitions or investments having a value greater than $200 million, a
significant change in the nature of our business; a sale of our assets outside
the ordinary course of business with a value of $100 million or more;
declaration of dividends or redemption or repurchase of shares; issuing shares
with an aggregate value of greater than $100 million; certain non-arm's length
transactions; amending our corporate charter; incurring indebtedness of $100
million or more; approval of our annual financing and capital plans; issuing our
shares below a threshold price; and terminating our senior officers.
Obligations Relating to Share Issuances and Conversion
Under the Shareholder's Agreement, there are a number of provisions which
impact our ability to issue shares. We cannot issue shares on a private basis to
a person who would then own more than 1% of our shares without that person
agreeing to be bound by the Shareholders Agreement. Except for certain
"grandfathered" share issuances, until the holders of the Series A Non-Voting
Preferred Shares convert their shares to a non-Preferred share class, our share
issuances are subject to pre-emptive rights in favour of the holders of the
Preferred Shares. In addition, until the Telecommunications Act (Canada) foreign
ownership restrictions are amended, we may not issue any shares which carry a
right to vote in all circumstances except for certain grandfathered share
issuances. However, the holders of the Series A Non-Voting Preferred Shares
cannot convert into our shares which carry a right to vote in all circumstances
unless the foreign ownership restrictions in the Telecommunications Act (Canada)
are eliminated or concurrently with or after an initial public offering of
shares with voting rights of at least $150 million.
Additional Provisions
The Shareholders Agreement contains a number of provisions which limit the
transfer of our shares by all shareholders. These include an absolute
prohibition, subject to certain exceptions, on the transfer of shares during a
one year lock-up period, rights of first offer, tag along rights and bring along
rights. Finally, if we have not completed a Qualified IPO by September 9, 2003,
certain of the Private Investor Group may demand an auction of the Company.
Mr. Maffei
On December 22, 1999, Gregory Maffei purchased 26,080,000 of our Class A
Non-Voting Shares and 4,920,000 of our Class C Multiple-Voting Shares for $77.5
million. To facilitate the sale, we advanced an amount equal to the purchase
price to Mr. Maffei under a limited recourse note maturing on December 22, 2005.
The note will mature, in whole or in part, as a result of the sale of our shares
by Mr. Maffei or Mr. Maffei's ceasing to be employed by us.
We have the right to repurchase certain of Mr. Maffei's shares at the
original purchase price plus the pro rata amount of interest accrued on the note
in the event Mr. Maffei's employment with us is terminated before June 30, 2003.
In addition, Mr. Maffei has the right to require us to repurchase some or all of
his shares not subject to our repurchase right.
Mr. Maffei became our Chief Executive Officer effective January 18, 2000.
Mr. Maffei is entitled to nominate two Directors to our Board.
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THE EXCHANGE OFFER
Purpose and Effect of Exchange Offer
We sold the old notes on July 28, 1999 to the initial purchasers, who
placed the old notes with certain institutional investors. We and the initial
purchasers entered into the registration rights agreement, concerning the
placement of the old notes, under which we agreed, for the benefit of the
holders of the old notes, that we would, at our sole cost, (1) within 90 days
following the original issuance of the old notes, file with the Securities and
Exchange Commission the exchange offer registration statement under the
Securities Act concerning an issue of a series of new notes of Worldwide Fiber
identical in all material respects to the series of old notes and (2) use our
best efforts to cause the exchange offer registration statement to become
effective under the Securities Act within 180 days following the original
issuance of the old notes. Upon the effectiveness of the exchange offer
registration statement, we will offer to the holders of the old notes the
opportunity to exchange their old notes for an equal amount of new notes, to be
issued without a restrictive legend and which may be reoffered and resold by the
holder without restrictions or limitations under the Securities Act. The term
"holder" concerning any note means any person in whose name the note is
registered on our books or any other person who has obtained a properly
completed bond power from the registered holder.
Terms of the Exchange Offer
Upon the terms and subject to the conditions described in this prospectus
and in the accompanying letter of transmittal (which together constitute the
exchange offer), we will accept for exchange old notes that are properly
tendered on or before the expiration date and not withdrawn as permitted below.
The term expiration date means 5:00 p.m., New York City time, on February 22,
2000; but if we, in our sole discretion, extend the period of time during which
the exchange offer is open, the term expiration date means the latest time and
date to which the exchange offer is extended. We may choose to extend the period
of time during which the exchange offer is open if we do not receive
substantially all of the old notes in the exchange offer.
As of the date of this prospectus, $500,000,000 aggregate principal amount
of old notes is outstanding. This prospectus, along with the letter of
transmittal, is first being sent on or about January 25, 2000, to all holders of
old notes known to us. Our obligation to accept old notes for exchange under the
exchange offer is subject to certain customary conditions as described below
under "--Certain Conditions to the Exchange Offer."
We expressly reserve the right, at any time and from time to time, to
extend the period of time during which the exchange offer is open, and
therefore, to delay acceptance for exchange of any old notes, by giving oral or
written notice of an extension to the holders of the old notes as described
below. During the extension, all old notes previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us. Any old
notes not accepted for exchange for any reason will be returned without expense
to the tendering holders of old notes as promptly as practicable after the
expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be in denominations of $1,000
or any integral multiple of $1,000.
We expressly reserve the right to amend or terminate the exchange offer,
and not to accept for exchange any old notes not previously accepted for
exchange, upon the occurrence of any of the conditions to the exchange offer
specified below under "--Certain Conditions to the Exchange Offer." We will give
oral or written notice of any extension, amendment, non-acceptance or
termination to the holder of the old notes as promptly as practicable, the
notice in the case of any extension to be issued by a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
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Procedures for Tendering Old Notes
If you are a registered holder of old notes you may tender your old notes
in the exchange offer. If you tender old notes to Worldwide Fiber as described
below, our acceptance of your old notes will constitute a binding agreement
between you and Worldwide Fiber upon the terms and subject to the conditions
described in this prospectus and in the accompanying letter of transmittal.
Except as described below, if you wish to tender old notes for exchange through
the exchange offer, you must transmit either (1) a properly completed and duly
executed letter of transmittal, including all other documents required by the
letter of transmittal, to HSBC Bank USA, the exchange agent, at one of the
addresses listed below under "Exchange Agent" on or before the expiration date
or (2) if you tender your old notes under the procedures for book-entry transfer
described below, you may transmit an agent's message to the exchange agent
instead of the letter of transmittal, in either case on or prior to the
expiration date. In addition, either
o certificates for the old notes must be received by the exchange agent
along with the letter of transmittal, or
o a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of the old notes, if this procedure is available, into
the exchange agent's account at the Depository Trust Company (the
"Book-Entry Transfer Facility") under the procedure for book-entry
transfer described below, along with the letter of transmittal or
agent's message, must be received by the exchange agent before the
expiration date, or
o the holder must comply with the guaranteed delivery procedures
described below.
The term "agent's message" means a message, transmitted to the Exchange
Agent, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from you that you have received and agree to be bound by
the letter of transmittal and that Worldwide Fiber may enforce the letter of
transmittal against you.
The method of delivery of old notes, letters of transmittal or the agent's
message and all other required documents is at your election and risk. If you
mail these documents, we recommend that you use registered mail, properly
insured, with return receipt requested. Always allow sufficient time to assure
timely delivery. Do not send letters of transmittal or old notes to the company.
You may request your respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for you.
If your old notes are registered in the name of a broker, dealer,
commercial bank, trust company, or other nominee and you wish to tender your old
notes in the exchange offer you should contact the registered holder promptly
and instruct the registered holder to tender on your behalf. If you with to
tender on your own behalf, you must, before completing and executing the letter
of transmittal and delivering the old notes, either make appropriate
arrangements to register ownership of the old notes in your name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders") must be guaranteed (see "--Guaranteed
Delivery Procedures") unless the old notes surrendered for exchange are tendered
(1) by a registered holder of the old notes who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the letter of transmittal or (2) for the account of an Eligible Institution (as
defined below). If signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, these guarantees must be by a
financial institution (including most banks, savings and loan associations and
brokerage houses) that is a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Program or the Stock
Exchange Medallion Program (collectively, "Eligible Institutions"). If old notes
are registered in the name of a person other than a signer of the letter of
transmittal, the old notes surrendered for exchange must be endorsed by or be
accompanied by a written instru-
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ment or instruments of transfer or exchange in satisfactory form as determined
by us in our sole discretion, duly executed by the registered holder exactly as
the name or names of the registered holder or holders appear on the old notes
with the signature on it guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of old notes tendered for exchange will be determined by
us in our discretion, which determination shall be final and binding. We reserve
the absolute right to reject any and all tenders of any particular old notes not
properly tendered or the acceptance of which might, in our judgment or in the
judgment of our counsel, be unlawful. We also reserve the absolute right to
waive any defects or irregularities or conditions of the exchange offer as to
any particular old notes either before or after the expiration date (including
the right to waiver the ineligibility of any holder who seeks to tender old
notes in the exchange offer). Our interpretation of the terms and conditions of
the exchange offer as to any particular old notes either before or after the
expiration date (including the letter of transmittal and its instructions) shall
be final and binding on all parties. Unless waivered, any defects or
irregularities in connection with tenders of old notes for exchange must be
cured within a reasonable period of time as we shall determine. None of
Worldwide Fiber, the exchange agent or any other person shall be under any duty
to notify of any defect or irregularity of any tender of old notes for exchange,
nor shall any of them have any liability for failure to notify.
By tendering old notes for exchange, you represent to us that, among other
things:
o the new notes acquired through the exchange offer are being acquired
in the ordinary course of business of the person receiving the new
notes, whether or not this person is the holder, and
o that neither the holder nor the other person has any arrangement or
understanding with any person to engage or participate in a
distribution of the new notes.
If any holder or an other person is an affiliate, as defined under Rule 405
of the Securities Act, of us or is engaged in or intends to engage in, or has an
arrangement or understanding with any person to participate in, a distribution
of the new notes to be acquired through the exchange offer, the holder or the
other person (1) may not rely on the applicable interpretation of the staff of
the Securities and Exchange Commission and (2) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. Each broker-dealer that receives new notes for its own
account in exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the new notes. See "Plan of Distribution." The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not have admitted that it is an "underwriter" within the
meaning of the Securities Act.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See "--Certain Conditions to the Exchange Offer" below. For purposes of
the exchange offer, we will be considered to have accepted properly tendered old
notes for exchange when we have given oral or written notice of it to the
exchange agent.
For each old note accepted for exchange you will receive a new note having
a principal amount equal to that of the surrendered old note. Accordingly,
registered holders of new notes on the relevant record date for the first
interest payment date following the consummation of the exchange offer will
receive interest accruing from the most recent date of which interest has been
paid on the old notes or, if no interest has been paid, from July 28, 1999. Old
notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the exchange offer. Holders whose old notes are accepted
for exchange will not receive any payment of accrued interest on these old notes
otherwise payable on any interest payment date for which the record date occurs
on or
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after the completion of the exchange offer. Old notes not tendered or not
accepted for exchange will continue to accrue interest from and after the date
of the completion of the exchange offer.
In all cases, issuance of new notes for old notes that are accepted for
exchange through the exchange offer will be made only after timely receipt by
the exchange agent of certificates for these old notes or a timely Book-Entry
Confirmation of these old notes into the exchange agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed letter of
transmittal and all other required documents or, in the case of a Book-Entry
Confirmation, an agent's message. If any tendered old notes are not accepted for
any reason under the terms and conditions of the exchange offer or if old notes
are submitted for a greater amount than the holder desires to exchange, those
unaccepted or non-exchanged old notes will be returned without expense to the
tendering holder of the notes or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at the Book-Entry Transfer
Facility according to the book-entry procedures described below, and any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of old notes by causing the
Book-Entry Transfer Facility under the Book-Entry Transfer Facility's procedures
for transfer. However, although delivery of old notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the letter of
transmittal or facsimile of it, with any required signature guarantees or an
agent's message instead of a letter of transmittal, and any other required
documents, must be transmitted to and received by exchange agent at the
addresses described below under "--Exchange Agent" on or before the expiration
date or the guaranteed delivery procedures described below must be complied
with.
Guaranteed Delivery Procedures
If a registered holder of the old notes desires to tender their old notes
and the old notes are not immediately available, or time will not permit the
holder's old notes or other required documents to reach the exchange agent
before the expiration date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
o the tender is made through an Eligible Institution,
o on or before 5:00 P.M., New York City time, on the expiration date,
the exchange agent receives from the Eligible Institution a properly
completed and duly executed letter of transmittal or a facsimile of
it, and Notice of Guaranteed Delivery, substantially in the form
provided by us, by telegram, telex, facsimile transmission, mail or
hand delivery, setting forth the name and address of the holder of the
old notes and the amount of old notes tendered, stating that the
tender is being made by the delivery of the letter of transmittal and
guaranteeing that within three New York Stock Exchange trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered old notes, in proper form for
transfer, or a Book-Entry Confirmation and any other documents
required by the letter of transmittal will be deposited by the
Eligible Institution with the exchange agent, and
o the certificates for all physically tendered old notes, in paper form
for transfer, or a Book-Entry Confirmation, and any other documents
required by the letter of transmittal will be deposited by the
Eligible Institution within three New York Stock Exchange trading days
after the date of execution of the Notice of Guaranteed Delivery.
Withdrawal of Tenders
Tenders of old notes may be withdrawn at any time before 5:00 P.M., New
York City time, on the expiration date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the exchange agent at one of
the addresses described below under "--Exchange Agent." This notice of
withdrawal must specify the name of the person having tendered the old notes to
be withdrawn, identify the old notes to be withdrawn, including the principal
amount of the old notes, and, where certificates for old notes have been
transmitted, specify
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the name in which the old notes are registered, if different from that of the
withdrawing holder. If certificates for old notes have been delivered or
otherwise identified to the exchange agent, then before the release of these
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless the holder is an
Eligible Institution in which case the guarantee will not be required. If old
notes have been tendered under the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn old notes
and otherwise comply with the procedures of the facility. We will determine all
questions concerning the validity, form and eligibility, including time of
receipt, of the notices. This determination will be final and binding on all
parties. Any old notes so withdrawn will be considered not to have been validly
tendered for exchange and will be returned to the holder of the old notes
without cost to the holder, or, in the case of old notes tendered by book-entry
transfer into the exchange agent's account at the Book-Entry Transfer Facility
maintained with the Book-Entry Transfer Facility for the old notes, as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn old notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or before the expiration date.
Material Conditions to the Exchange Offer
Despite any other provisions of the exchange offer, and subject to our
obligations under the registration rights agreement, we shall not be required to
accept for exchange, or to issue new notes in exchange for, any old notes, and
may terminate or amend the exchange offer, if, at any time before the acceptance
of the new notes for exchange, any of the following events shall occur:
(a) any injunction, order or decree shall have been issued by any court or
any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer;
(b) any change, or any development involving a prospective change, in our
business or financial affairs or any or our subsidiaries has occurred
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or materially impair the contemplated
benefits of the exchange offer to us;
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or materially impair the contemplated
benefits of the exchange offer to us;
(d) any governmental approval has not been obtained, which approval we
shall, in our sole discretion, consider necessary for the completion
of the exchange offer; or
(e) the exchange offer will violate any applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
The above conditions are for our sole benefit and may be asserted by us in
whole or in part at any time and from time to time in our sole discretion. Our
failure at any time to exercise any of the above rights shall not be considered
a waiver of any of these rights and these rights shall be considered ongoing
rights which may be asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any of these old notes, if at the time
any stop order is threatened by the Securities and Exchange Commission or in
effect concerning the registration statement of which this prospectus is a part
or the qualification of the indenture under the Trust Indenture Act of 1939, as
amended.
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The exchange offer is not conditioned on any minimum principal amount of
old notes being tendered for exchange.
Exchange Agent
HSBC Bank USA has been appointed as the exchange agent for the exchange
offer. All executed letters of transmittal should be directed to the exchange
agent at one of the addresses listed below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests or Notices of Guaranteed Delivery should be directed
to the exchange agent addressed as follows:
HSBC Bank USA,
Exchange Agent
By Registered or Certified Mail:
HSBC Bank USA
140 Broadway, 12th Floor
New York, New York 10005-1180
Attention: Corporate Trust Department
By Hand or Overnight Courier:
HSBC Bank USA
140 Broadway, 12th Floor
New York, New York 10005-1180
Attention: Corporate Trust Department
Confirm by Telephone:
(212) 658-6425
Delivery of the letter of transmittal to an address other than one listed
above or transmission of instructions via facsimile other than as listed above
does not constitute a valid delivery of the letter of transmittal.
Resales of the New Notes
Based on positions of the Securities and Exchange Commission described in
Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available July 2, 1993) and K-III Communications
Corporation (available May 14, 1993), and similar no-action letters issued to
third parties, we believe that the new notes issued in the exchange offer to a
holder in exchange for old notes may be offered for resale, resold and otherwise
transferred by any holder of old notes, except for a holder which is an
affiliate of Worldwide Fiber within the meaning of Rule 405 under the Securities
Act, without compliance with the registration and prospectus delivery provisions
of the Securities Act, if the new notes are acquired in the ordinary course of
the holder's business and the holder is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of the new notes. We have not requested or
obtained, and do not intend to seek, an interpretive letter from the staff of
the Securities and Exchange Commission concerning this exchange offer, and
neither we nor the holders of notes are entitled to rely on interpretive advice
provided by the staff of the Securities and Exchange Commission to other
persons, which advice was based on the facts and conditions represented in the
letters. Although there can be no assurance that the staff of the Securities and
Exchange Commission would make a similar determination relating to the exchange
offer, the exchange offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in these letters. If any
holder acquires new notes in the exchange offer to distribute or participate in
a distribution of the new notes, the holder cannot rely on the position of the
staff of the Securities and Exchange Commission described in the above no-action
and interpretive letters and must comply with the registration and prospectus
deliv-
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ery requirements of the Securities Act concerning a secondary resale
transaction, unless an exemption from registration is otherwise available.
Each broker-dealer that receives new notes for its own account through the
exchange offer must acknowledge that it will deliver a prospectus concerning any
resale of these new notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer concerning resales of new
notes received in exchange for old notes where the old notes were acquired by
the broker-dealer as a result of market-making activities or other trading
activities, except for old notes acquired directly from us. We have agreed that,
for a period of 180 days following the completion of the exchange offer, we will
make this prospectus available to any broker-dealer for use with any of these
resales. See "Plan of Distribution." Under the registration rights agreement, we
are required to allow the broker-dealers and other persons, if any, subject to
similar prospectus delivery requirements to use this prospectus concerning the
resale of the new notes.
Fees and Expenses
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telephone or in person by our officers and regular employees and our
affiliates.
We have not retained any dealer-manager relating to the exchange offer and
will not make any payments to brokers, dealers or others soliciting acceptances
of the exchange offer. However, we will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses relating to these services.
We will pay the cash expense incurred for the exchange offer. These
expenses include fees and expenses of the exchange agent and trustee, accounting
and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes through the exchange offer. If, however, certificates representing new
notes or old notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the old notes tendered, or if tendered old notes
are registered in the name of any person other than the person signing the
letter of transmittal, or if a transfer tax is imposed for any reason other than
the exchange of old notes under the exchange offer, then the amount of these
transfer taxes, whether imposed on the registered holder or any other person,
will be payable by the tendering holder. If satisfactory, evidence of payment of
these taxes or exemption from payment of these taxes is not submitted with the
letter of transmittal, the amount of the transfer taxes must accompany the
tender of old notes.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
which is the principal amount as reflected in our accounting records on the date
of the exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer and the unamortized expenses
related to the issuance of the old notes will be amortized over the term of the
new notes.
Regulatory Approvals
We do not believe that we need to obtain any material federal or state
regulatory approvals concerning the exchange offer.
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Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes except that holders who instruct us to register new notes
in the name of, or request that old notes not tendered or not accepted in the
exchange offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax on the
old notes.
Other
Participation in the exchange offer is voluntary and you should carefully
consider whether to accept the terms and conditions of the exchange offer. You
are urged to consult your financial and tax advisors in making your decisions on
what action to take concerning to the exchange offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered old notes under the terms of the exchange offer, we will have
fulfilled a covenant contained in the terms of the old notes and the
registration rights agreement. If you do not tender your old notes in the
exchange offer you will continue to hold these old notes and will be entitled to
all the rights, and limitations applicable to it, under the indenture, except
for the rights under the registration rights agreement, including rights to
receive Additional Interest, which by their terms terminate or cease to have
further effect as a result of the making and completion of the exchange offer.
All untendered old notes will continue to be subject to the restrictions on
transfer contained in the indenture and we do not currently anticipate that we
will register the old notes under the Securities Act. If old notes are tendered
and accepted in the exchange offer, the trading market, if any, for any
remaining old notes could be adversely affected. See "Risk Factors--Failure to
Exchange or Comply with the Exchange Offer--This will result in continuing
transfer restrictions or result in the inability to exchange."
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description the words "we",
"us", "ours" and "Worldwide Fiber" refer only to Worldwide Fiber Inc. and not to
any of its subsidiaries.
The old notes were, and the new notes will be, issued under an indenture
between Worldwide Fiber and HSBC Bank USA, as trustee. The terms of the new
notes are identical in all material respects to the old notes, except that the
new notes have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and will not contain certain provisions
providing for an increase in interest on them under certain circumstances
described in the registration rights agreement, the provisions of which will
terminate upon the completion of the exchange offer. The terms of the Notes
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939 or the TIA.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture and registration rights agreement because they, and not this
description, define your rights as holders of the notes. Copies of the indenture
and registration rights agreement are available as described below under
"Additional Information."
Brief Description of the Notes
The notes:
o are our general unsecured obligations;
o are effectively subordinated in right of payment to all our existing
and future secured Indebtedness to the extent of the value of the
assets securing such Indebtedness and to all liabilities, including
trade payables, of our subsidiaries;
o are equal in right of payment to all our existing and future
unsubordinated, unsecured Indebtedness; and
o will be senior in right of payment to any of our future subordinated
Indebtedness.
The indenture will permit us to assume additional Indebtedness, including
secured Indebtedness.
We conduct substantially all of our operations through our subsidiaries. As
a result, we depend upon the cash flow of our subsidiaries to meet our
obligations, including our obligations under the notes. As of the Issue Date,
all of our subsidiaries will be "Restricted Subsidiaries." However, under the
circumstances described below under the caption "Certain Covenants--Designation
of Restricted and Unrestricted Subsidiaries," we will be permitted to designate
certain of our subsidiaries as "Unrestricted Subsidiaries." Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants in the
indenture. None of our subsidiaries will guarantee the notes.
Principal, Maturity and Interest
We issued old notes with a principal amount of $500.0 million. The notes
are and will be in denominations of $1,000 and integral multiples of $1,000. The
notes will mature on August 1, 2009. Additional Senior Notes (as defined below)
may be issued from time to time, subject to the limitations described under
"Certain Incurrence of Indebtedness and Issuance of Preferred Stock."
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Interest on the notes will accrue at the rate of 12% per year and will be
payable semiannually in arrears on February 1 and August 1, beginning on
February 1, 2000. We will make each interest payment to the holders of record of
notes on the immediately preceding January 15 and July 15.
Interest on the notes will accrue from the date the notes were originally
issued, if interest has already been paid, from the date it was most recently
paid. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to us, we will make all
principal, premium, if any, and interest payments on those notes in accordance
with those instructions. All other payments on the notes will be made at the
office or agency of the Paying Agent and Registrar within the City and State of
New York unless we elect to make interest payments by check mailed to the
holders at their address described in the register of holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as Paying Agent and Registrar. We may change
the Paying Agent or Registrar without prior notice to the holders of the notes,
and we or any of our Subsidiaries may act as Paying Agent or Registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
holder to pay any transfer taxes and similar fees required by law or permitted
by the indenture. We are not required to transfer or exchange any note selected
for redemption. Also, we are not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes, other than concerning the payment of Additional Amounts (as defined
below).
Optional Redemption
Before August 1, 2002, we may on any one or more occasions redeem notes in
an amount equal up to 35% of the sum of (a) the aggregate principal amount of
notes originally issued under the indenture and (b) the total amount of
Additional Senior Notes issued under the indenture at a redemption price of 112%
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the redemption date, with the net cash proceeds of one or more
Qualified Equity Offerings; provided that:
(1) at least 65% of the sum of (a) the aggregate principal amount of notes
originally issued under the indenture and (b) the total amount of
Additional Senior Notes issued under the indenture remains outstanding
immediately after the occurrence of the redemption, excluding notes held by
Worldwide Fiber and our Subsidiaries; and
(2) the redemption must occur within 90 days of the date of the closing of the
Qualified Equity Offering.
Except according to the preceding paragraph or as described below under the
caption "Redemption for Changes in Canadian Withholding Taxes," the notes will
not be redeemable at our option before August 1, 2004.
On or after August 1, 2004 we may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices,
expressed as percentages of the principal amount, described below plus
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accrued and unpaid interest, if any, on the notes to the applicable redemption
date, if redeemed during the twelve-month period beginning on August 1 of the
years indicated below:
Date Percentage
---- ----------
2004.............................................. 106.000%
2005.............................................. 104.000%
2006.............................................. 102.000%
2007 and thereafter............................... 100.000%
Redemption for Changes in Canadian Withholding Taxes
The notes will be subject to redemption, at our option, in the event we
become obligated to pay any Additional Amounts as a result of a change in the
laws or regulations of Canada or any Canadian Taxing Authority, or a change in
any official position regarding the application or interpretation of those laws
and regulations, which is publicly announced or becomes effective on or after
the Issue Date. Upon the occurrence of this kind of change, Worldwide Fiber may,
at any time, redeem all, but not part, of the notes at a price equal to 100% of
the principal amount of the notes, plus accrued and unpaid interest, if any, to
the redemption date. Worldwide Fiber will give written notice of the redemption
not less than 30 nor more than 60 days before the redemption date.
Payment of Additional Amounts
All payments made by or on behalf of Worldwide Fiber on or with respect to
the notes will be made without withholding or deduction for any Taxes imposed by
any Canadian Taxing Authority, unless required by law or the interpretation or
administration of withholding or deduction of Taxes by the relevant Taxing
Authority. If Worldwide Fiber or any other payor is required to withhold or
deduct any amount on account of Taxes from any payment made with respect to the
notes, Worldwide Fiber will:
(1) make the withholding or deduction;
(2) remit the full amount deducted or withheld to the relevant government
authority in accordance with applicable law;
(3) pay such additional amounts ("Additional Amounts") as may be necessary so
that the net amount received by each holder, including Additional Amounts,
after the withholding or deduction will not be less than the amount the
holder would have received if the Taxes had not been withheld or deducted;
(4) furnish to the holders, within 30 days after the date the payment of any
Taxes is due, certified copies of tax receipts evidencing the payment by
Worldwide Fiber;
(5) indemnify and hold harmless each holder, other than an Excluded Holder, for
the amount of (a) any Taxes paid by the holder as a result of payments made
on or with respect to the notes, (b) any liability, including penalties,
interest and expenses, arising from the notes or with respect to the notes
and (c) any Taxes imposed with respect to any reimbursement under (a) or
(b), but excluding the Taxes on the holder's net income; and
(6) at least 30 days before each date on which any Additional Amounts are
payable, deliver to the trustee an Officers' Certificate stating the
amounts so payable and any other information necessary to enable the
trustee to pay the Additional Amounts to holders on the payment date.
Despite the above, no Additional Amounts will be payable to a holder for a
beneficial owner of a note (an "Excluded Holder"):
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(1) with which Worldwide Fiber does not deal at arm's length (within the
meaning of the Income Tax Act (Canada)) at the time of making the payment;
or
(2) which is subject to the Taxes because of its being connected with Canada or
any province or territory of Canada otherwise than by the mere acquisition,
holding or disposition of notes or the receipt of payments under the notes.
Whenever there is a reference in the indenture to, in any context, the
payment of principal, premium, if any, redemption price, Change of Control
Payment, offer price and interest, or any other amount payable under or
concerning any note, this reference shall be considered to include a reference
of the payment of Additional Amounts to the extent that, in this context,
Additional Amounts are, were or would be payable on the note. Our obligation to
make payments of Additional Amounts shall survive any termination of the
indenture or the defeasance of any rights under the notes. For a discussion of
the exemption from Canadian withholding taxes applicable to payments under or
concerning the notes, see "Material United States and Canadian Income Tax
Considerations--Canada."
Mandatory Redemption
Except as described below under "--Repurchase at the Option of Holders,"
Worldwide Fiber is not required to make mandatory redemption or sinking fund
payments concerning the notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each holder of notes will have the right to
require Worldwide Fiber to repurchase all or any part, equal to $1,000 or an
integral multiple of $1,000, of that holder's notes through the Change of
Control Offer. In the Change of Control Offer, Worldwide Fiber will offer a
Change of Control Payment in cash equal to 101% of the aggregate principal
amount of notes repurchased plus accrued and unpaid interest, if any, on the
notes to the date of purchase. Within 30 days following any Change of Control,
Worldwide Fiber will mail a notice to each holder, with a copy to the trustee,
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase notes on the Change of Control Payment Date specified
in the notice, under the procedures required by the indenture and described in
the notice. Worldwide Fiber will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations under the
Exchange Act to the extent these laws and regulations are applicable to the
repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, Worldwide Fiber will, to the extent
lawful:
(1) accept for payment all notes or portions of the notes properly tendered
under the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment plus accrued and unpaid interest, if any, on the notes for all
notes or portions of notes so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions of the notes being purchased by Worldwide
Fiber.
The Paying Agent will promptly mail to each holder of notes so tendered the
Change of Control Payment plus accrued and unpaid interest, if any, on the notes
for these notes, and the trustee will promptly authenticate and mail, or cause
to be transferred by book entry, to each holder a new note equal in principal
amount to any unpur-
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chased portion of the notes surrendered, if any; provided that each new note
will be in a principal amount of $1,000 or an integral multiple of $1,000.
Worldwide Fiber will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require Worldwide Fiber to make a
Change of Control Offer following a Change of Control will be applicable whether
or not any other provisions of the indenture are applicable. Except as described
above concerning a Change of Control, the indenture does not contain provisions
that permit the holders of the notes to require that Worldwide Fiber repurchase
or redeem the notes in the event of a takeover, recapitalization or similar
transaction.
Worldwide Fiber's ability to purchase notes through a Change of Control
Offer may be limited by a number of factors. If Worldwide Fiber enters into one
or more Credit Facilities, as currently anticipated, the Credit Facility is
expected to prohibit Worldwide Fiber from purchasing any notes and is expected
to provide that certain change of control events concerning Worldwide Fiber
would constitute a default under the notes. In the event a Change of Control
occurs at a time when Worldwide Fiber is prohibited from purchasing notes,
Worldwide Fiber could seek consent to the purchase of notes or could attempt to
refinance the borrowings that contain this prohibition. If Worldwide Fiber does
not obtain this consent or repay the borrowings, Worldwide Fiber will remain
prohibited from purchasing notes. In this case, Worldwide Fiber's failure to
purchase tendered notes would constitute an Event of Default under the indenture
which likely would, in turn, constitute a default under the Credit Facility and
under the terms of the 1998 Notes. In these circumstances, any security granted
for the Credit Facility could result in the holders of notes receiving less
ratably than the lenders under the Credit Facility.
Worldwide Fiber will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements described
in the indenture applicable to a Change of Control Offer made by Worldwide Fiber
and purchases all notes validly tendered and not withdrawn under the Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Worldwide Fiber and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of notes to require Worldwide Fiber to
repurchase the notes as a result of a sale, lease, transfer, conveyance or other
disposition of less than all of the assets of Worldwide Fiber and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
We will comply with the requirements of Rule 14e-1 of the Exchange Act and
any other securities laws and regulations under the Exchange Act, if applicable
to the repurchase of notes concerning a Change of Control Offer.
Asset Sales
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, complete an Asset Sale unless:
(1) Worldwide Fiber, or the Restricted Subsidiary, receives consideration at
the time of the Asset Sale at least equal to the fair market value of the
assets or Equity Interests issued or sold or otherwise disposed of;
(2) the fair market value is determined by Worldwide Fiber's Board of Directors
and evidenced by a resolution of the Board of Directors described in an
Officers' Certificate delivered to the trustee; and
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(3) at least 75% of the consideration for the Asset Sale received by Worldwide
Fiber or the Restricted Subsidiary is in the form of cash or
Telecommunications Assets. For purposes of this provision, each of the
following shall be considered to be cash:
(a) any liabilities, as shown on Worldwide Fiber's or the Restricted
Subsidiary's most recent balance sheet, of Worldwide Fiber or any
Restricted Subsidiary, other than contingent liabilities and
liabilities that are by their terms subordinated to the notes, that
are assumed by the transferee of these assets under a customary
novation agreement that releases Worldwide Fiber or the Restricted
Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Worldwide Fiber
or the Restricted Subsidiary from the transferee that are within 180
days converted by Worldwide Fiber or the Restricted Subsidiary into
cash, to the extent of the cash received in that conversion.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Worldwide Fiber or the Restricted Subsidiary, as applicable, may apply the Net
Proceeds at its option:
(1) to permanently repay or retire
(a) secured Indebtedness of Worldwide Fiber, including Indebtedness under
Credit Facilities,
(b) Indebtedness of Worldwide Fiber that ranks equally with the notes but
has a maturity date that is before the maturity date of the notes, or
(c) Indebtedness of any Restricted Subsidiary of Worldwide Fiber, in each
case other than any Indebtedness owed to Worldwide Fiber or any
Restricted Subsidiary; or
(2) to acquire Telecommunications Assets.
Pending the final application of the Net Proceeds, Worldwide Fiber may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Worldwide Fiber will
make an Asset Sale Offer to all holders of notes and all holders of other
Indebtedness that is pari passu with the notes containing provisions similar to
those described in the indenture concerning offers to purchase or redeem with
the proceeds of sales of assets to purchase the maximum principal amount of
notes and the other pari passu Indebtedness that may be purchased out of the
Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100%
of principal amount plus accrued and unpaid interest, if any, on the notes to
the date of purchase and will be payable in cash. If any Excess Proceeds remain
after completion of an Asset Sale Offer, Worldwide Fiber may use these Excess
Proceeds for any purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of notes and other pari passu Indebtedness tendered
into the Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee
shall select the notes and the other pari passu Indebtedness to be purchased on
a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
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(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by the
method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount of the note
to be redeemed. A new note in principal amount equal to the unredeemed portion
of the original note will be issued in the name of the holder of the note upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
Material Covenants
Restricted Payments
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of Worldwide Fiber's or any of its Restricted Subsidiaries' Equity
Interests, including, without limitation, any payment in connection with
any merger or consolidation involving Worldwide Fiber or any of its
Restricted Subsidiaries, or to the direct or indirect holders of Worldwide
Fiber's or any of its Restricted Subsidiaries' Equity Interests in their
capacity, other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of Worldwide Fiber or to Worldwide Fiber or
a Restricted Subsidiary of Worldwide Fiber;
(2) purchase, redeem or otherwise acquire or retire for value, including,
without limitation, in connection with any merger or consolidation
involving Worldwide Fiber, any Equity Interests of Worldwide Fiber or any
direct or indirect parent of Worldwide Fiber or any Restricted Subsidiary
of Worldwide Fiber, other than the Equity Interests owned by Worldwide
Fiber or any Restricted Subsidiary of Worldwide Fiber;
(3) make any payment on or concerning, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the notes, except a payment of interest or principal at the Stated
Maturity of the notes; or
(4) make any Restricted Investment (all of these payments and other actions
described in clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless:
(1) at the time of and after giving effect to the Restricted Payment, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence of the Restricted Payment; and
(2) Worldwide Fiber would, at the time of the Restricted Payment and after
giving pro forma effect to the Restricted Payment as if the Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness under clause (1) or (2) of the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
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(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Worldwide Fiber and its Restricted Subsidiaries
after the Issue Date, excluding Restricted Payments permitted by clauses
(2), (3), (4), (6), (7), (8)(a), (9), (10), (11), (12) and (13), is less
than the sum, without duplication, of
(a) 50% of the Consolidated Net Income of Worldwide Fiber for the period
(taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of Worldwide
Fiber's most recently ended fiscal quarter for which internal
financial statements are available at the time of the Restricted
Payment, or, if the Consolidated Net Income for the period is a
deficit, less 100% of the deficit, plus
(b) 100% of the aggregate net cash proceeds received by Worldwide Fiber
since the Issue Date as a contribution to its common equity capital or
from the issue or sale of Equity Interests of Worldwide Fiber, other
than Disqualified Stock, or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of Worldwide Fiber that have been converted into or
exchanged for the Equity Interests, other than Equity Interests, or
Disqualified Stock or debt securities, sold to a Subsidiary of
Worldwide Fiber, plus the aggregate net cash proceeds received by
Worldwide Fiber upon the conversion or exchange, plus
(c) 100% of the net reduction in Investments on and after the Issue Date,
resulting from payments of interest on Indebtedness, dividends,
repayments of loan or advances, or other transfers of property, but
only to the extent the interest, dividends, repayments or other
transfers of property are not included in the calculation of
Consolidated Net Income, in each case to Worldwide Fiber or any of its
Restricted Subsidiaries from any Person, including, without
limitation, from Unrestricted Subsidiaries of Worldwide Fiber, or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(in each case, valued as provided in the definition of "Investments"),
not to exceed in the case of any Person the amount of Restricted
Investments previously made by Worldwide Fiber or any of its
Restricted Subsidiaries in the Unrestricted Subsidiary (after the
Issue Date) and in each case which was treated as a Restricted Payment
(other than the Restricted Payment that was made under the provisions
of paragraphs (1) through (13) below).
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date it is declared,
if at the date of declaration the payment would have complied with the
provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of
any subordinated Indebtedness of Worldwide Fiber or of any Equity Interests
of Worldwide Fiber or any Restricted Subsidiary in exchange for, or out of
the net cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of Worldwide Fiber) of, Equity Interests of Worldwide Fiber
(other than Disqualified Stock); provided that the amount of the net cash
proceeds that are utilized for the redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (3)(b) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness of Worldwide Fiber with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; provided that the amount
of the net cash proceeds that are so utilized shall be excluded from clause
(3)(b) of the preceding paragraph;
(4) Investments made out of the net cash proceeds of a substantially concurrent
issue and sale (other than to a Subsidiary of Worldwide Fiber) of Equity
Interests (other than Disqualified Stock) of Worldwide Fiber; provided that
the amount of the net cash proceeds that are utilized for the Investment
shall be excluded from clause (3)(b) of the preceding paragraph;
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(5) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of Worldwide Fiber under any management equity
subscription agreement or stock option agreement and the repurchase of
Equity Interests of Worldwide Fiber from employees, officers or directors
of Worldwide Fiber or any of its Restricted Subsidiaries or their
authorized representatives upon the death, disability or termination of
employment of the officers, directors and employees in an aggregate amount
not to exceed $1.0 million in any calendar year plus (a) the aggregate cash
proceeds from any issuance during the calendar year of Equity Interests by
Worldwide Fiber to employees, officers or directors of Worldwide Fiber and
its Restricted Subsidiaries and (b) the aggregate cash proceeds received by
Worldwide Fiber or any of its Restricted Subsidiaries from any payments on
life insurance policies in which Worldwide Fiber or any of its Restricted
Subsidiaries is the beneficiary with respect to any employees, officers or
directors of Worldwide Fiber or its Restricted Subsidiaries which proceeds
are used to purchase Equity Interests of Worldwide Fiber held by the
employees, officers or directors;
(6) Investments in Telecommunications Assets, provided that the aggregate fair
market value of the Investment, when taken together with all other
Investments made under this clause (6) (measured on the date each
Investment was made), does not exceed $15.0 million, and provided further
however, that either Worldwide Fiber or any of its Restricted Subsidiaries,
after giving effect to the Investments will own at least 20% of the Voting
Stock of the Person;
(7) Permitted Fiber Investments in Telecommunications Assets;
(8) Investments in any Unrestricted Subsidiary of Worldwide Fiber, if either
(a) the Investment is a Permitted Project Financing Investment or (b) the
aggregate fair market value of the Investment, when taken together with all
other Investments made under this subclause 8(b) (measured on the date each
Investment was made), does not exceed $20.0 million;
(9) Investments the payment for which consists exclusively of Equity Interests
(other than Disqualified Stock) of Worldwide Fiber;
(10) pro rata dividends or other distributions made by a Restricted Subsidiary
of Worldwide Fiber to minority stockholders (or owners of an equivalent
interest in the case of a Restricted Subsidiary that is not a corporation);
(11) an Investment in any Person the primary business of which is
Telecommunication Business in an amount not to exceed at any one time
outstanding 10% of the Adjusted Consolidated Cash Flow, if positive,
accrued on a cumulative basis during the period (taken as one accounting
period) beginning on the first day of the first full fiscal quarter
immediately following the Issue Date and ending on the last day of the last
fiscal quarter preceding the date of such Investment;
(12) other Restricted Payments in an aggregate amount not to exceed $20.0
million; and
(13) the repurchase of Equity Interests of Worldwide Fiber considered to occur
upon the exercise of stock options if the Equity Interests represent a
portion of the exercise price of the Equity Interests;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (2), (3), (4), (5), (8)(b), (10),
(11) and (12) above, no Default in the payment of interest on the notes or Event
of Default exists or would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Worldwide Fiber or the Restricted
Subsidiary under the Restricted Payment. The fair market value of any assets or
securities that are required to be valued by this covenant shall be determined
by the Board of Directors whose resolution concerning
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the fair market value of any assets shall be delivered to the trustee. The Board
of Directors' determination must be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $15.0 million. No opinion or appraisal shall be
required for any Restricted Payment made under clause (7) above. In any year in
which Worldwide Fiber makes one or more Restricted Payments, Worldwide Fiber
shall include in its compliance certificate to the trustee a certification
stating that all of the Restricted Payments are, or were, permitted by the
indenture and shall set forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to any Indebtedness (including Acquired Debt), and Worldwide Fiber
will not issue any Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that
Worldwide Fiber may incur Indebtedness (including Acquired Debt) and issue
Disqualified Stock and any Restricted Subsidiary may incur Acquired Debt, if
either:
(1) the Consolidated Leverage Ratio at the end of Worldwide Fiber's most
recently ended full fiscal quarter (the "Reference Period") for which a
consolidated balance sheet of Worldwide Fiber is available immediately
preceding the date on which the additional Indebtedness is incurred or the
Disqualified Stock is issued would have been less than 5.5 to 1.0,
determined on a pro forma basis, including a pro forma application of the
net proceeds therefrom, as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued at the beginning of the
Reference Period; or
(2) the Consolidated Capital Ratio at the end of the Reference Period would
have been less than 2.0 to 1.0, determined after giving effect to the
incurrence or issuance of the Indebtedness or Disqualified Stock and, to
the extent described in the definitions used in this prospectus, on a pro
forma basis, including, to the extent described in the definitions used in
this prospectus, a pro forma application of the net proceeds therefrom.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
Indebtedness under Credit Facilities or Permitted Vendor Facilities;
provided that the aggregate principal amount of all Indebtedness of
Worldwide Fiber and its Restricted Subsidiaries outstanding under all
Credit Facilities or Permitted Vendor Facilities after giving effect to the
incurrence (with letters of credit being considered to have a principal
amount equal to the maximum potential liability of Worldwide Fiber
thereunder) does not exceed an amount equal to $200.0 million less the
aggregate amount of all Net Proceeds of Asset Sales applied by Worldwide
Fiber or any of its Restricted Subsidiaries since the Issue Date to
permanently repay Indebtedness under a Credit Facility under the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(2) the incurrence by Worldwide Fiber and its Restricted Subsidiaries of
Existing Indebtedness;
(3) the incurrence by Worldwide Fiber of Indebtedness represented by the notes
and the Series B Notes;
(4) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
Purchase Money Indebtedness and Vendor Financing Indebtedness provided (A)
that the amount thereof does not exceed 100% of Worldwide Fiber's and its
Restricted Subsidiaries' aggregate cost, determined in accordance with GAAP
in good faith by the Board of Directors of Worldwide Fiber, of the
construction, acquisition, develop-
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ment, engineering, installation and improvement of the applicable
Telecommunications Assets and (B) in the case of the incurrence of either
Purchase Money Indebtedness or Vendor Financing Indebtedness by a
Restricted Subsidiary, such Indebtedness shall be Qualified Subsidiary
Indebtedness;
(5) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace, Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4), (12), (14), (15) or (16) of this paragraph;
(6) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Worldwide Fiber and any of its
Restricted Subsidiaries and the issuance of preferred stock by a Restricted
Subsidiary to Worldwide Fiber or another Restricted Subsidiary of Worldwide
Fiber; provided, however, that:
(a) if Worldwide Fiber is the obligor on the Indebtedness, the
Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in the Indebtedness or preferred stock being held by a Person
other than Worldwide Fiber or a Restricted Subsidiary of Worldwide
Fiber and (ii) any sale or other transfer of the Indebtedness or
preferred stock to a Person that is not either Worldwide Fiber or a
Restricted Subsidiary of Worldwide Fiber; shall be considered, in each
case, to constitute an incurrence of the Indebtedness by Worldwide
Fiber or the Restricted Subsidiary that was not permitted by this
clause (6);
(7) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for fixing or hedging interest or
foreign currency exchange rate risk with respect to any floating rate
Indebtedness or foreign currency based Indebtedness, respectively, that is
permitted by the terms of this indenture to be outstanding; provided that
the notional amount of the Hedging Obligation does not exceed the amount of
Indebtedness or other liability to which the Hedging Obligation relates;
(8) the guarantee by Worldwide Fiber or any of its Restricted Subsidiaries of
Indebtedness of Worldwide Fiber or any Restricted Subsidiary of Worldwide
Fiber that was permitted to be incurred by another provision of this
covenant;
(9) the accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock, if, in each case, the amount of Disqualified Stock is
included in Fixed Charges of Worldwide Fiber as accrued;
(10) Worldwide Fiber and its Restricted Subsidiaries may incur Indebtedness
solely for bankers acceptances, letters of credit and performance bonds or
similar arrangements, all in the ordinary course of business (other than to
the extent not supporting Indebtedness);
(11) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries
arising from agreements of Worldwide Fiber or any of its Restricted
Subsidiaries providing for indemnification, adjustment of purchase price,
earn out or other similar obligation, in each case, incurred or assumed in
connection with the disposition of any business, assets or Restricted
Subsidiary of Worldwide Fiber or any of its Restricted Subsidiaries, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of the business, assets or Restricted Subsidiary to finance the
acquisition;
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(12) the incurrence of Indebtedness by Foreign Subsidiaries not to exceed $10.0
million or the equivalent amount thereof, in other foreign currencies;
(13) Worldwide Fiber or any of its Restricted Subsidiaries may incur Permitted
ROW Indebtedness;
(14) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
Acquired Debt in an aggregate amount not to exceed $10.0 million at any
time outstanding;
(15) Indebtedness of Worldwide Fiber not to exceed, at any one time outstanding,
two times the net cash proceeds received by Worldwide Fiber after the Issue
Date from the issuance and sale of its Equity Interest (other than
Disqualified Stock) to a Person that is not a Subsidiary of Worldwide
Fiber, to the extent such net cash proceeds have not been used pursuant to
(A) clause 3(b) of the first paragraph of the "Restricted Payments"
covenant described above to or (B) clauses (2) or (4) of the second
paragraph of the "Restricted Payments" covenant described above to make a
Restricted Payment; and
(16) the incurrence by Worldwide Fiber or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $15.0 million.
Indebtedness or preferred stock of any Person which is outstanding at the
time the Person becomes a Restricted Subsidiary of Worldwide Fiber (including
upon designation of any Subsidiary or other Person as a Restricted Subsidiary)
or is merged with or into or consolidated with Worldwide Fiber or a Restricted
Subsidiary of Worldwide Fiber shall be considered to have been incurred at the
time the Person becomes a Restricted Subsidiary of Worldwide Fiber or is merged
with or into or consolidated with Worldwide Fiber or a Restricted Subsidiary of
Worldwide Fiber, as applicable.
Worldwide Fiber will not incur any Indebtedness (including Permitted Debt)
that is contractually subordinated in right of payment to any other Indebtedness
of Worldwide Fiber unless the Indebtedness is also contractually subordinated in
right of payment to the notes on substantially identical terms; provided,
however, that no Indebtedness of Worldwide Fiber shall be considered to be
contractually subordinated in right of payment to any other Indebtedness of
Worldwide Fiber solely by being unsecured.
Notwithstanding any other provisions of this covenant, the maximum amount
of Indebtedness that Worldwide Fiber or a Restricted Subsidiary may incur shall
not be considered to be exceeded solely as a result of fluctuations in the
exchange rates of currencies.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, if an item of proposed
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (16) above, or is entitled to be incurred
under the first paragraph of this covenant, Worldwide Fiber will be permitted to
classify the item of Indebtedness on the date of its incurrence in any manner
that complies with this covenant.
Liens
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind on any asset now owned or hereafter acquired, except
Permitted Liens, without providing that the notes shall be secured equally and
ratably with the Indebtedness so secured for so long as the obligations are so
secured.
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Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Worldwide Fiber or any of Worldwide Fiber's Restricted Subsidiaries, or
with respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to Worldwide Fiber or any of
Worldwide Fiber's Restricted Subsidiaries;
(2) make loans or advances to Worldwide Fiber or any of Worldwide Fiber's
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to Worldwide Fiber or any of
Worldwide Fiber's Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or because of:
(1) Existing Indebtedness as in effect on the Issue Date and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those
contained in the Existing Indebtedness, as in effect on the Issue Date;
(2) the Credit Facilities, the indenture, the notes and the Series B Notes,
Qualified Subsidiary Indebtedness and Indebtedness ranking pari passu with
the notes, provided that with respect to Indebtedness ranking pari passu
with the Notes such provisions are no more restrictive than those set forth
in the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person acquired
by Worldwide Fiber or any of its Restricted Subsidiaries as in effect at
the time of the acquisition (except to the extent the Indebtedness was
incurred in connection with or in contemplation of the acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, if, in the case of Indebtedness, the
Indebtedness was permitted by the terms of the indenture to be incurred;
(5) customary non-assignment provisions restricting subletting or assignment in
leases or other agreements entered into in the ordinary course of business
and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on the property so acquired of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted Subsidiary
that restricts distributions by the Restricted Subsidiary pending its sale
or other disposition, provided that the consummation of the transaction
would not result in a Default or an Event of Default, that the restriction
terminates if the transaction is not completed and that the completed or
abandonment of the transaction occurs within one year of the date the
agreement was entered into;
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(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing the Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under the
provisions of the covenant described above under the caption "--Liens" that
limit the right of Worldwide Fiber or any of its Restricted Subsidiaries to
dispose of the assets subject to the Lien;
(10) customary limitations on the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business;
(12) encumbrances and restrictions in Indebtedness incurred by Foreign
Subsidiaries in accordance with the covenant described above under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(13) any Indebtedness or any agreement pursuant to which such Indebtedness was
issued if (A) the encumbrance or restriction applies only upon a payment or
financial covenant default or event of default contained in such
Indebtedness or agreement and (B) the encumbrance or restriction is not
materially more disadvantageous to the holders of the Notes than is
customary in comparable financings (as determined in good faith by the
Board of Directors of Worldwide Fiber).
Amalgamation, Merger, Consolidation, or Sale of Assets
Worldwide Fiber may not, directly or indirectly: (1) amalgamate or
consolidate or merge with or into another Person (whether or not Worldwide Fiber
is the surviving corporation); or (2) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of its properties or assets, in
one or more related transactions, to another Person; unless:
(1) either: (a) Worldwide Fiber is the surviving corporation; or (b) the Person
formed by or surviving the amalgamation, consolidation or merger (if other
than Worldwide Fiber) or to which the sale, assignment, transfer,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of Canada or any province of Canada or
the United States, any state of the United States or the District of
Columbia;
(2) the Person formed by or surviving any the amalgamation, consolidation or
merger (if other than Worldwide Fiber) or the Person to which the sale,
assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of Worldwide Fiber under the notes, the Series
B Notes, the indenture and the registration rights agreement under
agreements reasonably satisfactory to the trustee;
(3) no Default or Event of Default (or an event that, with the passing of time
or giving of notice or both, would constitute an Event of Default) shall
exist or shall occur immediately after giving effect on a pro forma basis
to the transaction;
(4) the transaction will not result in Worldwide Fiber or the Person formed by
or surviving the amalgamation, consolidation or merger (if other than
Worldwide Fiber) being required to make any deduction or withholding on
account of Taxes as described under the caption "Redemption for Changes in
Canadian Withholding Taxes" and "Payment of Additional Amounts" from any
payment under or for the notes that Worldwide Fiber would not have been
required to make had the transaction or series of related transactions not
occurred;
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(5) except in the case of the amalgamation, consolidation or merger of
Worldwide Fiber with or into a Wholly-Owned Restricted Subsidiary,
Worldwide Fiber or the Person formed by or surviving any amalgamation,
consolidation or merger (if other than Worldwide Fiber) will, on the date
of the transaction after giving pro forma effect to the transaction and any
related financing transactions as if the same had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness under clause (1) or (2) of the first paragraph
of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(6) Worldwide Fiber shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel, each stating that the amalgamation,
consolidation, merger or transfer and the supplemental indenture, if any,
comply with the indenture.
In addition, Worldwide Fiber may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Amalgamation, Merger, Consolidation, or
Sale of Assets" covenant will not apply to a sale, assignment, transfer,
conveyance or other disposition of assets between or among Worldwide Fiber and
any of its Wholly-Owned Restricted Subsidiaries.
Upon any amalgamation, consolidation or merger or any transfer of all or
substantially all of the assets of Worldwide Fiber in accordance with the above,
the successor corporation formed by the amalgamation or consolidation or into
which Worldwide Fiber is merged or to which the transfer is made shall succeed
to and (except in the case of a lease) be substituted for, and may exercise
every right and power of, Worldwide Fiber under the indenture with the same
effect as if the successor corporation had been named in the Indenture as
Worldwide Fiber, and (except in the case of a lease) Worldwide Fiber shall be
released from the obligations under the notes, and the indenture except with
respect to any obligations that arise from, or are related to, such transaction.
For purposes of the above, the transfer (by assignment, sale or otherwise)
of all or substantially all of the properties and assets of one or more
Subsidiaries, Worldwide Fiber's interest in which constitutes all or
substantially all of the properties and assets of Worldwide Fiber, shall be
considered to be the transfer of all or substantially all of the properties and
assets of Worldwide Fiber.
Transactions with Affiliates
Worldwide Fiber will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties, assets or securities to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Worldwide Fiber or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Worldwide Fiber or such
Restricted Subsidiary with a Person that is not an Affiliate; and
(2) Worldwide Fiber delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the Board of Directors described in an
Officers' Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors and is in the best interests of Worldwide Fiber or such
Restricted Subsidiary; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the holders of
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such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be considered to be Affiliate Transactions
and, therefore, will not be subject to the provisions of the prior paragraph:
(1) reasonable fees and compensation paid to, and indemnity provided on behalf
of, our officers, directors, employees, agents or consultants or any of our
Restricted Subsidiaries as determined in good faith by the Board of
Directors or senior management of Worldwide Fiber;
(2) transactions between or among us and any of our Restricted Subsidiaries;
(3) any sale or other issuance of our Equity Interests (other than Disqualified
Stock);
(4) Restricted Payments that are permitted by the provisions of the indenture
described above under the caption "--Restricted Payments" or by clauses
(1), (3), (6), (7) or (8) of the definition of "Permitted Investments"; and
(5) any agreement or arrangement as in effect on the Issue Date or any
amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement or
arrangement thereto so long as any such amendment or replacement agreement
or arrangement is not more disadvantageous to Worldwide Fiber or its
Restricted Subsidiaries, as the case may be, in any material respect than
the original agreement as in effect on the Issue Date.
Issuances of Guarantees by Restricted Subsidiaries
Worldwide Fiber will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of Worldwide Fiber which is pari passu (other than
any Indebtedness incurred under a Credit Facility) with or subordinate in right
of payment to the notes ("Guaranteed Indebtedness), unless:
o the Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a guarantee (a
"Subsidiary Guarantee") of payment of the notes by the Restricted
Subsidiary and
o the Restricted Subsidiary waives and will not in any manner whatsoever
claim, or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
Worldwide Fiber or any other Restricted Subsidiary as a result of any
payment by the Restricted Subsidiary under its Subsidiary Guarantee;
provided that this paragraph shall not be applicable to any guarantee
of any Restricted Subsidiary that existed at the time the Person
became a Restricted Subsidiary and was not incurred in connection
with, or in contemplation of, the Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the
notes, then the guarantee of the Guaranteed Indebtedness shall be pari
passu with, or subordinated to, the Subsidiary Guarantee or (B)
subordinated to the notes, then the guarantee of the Guaranteed
Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated
to the notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (1) any sale, exchange or transfer,
to any Person that is not an Affiliate of Worldwide Fiber, of all of Worldwide
Fiber's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all of the assets of, the Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the indenture) or (2) the release or
discharge of the guarantee which re-
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sulted in the creation of the Subsidiary Guarantee, except a discharge or
release by or as a result of payment under the guarantee.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Worldwide Fiber and its Restricted Subsidiaries
in the Subsidiary so designated will be considered to be an Investment made as
of the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Restricted Payments." All such outstanding Investments will
be valued at their fair market value at the time of such designation. That
designation will only be permitted if the Restricted Payment would be permitted
at that time and if the Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary. The Board of Directors may redesignate any
Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would
not cause a Default and such redesignation will increase the amount available
for Restricted Payments under the first paragraph of the covenant described
under the caption "--Restricted Payments" as provided in the covenant described
under the caption "--Restricted Payments" or Permitted Investments, as
applicable.
Business Activities
Worldwide Fiber will not, and will not permit any Restricted Subsidiary to,
engage to any material extent in any business other than the Telecommunications
Business.
Payments for Consent
Worldwide Fiber will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes unless
the consideration is offered to be paid and is paid to all holders of the notes
that consent, waive or agree to amend in the time frame described in the
solicitation documents relating to the consent, waiver or agreement.
Reports
For so long as any notes remain outstanding, Worldwide Fiber will furnish
to the holders the information required to be delivered under Rule 144A(d)(4)
under the Securities Act. Whether or not Worldwide Fiber is subject to Section
13(a) or 15(d) of the Exchange Act, Worldwide Fiber shall file with the
Securities and Exchange Commission and furnish to the holders and the trustee
(1) within 140 days after the end of each fiscal year, annual reports on Form
20-F or 40-F, as applicable (or any successor form), containing the information
required to be contained in the annual reports (or required in such successor
form) and (2) (a) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q or (b) within 60 days after
the end of each of the first three fiscal quarters of each fiscal year, reports
on Form 6-K (or any successor form) which, regardless of applicable
requirements, shall, at a minimum, contain a "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Additional
Amounts, if any, concerning, the notes;
(2) default in payment when due of the principal of or premium, if any, on the
notes;
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(3) failure by Worldwide Fiber or any of its Restricted Subsidiaries to comply
with the provisions described under the caption "--Amalgamation, Merger,
Consolidation, or Sale of Assets";
(4) failure by Worldwide Fiber or any of its Restricted Subsidiaries for 15
days after written notice thereof has been given to Worldwide Fiber by the
trustee or to Worldwide Fiber and the trustee by holders of at least 25% of
the aggregate principal amount of the notes outstanding to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Asset Sales;"
(5) failure by Worldwide Fiber or any of its Restricted Subsidiaries for 60
days after written notice thereof has been given to Worldwide Fiber by the
trustee or to Worldwide Fiber and the trustee by holders of at least 25% of
the aggregate principal amount of the notes outstanding to comply with any
of the other agreements in the indenture or the notes;
(6) the voluntary relinquishment by Worldwide Fiber of any of its rights under
the Non-Competition Agreement or the failure by Worldwide Fiber for 30 days
after written notice has been given to Worldwide Fiber by the trustee or to
Worldwide Fiber and the trustee by holders of at least 25% of the aggregate
principal amount of the notes outstanding to enforce any of such rights, in
each case which is materially detrimental to the interests of Worldwide
Fiber or the holders;
(7) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Worldwide Fiber or any of its Restricted Subsidiaries
(or the payment of which is guaranteed by Worldwide Fiber or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after the Issue Date, if that default:
(a) is caused by a failure to pay principal of or premium, if any, on such
Indebtedness before the expiration of the grace period provided in
such Indebtedness on the date of the default (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness before its express
maturity,
and, in each case, the principal amount of such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(8) failure by Worldwide Fiber or any of its Restricted Subsidiaries to pay
final judgments which are non-appealable aggregating in excess of $10.0
million (net of applicable insurance coverage which is acknowledged in
writing by the insurer), which judgments are not paid, discharged or stayed
for a period of 60 days; and
(9) certain events of bankruptcy or insolvency concerning Worldwide Fiber or
any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Worldwide Fiber, any Restricted
Subsidiary that is a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding notes will become due and payable immediately without further
action or notice. If any other Event of Default occurs and is continuing, the
trustee by notice to Worldwide Fiber or the holders of at least 25% in principal
amount of the then outstanding notes by notice to Worldwide Fiber and the
trustee may declare all the notes to be due and payable immediately.
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Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the notes.
Worldwide Fiber is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Worldwide Fiber is required to deliver to the trustee a
statement specifying the Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Worldwide
Fiber or any of its Subsidiaries shall have any liability for any obligations of
Worldwide Fiber or its Subsidiaries under the notes, the indenture or for any
claim based on, for, or because of, such obligations or their creation. Each
holder of notes by accepting a note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the notes. The
waiver may not be effective to waive liabilities under the federal securities
laws.
Legal Defeasance and Covenant Defeasance
Worldwide Fiber may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments for the
principal of, premium, if any, and interest on the notes when the payments
are due from the trust referred to below;
(2) Worldwide Fiber's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Worldwide Fiber's obligations in connection the rights, powers, trusts,
duties and immunities of the trustee;
(4) the Legal Defeasance provisions of the indenture; and
(5) Worldwide Fiber's obligation to pay Additional Amounts.
In addition, Worldwide Fiber may, at its option and at any time, elect to
have the obligations of Worldwide Fiber released concerning certain covenants
that are described in the indenture ("Covenant Defeasance") and after the
election any omission to comply with those covenants shall not constitute a
Default or Event of Default concerning the notes. In the event Covenant
Defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default concerning the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
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(1) Worldwide Fiber must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash and non-callable Government
Securities, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding notes on the
stated maturity or on the applicable redemption date and Worldwide Fiber
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Worldwide Fiber shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that (a) Worldwide Fiber has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the Issue
Date, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based on an IRS ruling or applicable
federal income tax law such opinion of counsel shall confirm that, the
holders of the outstanding notes will not recognize income, gain or loss
for United States federal income tax purposes as a result of the Legal
Defeasance and will be subject to United States federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if the Legal Defeasance had not occurred and Worldwide Fiber shall
have delivered to the trustee an opinion of counsel in Canada reasonably
acceptable to the trustee confirming that the holders of the outstanding
notes will not recognize income, gain or loss for Canadian federal income
tax purposes as a result of the Legal Defeasance and will be subject to
Canadian federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if the Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, Worldwide Fiber shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not recognize
income, gain or loss for United States federal income tax purposes as a
result of the Covenant Defeasance and will be subject to United States
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if the Covenant Defeasance had not
occurred and Worldwide Fiber shall have delivered to the trustee an opinion
of counsel in Canada reasonably acceptable to the trustee confirming that
the holders of the outstanding notes will not recognize income, gain or
loss for Canadian federal income tax purposes as a result of the Covenant
Defeasance and will be subject to Canadian federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if the Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of the deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to the
deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) the Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument (other than the indenture) to which Worldwide Fiber or any of
its Restricted Subsidiaries is a party or by which Worldwide Fiber or any
of its Restricted Subsidiaries is bound;
(6) Worldwide Fiber must have delivered to the trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) Worldwide Fiber must deliver to the trustee an Officers' Certificate
stating that the deposit was not made by Worldwide Fiber with the intent of
preferring the holders of notes over the other creditors of Worldwide Fiber
with the intent of defeating, hindering, delaying or defrauding creditors
of Worldwide Fiber or others; and
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(8) Worldwide Fiber must deliver to the trustee an Officers' Certificate and an
opinion of counsel, in the case of the Officers' Certificate, stating that
all conditions precedent relating to the Legal Defeasance or the Covenant
Defeasance have been complied with and, in the case of the opinion of
counsel, that the conditions precedent in clauses (1) (concerning the
validity and perfection of the security interest), (2), (3) and (5) have
been complied with.
Indemnification for Judgment Currency Fluctuations
The obligations of Worldwide Fiber to any holder of notes shall,
notwithstanding any judgment in a currency (the "Judgment Currency") other than
U.S. dollars (the "Agreement Currency"), be discharged only to the extent that
on the day following receipt by the holder of notes or the trustee of any amount
in the Judgment Currency, the holder of notes may in accordance with normal
banking procedures purchase the Agreement Currency with the Judgment Currency.
If the amount of the Agreement Currency so purchased is less than the amount
originally to be paid to the holder of notes or the trustee in the Agreement
Currency, Worldwide Fiber will pay the difference and if the amount of the
Agreement Currency so purchased exceeds the amount originally to be paid to the
holder of notes or the trustee the holder of notes or the trustee will pay to or
for the account of Worldwide Fiber the excess, provided that the holder of notes
or the trustee shall not have any obligation to pay the excess as long as a
Default by Worldwide Fiber in its obligations under the notes or the indenture
has occurred and is continuing, in which case the excess may be applied by the
holder of notes to such obligations.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when either (a) all such notes theretofore
authenticated and delivered (except lost, stolen or destroyed notes which have
been replaced or paid and notes for whose payment money has theretofore been
deposited in trust and thereafter repaid to Worldwide Fiber) have been delivered
to the Trustee for cancellation; or (b)(i) all such Notes not theretofore
delivered to such trustee for cancellation have become due and payable by reason
of the making of a notice of redemption or otherwise or will become due and
payable within one year and we or a Subsidiary Guarantor, if any, has
irrevocably deposited or caused to be deposited with such Trustee as trust funds
in trust an amount of money sufficient to pay and discharge the entire
Indebtedness on such notes not theretofore delivered to the Trustee for
cancellation for principal, premium, if any, and accrued interest to the date of
maturity or redemption; (ii) no Default or Event of Default with respect to the
indenture or the notes shall have occurred and be continuing on the date of such
deposit or shall occur as a result of such deposit and such deposit will not
result in a breach or violation of, or constitute a default under, any other
instrument to which we or a Subsidiary Guarantor, if any, is a party or by which
we or a Subsidiary Guarantor, if any, is bound; (iii) we or a Subsidiary
Guarantor, if any, has paid or caused to be paid all sums payable by it under
the indenture; and (iv) we have delivered irrevocable instructions to the
trustee under the indenture to apply the deposited money toward the payment of
such notes at maturity or the redemption date, as the case may be.
In addition, we must deliver an Officer's Certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
Amendment, Supplement and Waiver
With the consent of holders of not less than a majority in aggregate
principal amount of the notes at the time outstanding, Worldwide Fiber and the
trustee are permitted to amend or supplement the indenture or any supplemental
indenture or modify the rights of the holders; provided that without the consent
of each holder affected, no amendment, supplement, modification or waiver may
(concerning any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
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(2) reduce the principal of or change the fixed maturity of any note or alter
the provisions concerning the redemption of the notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the notes (except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers of
past Defaults or the rights of holders of notes to receive payments of
principal of or premium, if any, or interest on the notes;
(7) waive a redemption payment concerning any note (other than a payment
required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders");
(8) cause the notes to become subordinate in right of payment to any other
Indebtedness;
(9) make any change that would adversely affect the rights of the holders to
receive Additional Amounts;
(10) modify the obligation of Worldwide Fiber to make a Change of Control Offer
to purchase notes after the occurrence of an event which constitutes a
Change of Control; or
(11) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
Worldwide Fiber and the trustee may amend or supplement the indenture or the
notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Worldwide Fiber's obligations to holders
of notes in the case of a merger or consolidation or sale of all or
substantially all of Worldwide Fiber's assets;
(4) to make any change that would provide any additional rights or benefits to
the holders of notes or that does not adversely affect the legal rights
under the indenture of any such holder; or
(5) to comply with requirements of the Securities and Exchange Commission to
effect or maintain the qualification of the indenture under the Trust
Indenture Act.
Concerning the Trustee
If the trustee becomes one of our creditors, the indenture limits its right
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate the conflict within 90 days, apply to the
Securities and Exchange Commission for permission to continue or resign.
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The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless the holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Worldwide Fiber Inc.,
#1510-1066 West Hastings Street, Vancouver, BC Canada V6E 3X1, Attention:
Stephen Stow.
Governing Law
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of laws to the extent that the
application of the law of another jurisdiction would be required by principles
of conflicts of laws.
Enforceability of Judgments
Because all or a substantial portion of our assets and the assets of our
directors and officers are located outside of the United States, it may not be
possible for you to effect service of process within the United States upon us
or those persons. Furthermore it may not be possible for you to enforce against
us or them in the United States, judgments obtained in U.S. courts based upon
the civil liability provisions of the U.S. Federal securities laws or other laws
of the United States, including judgments concerning the payment of principal,
premium, interest, Additional Amounts, Change of Control Payment, offer price,
redemption price or other amounts payable under the notes.
Worldwide Fiber has been informed by its Canadian counsel, Farris, Vaughan,
Wills & Murphy, that the laws of the Province of British Columbia and the
federal laws of Canada applicable in the Province of British Columbia permit an
action to be brought in a court of competent jurisdiction in the Province of
British Columbia on any final and conclusive judgment in personam of any federal
or state court located in the Borough of Manhattan in The City of New York that
is not impeachable as void or voidable under the internal laws of the State of
New York for a sum certain for the enforcement of the indenture or the notes if:
o the court rendering the judgment had jurisdiction over the judgment
debtor, as recognized by the Canadian Court (and submission by
Worldwide Fiber in the indenture to the non-exclusive jurisdiction of
the New York court will be sufficient for that purpose),
o the judgment was not obtained by fraud or in a manner contrary to
natural justice and the enforcement of the judgment would not be
inconsistent with public policy, as that term is applied by a Canadian
Court, or contrary to any order made by the Attorney General of Canada
under the Foreign Extraterritorial Measures Act (Canada),
o the enforcement of the judgment does not constitute, directly or
indirectly, the enforcement of such foreign revenue, expropriatory or
penal laws, and
o the action to enforce the judgment is commenced within the applicable
limitation period. Worldwide Fiber has been advised by Farris,
Vaughan, Wills & Murphy that it knows of no reason, based upon public
policy under the laws of the Province of British Columbia and the
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eral laws of Canada applicable in the Province of British Columbia for
avoiding recognition of a judgment of a New York court to enforce the
indenture or the notes.
We are a corporation organized under the laws of the Canada. A majority of
our directors and officers, as well as certain experts named in this prospectus,
reside principally in Canada. Because all or a substantial portion of our assets
and the assets of these persons are located outside the United States, it may
not be possible for you to effect service of process within the United States
upon us or those persons. Furthermore it may not be possible for you to enforce
against us or them in the United States, judgments obtained in U.S. courts based
upon the civil liability provisions of the U.S. Federal securities laws or other
laws of the United States. We have been advised by Farris, Vaughan, Wills &
Murphy, our special Canadian counsel, that there is doubt as to the
enforceability, in original actions in Canadian courts, of liabilities based
upon the U.S. Federal securities laws and as to the enforceability in Canadian
courts of judgments of U.S. courts obtained in actions based upon the civil
liability provisions of the U.S. Federal securities laws. Therefore, it may not
be possible to enforce those actions against us, our directors and officers or
the experts named in this prospectus.
Consent to Jurisdiction and Service
The indenture provides that Worldwide Fiber irrevocably appoints CT
Corporation System as its agent for service of process in any suit, action, or
proceeding concerning the indenture or the notes and for actions brought under
federal or state securities laws in any federal or state court located in the
Borough of Manhattan in The City of New York, and submits to the non-exclusive
jurisdiction.
Certain Definitions
Described below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all of these terms, as well as
any other capitalized terms used in this prospectus for which no definition is
provided.
"Acquired Debt" means, concerning any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
whether or not the Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Additional Senior Notes" means any senior notes which have terms,
conditions and covenants substantially identical to the terms, conditions and
covenants of the notes and which are issued by Worldwide Fiber under the
indenture after the Issue Date.
"Adjusted Consolidated Cash Flow" means Consolidated Cash Flow minus all
non-cash items, increasing Consolidated Net Income for the applicable period to
the extent not previously deducted in computing Consolidated Cash Flow, whether
or not such non-cash items were accrued or incurred in the ordinary course of
the business or otherwise.
"Adjusted Fiber Value" means, at any time after certain Affiliates of
Ledcor Inc. have contributed 12 dark fiber strands to Worldwide Fiber under the
Undertaking Agreements, an amount equal to $72.5 million less one-twelfth (1/12)
of such amount for each of the dark fiber strands which has been sold, leased,
contributed or with respect to which an IRU has been granted to any Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be considered to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or rights
other than any sale, lease, transfer, conveyance or other disposition of
telecommunications capacity, transmission rights, or other
telecommunications services provided over our network in the ordinary
course of business; provided that the sale, conveyance or other disposition
of all or substantially all of the assets of Worldwide Fiber and its
Restricted Subsidiaries taken as a whole will be governed by the provisions
of the indenture described above under the caption "--Change of Control"
and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the "Asset
Sale" covenant; and
(2) the issuance of Equity Interests by any of Worldwide Fiber's Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries,
Notwithstanding the preceding, the following items shall be considered not to be
Asset Sales:
(1) any single transaction or series of related transactions that: (a) involves
assets having a fair market value of less than $1.0 million; or (b) results
in net proceeds to Worldwide Fiber and its Restricted Subsidiaries of less
than $1.0 million;
(2) a transfer of assets between or among Worldwide Fiber and its Restricted
Subsidiaries or between Restricted Subsidiaries,
(3) Permitted Telecommunication Asset Dispositions;
(4) an issuance of Equity Interests by a Restricted Subsidiary to Worldwide
Fiber or to a Wholly-Owned Restricted Subsidiary; and
(5) a Permitted Investment or a Restricted Payment that is permitted by the
covenant described above under the caption "--Restricted Payments."
"Beneficial Owner" has the meaning assigned to the term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as the term is used in Section 13(d)(3) of
the Exchange Act), the "person" shall be considered to have beneficial ownership
of all securities that such "person" has the right to acquire, whether the right
is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"Canadian Taxing Authority" shall mean any federal, provincial, territorial
or other Canadian government or any authority or agency therein or thereof
having power to tax.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability for a capital lease that would at that
time be required to be capitalized on a balance sheet in accordance with GAAP.
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"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means any of the following:
(1) any investment in direct obligations of the United States of America or any
agency thereof or of Canada or any province or agency thereof of
obligations guaranteed by the United States of America or any agency
thereof or Canada or any province or agency thereof, in each case with a
term of not more than one year, provided that any province of Canada must
be rated at least "R-1" by the Dominion Bond Rating Service Limited;
(2) investments in time deposit accounts, term deposit accounts, certificates
of deposit, money-market deposits, bankers acceptances and obligations
maturing within one year of the date of acquisition of the obligation
issued by a bank or trust company which is organized under the laws of the
United States of America, any state of the United States, Canada or any
province of Canada, and which bank or trust company has, or the obligations
of which bank or trust company is guaranteed by a bank or trust company
which has, capital, surplus and undivided profits aggregating in excess of
$150.0 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A", or the similar equivalent rating, or
higher by at least one "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act) or by
Dominion Bond Rating Service Limited or Canadian Bond Rating Service, Inc.
or any money-market fund sponsored by a registered broker dealer or mutual
fund distributor;
(3) repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (1) above entered into with a
bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days after the
date of acquisition, issued by a corporation (other than Worldwide Fiber or
an Affiliate of Worldwide Fiber) organized and in existence under the laws
of the United States of America or Canada with a rating at the time as of
which any investment the United States of American or Canada is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's or at least "R-1" by Dominion Bond
Rating Service Limited or Canadian Bond Rating Service (in the case of a
Canadian issuer);
(5) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth,
territory or province of the United States of America or Canada, or by any
political subdivision or taxing authority of the United States of America
or Canada, and rated at least "R-1" by the Dominion Bond Rating Service
Limited (in the case of a Canadian issuer);
(6) investments in money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(5) of this definition.
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"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of Worldwide Fiber and its
Subsidiaries taken as a whole to any "person" (as the term is used in
Section 13(d)(3) of the Exchange Act) other than a Permitted Holder;
(2) the adoption of a plan relating to the liquidation or dissolution of
Worldwide Fiber;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than a Permitted Holder, becomes the Beneficial
Owner, directly or indirectly, of more than 50% of the Voting Stock of
Worldwide Fiber, measured by voting power rather than number of shares;
(4) the first day on which a majority of the members of the Board of Directors
of Worldwide Fiber are not Continuing Directors; or
(5) Worldwide Fiber consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, Worldwide Fiber, in
any such event pursuant to a transaction in which any of the outstanding
Voting Stock of Worldwide Fiber is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of Worldwide Fiber outstanding immediately before such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
"Consolidated Capital Ratio" means, with respect to Worldwide Fiber as of
any date, the ratio of (1) the aggregate consolidated principal amount of
Indebtedness of Worldwide Fiber and its Restricted Subsidiaries then outstanding
to (2) the Consolidated Net Worth of Worldwide Fiber and its Restricted
Subsidiaries as of such date, in each case as shown on the consolidated balance
sheet of Worldwide Fiber in accordance with GAAP.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing the Consolidated Net Income; plus
(2) Fixed Charges of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred for letter of credit or bankers' acceptance
financings, and net payments, if any, under Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated
Net Income; plus
(3) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid cash
expense that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income; minus
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(4) non-cash items increasing the Consolidated Net Income for such period,
other than items that were accrued in the ordinary course of business, in
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of Worldwide Fiber shall be added to Consolidated
Net Income to compute Consolidated Cash Flow of Worldwide Fiber only to the
extent that a corresponding amount would be permitted at the date of
determination to be dividended to Worldwide Fiber by the Restricted Subsidiary
without prior approval (that has not been obtained), under the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Subsidiary or its
stockholders.
"Consolidated Leverage Ratio" means, concerning Worldwide Fiber, as of any
date, the ratio of (1) the aggregate amount of Indebtedness of Worldwide Fiber
and its Restricted Subsidiaries then outstanding (other than intercompany debt)
to (2) the Consolidated Cash Flow of Worldwide Fiber and its Restricted
Subsidiaries on a consolidated basis for the most recently ended four fiscal
quarters immediately preceding the date of determination for which consolidated
financial statements of Worldwide Fiber are available (the "Reference Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated Cash Flow" shall be calculated on a pro forma basis after giving
effect to the issuance of the notes and the incurrence of the Indebtedness (and
the application of the proceeds therefrom) giving rise to the need to make such
calculation and any incurrence (and the application of the proceeds therefrom)
or repayment of Indebtedness, other than the incurrence or repayment of
Indebtedness for ordinary working capital purposes, at any time subsequent to
the beginning of the Reference Period and on or prior to the date of
determination, as if such incurrence (and the application of the proceeds
thereof), or the repayment, as the case may be, occurred on the first day of the
Reference Period.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the specified Person or a Restricted
Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by
that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders, it being understood that the Net Income of such
Restricted Subsidiary for such period shall be included in Consolidated Net
Income up to the aggregate amount of cash that such Restricted Subsidiary
could have paid under the dividends or similar distributions during the
period to Worldwide Fiber or any of its Restricted Subsidiaries;
(3) the Net Income of any Person acquired in a pooling of interests transaction
for any period before the date of such acquisition shall be excluded;
(4) the Net Income (but not loss) of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the specified Person or one of its
Subsidiaries, except for purposes of the covenant described under the
caption "--Certain Covenants--Restricted Payments" and "--Incurrence of
Indebtedness and Issuance of Preferred Stock," in which case the Net Income
of any Unrestricted Subsidiary will be included to the extent it would
otherwise be included under clause (1) of this definition above; and
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(5) the cumulative effect of a change in accounting principles shall be
excluded.
"Consolidated Net Worth" means, with respect to Worldwide Fiber as of any
date, the sum of (1) the consolidated equity of the common stockholders of
Worldwide Fiber and its Restricted Subsidiaries that are Restricted Subsidiaries
as of such date plus (2) the respective amounts reported on Worldwide Fiber's
balance sheet as of such date with respect to any series of Preferred Stock
(other than Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of net
earnings for the year of such declaration and payment, but only to the extent of
any cash received by Worldwide Fiber upon issuance of such Preferred Stock plus
(3) the Adjusted Fiber Value, less (x) all write-ups (other than write-ups
resulting from foreign currency translations and write-ups of tangible assets of
a going concern business made within 12 months after the acquisition of such
business) after the Issue Date in the book value of any asset owned by Worldwide
Fiber or a Restricted Subsidiary of Worldwide Fiber, (y) all outstanding net
Investments as of such date in unconsolidated Restricted Subsidiaries and in
Persons that are not Restricted Subsidiaries, and (z) all unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the above determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of Worldwide Fiber who:
(1) was a member of the Board of Directors on the Issue Date; or
(2) was nominated for election or elected to the Board of Directors with the
approval of a majority of the Continuing Directors who were members of the
Board at the time of such nomination or election.
"Credit Facilities" means, with respect to Worldwide Fiber or any if its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
loans or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, under a sinking
fund obligation or otherwise, or redeemable at the option of the holder thereof,
in whole or in part, on or before the date that is 91 days after the date on
which the notes mature. Notwithstanding the preceding sentence, any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require Worldwide Fiber to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
Worldwide Fiber may not repurchase or redeem any such Capital Stock under such
provisions unless the repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Eligible Investments" means cash or Cash Equivalents or such other
investment grade debt securities as the Board of Directors shall approve from
time to time; provided, however, that in no event shall any funds required to be
held as Eligible Investments be used, directly or indirectly, to repurchase any
notes, except as specifically provided in the Unrestricted Offer.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Existing Indebtedness" means Indebtedness of Worldwide Fiber or any of its
Restricted Subsidiaries outstanding on the Issue Date (other than the Credit
Facilities).
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments, if any, under Hedging Obligations;
plus
(2) the consolidated interest of such Person and its Restricted Subsidiaries
that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is Guaranteed
by such Person or one of its Restricted Subsidiaries or secured by a Lien
on assets of such Person or one of its Restricted Subsidiaries, whether or
not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividend payments, whether or not in cash, on any
series of preferred stock (including, without limitation, Disqualified
Stock) of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests of
Worldwide Fiber (other than Disqualified Stock) or to Worldwide Fiber or a
Restricted Subsidiary of Worldwide Fiber, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Foreign Subsidiary" means any Restricted Subsidiary of Worldwide Fiber
which (1) is not organized under the laws of (x) the United States or any state
of the United States, (y) the District of Columbia or (z) Canada or any province
of Canada and (2) conducts substantially all of its business operations outside
the United States of America and Canada.
"GAAP" means generally accepted accounting principles in the United States
as described in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
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(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except such balance that constitutes an accrued expense or trade payable;
or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person, which shall be considered the lesser of the full amount of
such Indebtedness and the fair market value of the property or asset so secured)
and, to the extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Worldwide Fiber or any Restricted Subsidiary of Worldwide Fiber sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Worldwide Fiber so that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of Worldwide
Fiber, Worldwide Fiber shall be considered to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Restricted Payments."
"Issue Date" means the first date on which any notes were issued under the
indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person and its Restricted Subsidiaries, determined in accordance with GAAP
and before any reduction for preferred stock dividends, excluding, however:
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(1) any gain or loss, together with any related provision for taxes on the gain
or loss, realized in connection with: (a) any Asset Sale; or (b) the
disposition of any securities by the Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of the Person or any
of its Restricted Subsidiaries; and
(2) any extraordinary gain or loss, together with any related provision for
taxes on the extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by Worldwide
Fiber or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, in each case after taking into account any available tax credits
or deductions and any tax sharing arrangements and amounts required to be
applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that were the subject of such Asset Sale.
"Network" means the fiber optic telecommunications network constructed or
owned from time to time by Worldwide Fiber and its Restricted Subsidiaries.
"Non-Competition Agreement" means that certain Letter to Worldwide Fiber
from Ledcor Inc., dated as of May 31, 1998, regarding Ledcor Inc.'s agreement
not to compete with Worldwide Fiber in the business of developing or
constructing fiber optic communications infrastructure.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Worldwide Fiber nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender; and
(2) no default with respect to which, including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes, the 1998 Notes or the Credit
Facilities) of Worldwide Fiber or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable before its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent Companies" means Ledcor Inc., an Alberta corporation, Worldwide
Fiber Holdings Ltd., an Alberta corporation, Ledcor Industries Limited, an
Alberta corporation, and Ledcom Holdings Ltd., an Alberta corporation.
"Permitted Fiber Investment" means any Investment of up to 12 fibers on any
Segment of the Network.
"Permitted Holder" means any Parent Company and its Affiliates.
"Permitted Investments" means:
(1) any Investment in Worldwide Fiber or in any Restricted Subsidiary of
Worldwide Fiber;
(2) any Investment in Cash Equivalents;
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(3) any Investment by Worldwide Fiber or any Restricted Subsidiary of Worldwide
Fiber in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Worldwide Fiber; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Worldwide Fiber or a Restricted Subsidiary of
Worldwide Fiber;
(4) any Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made under and in compliance with the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(5) advances and loans to officers and employees of Worldwide Fiber or any
Restricted Subsidiary in an amount not exceeding $5.0 million any one time
outstanding;
(6) Investments in the form of intercompany Indebtedness to the extent
permitted under clause (6) of the second paragraph under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock";
(7) Hedging Obligations, provided that such Hedging Obligations constitute
Permitted Indebtedness permitted by clause (7) of the second paragraph
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock";
(8) Investments of Worldwide Fiber or any Restricted Subsidiary existing on the
Issue Date; and
(9) Investments in securities of trade creditors or customers received under
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers.
"Permitted Liens" means:
(1) Liens on the assets of Worldwide Fiber and any Restricted Subsidiary of
Worldwide Fiber securing Indebtedness and other Obligations under Credit
Facilities that are permitted by the terms of the indenture to be incurred;
(2) Liens in favor of Worldwide Fiber or its Restricted Subsidiaries;
(3) Liens on property of a Person existing at the time such Person becomes a
Restricted Subsidiary of Worldwide Fiber or is merged with or into or
consolidated with Worldwide Fiber or any Restricted Subsidiary of Worldwide
Fiber; provided that such Liens were in existence before the contemplation
of such Person becoming a Restricted Subsidiary of Worldwide Fiber or
merger or consolidation and do not extend to any assets other than those of
such person or the Person merged into or consolidated with Worldwide Fiber
or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by Worldwide
Fiber or any Restricted Subsidiary of Worldwide Fiber, provided that such
Liens were in existence before the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business;
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(6) Liens to secure Purchase Money Indebtedness and Vendor Financing
Indebtedness permitted by clause (4) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets, or portion of the assets, acquired with
such Indebtedness;
(7) Liens existing on the Issue Date;
(8) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made for the Liens;
(9) Liens created for the benefit of the notes;
(10) Liens imposed by law or arising by operation of law, including, without
limitation, landlords', mechanics', carriers', warehousemen's,
materialmen's, suppliers', and vendors' Liens, Liens for master's and
crew's wages and other similar maritime Liens and mechanics' Liens, in each
case which are incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserves or other
appropriate provisions, if any, as shall be required by GAAP shall have
been made with respect thereto;
(11) zoning restrictions, easements, license, covenants, reservations,
restrictions on the use of real property and defects, irregularities and
deficiencies in title to real property that do not, individually or in the
aggregate, materially affect the ability of Worldwide Fiber or any
Restricted Subsidiary to conduct its business and are incurred in the
ordinary course of business;
(12) Liens incurred or pledges and deposits made in the ordinary course of
business in connection with workers' compensation and unemployment
insurance and other types of social security;
(13) Liens to secure any extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or
in part, of any Indebtedness secured by Liens referred to in the above
clauses (3), (4), (6), and (7) of this definition, provided that such Liens
do not extend to any other property of Worldwide Fiber or any Restricted
Subsidiary and the principal amount of the Indebtedness secured by such
Lien is not increased;
(14) judgment Liens not giving rise to an Event of Default so long as such Lien
is adequately bonded and any appropriate legal proceedings that may have
been initiated for the review of such judgment, decree or order shall not
have been finally terminated or the period within which such proceedings
may be initiated shall not have expired;
(15) Liens securing obligations of Worldwide Fiber under Hedging Obligations
permitted to be incurred under clause (7) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" or any collateral for the Indebtedness to which such Hedging
Obligations relate;
(16) Liens upon specific items of inventory or other goods and proceeds of any
Person securing such Person's obligations in respect of banker's
acceptances issued or credited for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(17) Liens securing reimbursement obligations with respect to commercial letters
of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;
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(18) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of Worldwide
Fiber or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(19) Liens arising out of consignment or similar arrangements for the sale of
goods in the ordinary course of business;
(20) any interest or title of a lessor in the Property subject to any lease
other than a Capital Lease;
(21) leases or subleases granted to others that do not materially interfere with
the ordinary course of business of Worldwide Fiber and its Restricted
Subsidiaries;
(22) Liens encumbering Property or other assets under construction arising from
progress or partial payments by a customer or us or our Restricted
Subsidiaries relating to such Property or other assets;
(23) Liens arising from filing Uniform Commercial Code financing statements
regarding leases, provided that such Liens do not extend to any property or
assets which are not leased property subject to such leases or subleases;
(24) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation
of goods;
(25) Liens securing Permitted ROW Indebtedness;
(26) Liens securing other Indebtedness not exceeding $5.0 million at any time
outstanding;
(27) Liens incurred in the ordinary course of business of Worldwide Fiber or any
Restricted Subsidiary of Worldwide Fiber with respect to obligations that
do not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by Worldwide Fiber or such Restricted Subsidiary; and
(28) Liens securing Qualified Subsidiary Indebtedness to the extent permitted to
be incurred under the "Incurrence of Indebtedness and Issuance of Preferred
Stock" covenant.
"Permitted Project Financing Investment" means an Investment by Worldwide
Fiber or any Restricted Subsidiary in any Unrestricted Subsidiary for the
purpose of facilitating the incurrence by such Unrestricted Subsidiary of
Non-Recourse Debt for the purpose of financing a portion of the cost of
construction, engineering, acquisition, installation, development or improvement
by such Unrestricted Subsidiary of any Segment of the Network; provided,
however, that the amount of any such Investment shall not exceed 55% of the
total initial capitalization of any such Unrestricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of Worldwide
Fiber or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Worldwide Fiber or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith);
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(2) such Permitted Refinancing Indebtedness has a final maturity date equal to
or later than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date equal to or
later than the final maturity date of, and is subordinated in right of
payment to, the notes on terms at least as favorable to the holders of
notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Worldwide Fiber or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Vendor Facilities" shall mean Vendor Financing Indebtedness that
is permitted to include working capital facilities.
"Permitted ROW Indebtedness" means Indebtedness evidencing the deferred
obligation to the seller of any ROW on which any Segment of our Network is being
constructed to pay the purchase price for such ROW; provided, however, that in
no event shall the aggregate principal amount of such Indebtedness exceed, with
respect to any Segment of the Network, more than 50% of the total anticipated
construction cost of such Segment, as determined by the Board of Directors in
good faith.
"Permitted Stockholder" means Worldwide Fiber Holdings Ltd., an Alberta
corporation, and its Affiliates.
"Permitted Telecommunications Asset Disposition" means the transfer,
conveyance, sale, lease, grant of an IRU or other disposition (each, a
"Disposition") in the ordinary course of business of dark fiber, conduit or
associated infrastructure of the Network, (1) the proceeds of which are treated
as revenues by Worldwide Fiber in accordance with GAAP and (2) that, in the case
of the sale of dark fiber, would not result in Worldwide Fiber retaining less
than (x) 24 fibers per route mile or (y) 12 fibers and one empty conduit per
route mile, in each case, on every Segment of the Network constructed or
developed by Worldwide Fiber (other than the FOTS in which Worldwide Fiber shall
only be required to retain six fibers per route mile on each Segment), provided,
however, that any Permitted Fiber Investment that results in Worldwide Fiber
retaining a minimum of 12 fibers per route mile (in the case of clause (x)
above) or one empty conduit (in the case of clause (y) above) shall be
considered to be a Permitted Telecommunications Asset Disposition; provided
further that any subsequent Disposition of the Permitted Fiber Investment shall
be considered to be an Asset Sale.
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person.
"Purchase Money Indebtedness" means Indebtedness of Worldwide Fiber
(including Acquired Indebtedness and Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of financing
all or any part of the cost of construction, engineering, acquisition,
installation, development or improvement by Worldwide Fiber or any Restricted
Subsidiary of any Telecommunications Assets of Worldwide Fiber or any Restricted
Subsidiary and including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
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"Qualified Equity Offerings" means (A) any underwritten public offering
(other than on Form S-4 or S-8 or any successor forms thereto) of common stock
of Worldwide Fiber in which the gross proceeds to us are at least $100.0 million
or (B) the sale by Worldwide Fiber of its Equity Interests to any Strategic
Equity Investor, the net proceeds of which are at least $25.0 million.
"Qualified Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary under one or more senior credit agreements, senior secured loan
agreements or similar senior secured facilities (including any supply or similar
agreement under which the goods to be financed were obtained) entered into from
time to time, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Segment" means (x) with respect to the intercity portions of the Network,
the through-portion of the network between two local networks and (y) with
respect to a local portion of the Network, the entire through- portion of the
Network, excluding the spurs which branch off the through-portion.
"Series A Notes" means Worldwide Fiber's U.S. $500,000,000 12% Senior Notes
due 2009.
"Series B Notes" means Worldwide Fiber's U.S. $500,000,000 12% Senior Notes
due 2009 to be issued pursuant to the Exchange Offer.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
under the Act, as such Regulation is in effect on the date of this Prospectus.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal before the date
originally scheduled for the payment thereof.
"Strategic Equity Investor" means a corporation, partnership or other
entity engaged in one or more Telecommunications Businesses that has 80% or more
of the voting power of its Capital Stock owned by a Person or Persons that has
or have, as the case may be, at the time of the initial investment in Worldwide
Fiber, an equity market capitalization in excess of $1.0 billion; provided that
in no event shall any Affiliate of Worldwide Fiber (immediately prior to the
time of such investment) be eligible to be a Strategic Equity Investor.
"Subsidiary" means, with respect to any Person:
(1) any corporation a majority of whose Capital Stock with voting power, under
ordinary circumstances, to elect directors is, at the date of
determination, directly or indirectly, owned by such Person (a
"subsidiary"), by one or more subsidiaries of such Person or by such Person
and one or more subsidiaries of such Person;
(2) a partnership in which such Person or a subsidiary of such Person is, at
the date of determination, a general partner of such partnership; or
(3) any partnership, limited liability company or other Person in which such
Person, a subsidiary of such Person or such Person and one or more
subsidiaries of such Person, directly or indirectly, at the date of
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determination, has (x) at least a majority ownership interest or (y) the
power to elect or appoint or direct the election or appointment of the
managing partner or member of such Person or, if applicable, a majority of
the directors or other governing body of such Person.
"Tax" shall mean any tax, duty, levy, impost, assessment or other
governmental charge, including penalties, interest and any other liabilities
related thereto.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business and the Equity Interests of
a Person engaged entirely or substantially entirely in a Telecommunications
Business.
"Telecommunications Business" means the business of (1) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased terrestrial or submarine transmission facilities and (2)
constructing, installing, maintaining, creating, developing or marketing
terrestrial or submarine communications related network infrastructure,
components, equipment, software and other devices for use in a
telecommunications business and any other business or opportunity that is
reasonably related or complementary the telecommunication business; provided
that the determination of what constitutes a Telecommunications Business shall
be made in good faith by the Board of Directors of Worldwide Fiber.
"Undertaking Agreements" means that certain Undertaking Agreement dated as
of May 31, 1998 between Worldwide Fiber (formerly known as Starfiber Inc.) and
786522 Alberta Ltd. pursuant to which 786522 Alberta Ltd. agreed to contribute
12 fiber strands on the FOTS to Worldwide Fiber in exchange for the issuance of
certain Capital Stock and the Agreement, dated May 28, 1999, as amended, between
Worldwide Fiber and certain affiliates of Ledcor whereby Worldwide Fiber agreed
to acquire certain fiber optic assets.
"Unrestricted Subsidiary" means any Subsidiary of Worldwide Fiber that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with
Worldwide Fiber or any Restricted Subsidiary of Worldwide Fiber unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to Worldwide Fiber or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of
Worldwide Fiber;
(3) is a Person with respect to which neither Worldwide Fiber nor any of its
Restricted Subsidiaries has any direct or indirect obligation to maintain
or preserve the Person's financial condition or to cause the Person to
achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Worldwide Fiber or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a director
or executive officer of Worldwide Fiber or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Worldwide Fiber or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Worldwide Fiber as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall
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thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture
and any Indebtedness of such Subsidiary shall be considered to be incurred by a
Restricted Subsidiary of Worldwide Fiber as of such date and, if the
Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," Worldwide Fiber shall be in default of such covenant. The
Board of Directors of Worldwide Fiber may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that the designation shall be
considered to be an incurrence of Indebtedness by a Restricted Subsidiary of
Worldwide Fiber of any outstanding Indebtedness of such Unrestricted Subsidiary
and the designation shall only be permitted if (1) such Indebtedness is
permitted under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if the designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Vendor Financing Indebtedness" means Indebtedness of Worldwide Fiber
incurred under any agreements between Worldwide Fiber and one or more vendors or
lessors (or any Affiliate of any such vendor or lessor) of Telecommunications
Assets used or intended for use in a Telecommunications Business by Worldwide
Fiber providing financing for all or any part of the cost of construction,
engineering, acquisition, installation, development or improvement by Worldwide
Fiber or any Restricted Subsidiary of any Telecommunications Assets from the
vendor or lessor (or any Affiliate of such vendor or lessor) and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time. Vendor Financing Indebtedness shall not
include any working capital facility or Indebtedness to fund interest or other
similar expenses made available by any vendor or lessor.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between the date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly-Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by the Person and/or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
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DESCRIPTION OF OTHER INDEBTEDNESS
1998 Notes
General. The 1998 Notes are senior obligations of ours, limited to $175
million in principal amount, and mature on December 15, 2005. The 1998 Notes,
which were issued pursuant to the 1998 indenture, accrue interest at a rate of
12 1/2% per annum. Interest is payable each June 15 and December 15, commencing
on June 15, 1999.
Ranking. The 1998 Notes rank senior in right of payment to any of our
future subordinated indebtedness, and pari passu in right of payment with all of
our senior indebtedness, including the Notes.
Optional Redemption. The 1998 Notes are not redeemable prior to December
31, 2003. Thereafter, the 1998 Notes will be redeemable, in whole or in part, at
our option, at the redemption prices set forth in the 1998 Indenture, plus
accrued and unpaid interest to the applicable redemption date. Specifically, if
redeemed during the 12-month period beginning on December 31 of the years set
forth below, the redemption price will be that amount, expressed as a percentage
of the principal amount of the 1998 Notes, listed below:
Year Redemption Price
- ---- ----------------
2003............................................... 106.250%
2004............................................... 100.000%
Despite the foregoing, however, we shall not be permitted to make an optional
redemption until we consummate an offer with respect to the amount of cash
generated by us which is not used for the provision of taxes, fixed charges,
extraordinary losses or to repay secured indebtedness (the "Accumulated Excess
Cash Flow Amount") existing at December 31, 2003 as described in "Excess Cash
Flow Offer" below.
In addition, (1) prior to December 15, 2001, we may redeem up to 35% of the
originally issued principal amount of the 1998 Notes at 112.5% of their
principal amount, plus accrued and unpaid interest through the redemption date,
with the net cash proceeds of one or more public equity offerings; provided,
however, that at least 65% of the originally issued principal amount of the 1998
Notes remains outstanding after the occurrence of the redemption and (2) we may
redeem the 1998 Notes at their face value if we become obligated to pay any
additional amounts as a result of change in the laws or regulations of Canada or
any Canadian taxing authority, or a change in any official position regarding
their application or interpretation.
Change of Control. Upon the occurrence of a change of control, each holder
of 1998 Notes will have the right to require us to repurchase all or any part of
that holder's 1998 Notes at a purchase price in cash equal to 101% of their
principal amount, plus accrued and unpaid interest to the date of purchase.
Excess Cash Flow Offer. If at the end of our fiscal quarter ended December
31, 2000 or any fiscal quarter ending on June 30 or December 31 thereafter, our
Accumulated Excess Cash Flow Amount exceeds $10.0 million, we will be required
to make an offer to all holders of 1998 Notes to purchase the maximum principal
amount of 1998 Notes that may be purchased using that Accumulated Excess Cash
Flow Amount at an offer price equal to 110% of the principal amount of the 1998
Notes, plus accrued and unpaid interest to the date of purchase, subject to a
limitation that we are not obliged to repurchase more than 25% of the original
principal amount of the 1998 Notes before December 31, 2003.
Covenants. The 1998 indenture contains certain covenants that, among other
things, limit the ability of Worldwide Fiber and its restricted subsidiaries to:
o borrow money,
o pay dividends on stock or repurchase stock,
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o make investments,
o use assets as security in other transactions, and
o sell certain assets or merge with or into other companies.
Events of Default. The 1998 indenture contains customary events of default,
including:
o defaults in the payment of principal, premium or interest,
o defaults in the compliance with covenants contained in the 1998
indenture,
o cross defaults on more than $10 million of other indebtedness,
o failure to pay more than $10 million of judgments that have not been
stayed by appeal or otherwise, and
o the bankruptcy of Worldwide Fiber or certain of its subsidiaries.
Proposed Worldwide Fiber Inc. Credit Facility
We have accepted a commitment letter from an affiliate of Salomon Smith
Barney Inc., one of the initial purchasers of the notes, to arrange, subject to
credit approval and final documentation, a senior secured revolving credit
facility of up to $115 million. We expect the facility to close in the first
quarter of 2000.
The indebtedness outstanding under the proposed credit facility would be
guaranteed by some of our subsidiaries and would be secured by all property and
assets owned by and all capital stock and intercompany indebtedness of us and
some of our subsidiaries.
The proposed credit facility would contain various covenants which would
restrict us and our subsidiaries with respect to, among other things, incurring
indebtedness, entering into merger or consolidation transactions, disposing of
our assets, acquiring assets, making certain restricted payments, repaying the
notes, creating any liens on our assets, making investments, and entering into
sale and leaseback transactions and transactions with affiliates. The proposed
credit facility would also require that we comply with various financial
covenants, including a fixed charge coverage ratio, maximum leverage ratios and
a limit on capital expenditures. The proposed credit facility would also contain
certain events of default, including default upon the nonpayment of principal,
interest, fees or other amounts, a cross-default with respect to other
obligations of ours and our subsidiaries, failure to comply with certain
covenants, conditions or provisions under the credit facility, the existence of
certain unstayed or undischarged judgments, the occurrence of any default under
material agreements that could result in a material adverse effect on us, the
making of materially false or misleading representations or warranties, or the
commencement of reorganization, bankruptcy, insolvency or similar proceedings or
the occurrence of certain ERISA events or a change of control. Upon occurrence
and during the continuance of an event of default under the credit facility, all
obligations under the credit facility could be declared to be immediately due
and payable.
We are likely from time to time, prior to the maturity date of the notes,
to refinance, replace, restructure, substitute for, amend or supplement the
credit facility. The actual terms of any credit facility could differ
substantially from the proposed facility outlined above.
Proposed Hibernia Credit Facility
We have accepted a commitment letter from Goldman Sachs Credit Partners LP,
DLJ Capital Funding, Inc. and Credit Suisse First Boston, to arrange, subject to
certain standard conditions, including completion of
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definitive documentation, up to $565 million in senior secured credit facilities
consisting of two term loan facilities aggregating $575 million and a $25
million working capital revolving credit facility. DLJ Capital Funding, Inc. is
an affiliate to Donaldson Lufkin & Jenrette Securities Corporation, one of the
initial purchasers of the notes.
The indebtedness outstanding under the proposed credit facility would be
borrowed by one of our subsidiaries and would be secured by all property and
assets owned by that subsidiary and relating to Hibernia. The proposed facility
would be non-recourse to Worldwide Fiber Inc. The proposed credit facility would
contain various covenants which would restrict the subsidiary to the
development, design, engineering, construction and installation of Hibernia. The
actual terms of the definitive credit facility could differ substantially from
the proposed facility outlined above.
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BOOK-ENTRY, DELIVERY AND FORM
The old notes were offered and sold to qualified institutional buyers (as
defined in Rule 144A under the Securities Act) ("QIBs") in reliance of Rule 144A
under the Securities Act or Rule 144A notes). Rule 144A notes were initially
represented by one or more notes in registered, global form without interest
coupons. The global old notes were deposited upon issuance with the trustee, as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee for credit to the accounts of DTC's
Direct and Indirect Participants (as defined below). Except for new notes issued
in certificated form, the new notes will be represented by one or more notes in
registered, global form without interest coupons. The global new note will be
deposited upon issuance with the trustee as custodian for DTC and registered in
the name of DTC or its nominee, in each case for credit to an account of direct
or indirect participant.
Except as described below, the global new note may be transferred, in whole
but not in part, only to another nominee of DTC or to successor of DTC or its
nominee. Beneficial interests in the global new note may not be exchanged for
new notes in certificated form except in the limited circumstances described
below. See "--Exchange of the Global New Note for Certificated New Notes."
The new notes may be presented for registration of transfer and exchange at
the offices of the Registrar (as defined in the indenture).
Depositary Procedures
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Participants. The Direct Participants include securities
brokers and dealers (including the initial purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants").
DTC has also advised us that, under DTC's procedures, (1) upon deposit of
the global new note, DTC will credit the accounts of the exchanging Direct
Participants with portions of the global new note and (2) DTC will maintain
records of the ownership interests of the Direct Participants in the global new
note and the transfer of ownership interests by and between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer of
ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the global notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the global new note.
Investors in the global new note may hold their interests in the global new
note directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
global new note to the persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a global new note to
pledge the interest to persons or entities that are not Direct Participants in
DTC, or to otherwise take actions for the interests, may be affected by the lack
of physical certificates evidencing the interests. For certain other
restrictions on the transferability of the new notes see "--Exchange of the
Global New Note for Certificated New Notes."
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Except as described in this prospectus, owners of beneficial interests in
the global new note will not have new notes registered in their names, will not
receive physical delivery of new notes in certificated form and will not be
considered the registered owners or holders of new notes under the indenture for
any purpose.
Under the terms of the indenture, we and the trustee will treat the persons
in whose names the new notes are registered (including the global new note) as
the owners of the new notes for the purpose of receiving payments and for any
and all other purposes whatsoever. Payments for the principal, premium, and
interest on the global new note registered in the name of DTC or its nominee
will be payable by the trustee to DTC or its nominee as the registered holder
under the indenture. Consequently, neither we, the initial purchasers, the
trustee nor any agent of ours or the trustee has or will have any responsibility
or liability for (1) any aspect of DTC's records or any Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the global new note or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests in
any global new note or (2) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised us that its current payment practice (for payments of
principal, interest and the like) concerning securities the as the new notes is
to credit the accounts of the relevant Direct Participants with the payment on
the payment date in amounts proportionate to the Direct Participant's respective
ownership interests in the relevant security as shown on DTC's records. Payments
by Direct Participants and Indirect Participants to the beneficial owners of the
new notes will be governed by standing instructions and customary practices
between them and will not be our responsibility or the responsibility of DTC or
the trustee. Neither we nor the trustee will be liable for any delay by DTC or
its Direct Participants or Indirect Participants in identifying the beneficial
owners of the new notes, and we and the trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee as the
registered owner of the global new note for all purposes.
The global new note will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of the
Direct Participant but generally will settle in immediately available funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of new notes only at the direction of one or more Direct Participants to
whose account interests in the global new note are credited and only for the
portion of the aggregate principal amount of the new notes to which the Direct
Participant or Direct Participants has or have given direction. However, if
there is an Event of Default under the new notes, DTC reserves the right to
exchange the global new note (without the direction of one or more of its Direct
Participants) for new notes in certificated form, and to distribute the new
notes to its Direct Participants. See "--Exchange of the Global New Note for
Certificated New Notes."
Although DTC agreed to the above procedures to facilitate transfers of
interests in the global new note among accountholders in DTC, it is under no
obligation to perform or to continue to perform the procedures, and the
procedures may be discontinued at any time. Neither we, the trustee nor any of
our or the trustee's agents will have any responsibility for the performance by
DTC or its respective participants, indirect participants or accountholders of
their respective obligations under the rules and procedures governing any of
their operations.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that we believe to be reliable, but we take no
responsibility for its accuracy.
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Exchange of the Global New Note for Certificated New Notes
New notes issued or transferred to institutional "accredited investors"
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the
Securities Act who are not QIBs will be issued in registered certificated form.
In addition, the global new note is exchangeable for definitive new notes in
registered certificated form if (1) DTC (x) notifies us that it is unwilling or
unable to continue as depository for the global new note and we thereupon fail
to appoint a successor depository or (y) has ceased to be a clearing agency
registered under the Exchange Act, (2) we, as our option, notify the trustee in
writing that we elect to cause the issuance of the new notes in certificated
form or (3) there shall have occurred and be continuing a Default or an Event of
Default concerning the notes. In all cases, certificated new notes delivered in
exchange for the global new note or beneficial interests in the global new note
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of DTC (in accordance with its customary procedures).
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MATERIAL UNITED STATES AND CANADIAN INCOME TAX CONSIDERATIONS
The discussion below is a general description of the material United States
and Canadian income tax consequences to beneficial owners of notes. This
discussion does not take into account the individual circumstances of any
particular investor and does not purport to discuss all of the possible tax
consequences of the purchase, ownership and disposition of the notes. Therefore,
prospective investors are urged to consult their own tax advisors concerning the
tax consequences of purchasing, holding and disposing of the notes, including
the application of state, provincial, local, foreign and other tax laws.
United States
The following is a general discussion of the material U.S. federal income
tax consequences of the exchange of old notes for new notes under the exchange
offer and the ownership and disposition of the new notes to investors who are
U.S. Holders. As used in this prospectus, "U.S. Holder" means a beneficial owner
of a note that is
o an individual who is a citizen or resident of the United States,
o a corporation or other entity taxable as a corporation, created or
organized in or under the laws of the United States or of any state of
the United States (including the District of Columbia),
o an estate the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source or
o a trust if a U.S. court is able to exercise primary supervision over
the trust's administration and one or more U.S. persons have authority
to control all substantial decisions of the trust.
This discussion is based on the Internal Revenue Code of 1986, as amended
or the Code, Treasury regulations promulgated under the Code, and administrative
and judicial interpretations of the Code, all as in effect or proposed on the
date of this prospectus and all of which are subject to change, possibly with
retroactive effect. This discussion is limited to U.S. Holders that purchase
notes at the issue price and hold notes as capital assets within the meaning of
Section 1221 of the Code. This discussion does not address federal alternative
minimum tax consequences or all aspects of U.S. federal income taxation that may
be relevant to particular purchasers in light of their personal circumstances or
to purchasers subject to special treatment under U.S. federal income tax law
(including, without limitation, dealers in securities or foreign currency,
tax-exempt entities, banks, insurance companies or other financial institutions,
persons that hold notes as part of a "straddle," "hedge" or "conversion
transaction," persons that have a "functional currency" other than the U.S.
dollar and persons that own notes through partnerships or other pass-through
entities). This discussion also does not address any tax consequences arising
out of the tax laws of any state, local or foreign jurisdiction.
Prospective purchasers are urged to consult their own tax advisors as to
the particular tax consequences to them of the exchange of old notes for new
notes and the ownership and disposition of new notes, including the
applicability of any state, local or foreign tax laws, and any changes (or
proposed changes) in applicable tax laws or their interpretations.
Federal Income Tax Consequences of Tendering Old Notes for New Notes
Exchange Offer
A U.S. Holder will not recognize taxable gain or loss on the exchange of
old notes for new notes under the exchange offer, and a U.S. Holder's tax basis
and holding period for the new notes will be the same as for the old notes
immediately before the exchange.
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Federal Income Tax Consequences of Owning and Disposing of New Notes
Interest on Notes
Interest paid on a note will be taxable to a U.S. Holder as ordinary
interest income, generally at the time it is received or accrued, in accordance
with the holder's regular method of accounting for United States federal income
tax purposes. If Canadian withholding taxes are imposed on the interest
payments, Worldwide Fiber will be required to pay Additional Amounts to holders
of notes (see "Description of Notes--Payment of Additional Amounts"). Worldwide
Fiber believes that the imposition of Canadian withholding taxes concerning
interest on the notes as a result of a change in Canadian tax law is a remote
and incidental contingency. Accordingly, Worldwide Fiber does not intend to
treat the notes as contingent payment debt instruments. Similarly, Worldwide
Fiber believes that the likelihood of a redemption or a repurchase as a result
of a "Change of Control" is remote and Worldwide Fiber does not intend to treat
that possibility as affecting the yield to maturity of the notes for U.S.
federal income tax purposes.
Sale, Redemption or Retirement of Notes
Upon the sale, redemption, retirement at maturity or other taxable
disposition of a note, a U.S. Holder generally will recognize gain or loss equal
to the difference between the sum of cash plus the fair market value of all
other property received on that sale, redemption, retirement or disposition
(except to the extent the cash or property is attributable to accrued but unpaid
interest that has not previously been included in the holder's income) and the
U.S. Holder's tax basis in the note (generally, its cost).
Gain or loss recognized on the sale or other taxable disposition of a note
generally will be capital gain or loss and will be long-term capital gain or
loss if, at the time of the disposition, the note has been held for more than
one year. In the case of a U.S. Holder who is an individual, long term capital
gains generally are subject to a maximum capital gains rate of 20%.
Foreign Tax Credit Considerations
Interest on the notes will constitute income from sources without the
United States for United States foreign tax credit purposes. Payment of interest
on the notes will not be subject to Canadian withholding tax. See "--Canada."
If, however, the interest payments on the notes become subject to Canadian
withholding taxes as the result of a change in Canadian tax law, U.S. Holders
will be treated for U.S. federal income tax purposes as having actually received
the amount of the taxes withheld and as having paid that amount to the Canadian
taxing authorities. As a result, the amount of interest income included in gross
income by a U.S. Holder generally will be greater than the amount of cash
actually received by the U.S. Holder from Worldwide Fiber for the interest
income. A U.S. Holder may be able, subject to generally applicable limitations,
to claim a foreign tax credit or take a deduction for Canadian withholding taxes
imposed on interest payments (including withholding taxes imposed on Additional
Amounts).
Gain or loss on the sale, redemption, retirement at maturity or other
taxable disposition of a note generally will constitute U.S. source gain or loss
for U.S. foreign tax credit purposes.
Backup Withholding
Backup withholding may apply to certain payments of principal, premium, if
any, and interest on a note and to proceeds of the sale or other disposition of
a note before maturity. Worldwide Fiber, or its U.S. agent or broker, will be
required to withhold from any payment that is subject to backup withholding a
tax equal to 31% of the payment, unless the U.S. Holder furnishes its taxpayer
identification number (social security or employer identification number),
certifies that the number is correct, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. Certain U.S.
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Holders, including corporations, are not subject to backup withholding. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Holder generally will be allowed as a credit against the U.S. Holder's U.S.
federal income tax liability and may entitle the U.S. Holder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
Canada
The following summarizes the material Canadian federal income tax
considerations as of the date of this prospectus under the Income Tax Act
(Canada) (the "Canadian Tax Act") and the published administrative practice of
Revenue Canada generally applicable to a holder of notes who acquires notes
under this prospectus.
This summary is based upon the provisions of the Canadian Tax Act and the
regulations adopted under the Canadian Tax Act (the "Regulations") in force on
the date of this prospectus, proposed amendments to the Canadian Tax Act and the
Regulations publicly announced prior to the date of this prospectus by or on
behalf of the Minister of Finance (Canada) and current published administrative
practices and assessing policies of Revenue Canada. This summary does not
otherwise take into account or anticipate any changes in law or administrative
practice, whether by legislative, governmental or judicial action, nor does it
take into account provincial or foreign income tax considerations. This summary
of Canadian federal income tax considerations does not take into account the
individual circumstances of any particular investor and does not purport to
discuss all of the possible tax consequences of an investment in the notes.
Prospective holders should consult their tax advisors for advice regarding the
income tax considerations applicable to them.
The following discussion is applicable to a holder (other than an initial
purchaser) who, for purposes of the Canadian Tax Act and any relevant tax
treaty, deals at arm's length with Worldwide Fiber, is not and is not deemed to
be a resident of Canada, does not use or hold, and is not deemed to use or hold,
the notes in the course of carrying on a business in Canada and, in the case of
a person who carries on an insurance business in Canada and elsewhere,
establishes the notes are not effectively connected with the insurance business
carried on in Canada and are not "designated insurance property" for purposes of
the Canadian Tax Act (a "Non-Resident Holder"). For purposes of the Canadian Tax
Act, related persons (as defined in the Canadian Tax Act) are deemed not to deal
at arm's length, and it is a question of fact whether persons not related to
each other deal at arm's length.
The payment by Worldwide Fiber of interest, principal or premium on the
notes to a Non-Resident Holder will be exempt from Canadian withholding tax.
No other tax on income (including taxable capital gains) will be payable by
a Non-Resident Holder under the Canadian Tax Act as a result of the acquisition,
holding, sale, redemption or other disposition of the notes, including the
receipt of interest or premium thereon.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account through the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired by the broker-dealer as a result of market-making activities or
other trading activities. We have agreed that, starting on the expiration date
and ending on the close of business on the 180th day following the expiration
date, we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with a resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
through the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions through
the writing of options on the new notes or a combination of these methods of
resale, at market prices prevailing at the time of resale, at prices re-
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lated to prevailing market prices or at negotiated prices. The resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the broker-dealer
and/or the purchasers of the new notes. Any broker-dealer that resells new notes
that were received by it for its own account under the exchange offer and any
broker or dealer that participates in a distribution of new notes may be
considered to be an "underwriter" within the meaning of the Act and any profit
of resale of new notes and any commissions or concessions received by any person
may be considered to be underwriting compensation under the Securities Act. The
letter of transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not have admitted that it is an
"underwriter" within the meaning of the Securities Act. By acceptance of the
exchange offer, each broker-dealer that receives new notes under the exchange
offer agrees to notify us before using this prospectus in connection with the
sale or transfer of new notes, and acknowledges and agrees that, upon receipt of
notice from us of the happening of any event which makes any statement in this
prospectus untrue in any material respect or which requires the making of any
changes in this prospectus to make the statements in this prospectus not
misleading, which notice we agree to deliver promptly to the broker-dealer, the
broker-dealer will suspend use of this prospectus until we have amended or
supplemented the prospectus to correct the misstatement or omission and have
furnished copies of the amended or supplemented prospectus to the broker-dealer.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests these documents in the letter of
transmittal. We have agreed to pay all expenses for the exchange offer
(including the expenses of any one special counsel for the holders of the notes)
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the notes participating in the exchange offer
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
The holder of each old note accepted for exchange will receive a new note
in an amount equal to the surrendered old note. Old notes accepted for exchange
will not accrue interest from the date the exchange offer is completed. Holders
of old notes accepted for exchange will not receive any payment of accrued
interest on those old notes. Old notes which are not tendered or not accepted
for exchange will continue to accrue interest.
The old notes were issued on July 28, 1999 in a transaction exempt from the
registration requirements of the Securities Act. They may not be offered or sold
in the United States unless registered or under an applicable exemption under
the Securities Act. We are offering the new notes under this prospectus to
satisfy certain of our obligations contained in the registration rights
agreement we entered into concerning the offering. Based on interpretations by
the staff of the Securities and Exchange Commission as described in no-action
letters issued to others, we believe that new notes issued through the exchange
offer in exchange for old notes may be offered for resale, resold and otherwise
transferred by any holder of notes, except a holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that these new notes are acquired in the ordinary course of the
holder's business and the holder has no arrangement or understanding with any
person to participate in a distribution of these new notes. However, we have not
sought a no-action letter concerning the exchange offer and we cannot assure you
that the staff of the Securities and Exchange Commission would make a similar
determination about the exchange offer. Each holder of old notes, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage or participate in, a distribution of new notes and has no arrangement
or understanding to participate in a distribution of new notes. Each
broker-dealer that receives new notes for its own account through the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of new notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not have admitted that it
is an "underwriter" within the meaning of the Securities Act. This prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer with resales of new notes received in exchange for old notes
acquired by that broker-dealer as a result of market-making activities or other
trading activities. We have agreed that, for a period ending at the close of
business on the 180th day following the expiration date, we will make this
prospectus available to any broker-dealer to use with resales. See "Plan of
Distribution."
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We will not receive any proceeds from the exchange offer. We will pay all
the expenses of the exchange offer. In the event we terminate the exchange offer
and do not accept any old notes for exchange we will promptly return the old
notes to the holders of the notes. See "The Exchange Offer."
There has previously been only a limited secondary market, and no public
market, for the old notes. The old notes are eligible for trading in The Portal
Market. We have been advised by the initial purchasers that they intend to make
a market for the new notes; however, the initial purchasers are not obligated to
do so. We do not currently intend to list the new notes on any securities
exchange. Any market-making may be discontinued at any time, and there is no
assurance that an active public market for the new notes will develop or, if it
does develop, that it will continue. This prospectus may be used by the initial
purchasers in connection with offers and sales of the new notes which may be
made by them from time to time in market-making transactions at negotiated
prices relating to prevailing market prices at the time of sale. The initial
purchasers may act as principal or agent in this transaction.
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance of it would not comply with the securities or blue sky
laws of that jurisdiction.
You should rely only on the information contained in this document or what
we have referred you to. We have not authorized anyone to provide you with
information that is different.
The market data included in this prospectus, including information relating
to our relative position in the industry, are based on independent industry
publications, other publicly available information or our management's good
faith beliefs. Although we believe that these independent sources are reliable,
the accuracy and completeness of these independent sources has not been
independently verified.
Old notes in the aggregate principal amount of $500 million were issued
originally in global form. The global old note was deposited with The Depository
Trust Company, as initial depository. The global old note is registered in the
name of Cede & Co., as nominee of the depository. Beneficial interests in the
global old note are shown on, and transfers of the global old note are effected
only through, records maintained by the depository and its participants. The use
of the global old note to represent certain of the old notes permits the
depository's participants, and anyone holding a beneficial interest in an old
note registered in the name of that a participant, to transfer interests in the
old notes electronically in accordance with the depository's established
procedures without the need to transfer a physical certificate. The new notes
will also be issued initially as a note in global form and deposited with the
depository.
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LEGAL MATTERS
Certain legal matters concerning the new notes will be passed upon for
Worldwide Fiber by Cahill Gordon & Reindel, New York, New York (concerning
matters of U.S. law) and Farris, Vaughan, Wills & Murphy, Vancouver, British
Columbia (concerning matters of Canadian law).
EXPERTS
The divisional financial statements of the predecessor division as of May
31, 1998, August 31, 1997 and August 31, 1996 and for each of the periods then
ended and the divisional statements of operations and retained earnings and cash
flows for the year ended March 31, 1996, included in this prospectus, have been
audited by Deloitte & Touche LLP, Edmonton, Alberta, as stated in their report
contained in this prospectus. Deloitte & Touche LLP have been auditors of Ledcor
for 51 years.
Our consolidated financial statements dated December 31, 1998, included in
this prospectus, have been audited by PricewaterhouseCoopers LLP, Vancouver,
British Columbia, as stated in their report contained in this prospectus.
PricewaterhouseCoopers LLP are Worldwide Fiber's auditors.
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ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
We are a corporation organized under the laws of Canada. A majority of our
directors and officers, as well as certain experts named in this prospectus,
reside principally in Canada. Because all or a substantial portion of our assets
and the assets of these persons are located outside the United States, it may
not be possible for you to effect service of process within the United States
upon us or those persons. Furthermore it may not be possible for you to enforce
against us or them in the United States, judgments obtained in U.S. courts based
upon the civil liability provisions of the U.S. Federal securities laws or other
laws of the United States. We have been advised by Farris, Vaughan, Wills &
Murphy, our Canadian counsel, that there is doubt as to the enforceability, in
original actions in Canadian courts, of liabilities based upon the U.S. Federal
securities laws and as to the enforceability in Canadian courts of judgments of
U.S. courts obtained in actions based upon the civil liability provisions of the
U.S. Federal securities laws. Therefore, it may not be possible to enforce those
actions against us, our directors and officers or the experts named in this
prospectus.
CURRENCY TRANSLATION
We report our financial statements in U.S. dollars, while the currency of
measurement for our operations varies depending upon location. Unless otherwise
indicated, references to "dollars" or "$" are to U.S. dollars and references to
"Cdn. $" are to Canadian dollars.
The following table lists, for each period indicated, the high and low
exchange rates for Canadian dollars expressed in U.S. dollars, based on the
inverse of the noon buying rate in New York City for cable transfers in foreign
currencies, as certified for customs purposes by the Federal Reserve Bank of New
York, the average of these exchange rates on the last day of each month during
this period, and the exchange rate at the end of this period:
<TABLE>
<CAPTION>
Year Ended December 31,
Nine Months Ended
September 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
High..................... 0.7632 0.7527 0.7513 0.7487 0.7105 0.6912
Low...................... 0.7103 0.7023 0.7235 0.6945 0.6341 0.6477
Average (1).............. 0.7300 0.7305 0.7329 0.7198 0.6714 0.6714
Rate at period end....... 0.7128 0.7323 0.7301 0.6999 0.6504 0.6911
- --------------------
</TABLE>
(1) The average of the exchange rate on the last day of each month during the
applicable period.
On January 15, 2000, the inverse of the noon buying rate was Cdn. $1.00 =
$0.6669. There are currently no Canadian restrictions on currency exchanges or
the repatriation of dividends or capital gains.
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<TABLE>
<CAPTION>
GLOSSARY
<S> <C>
Asynchronous Transfer Mode
(ATM)......................... A cell-based connection-oriented technology that provides a protocol for
transmitting multiple traffic types over high-speed networks.
Available Bit Rate (ABR)...... A class of service in which the ATM Network makes its "best effort" to meet
traffic bit rate requirements.
Band.......................... A range of frequencies between two defined limits.
bandwidth..................... The relative range of analog frequencies or digital signals that can be
passed through a transmission medium, such as glass fibers, without
distortion. The greater the bandwidth, the greater the information carrying
capacity. Bandwidth is measured in hertz (analog) or bits per second
(digital).
Bit........................... A binary unit of information that can have either of two values, 0 or 1.
carrier....................... A provider of communications transmission services by fiber, wire or radio.
carrier's carrier............. A provider of communications transmission services that specializes in the
wholesale provision of telecommunications bandwidth and services to other
carriers and service providers.
Cell.......................... For ATM, an information package consisting of 53 bytes, or octets, of data.
Of these, the first 5 constitute the header: 48 carry the payload.
Cell Relay.................... Network transmission format that uses small packets of the same size, called
cells. The cells are fixed-length and can be transmitted and processed by
hardware at very high rates. Cell relay acts as a basis for ATM.
Cell Relay Service............ A carrier service that supports the receipt and transmission of ATM cells
between end users in compliance with ATM standards and implementation
specifications.
Circuit Emulation Service
(CES)......................... ATM Forum-defined service that provides a virtual circuit connection that
emulates the characteristics of a real, constant-bit-rate,
dedicated-bandwidth circuit.
city ring..................... A facility of conduit and fiber optic cable encircling a metropolitan area.
CLEC.......................... Competitive local exchange carrier. A company that competes with LECs in
the local services market.
Constant Bite Rate (CBR)...... Delay intensive applications such as video and voice that must be digitized
and represented by a continuous bit stream. CBR traffic requires guaranteed
levels of service and throughput.
CRTC.......................... Canadian Radio-television and Telecommunications Commission.
customer premises equipment
edge.......................... ATM access equipment located on a customer site.
dark fiber.................... Fiber that lacks the requisite optical transmission equipment necessary to
use the fiber for transmission.
digital....................... Describes a method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission/switching technologies employ a
sequence of discrete, distinct pulses to represent information, as opposed
to the continuously variable analog signal. This gives operators
significant capacity increases over analog.
DWDM.......................... Dense Wavelength Division Multiplexing. High speed version of WDM, which is
a means of increasing the capacity of SONET fiber-optic transmission systems
through the multiplexing of multiple wavelengths of light. A technique for
transmitting more than one light wave frequency on a single fiber to
increase the information carrying capacity.
A-1
<PAGE>
FCC........................... Federal Communications Commission.
fiber miles................... The number of route miles installed along a telecommunications path
multiplied by the number of fibers along the path. See the definition of
"route miles" below.
fiber optics.................. Fiber optic technology involves sending laser light pulses across glass
strands in order to transmit digital information. Fiber optic cable is the
medium of choice for the telecommunications and cable industries.
frame relay................... A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5 megabits per seconds.
This service is well-suited for connecting local area networks, but is not
presently well suited for voice and video applications due to the variable
delays which can occur. Frame Relay was designed to operate at high speeds
on modern fiber optic networks.
ILEC.......................... Incumbent local exchange carrier.
IP............................ Internet protocol.
ISP........................... Internet service provider. A company that provides businesses and consumers
with access to the Internet.
IRU........................... Indefeasible right of use. A long-term lease of approximately 10 or 20
years with option periods thereafter to renew at lower rates, at the option
of the lessee.
IXC........................... Interexchange carrier. In the United States, a company providing inter-LATA
or long distance services between LATAs on an intrastate or interstate
basis. In Canada, a company that provides long distance services between
local telephone exchanges on an intraprovincial or interprovincial basis.
jetting....................... The process of blowing fiber through a conduit.
LAN........................... Local area network.
LATA.......................... Local access and transport area. The approximately 200 geographic areas in
the United States that define the areas between which the RBOCs currently
are prohibited from providing long distance services.
LEC........................... Local exchange carrier.
lit fiber..................... Fiber activated or equipped with the requisite optical transmission
equipment necessary to use the fiber for transmission.
MSP........................... Multi service platform.
multiplexing.................. An electronic or optical process that combines a large number of lower speed
transmission lines into one high speed line by splitting the total available
bandwidth into narrower bands (frequency division), or by allotting a common
channel to several different transmitting devices, one at a time in sequence
(time division).
Multiprotocol Encapsulation
over ATM...................... The process for enabling an ATM device or application to add a standard
protocol identifier to the LAN data which allows higher-layer protocols,
such as IP, to be routed over ATM.
NNI links..................... Network to network interface links.
NOC........................... Network Operations Center.
OC-192........................ OC is a measure of SONET transmission optical carrier level, which is equal
to the corresponding number of DS3s (e.g., OC3 is equal to 3 DS3s (DS3
service has a bit rate of 45 megabits per second and typically transmits 672
simultaneous voice conversations) and OC48 is equal to 48 DS3s).
Optical Add/Drop.............. Optical equipment where an individual wavelength is added or dropped.
Optical Carrier (OCx)......... Fundamental unit of measurement used in SONET (Synchronous Optical Network)
hierarchy. OC indicates an optical carrier
signal and x represents
A-2
<PAGE>
increments of
51.84Mb/s. OC-1, OC-3, and OC-12 represent
optical transmission rates of 51, 155,
622Mb/s.
Optical Line Amplifier........ A device used to boost the strength of an optical signal, which is weakened
(attenuated) as it passes through the transport network.
Optical Terminal.............. A group of optoelectric circuits that converts an electrical signal to an
optical signal and an optical signal to an electrical signal.
Permanent Virtual Circuit
(PVC)......................... A defined virtual link with fixed end-points that are set-up by the network
manager. A single virtual path may support multiple PVC's.
POP........................... Points-of-presence. Locations where a carrier has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of the carrier, or locations in customer buildings where a
carrier has installed electronics and/or facilities.
PNN........................... Private Network--Network Interface.
Protocol...................... A formal description of a set of rules and conventions that govern how
devices on a network exchange information. These rules consist of syntax
(header structure), semantics (actions and reactions that are supposed to
occur), and timing (relative ordering and direction of states and events).
Quality of Service (QoS)...... The set of parameters and their values that quantify the performance of a
given virtual circuit.
RBOC.......................... Regional Bell Operating Companies. The seven local telephone companies
established as a result of the court-ordered breakup in 1984 of AT&T.
Regeneration Shelter.......... A self-contained, pre-constructed building that houses environmental and
electrical support for optoelectric circuitry.
reseller...................... A carrier that does not own transmission facilities, but obtains
communications services from another carrier on a wholesale basis for resale
to the public.
route miles................... The number of miles of the telecommunications path in which fiber optic
cables are installed.
ROW........................... Rights-of-way, licenses and permits (creating a contractual interest and not
an interest in land) from third party landowners and governmental
authorities which permit the holder to install conduit and fiber.
SONET Ring.................... Synchronous Optical Network Technology Ring. An electronics and network
architecture for variable-bandwidth products which enables transmission of
voice, data and video (multimedia) at very high speeds in the event of a
fiber cut by automatically rerouting traffic in the opposite direction
around the ring.
switch........................ A sophisticated computer that accepts instructions from a caller in the form
of a telephone number. Like an address on an envelope, the numbers tell the
switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission
path between users. Switches allow local telecommunications service
providers to connect calls directly to their destination, while providing
advanced features and recording connection information for future billing.
Switched Virtual Circuit (SVC)
A virtual link, with variable end-points,
established through an ATM network. With an
SVC, the user defines the end-points when
the call is initiated that are subsequently
terminated at the end of the call.
Synchronous Optical Network
(SONET)....................... A Consultative Committee for International Telegraph and Telephony standard
for synchronous transmission up to multi-gigabit speeds.
A-3
<PAGE>
Unspecified Bit Rate (UBR)....
An ATM service type in which the ATM network
makes a "best effort" to meet the
transmitter's bandwidth requirements;
essentially a "send and pray" service like
that available from today's networks.
User Network Interface (UNI)..
The protocol to define connections between
ATM end-stations and the ATM switch
including signaling, cell structure,
addressing, traffic management, and
adaptation layers.
Variable Bit Rate (VBR)....... Applications, which produce traffic of varying bit rates, like common LAN
applications, that produce varying throughput rates.
Variable Bit Rate/non-real
time (VBR/nrt)................ One of five ATM Forum-defined service types. Supports variable bit rate
traffic which requires strict timing control, such as packetized voice or
video, with average, and peak traffic parameters.
Variable Bit Rate/real time
(VBR/rt)...................... One of five ATM Forum-defined service types. Supports variable bit rate
traffic which requires strict timing control, such as packetized voice or
video, with average, and peak traffic parameters.
Virtual Channel Connection
(VCC)......................... Virtual channels in two or more sequential physical circuits can be
concatenated to create an end-to-end connection called a VCC. A VCC is a
specific instance of a SVC or PVC. A VCC may traverse one end-to-end VPC or
several sequential VPCs.
Virtual Circuit (VC).......... Logical channel established as a result of the call initiation procedure to
a network address that exists for a period of time.
Virtual Path.................. A group of virtual channels, which can support multiple virtual circuits.
Virtual Path
Identifier/Virtual Channel
Identifier (VPI/VCI).......... Combined, these fields identify a connection in the ATM network.
xDSL.......................... A term referring to a variety of new Digital Subscriber Line technologies.
Some of these varieties are asymmetric with
different data rates in the downstream and
upstream directions. Others are symmetric.
Downstream speeds range from 384 kbps, or
SDSL, to 1.5-8 Mbps, or ADSL.
</TABLE>
A-4
<PAGE>
Worldwide Fiber Inc.
Index to Pro Forma Financial Information
Page
Nature and Purpose of Pro Forma Financial Information.................. PF-2
Pro Forma Consolidated Balance Sheet as at September 30, 1999.......... PF-4
Pro Forma Consolidated Income Statement for the nine month
period ended September 30, 1999...................................... PF-5
Pro Forma Consolidated Income Statement for the year ended
December 31, 1998.................................................... PF-6
Notes to Pro Forma Financial Information............................... PF-7
PF-1
<PAGE>
Worldwide Fiber Inc.
Nature and Purpose of Pro-Forma Financial Information
(Unaudited)
The accompanying pro forma consolidated balance sheet of Worldwide Fiber
Inc. (the "Company") as at September 30, 1999 assumes the following transactions
occurred on September 30, 1999: (i) the issuance of a note receivable in the
amount of $77,500,000 provided by the Company to an executive officer of the
Company and the issuance on December 22, 1999 of 26,080,000 Class A Non-Voting
shares and 4,920,000 Class C Multiple Voting shares for consideration of
$77,500,000 and (ii) the Company's acquisition of CN's shares in WFI-CN Fiber
Inc. and IC's units in Worldwide Fiber IC LLC, (the "CN/IC minority interest
acquisition") in exchange for Class A Non-Voting shares of the Company.
The accompanying pro forma consolidated income statement of the Company for
the nine month period ended September 30, 1999 assumes that the following
transactions occurred on January 1, 1998: (i) the effect of the interest
expense, including amortization of deferred financing costs, relating to the
Notes and (ii) the amortization of goodwill arising from the CN/IC minority
interest acquisition.
The accompanying pro forma consolidated income statement of the Company for
the year ended December 31, 1998 assumes that the following transactions
occurred on January 1, 1998: (i) the transfer on May 31, 1998 of certain of the
operations of the Telecommunications Division ("Division") of Ledcor, the
Construction Services, Management Services and Employee Services Agreements
between the Company and affiliates of Ledcor, (ii) the consolidation of
Worldwide Fiber (USA), Inc. ("WFI USA"), (formerly Pacific Fiber Link, Inc.) as
a result of the Company's agreement to increase its interest in WFI USA from 50%
to 75% on December 31, 1998, (iii) the effect of the interest expense, including
amortization of deferred financing costs, relating to the Notes and $175,000,000
12 1/2% senior notes (the "1998 Notes"), and (iv) the amortization of goodwill
arising from the CN/IC minority interest acquisition.
The unaudited pro forma consolidated balance sheet and income statement as
of and for the nine month period ended September 30, 1999 is based on the
historical unaudited consolidated financial statements for the nine month period
ended September 30, 1999.
The unaudited pro forma consolidated income statement for the year ended
December 31, 1998 is presented on the basis of the fiscal year end of December
31, 1998 adopted by the Company and is based on the historical consolidated
income statement of the Company for the seven-month period ended December 31,
1998, and the operations of the Division for the five months ended May 31, 1998
derived from the historical statement of operations for the Division for the
nine months ended May 31, 1998.
The unaudited pro forma consolidated financial statements are not
necessarily indicative of the results that actually would have been achieved if
the transactions reflected therein had been completed on the dates indicated or
the results which may be obtained in the future. The unaudited pro forma
consolidated financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial
PF-2
<PAGE>
Worldwide Fiber Inc.
Nature and Purpose of Pro-Forma Financial Information
(Unaudited)
statements of the Company, financial statements of the Division and consolidated
income statement of WFI USA, including the respective notes thereto, included
elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
Worldwide Fiber Inc.
Pro Forma Consolidated Balance Sheet
(Unaudited)
September 30, 1999
(tabular amounts expressed in thousands of U.S. Dollars)
Pro forma
Worldwide Pro forma Consolidated
Fiber Inc. Adjustments Balance Sheet
$ $ $
-------------- ---------------- ---------------
Assets
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents...................... 675,175 -- 675,175
Short term investments......................... 68,616 __ 68,616
Accounts receivable............................ 19,114 -- 19,114
Unbilled revenue............................... 83,973 -- 83,973
Inventory...................................... 121,758 -- 121,758
Other current assets........................... 5,524 -- 5,524
-------------- ---------------- ---------------
974,160 -- 974,160
Fixed Assets................................... 107,264 -- 107,264
Deposits on long-term construction contracts... 100,187 -- 100,187
Deferred income taxes.......................... 12,167 -- 12,167
Deferred financing costs....................... 22,416 -- 22,416
Goodwill....................................... -- 4(ii)97,500 97,500
-------------- ---------------- ---------------
1,216,194 97,500 1,313,694
============== ================ ===============
Liabilities
Current liabilities
Accounts payable and accrued liabilities....... 116,518 -- 116,518
Deferred Revenue............................... 25,000 -- 25,000
Income taxes payable........................... 15,262 -- 15,262
Other liabilities.............................. 1,261 -- 1,261
-------------- ---------------- ---------------
158,041 158,041
Senior Notes................................... 675,000 -- 675,000
-------------- ---------------- ---------------
833,041 833,041
Minority interest.............................. 7,190 4(ii)(2,500) 4,690
Redeemable Convertible Preferred Stock......... 345,157 -- 345,157
Shareholders' Equity
Common Stock................................... 46,528 4(i) 77,500 224,028
4(ii)100,000
Note receivable (note 4)....................... -- 4(i)(77,500) (77,500)
Other shareholders' equity..................... 7,742 -- 7,742
Deficit........................................ (23,799) -- (23,799)
Accumulated other comprehensive
income.................................... 335 -- 335
-------------- ---------------- ---------------
30,806 100,000 130,806
-------------- ---------------- ---------------
1,216,194 97,500 1,313,694
============== ================ ===============
</TABLE>
PF-4
<PAGE>
<TABLE>
<CAPTION>
Worldwide Fiber Inc.
Pro Forma Consolidated Income Statement
(Unaudited)
For the nine month period ended September 30, 1999
(tabular amounts expressed in thousands of U.S. Dollars)
Pro forma
Worldwide Pro forma Consolidated Income
Fiber Inc. Adjustments Statement
$ $ $
------------ ------------- -----------
<S> <C> <C> <C>
Revenue........................................ 235,138 -- 235,138
Costs.......................................... 165,263 -- 165,263
------- ------ -------
Gross Profit................................... 69,875 -- 69,875
------- ------ -------
Expenses
General and administrative..................... 17,263 5(iii)875 18,138
Depreciation................................... 871 -- 871
Amortization of goodwill....................... -- 5(iv)3,656 3,656
------- ---------- -------
18,134 4,531 22,665
------- ---------- -------
51,741 (4,531) 47,210
Interest expense............................... 20,468 5(i)36,800 57,268
Interest income................................ 8,020 -- 8,020
------- ---------- -------
Income (loss) before income taxes and
minority interest............................ 39,293 (41,331) (2,038)
Provision for income taxes..................... 20,175 5(iii)656
------- 5(iii)(17,260) 3,571
---------- -------
Income (loss) before minority
interest..................................... 19,118 (24,727) (5,609)
Income attributable to minority interest....... 5,747 5(iv)(2,500) 3,247
------- ---------- -------
Net income (loss) for the period 13,371 (22,227) (8,856)
======== ========== =======
</TABLE>
PF-5
<PAGE>
<TABLE>
<CAPTION>
Worldwide Fiber Inc.
Pro Forma Consolidated Income Statement
(Unaudited)
For the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Ledcor
Industries Worldwide
Worldwide Limited Fiber
Fiber Inc. Tele-communications (USA), Inc. Pro forma
(June 1 to Division (formerly Consolidated
December 31, (January 1 to Pacific Fiber Pro forma Income
1998) May 31, 1998) Link, Inc.) Subtotal Adjustments Statement
$ $ $ $ $ $
------------ ------------------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... 164,319 20,537 21,071 205,927 6(i) 1,111 207,038
Costs....................... 147,621 11,398 16,533 175,552 6(i) 6,966 182,518
-------- ------- ------- ------- ------- --------
Gross profit................ 16,698 9,139 4,538 30,375 (5,855) 24,520
-------- ------- ------- ------- ------- --------
Expenses
General and administrative.. 2,274 1,289 1,683 5,246 6(ii) 394 8,140
6(v) 2,500
Depreciation................ 464 175 -- 639 -- 639
Amortization of goodwill.... -- -- -- -- (vii) 4,875 4,875
------- ------- ------- ------- ------- --------
2,738 1,464 1,683 5,885 7,769 13,654
-------- ------- ------- ------- ------- --------
13,960 7,675 2,855 24,490 (13,624) 10,866
Interest expense............ 492 -- 72 564 6(vi) (72) 85,600
6(iii) 85,108
Interest income............. 267 -- 53 320 6(vi) (72) 248
-------- ------- ------- ------- -------- -------
Income (loss) before equity
income, income taxes and
minority interest......... 13,735 7,675 2,836 24,246 (98,732) (74,486)
Equity income............... 928 -- -- 928 6(vi) (928) --
-------- ------- ------- ------- -------- -------
Income (loss) before income
taxes and minority
interest.................. 14,663 7,675 2,836 25,174 (99,660) (74,486)
Provision for (recovery of) 6(v) 1,900
income taxes.............. 5,643 3,323 980 9,946 6(iv) (38,556) (26,710)
------- ------- ------- ------- -------- --------
Income (loss) before
minority interest........... 9,020 4,352 1,856 15,228 (63,004) (47,776)
Income attributable to
minority interest......... -- -- -- -- 6(vi) 464 464
------- ------- ------- ------- ------- -------
Net income (loss) for the
year...................... 9,020 4,352 1,856 15,228 (63,468) (48,240)
======= ======= ======= ======= ======== ========
</TABLE>
PF-6
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
1. Pro forma transactions
The unaudited pro forma consolidated balance sheet and income statements of
the Company have been prepared to reflect the effects of the following completed
or proposed transactions.
Effective May 31, 1998, the operations of the Telecommunications Division
("Division") of Ledcor Industries Ltd. ("Ledcor") were transferred to the
Company. The transfer was pursuant to a series of agreements as follows:
o The Company obtained certain equipment, fiber optic network assets and
other assets;
o Ledcor retained all construction contracts entered into prior to the
transfer of the business and entered into two Construction Services
Agreements whereby the Company would provide services to Ledcor to
complete the contracts in exchange for a fee;
o The Company and Ledcor entered into a Management Services Agreement
whereby Ledcor would provide the Company with management staff,
administrative and other support services. The Company reimburses
Ledcor for direct costs paid on the Company's behalf and pays Cdn.
$200,000 per month for the Company's share of corporate overhead;
o The Company and Ledcor entered into Employee Services Agreements
whereby Ledcor provides personnel for designing, engineering,
construction and installation services on a cost reimbursement basis
to the Company;
These agreements are summarized in the consolidated financial statements of
the Company for the period ended December 31, 1998.
On December 23, 1998, the Company issued $175,000,000 12-1/2% Senior notes
due 2005 (the "1998 Notes") and on July 28, 1999, the Company issued
$500,000,000 12% Senior notes due 2009 (the "Notes").
On December 31, 1998, the Company increased its interest in Worldwide Fiber
(USA), Inc. ("WFI USA") (formerly Pacific Fiber Link, Inc.) from 50% to 75% in
exchange for the conversion of a note amounting to $3,915,000.
The Company issued 26,080,000 Class A Non-voting shares and 4,920,000 Class
C multiple voting shares, to an executive officer of the Company, for
consideration of $77,500,000. In addition, the Company issued a note receivable
in the amount of $77,500,000 to the executive officer.
PF-7
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
The Company entered into a commitment with CN and IC to acquire their
respective 25% interests in WFI-CN Fiber Inc. and Worldwide Fiber IC LLC
("CN/IC") in exchange for Class A Non-Voting shares of the Company.
2. Basis of presentation
The unaudited pro forma balance sheet and consolidated income statements
have been prepared by management in accordance with generally accepted
accounting principles in the United States and the pro forma assumptions and
adjustments described in notes 1, 4, 5 and 6.
The unaudited pro forma consolidated balance sheet and income statement as
of and for the nine month period ended September 30, 1999 are based on the
unaudited historical consolidated financial statements of the Company for the
nine month period ended September 30, 1999.
The unaudited pro forma consolidated income statement for the year ended
December 31, 1998 is presented on the basis of the fiscal year end of December
31 adopted by the Company. The pro forma consolidated income statement for the
year ended December 31, 1998 is based on the historical consolidated income
statement of the Company for the seven-month period ended December 31, 1998, and
the operations of the Division for the five months ended May 31, 1998 derived
from the historical statement of operations for the Division for the nine months
ended May 31, 1998.
The unaudited pro forma consolidated financial statements are not
necessarily indicative of the results that actually would have resulted if the
transactions reflected herein had been completed on the dates indicated or the
results which may be obtained in the future. The unaudited pro forma
consolidated financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements of the Company, financial
statements of the Division, and consolidated income statement of WFI USA,
including the respective notes thereto, included elsewhere herein.
3. Significant accounting policies
The significant accounting policies used in the preparation of the pro
forma consolidated balance sheet and income statements include those disclosed
in the financial statements of the Company.
PF-8
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
4. Pro forma consolidated balance sheet assumptions and adjustments as at
September 30, 1999
(i) Issuance of shares
In addition, this adjustment records the issuance of 26,080,000 Class A
Non-Voting shares and 4,920,000 Class C multiple voting shares, to the executive
officer. The issuance of shares will result in compensation expense in futures
periods. No adjustment for compensation expense has been recorded for these
proforma financial statements as the services to be provided will only be
received in the future and have no affect on operations presented for 1998 and
1999.
(ii) Acquisition of CN /IC Minority Interests
This adjustment records the Company's acquisition of the shares in WFI-CN
Fiber Inc. and units in Worldwide Fiber IC LLC in exchange for Class A
Non-Voting shares of the Company. This pro forma adjustment assumes a purchase
price of $100,000,000. The number of Class A Non-Voting shares issued may be
adjusted on an initial public offering in accordance with a formula specified in
the purchase agreement. The excess purchase price of $97,500,000 over the cost
of net assets has been allocated to goodwill. Goodwill will be amortized on a
straight-line basis over 20 years which is the estimated useful life of the
fiber optic network assets being constructed on the CN/IC routes.
5. Pro Forma Consolidated Income Statement assumptions and adjustments for the
nine month period ended September 30, 1999
(i) Interest expense
This adjustment records the interest expense, including amortization of
deferred financing costs, related to the Notes assuming the Notes were issued on
January 1, 1998. Amortization of the deferred financing costs was computed based
on the effective interest method. The Company would have capitalized a portion
of interest expense related to the Notes to the cost of the fiber optic network
assets constructed during the nine month period ended September 30, 1999, which
is not reflected in this pro forma statement.
(ii) Income taxes
This adjustment records income taxes of $3,571,000 for the nine month
period ended September 30, 1999 using an effective tax rate of 41.1%.
PF-9
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
(iii) Capital taxes
This adjustment records estimated additional BC Corporation Capital taxes
of $875,000 and Federal Large Corporation taxes of $656,000 resulting from the
issuance of the Notes.
(iv) Amortization of Goodwill
This adjustment records amortization of goodwill of $3,656,000 arising from
the acquisition of the CN/IC minority interest.
6. Pro forma consolidated income statement assumptions and adjustments for the
year ended December 31, 1998
The following assumptions and adjustments have been made in the pro forma
consolidated income statement for the year ended December 31, 1998 to reflect
the retention of various contracts by Ledcor, the provision of general and
administrative services, the consolidation of WFI USA in respect of the
acquisition of an additional interest in WFI USA bringing the Company's interest
to 75% on December 31, 1998, the effect of the additional interest expense,
including amortization of deferred financing costs, related to the Notes and
1998 Notes, and the amortization of goodwill arising from the acquisition of the
CN/IC minority interests.
(i) Revenue and costs
Under the Construction Services Agreements with Ledcor, the Company is
reimbursed for all costs incurred plus a fee of 15%. Contract costs have been
adjusted to reflect costs incurred by the Division that are included in
inventory which would have been reimbursed if the Construction Services
Agreements had been in place. Revenues have been adjusted to reflect the costs
incurred plus the 15% fee for the five-month period ended May 31, 1998.
(ii) General and administrative costs
In accordance with the Management Services Agreement, Ledcor provides the
Company with management staff, administrative and other support services. The
Company reimburses Ledcor for direct costs and pays Cdn. $200,000 per month for
the Company's share of corporate overheads.
This adjustment eliminates the general corporate overhead costs allocated
to the Division of $299,546 and records $693,575 in accordance with the
Management Services Agreement for the five-month period ended May 31, 1998.
PF-10
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
(iii) Interest expense
This adjustment records the interest expense, including amortization of
deferred financing costs, related to the Notes and the 1998 Notes assuming the
Notes and the 1998 Notes were issued on January 1, 1998. Amortization of the
deferred financing costs was computed based on the effective interest rate
method. The Company would have capitalized a portion of the interest expense
related to the Notes and 1998 Notes to the cost of the fiber optic network
assets constructed during the year ended December 31, 1998, which is not
reflected in this pro forma income statement.
(iv) Income taxes
This adjustment records an income tax recovery of $26,710,000 for the year
ended December 31, 1998 using an effective tax rate of 41.1% related to the
recognition of a deferred tax asset from the tax loss carryforward created for
the year ended December 31, 1998. Management believes that, based on a number of
factors, it is more likely than not that the deferred tax asset will be fully
realized, such that no valuation allowance would be recorded.
(v) Capital taxes
This adjustment records estimated additional BC Corporation Capital taxes
of $2,500,000 and Federal Large Corporation tax of $1,900,000 for the year ended
December 31, 1998 resulting from the issuance of the Notes and Series A
Non-Voting preferred shares.
(vi) Acquisition of additional interest in WFI USA
It has been assumed that the Company's acquisition of the additional 25%
interest in WFI USA occurred on February 11, 1998, the date WFI USA commenced
operations.
Depreciation expense has not been adjusted for the acquisition of the
additional interest in WFI USA as the fiber optic network assets of WFI USA were
under construction at the date of acquisition and are not yet available for use.
Accordingly, if the acquisition had occurred on February 11, 1998, the
transaction would have been reflected as an issuance of shares for cash. No
interest income has been recognized on this transaction.
This adjustment eliminates the Company's equity in the earnings of WFI USA,
records the net income attributed to the minority interest as a result of the
consolidation of the net income of WFI USA, and eliminates intercompany interest
charged.
PF-11
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(Unaudited)
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
(vii) Amortization of Goodwill
This adjustment records amortization of goodwill of $4,875,000 arising from
the acquisition of the CN/IC minority interest.
PF-12
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
WORLDWIDE FIBER INC. UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1999
<S> <C>
Unaudited Consolidated Balance Sheets............................................................ F-2
Unaudited Consolidated Income Statements......................................................... F-4
Unaudited Consolidated Statement of Changes in Shareholders' Equity.............................. F-5
Unaudited Consolidated Statements of Cash Flows.................................................. F-6
Notes to Unaudited Consolidated Financial Statements............................................. F-7
WORLDWIDE FIBER INC. AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998
Auditors' Report................................................................................. F-19
Consolidated Balance Sheet....................................................................... F-20
Consolidated Income Statement.................................................................... F-22
Consolidated Statement of Changes in Shareholders' Equity........................................ F-23
Consolidated Statement of Cash Flows............................................................. F-24
Notes to Consolidated Financial Statements....................................................... F-25
WORLDWIDE FIBER (USA), INC. AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998
Report of Independent Accountants................................................................ F-42
Consolidated Income Statement.................................................................... F-43
Consolidated Statement of Changes in Shareholders' Equity........................................ F-44
Consolidated Statement of Cash Flows............................................................. F-45
Notes to Consolidated Financial Statements....................................................... F-46
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Auditors' Report................................................................................. F-52
Divisional Balance Sheets........................................................................ F-53
Divisional Statements of Operations and Retained Earnings........................................ F-54
Divisional Statements of Cash Flows.............................................................. F-55
Notes to the Divisional Financial Statements..................................................... F-56
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
WORLDWIDE FIBER INC.
Consolidated Balance Sheets
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
September 30, 1999 December 31, 1998
--------------------- ----------------------
Assets
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 675,175 $ 156,366
Short term investments 68,616 -
Accounts receivable 19,114 3,272
Unbilled revenue (note 3) 83,973 10,582
Inventory (note 3) 121,758 25,300
Other current assets 5,524 17,342
--------------------- ---------------------
974,160 212,862
Fixed Assets (note 3) 107,264 15,475
Deposits on long-term construction
contracts (note 8) 100,187 -
Deferred income taxes (note 4) 12,167 1,273
Deferred financing costs 22,416 6,650
--------------------- ---------------------
$ $1,216,194 $ 236,260
===================== =====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
<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
Current liabilities
<S> <C> <C>
Accounts payable and accrued liabilities (note 3) $ 116,518 $ 20,296
Deferred revenue (note 1) 25,000 --
Advances on contracts -- 13,651
Income taxes payable 15,262 7,609
Other liabilities 1,261 --
------------- -------------
158,041 41,556
Senior Notes (note 9) 675,000 175,000
------------- -------------
833,041 216,556
Minority interest 7,190 1,443
Redeemable Convertible Preferred Stock
Authorized:
100,000,000,000 Series A Non-Voting Convertible Preferred Shares
100,000,000,000 Series B Subordinate Voting Convertible
Preferred Shares
45,000,000 Series C Redeemable Preferred Shares, no par value
Issued and outstanding:
70,934,464 Series A Non-Voting Preferred Shares (including
accretion of discount from redemption value of $1,190 and net of
issuance costs of $1,033) (note 6) 345,157 --
Shareholders' equity
Common stock
Authorized:
Unlimited number of Class A Non-Voting, Class B Subordinate Voting and Class
C Multiple Voting shares, no par value
Issued and outstanding:
191,948,000 (1998 - 40,002,400) Class B Subordinate Voting 35,419 7,400
Shares (note 7)
36,000,000 Class C Multiple Voting Shares (note 7) 11,109 --
Other shareholders' equity 7,742 2,242
(Deficit) retained earnings (23,799) 9,020
Accumulated other comprehensive income 335 (401)
------------- -------------
30,806 18,261
------------- -------------
$ 1,216,194 $ 236,260
============= =============
Commitments (Note 8)
Subsequent events (Note 10)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<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 165,263 90,909
------------- -------------
Gross profit $ 69,875 $ 13,910
Expenses:
General and administrative 17,263 1,318
Depreciation 871 260
------------- -------------
18,134 1,578
------------- -------------
51,741 12,332
Interest expense 20,468 --
Interest income 8,020 --
------------- -------------
Income before income taxes, equity loss and
minority interest 39,293 12,332
Equity loss -- (48)
------------- -------------
Income before income taxes and minority
interest 39,293 12,284
Provision for income taxes 20,175 5,402
Income before minority interest 19,118 6,882
Minority interest 5,747 --
------------- -------------
Net income for the period $ 13,371 $ 6,882
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<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)
Class B Subordinated
Voting Shares Class C
(formerly Class A Common) Multiple Voting Shares Other Shareholders' Equity
Additional Unearned
Contributed Paid in Compen-
Shares Amount Shares Amount Surplus Capital sation
----------- ---------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance-beginning of period 40,002,400 $ 7,400 - $ - $ 2,242 $ - $ -
Issuance of shares for
certain Ledcor assets 159,997,600 25,019
with deferred tax asset
Repurchase of Class B
Subordinate Voting Shares
in exchange for Class B
Subordinate Voting Shares
and Series C Redeemable
Preferred (200,000,000) (32,419)
Shares (note 1) 190,748,000 32,419
Issuance of Class B
Subordinate Voting Shares
for cash (note 1) 1,200,000 3,000
Stock dividend of Series C
Redeemable Preferred
Shares (note 1)
Redemption of Series C
Redeemable Preferred
Shares (note 1)
Issuance of Class C
Multiple Voting
Shares for certain
Ledcor assets with
deferred tax asset
(note 1) 36,000,000 11,109
Accretion of Preferred
Stock to redemption
value
Unearned compensation 16,447 (16,447)
Amortization of compensation
expense 5,500
Comprehensive income
Net income for the
period
Accumulated other
comprehensive
income-foreign
currency translation
------------------------------------------------------------------------------------------
Total comprehensive
income - - - - - - -
------------------------------------------------------------------------------------------
Balance-end of period 191,948,000 $35,419 36,000,000 $11,109 $2,242 $16,447 $(10,947)
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
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
Compre- Share-
Retained hensive holders'
Earnings Income equity
-------- ------------ --------
Balance-beginning of period $ 9,020 $ (401) $ 18,261
Issuance of shares for
certain
Ledcor assets with
deferred tax asset 25,019
Repurchase of Class B
Subordinate
Voting Shares in
exchange for Class B
Subordinate Voting Shares
and Series C Redeemable
Preferred Shares (note 1)
Issuance of Class B
Subordinate Voting Shares for
cash ( note 1) 3,000
Stock dividend of Series C
Redeemable Preferred
Shares (note 1) (5,000) (5,000)
Redemption of Series C
Redeemable Preferred
Shares (note 1) (40,000) (40,000)
Issuance of Class C
Multiple Voting
Shares for certain
Ledcor assets with deferred
tax asset (note 1) 11,109
Accretion of Preferred
Stock to redemption value (1,190) (1,190)
Unearned compensation
Amortization of compensation
expense 5,500
Comprehensive income
Net income for the period 13,371 13,371
period
Accumulated other
comprehensive income-foreign
currency translation 736 736
---------------------------------------------
Total comprehensive income 13,371 736 14,107
---------------------------------------------
Balance-end of period $ (23,799) $ 335 $ 30,806
=============================================
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<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 $ (138,614) $ 79
------------- -------------
Cash flows used in investing activities
Fixed asset additions (61,124) --
Purchase of short term investments (68,616) --
------------- -------------
Cash flows provided from financing activities (129,740) --
Issuance of 12% Senior Notes 500,000 --
Issuance of Series A Non-Voting Convertible Preferred 345,000 --
Shares for cash
Issuance of Class B Subordinate Voting Shares for cash 3,000 --
Repurchase of Series C Redeemable Preferred Shares for (45,000) --
cash
Deferred financing costs (16,000) --
------------- -------------
787,000 --
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>
F-6
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
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. All share amounts have been presented on a post stock split basis
(note 10).
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 159,997,600 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 200,000,000 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 Convertible
Preferred Shares and Series C Redeemable Preferred Shares. Subsequently, the
Company declared a stock dividend of 5,000,000 (pre-split) Series C Redeemable
Preferred Shares for $5,000,000. Concurrently, the Company repurchased the
200,000,000 outstanding Class B Subordinate Voting Shares from its parent in
exchange for the issuance of 190,748,000 Class B Subordinate Voting Shares and
40,000,000 (pre-split) Series C Redeemable Preferred Shares. The Company then
redeemed the 45,000,000 (pre-split) 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 1,200,000 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 70,934,464 Series A Non-Voting Convertible
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
36,000,000 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 assets acquired amounted to
F-7
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
$26,349,800, the cost of the assets in the accounts of Ledcor. The Company also
received a deferred tax benefit of $7,759,000, as a result of a higher tax cost
versus accounting cost of fixed assets. The Company also recorded deferred
revenue of $25,000,000 relating to a build commitment 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.
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.
Short term investments
Short term investments consist of highly liquid short term interest bearing
securities with maturities at the date of purchase greater than three months.
Interest earned is recognized immediately in the income statement.
F-8
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
2. Supplemental cash flow information
Nine months ended September 30,
1999 1998
---------------------------------
<S> <C>
Cash paid for income taxes $ 12,778 -
Cash paid for interest 10,451 -
Issuance of common shares for certain Ledcor assets 75,726 8,488
Series C redeemable preferred share stock dividend 5,000 -
Accretion of preferred stock to redemption value 1,190 -
Stock based compensation 5,500 -
3. Balance Sheet components
September 30, 1999 December 31, 1998
------------------ -------------------
Unbilled revenue
Revenue earned on uncompleted contracts $ 235,138 22,236
Less: Billings to date 151,165 11,654
-------------- ----------
$ 83,973 10,582
============== ==========
Inventory
Fiber optic network assets $ 121,209 24,155
Construction supplies and small tools 549 1,145
-------------- ----------
$ 121,758 25,300
============== ==========
F-9
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
Fixed assets
Fiber optic network assets $ 98,773 11,461
Construction equipment 9,222 4,249
Other 622 229
------------- ------------
108,617 15,939
Less: Accumulated depreciation (1,353) (464)
------------- ------------
Fixed assets - net $ 107,264 15,475
============= ============
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 December 31, 1998
------------------ -----------------
Accounts payable and accrued liabilities
Subcontractor and supplier costs $ 75,261 14,961
Subcontractor holdbacks payable 23,800 4,843
Interest payable 17,457 492
-------------- ------------
$ 116,518 20,296
============== ============
4. Income taxes
Income before income taxes and minority interest
The components of income before income taxes and minority interest are as
follows:
F-10
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
Nine months ended
September 30,
1999 1998
------------- --------
Canadian $ 13,839 7,838
U.S. 25,454 4,494
------------- -------
$ 39,293 $12,332
============= =======
Current income taxes
The provision for income taxes attributable to net earnings consists of the
following:
Nine months ended
September 30,
1999 1998
------------- ----------
Canadian $ 9,130 3,605
U.S. federal $ 8,946 1,438
U.S. state and local 2,099 359
------------- ---------
$ 20,175 $ 5,402
============= =========
Deferred income taxes
Significant components of the Company's deferred tax assets are as follows:
F-11
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
Fixed assets $ 12,167 1,088
Other -- 185
Valuation allowance -- --
--------------- ---------------
Net deferred tax assets $ 12,167 1,273
=============== ===============
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:
Nine months ended
September 30, 1999 September 30, 1999
Deposits on Deferred
long-term financing
Revenues Fixed assets construction costs
contracts
Canada $ 102,873 $ 27,302 $ -- $ 22,416
U.S. 132,265 79,962 -- --
Barbados -- -- 100,187 --
------------- ------------- ------------- -------------
$ 235,138 $ 107,264 $ 100,187 $ 22,416
============= ============= ============= =============
The revenues are based on the location of the construction activities.
</TABLE>
F-12
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
6. Redeemable Convertible Preferred Stock
On September 9, 1999 the Company authorized the following series of
preferred shares (note 1):
100,000,000,000 Series A Non-Voting Convertible Preferred Shares
100,000,000,000 Series B Subordinate Voting Convertible Preferred Shares
45,000,000 Series C Redeemable Preferred Shares
Series A Non-Voting Convertible Preferred Shares
On September 9, 1999 the Company issued 70,934,464 Series A Non-Voting
Convertible Preferred Shares ("Series A Preferred Shares") for $345,000,000 in
cash.
The Series A Preferred Shares are entitled to dividends on an equivalent
basis to the Class A Non-Voting Shares into which the Series A Preferred Shares
can be converted. The Series A 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 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 Preferred
Shares, each Series A 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 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 Convertible Preferred Shares
on a one for one basis. In addition, the holders of the Series A Preferred
Shares have anti-dilution protection.
F-13
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
Series B Subordinate Voting Convertible Preferred Shares
As at September 30, 1999, there are no Series B Subordinate Voting
Convertible Preferred Shares ("Series B Preferred Shares") outstanding.
The Series B 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 Preferred Shares can be converted. The Series B
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 Preferred Shares are entitled to one vote per share.
The Series B 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 Preferred
Shares, each Series B 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 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 Preferred Shares on a one for one basis. In
addition, the holders of the Series B Preferred Shares have anti-dilution
protection
Series C Redeemable Preferred Shares
On September 9, 1999 5,000,000 Series C Redeemable Preferred Shares
("Series C Preferred Shares") were issued pursuant to a stock dividend and
40,000,000 Series C Preferred Shares were issued pursuant to a share
re-organization. Subsequently, the Company repurchased the 45,000,000 issued
Series C Preferred Shares for $45,000,000 (note 1). As at September 30, 1999, no
Series C Preferred Shares are outstanding.
F-14
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
The holders of Series C Preferred Shares are not entitled to dividends or
voting rights and may redeem the Series C 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 (note 1):
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 191,948,000
Class C Multiple Voting Shares 36,000,000
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 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.
F-15
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
During the nine months ended September 30, 1999, the Company granted stock
options to employees and officers to purchase an aggregate 21.6 million shares
of Class A Non-Voting Shares of the Company at exercise prices between $1.25 and
$2.50 per share. The stock options have terms expiring on or before September
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
deposits of $101 million in the nine month period ended September 30, 1999.
The Company has placed purchase orders of approximately $47,600,000 with
Nortel Networks.
CN/IC 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 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. (See Note 10)
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, 2004 at certain
specified redemption prices ranging up to 106.00%. Up to 35% of the Notes may be
redeemed by the Company prior to August 1, 2002 at a redemption price of 112% of
the principal amount with the net proceeds from certain sales of the Company's
common stock. If a change in control occurs, as defined in the Notes indentures,
the holders of the notes can require the company to repurchase all or part of
the notes at 101% of the principal amount. Where excess proceeds from certain
asset sales,
F-16
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
as defined in the Notes indentures, exceeds $10,000,000 the Company is required
to make an offer to repurchase the maximum amount of Notes that can be
repurchased with such excess proceeds at an offer price equal to 100% of the
principal amount.
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.
10. Subsequent events
Conversion of Class B Subordinate Voting Shares
On November 18, 1999, the Company's parent exercised its conversion rights
and converted 150,636,000 Class B Subordinate Voting Shares into 150,636,000
Class A Non-Voting Shares.
Stock Split
On November 24, 1999, all classes of the Company's issued and outstanding
shares were split on the basis of eight new shares for each one share previously
held. The number of issued and outstanding shares at September 30, 1999 and
December 31, 1998 are presented on a post-split basis.
Senior Credit Facility
The Company has entered into a commitment letter with certain lenders
pursuant to which the lenders would provide a three-year secured revolving
credit facility totaling US$115,000,000. The execution and delivery of the
definitive documentation is in progress.
Hibernia Credit Facility
The Company has entered into a commitment letter with certain lenders
pursuant to which the lenders would provide a credit facility totaling
US$565,000,000. The execution and delivery of definitive documentation is in
progress.
F-17
<PAGE>
WORLDWIDE FIBER INC.
Notes to Consolidated Financial Statements
September 30, 1999
(tabular amounts expressed in thousands of U.S. dollars)
(Unaudited)
CN/IC
The Company entered into a commitment with CN and IC to acquire their
respective 25% interests in WFI-CN Fiber Inc. and Worldwide Fiber IC LLC in
exchange for Class A non-voting shares of the Company. The number of Class A
non-voting shares to be issued by the Company may be adjusted on an initial
public offering in accordance with a formula specified in the agreement.
Issuance of shares
The Company entered into an agreement with an executive officer of the
Company to issue 26,080,000 Class A Non-Voting shares and 4,920,000 Class C
Multiple Voting shares for consideration of $77,5000,000. In addition, as the
Company issued a note receivable in the amount of $77,500,000 to the executive
officer.
F-18
<PAGE>
AUDITORS' REPORT
To the Directors and Shareholder of
Worldwide Fiber Inc.
We have audited the consolidated balance sheet of Worldwide Fiber Inc. as
at December 31, 1998 and the consolidated income statement and statements of
changes in shareholder's equity and cash flows for the period from February 5,
1998 (date of incorporation) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and the results of its operations and its cash flows for the period from
February 5, 1998 (date of incorporation) to December 31, 1998 in accordance with
generally accepted accounting principles in the United States.
PricewaterhouseCoopers LLP
Vancouver, Canada
March 12, 1999, except for Note 14
which is as of January 20, 2000
F-19
<PAGE>
Worldwide Fiber Inc.
Consolidated Balance Sheet
As at December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents................................... $156,366
Accounts receivable (note 4)................................ 3,272
Unbilled revenue (note 4)................................... 10,582
Deposit (note 4)............................................ 3,930
Inventory (note 4).......................................... 25,300
Due from parent/net (note 6)................................ 13,412
--------
212,862
Fixed assets (note 4)....................................... 15,475
Deferred income taxes (note 10)............................. 1,273
Deferred financing costs.................................... 6,650
--------
$236,260
========
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
<PAGE>
Worldwide Fiber Inc.
Consolidated Balance Sheet
As at December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Liabilities
Current liabilities
Accounts payable (note 4)....................................... $ 20,296
Advances on contracts........................................... 13,651
Income taxes payable............................................ 7,609
--------
41,556
Senior notes (note 7)........................................... 175,000
-------
216,556
Minority interest............................................... 1,443
Shareholder's Equity
Common stock
Authorized
Unlimited number of Class A voting, Class B voting
and Class C non-voting shares,
no par value...........................................
Issued and outstanding
40,002,400 Class A shares (note 9) (note 14)........... 7,400
Contributed surplus (notes 1 and 5)............................. 2,242
Retained earnings............................................... 9,020
Accumulated other comprehensive income.......................... (401)
-------
18,261
--------
$236,260
========
Commitments (notes 1 and 13)
Subsequent events (note 14)
The accompanying notes are an integral part of these
consolidated financial statements.
F-21
<PAGE>
Worldwide Fiber Inc.
Consolidated Income Statement
For the period from February 5, 1998 (date of incorporation)
to December 31, 1998.
(The Company's operations commenced on June 1, 1998)
(tabular amounts expressed in thousands of U.S. dollars)
Revenue............................................................ $164,319
Costs.............................................................. 147,621
--------
Gross profit....................................................... 16,698
--------
Expenses
General and administrative...................................... 2,274
Depreciation.................................................... 464
-------
2,738
13,960
Interest expense................................................... 492
Interest income.................................................... 267
-------
Income before equity income and income taxes....................... 13,735
Equity income (note 5)............................................. 928
-------
Income before income taxes......................................... 14,663
Provision for income taxes (note 10)............................... 5,643
-------
Net income for the period.......................................... $ 9,020
=======
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
Worldwide Fiber Inc.
Consolidated Statement of Changes in Shareholder's Equity
For the period from February 5, 1998 (date of
incorporation) to December 31, 1998.
(The Company's operations commenced on June 1, 1998)
(tabular amounts expressed in thousands of U.S. dollars)
Common stock
Class A
Accumulated
other Total
Contributed Retained income shareholder's
Shares Amount surplus earnings comprehensive equity
--------- -------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--beginning of period
Incorporation shares issued,
February 5, 1998............ 800 $ -- $ -- $ -- $ -- $ --
Issuance of shares for certain
Ledcor assets with deferred
tax asset (note 5).......... 1,600 7,400 1,088 -- -- 8,488
Issuance of shares for
investments (note 5)........ 40,000,000 -- -- -- -- --
Excess of proceeds over cost on
fiber optic strands to be
reacquired from parent company
(note 1).................... -- -- 1,154 -- -- 1,154
Comprehensive income
Net income for the period.. -- -- -- 9,020 -- 9,020
Accumulated other
comprehensive
income-foreign currency -- -- -- -- (401) (401)
-------- ----- ----- ----- ------ --------
translation.............
Total comprehensive income..... -- -- -- 9,020 (401) 8,619
-------- ----- ----- ----- ------ -------
Balance--end of period.......... 40,002,400 $7,400 $2,242 $9,020 $(401) $18,261
========== ====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
<PAGE>
Worldwide Fiber Inc.
Consolidated Statement of Cash Flows
For the period from February 5, 1998 (date of
incorporation) to December 31, 1998.
(The Company's operations commenced on June 1, 1998)
(tabular amounts expressed in thousands of U.S. dollars)
Cash flows used in operating activities
Net income for the period....................................... $9,020
Adjustments to reconcile net income to net cash used for
operating activities
Depreciation................................................ 464
Equity income............................................... (928)
Changes in non-cash working capital items
Accounts receivable..................................... (196)
Unbilled revenue........................................ (992)
Deposit................................................. (3,949)
Inventory............................................... (1,568)
Due from parent......................................... (16,230)
Accounts payable........................................ 2,904
Advances on contracts................................... 13,708
Income taxes payable.................................... 6,491
Advances to WFI USA..................................... (21,783)
--------
(13,059)
Cash flows from (used in) investing activities
Fixed asset additions........................................... (1,065)
Cash acquired on acquisition of WFI USA......................... 2,242
-------
1,177
Cash flows from (used in) financing activities
Proceeds from issuance of common stock.......................... --
Senior notes.................................................... 175,000
Deferred financing costs........................................ (6,650)
--------
168,350
Effect of exchange rate changes on cash......................... (102)
--------
Net increase in cash and cash equivalents, being cash and
cash equivalents at end of period............................. $156,366
========
The accompanying notes are an integral part of these
consolidated financial statements.
F-24
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
1. The Company
Worldwide Fiber Inc. (the "Company") was incorporated on February 5, 1998
and is indirectly a wholly-owned subsidiary of Ledcor Inc. On May 31, 1998 the
Company began its operations after certain assets of the Telecommunications
Division ("Division") of Ledcor Industries Limited ("Ledcor"), a Ledcor Inc.
subsidiary were transferred to the Company. Prior to June 1, 1998, the
operations were carried out by the Division.
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. For the period to December 31, 1998,
$162,455,000 of the Company's revenues related to Construction Services
Agreements with Ledcor (see Note 1(ii)).
Transactions with Ledcor
On May 31, 1998, the Company entered into several agreements with
Ledcor as follows:
(i) Undertaking agreement whereby certain fiber optic network assets,
located in Canada and the U.S. would be transferred to the Company by
Ledcor in exchange for 159,997,600 Class A common shares. The Company
constructed these assets for Ledcor under the Construction Services
Agreements noted below. Construction of the assets was substantially
complete at December 31, 1998 and the Company completed the exchange on
March 31, 1999. This transaction will be accounted for using the carrying
values reported in the accounts of Ledcor as a transaction between a parent
and a wholly owned subsidiary and accordingly, the fixed assets acquired by
the Company will be recorded at the carrying amount of the assets in the
accounts of Ledcor. The cost of fixed assets acquired at March 31, 1999
amounted to $21,883,000. As a result of the transaction, the Company also
received a deferred tax benefit of $3,136,000 which will be reflected as a
deferred tax asset.
(ii) Construction Services Agreements to provide construction services
to Ledcor to complete various projects including completion of the fiber
optic network assets to be transferred to the Company. As the Company is
required to obtain the fiber optic network assets from Ledcor, the revenues
and costs associated with this portion of the agreement have not been
reflected in these consolidated financial statements. The costs to
construct the network will be reflected when the construction is completed
and the shares have been issued. As at December 31, 1998, the Company has
billed Ledcor $18,138,000 for the services related to construction of the
fiber optic network assets which exceeds their costs by $2,099,000. This
excess, net of income taxes of
F-25
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
$945,000, has been excluded from the consolidated income statement and has
been reported as contributed surplus.
(iii) Management Services Agreement whereby Ledcor provides the
Company with management staff, administrative and other support services.
The Company reimburses Ledcor for direct costs and pays Cdn. $200,000 per
month for the Company's share of corporate overheads. In accordance with
this agreement, substantially all costs and expenses incurred by the
Company were paid by Ledcor and charged to the Company through an
intercompany account.
(iv) Employee Services Agreements whereby the Company obtains the
services of certain employees from Ledcor on a cost reimbursement basis.
2. Summary of significant accounting policies
Basis of presentation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States and include
the accounts of the Company, its wholly owned subsidiaries and its 75% interest
in Worldwide Fiber (USA), Inc. ("WFI USA"). All significant intercompany
transactions and balances have been eliminated on consolidation. For investments
where the Company exercises significant influence, the investment is accounted
for using the equity method.
On December 31, 1998, the Company increased its interest in WFI USA from
50% to 75% (note 5). The consolidated income statement and statement of cash
flows account for the Company's initial 50% interest in WFI USA using the equity
method for the period May 31, 1998 to December 31, 1998. The Company's
consolidated balance sheet includes WFI USA's assets and liabilities, and
minority interest therein, as at December 31, 1998.
All share amounts have been retroactively adjusted for the eight-for-one
stock split on November 18, 1999 (note 14).
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses for the period reported. Actual results
could differ from those estimates.
F-26
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Cash and cash equivalents
Cash and cash equivalents consists of cash on deposit and highly liquid
short-term interest bearing securities with maturity at the date of purchase of
three months or less.
Fixed assets
Fiber optic network assets constructed for the Company's own use are
recorded as fixed assets. Fiber optic network assets, construction equipment and
other assets are recorded at cost. Fixed assets are depreciated using the
following rates and methods:
o Fiber optic network assets--straight-line method over the estimated
useful lives of the assets.
o Construction equipment--hourly usage rates, estimated to depreciate
the equipment over the estimated useful lives of the equipment.
o Other assets--straight-line method, over the estimated useful lives of
the assets.
Inventory
Inventory consists of fiber optic network assets to be sold or leased under
sales-type leases, construction supplies and small tools.
Fiber optic network assets are recorded at the lower of cost and market.
Cost includes direct materials and subcontractor charges, labour, and interest
(see "capitalization of interest").
Construction supplies and small tools inventory are recorded at the lower
of cost and replacement value.
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.
F-27
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Unbilled revenue
Revenue recognized using the percentage-of-completion basis (see "Revenue
recognition") less billings to date is recorded as unbilled revenue.
Capitalization of interest
Interest is capitalized as part of the cost of constructing fiber optic
network assets. Interest capitalized during the construction period is computed
by determining the average accumulated expenditures for each interim
capitalization period and applying the interest rate related to the specific
borrowings associated with each construction project. The total interest
capitalized for the period ended December 31, 1998 was $nil.
Deferred financing costs
Costs incurred in connection with obtaining the Senior notes financing are
deferred and amortized, using the effective interest method, to interest expense
over the term of the Senior notes.
Advances on contracts
Cash received from customers pursuant to contracts where construction has
not commenced is recorded as advances on contracts.
Foreign currency transactions
The Company's functional currency is the Canadian dollar. The consolidated
financial statements are translated to United States dollars using the
period-end exchange rate for assets and liabilities and weighted-average
exchange rates for the period for revenues and expenses. Translation losses are
deferred and accumulated as a component of other comprehensive income in
shareholder's equity. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated income statement.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current period
and deferred tax liabilities and assets for future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of enacted tax laws; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance, where, based on available evidence, the
probability of realization of the deferred tax asset does not meet a more likely
than not criteria.
F-28
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Fair value of financial instruments
The fair value of the Company's financial instruments, consisting of cash
and cash equivalents, accounts receivable, unbilled revenue, deposit, due from
parent, accounts payable, advances on contracts, and income taxes payable
approximate their carrying values due to their short-term nature. The Senior
notes were issued at period end and accordingly fair value does not vary
significantly from carrying value at December 31, 1998.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on its consolidated financial statements.
<TABLE>
<CAPTION>
3. Supplemental cash flow information
<S> <C>
Cash paid for income taxes......................................................... $--
Cash paid for interest............................................................. --
Supplemental non-cash investing and financing activities
Issuance of common shares for:
Certain Ledcor assets with deferred tax asset of $1,088,000.................. 8,488
Investment in Ledcom Holdings Ltd. .......................................... --
Initial 50% investment in WFI USA............................................ --
Additional 25% investment in WFI USA in exchange for surrender of note
receivable................................................................ 3,915
4. Balance Sheet components
Accounts receivable
Trade accounts receivable................................................... $3,107
Interest receivable......................................................... 165
------------
$3,272
============
Unbilled revenue
Revenue earned on uncompleted contracts..................................... $22,236
Less: Billings to date..................................................... $11,654
------------
$10,582
============
F-29
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Unbilled revenue relates primarily to WFI USA contracts. Each contract
specifies individual billing arrangements as specified in the contract.
Deposit
Deposit for right of way access.............................................. $ 3,930
=======
The cost of right of way accesses is included in the cost of fiber optic
network assets when construction commences.
Inventory
Fiber optic network assets.................................................... $24,155
Construction supplies and small tools......................................... 1,145
-------
$25,300
Fixed assets
Fiber optic network assets.................................................... $11,461
Construction equipment........................................................ 4,249
Other......................................................................... 229
-------
15,939
Less: Accumulated depreciation............................................... (464)
--------
Fixed asset/net.................................................................... $15,475
=======
The Company has not provided for any depreciation on fiber optic
network assets for the period ended December 31, 1998 as these assets were under
construction.
Accounts payable
Subcontractor and supplier costs............................................ $13,468
Subcontractor holdbacks payable............................................. 4,843
Other....................................................................... 1,493
Interest payable............................................................ 492
-------
$20,296
</TABLE>
5. Acquisitions
Telecommunications Division assets
Effective May 31, 1998, the Company entered into a series of agreements
whereby equipment, fiber optic network assets and other assets related to the
business of the Telecommunications Division of Ledcor were transferred to the
Company. In addition, the Company was granted a license to use Ledcor's patented
rail plow technology. This license agreement was for an initial term of ten
years, renewable annually upon completion of the initial term. As part of this
transaction, Ledcor retained all existing con-
F-30
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
struction contracts related to the business. This transaction was between
entities under common control and has been accounted for using the carrying
amounts recorded in Ledcor's accounts. The tax basis of substantially all the
Canadian assets transferred to the Company were Ledcor's carrying values whereas
the tax basis of the U.S. assets transferred was their fair value. The deferred
tax balances were adjusted for the change in the tax basis of the U.S. assets
with the adjustment being reflected as contributed surplus. As consideration for
the transaction, the Company issued 200 Class A shares to Ledcor.
The assets transferred and consideration given, in connection with this
transaction, were as follows:
Assets
Construction equipment................................. $2,830
Fiber optic network assets............................. 4,424
Deferred income taxes.................................. 1,088
Other.................................................. 146
------
$8,488
Consideration given
Class A common shares and contributed surplus.......... $8,488
======
Ledcom Holdings Ltd.
On December 1, 1998 the Company acquired 50 Class A common shares
representing a 50% interest of Ledcom Holdings Ltd. ("Ledcom") from Worldwide
Fiber Holdings Ltd. ("WFHL"), the Company's parent. As consideration, the
Company issued 2,000,000 Class A common shares. Ledcom holds the patent to
Ledcor's rail plow technology, and in conjunction with this acquisition Ledcor
has committed to grant to the Company a worldwide exclusive license for the use
of the rail plow technology. The license will become non-exclusive six months
after a change of control of the Company. This transaction was between entities
under common control and has been accounted for using the carrying value of the
investment recorded in WFHL's accounts which was $nil.
Investment in WFI USA
On August 31, 1998, the Company purchased Ledcor's 50% interest in, and a
promissory note of $3,915,000 from WFI USA, in exchange for 3,000,000 Class A
common shares of the Company and the issuance of a promissory note by the
Company. WFI USA was a joint venture with Mi-Tech Communications LLC ("Mi-Tech")
which held the remaining 50% interest in WFI USA. WFI USA's operations consist
primarily of developing fiber optic network assets in the United States.
As this transaction was between entities under common control, it was
accounted for in a manner similar to a pooling of interests. These financial
statements reflect the equity interest in the income of WFI
F-31
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
USA from May 31, 1998 to December 31, 1998 in the amount of $928,000. Prior to
May 31, 1998, the equity interest was reported as part of the Division of
Ledcor.
On December 31, 1998 the Company increased its interest in WFI USA to 75%
by surrendering its note receivable from WFI USA of $3,915,000 for 100
non-voting common shares and 100 Class A voting preferred shares of WFI USA. The
acquisition has been accounted for using the purchase method effective December
31, 1998. The purchase price of the additional 25% has been allocated to assets
and liabilities based on their fair values. As a result, the net assets acquired
were as follows:
Current assets.............................. $3,742
Inventory................................... 6,048
Fixed assets................................ 1,795
Current liabilities......................... 10,052
On December 31, 1998, the Company entered into a Shareholders' Agreement
("Agreement") with Ledcor, Mi-Tech and Michels Pipeline Construction, Inc.
("Michels") (an affiliate of Mi-Tech). Pursuant to this agreement, Mi-Tech will
have the option to convert all of its 25% interest in WFI USA into shares of the
Company should the Company complete a public offering of shares with an
aggregate value of at least $20,000,000 or there is a change of control of WFI
USA. In connection with the conversion, Mi-Tech will be granted certain
registration rights in accordance with the Agreement. In addition, after the
tenth anniversary of this agreement, Mi-Tech has the option to require WFI USA
to purchase all of the shares owned by Mi-Tech and its affiliates at fair market
value. If Mi-Tech exercises this option, the Company can elect to sell all the
shares or assets of WFI USA in which case it will not be required to purchase
Mi-Tech's shares in WFI USA. In the event of a proposed sale of the shares of
WFI USA held by the Company, Mi-Tech will have certain tag-along rights.
Also as part of the Agreement the Company:
o Agreed not to participate in any projects or business nor provide
advice or assistance to any business which undertakes projects within
WFI USA's scope of business, as defined in the Agreement, for a period
of four years from the date of the Agreement.
o Is restricted from selling, transferring, encumbering or divesting its
ownership or control of WFI USA.
o WFI USA has an option to purchase from Mi-Tech 24 fiber optic strands
along certain existing routes owned by Mi-Tech and its affiliates at
fair market value.
F-32
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
6. Due from parent
The components of the amount due from parent consist of the following:
Contract amounts billed to parent.................. $180,593
Costs charged by parent
Material...................................... 91,937
Subcontracts.................................. 33,613
Labor......................................... 27,435
Other......................................... 10,729
General and administrative.................... 2,816
Deferred financing costs...................... 268
-------
166,798
13,795
Net advance received.......................... (383)
--------
$ 13,412
The amounts due from Ledcor and advances received from Ledcor are
non-interest bearing, have no stated terms of repayment and are due on demand.
Contract amounts billed to parent and costs charged by parent exceed revenues
and costs as reported in the income statement due to fiber optic network assets
to be transferred to the Company as described in note 1(ii).
7. Senior notes
The Senior notes (the "Notes") are unsecured obligations of the Company
bearing interest at 12.5% payable semi-annually. The Notes are due December 15,
2005 and may be redeemed by the Company on or after December 31, 2003 at certain
specified redemption prices ranging up to 106.25% of the principal amount. Up to
35% of the Notes may be redeemed by the Company prior to December 15, 2001, at a
redemption price of 112.5% of the principal amount with the net proceeds from
certain sales of the company's common equity to the public. If a change of
control occurs, as defined in the Notes Indenture, the holders of the Notes can
require the Company to repurchase all or part of the Notes at 101% of the
principal amount. If at the end of December 31, 2000 and semi-annually
thereafter, the Company's Accumulated Excess Cash Flow, as defined in the Notes
Indenture, exceeds $10,000,000, the Company is required to make an offer to
repurchase the maximum principal amounts of Notes that may be purchased by such
Accumulated Excess Cash Flow Amount at an offer price equal to 110% of the
principal amount of the Notes. Under this Excess Cash Flow provision, the
Company is not required to repurchase more than 25% of the original principal
amount of the Notes prior to December 31, 2003.
The Notes contain certain covenants that restrict the ability of the
Company and its subsidiaries to incur additional indebtedness and issue certain
preferred stock, pay dividends or make other distributions,
F-33
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
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.
8. Preferred stock
Authorized
The Company is authorized to issue an unlimited number of Class I, II and
III preferred shares (collectively "preferred shares"). As at December 31, 1998,
there were no issued and outstanding preferred shares.
Voting
The holders of Class I preferred shares are entitled to attend shareholder
meetings and to one vote for each share held. The holders of Class II and III
preferred shares are not entitled to vote or attend shareholder meetings.
Dividends
The holders of preferred shares are entitled to receive a dividend when
declared by the Board of Directors. The holders of preferred shares have no
preference or priority as to the declaration of dividends, and dividends may be
declared and paid on any other class of shares of the Company to the exclusion
of a dividend being declared and paid on the preferred shares. Dividends may be
declared and paid on the preferred shares individually to the exclusion of a
dividend being declared and paid on another class of preferred shares. No
dividends can be declared on such other shares if it impairs the ability of the
Company to redeem the outstanding preferred shares.
Return of capital
In the event the Company is liquidated, dissolved or wound up, the holders
of preferred shares have priority as to payment of the redemption price and for
all declared and unpaid dividends over all other shares.
F-34
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Redemption and retraction
The Company may redeem or purchase preferred shares together with all
declared and unpaid dividends. In addition, the holders of preferred shares are
entitled to have the Company redeem or purchase all or any part of the preferred
shares held by a shareholder.
9. Common stock
Authorized
The Company is authorized to issue an unlimited number of Class A, B and C
common shares (collectively "common shares").
Voting
The holders of Class A and B common shares are entitled to one vote for
each share held. The holders of Class C common shares are not entitled to vote.
Dividends
The holders of common shares are entitled to receive a dividend when
declared by the directors of the Company. Dividends may be declared and paid on
the common shares without declaring dividends on any other class or classes of
shares of the Company. However, no dividends can be declared on the common
shares if to do so would impair the ability of the Company to redeem any
outstanding preferred shares.
Return of capital
In the event the Company is liquidated, dissolved or wound up or the
Company distributes the assets of the Company among shareholders for the purpose
of winding up its affairs, the holders of common shares rank equally with one
another to receive any remaining balance of the assets of the Company after
payment for a return of capital and any declared but unpaid dividends to the
holders of preferred shares.
F-35
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
10. Income taxes
Income before equity income and income taxes.
The components of income before equity income and income taxes are as
follows:
Canadian............................................. $5,683
U.S.................................................. 8,052
---------
$13,735
=========
Current income taxes
The provision for current income taxes consists of the following:
Canadian............................................. $2,599
U.S. federal......................................... 2,563
U.S. state and local................................. 481
---------
$5,643
=========
The Company's statutory rate of 45.6% varies from its effective rate of
41.1% due primarily to federal and state taxes on U.S. income at a rate of 38%.
Deferred income taxes
Significant components of the Company's deferred tax assets and liabilities
are as follows:
Fixed assets (note 5)................................. $1,088
Other................................................. 185
Valuation allowance................................... --
Net deferred tax assets............................... $1,273
======
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will be fully utilized, such that no
valuation allowance has been recorded.
F-36
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
11. Concentration of credit risk
Financial instruments that potentially subject the Company to a significant
concentration of credit risk consist primarily of cash and cash equivalents,
accounts receivable, unbilled revenue and due from parent which are not
collateralized. The Company limits its exposure to credit loss by placing its
cash and cash equivalents with high credit quality financial institutions.
Concentrations of credit risk with respect to accounts receivable and unbilled
revenue are considered to be limited due to the credit quality of the customers
comprising the Company's customer base.
The Company performs ongoing credit evaluations of its customers' financial
condition to determine the need for an allowance for doubtful accounts. The
Company has not experienced significant credit losses to date. At December 31,
1998 twelve customers accounted for the entire accounts receivable and unbilled
revenue balances.
The concentration of credit risk relating to the amount due from the parent
is considered limited due to the credit quality of the Company's parent. As
described in Note 1, substantially all of the Company's revenues during the
period ended December 31, 1998 were earned from construction services provided
to Ledcor.
12. Segmented information
The Company operates within a single operating segment being 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:
<TABLE>
<CAPTION>
Deferred
financing
Revenues Fixed assets costs
--------- ------------ ---------
<S> <C> <C> <C>
Canada.............................................. $84,534 $ 8,218 $6,650
U.S................................................. 79,785 7,257 --
-------- ------- -----
$164,319 $15,475 $6,650
======== ======= ======
</TABLE>
The revenues are based on the location of the construction activities.
13. Commitments
Network developments
The Company has, in the normal course of business, entered into agreements
to provide construction services and fiber optic network assets to third parties
in Canada and the United States.
F-37
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Right of way access agreements
The Company has entered into various agreements during the year to secure
the rights of ways along its network routes. In general, most agreements have an
option renewal clause stating that grantors cannot unjustly withhold their
acceptance of a renewal.
Operating leases
The Company leases certain facilities and equipment used in its operations
under operating leases. Future minimum lease payments under these lease
agreements at December 31, 1998 are as follows:
1999...................................................... $339
2000...................................................... $288
2001...................................................... $240
2002...................................................... $188
2003 and thereafter....................................... $ 46
14. Subsequent events
Senior Notes
On July 28, 1999 the Company issued Senior notes (the "12% Notes") with a
face value of $500,000,000. The 12% Notes are unsecured obligations of the
Company bearing interest at 12% payable semi-annually. The 12% 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 12% 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 12% 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 12% 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 12% Notes Indenture.
F-38
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Agreement with Tyco Submarine Systems Ltd.
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 called
"Hibernia". The initial contract price is approximately $607 million. The
Company has paid $60.7 million in advance payments to Tyco.
Common stock
Subsequent to year end, the Company granted stock options to employees and
officers to purchase an aggregate of 21.6 million shares of Class A Non-Voting
Shares of the Company at prices between $1.25 and $2.50 per share. The stock
options have terms expiring on or before September 30, 2009.
CN/IC 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 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.
The Company entered into a commitment with CN and IC to acquire their
respective 25% interests in WFI-CN Fiber Inc. and Worldwide Fiber IC LLC in
exchange for Class A Non-Voting Shares of the Company. The number of Class A
non-voting shares to be issued by the Company may be adjusted on an initial
public offering in accordance with a formula specified in the agreement.
Agreement with Ledcor
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, upon closing, the
Company issued to affiliates of Ledcor 36,000,000 Class C Multiple Voting
shares. In addition, the Company assumed certain rights and obligations of the
affiliates under their 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 assets acquired amounted to $26,349,800, the cost of the assets in the
accounts of Ledcor. The Company also received a deferred tax benefit of
$7,759,000, as a result of a higher tax cost versus ac-
F-39
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
counting cost of fixed assets. The Company also recorded deferred revenue of
$25,000,000 relating to a build commitment assumed from Ledcor.
Share Reorganization
Pursuant to a reorganization of the Company's share capital, on September
9, 1999, the Company amended its share capital by redesignating all Class A
Voting Shares to Class B Subordinate Voting Shares, cancelling the remaining
classes of shares and creating Class A Non-Voting Shares, Class C Multiple
Voting Shares, and Series A and B Preferred Shares and Series C Redeemable
Preferred Shares. Subsequently, the Company declared a stock dividend of
5,000,000 (pre-split) Series C Redeemable Preferred Shares. Concurrently, the
Company repurchased the 200,000,000 outstanding Class B Subordinate Voting
Shares from its parent in exchange for the issuance of 190,748,000 Class B
Subordinate Voting Shares and 40,000,000 (pre-split) Series C Redeemable
Preferred Shares. The Company then redeemed the 45,000,000 (pre-split)
outstanding Series C Redeemable Preferred Shares for $45,000,000 of cash.
Issuance of Shares
On August 31, 1999 the Company issued 1,200,000 Class B Subordinate Voting
Shares (redesignated from Class A Voting Shares) for $3,000,000 of cash and on
September 9, 1999, the Company issued 70,934,464 Series A Non-Voting Preferred
Shares for $345,000,000 of cash.
The Company entered into an agreement with an executive officer of the
Company to sell 26,080,000 Class A Non-Voting shares and 4,920,000 Class C
Multiple Voting shares for consideration of $77,500,000. In addition, the
Company issued a note receivable in the amount of $77,500,000 to the executive
officer.
Senior Credit Facility
The Company has entered into a commitment letter with certain lenders
pursuant to which the lenders would provide a three-year secured revolving
credit facility totaling US$115,000,000. The execution and delivery of the
definitive documentation is in progress.
Hibernia Credit Facility
The Company has entered into a commitment letter with certain lenders
pursuant to which the lenders would provide a credit facility totaling
US$565,000,000. The execution and delivery of definitive documentation is in
progress.
F-40
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Conversion of Class B Subordinate Voting Shares
On November 18, 1999, the Company's parent exercised its conversion rights
and converted 18,829,150 Class B Subordinate Voting Shares into 18,829,150 Class
A Non-Voting Shares.
Stock Split
On November 24, 1999, all classes of the Company's issued and outstanding
shares were split on the basis of eight shares for each one share previously
held.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Worldwide Fiber (USA), Inc.
(formerly, Pacific Fiber Link, Inc.)
In our opinion, the accompanying consolidated income statement and
statements of changes in shareholders' equity and of cash flows present fairly,
in all material respects, the results of operations of Worldwide Fiber (USA),
Inc. (formerly Pacific Fiber Link, Inc.) and its subsidiaries and their cash
flows for the period from February 11, 1998 to December 31, 1998, in conformity
with generally accepted accounting principles in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Vancouver, Canada
March 12, 1999
F-42
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Consolidated Income Statement
For the period from February 11, 1998 to December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Revenue........................................... $21,071
Costs............................................. 16,533
-------
Gross profit...................................... 4,538
Expenses
General and administrative................... 1,683
-------
2,855
Interest expense.................................. 72
Interest income................................... 53
-------
Income before income taxes........................ 2,836
Provision for income taxes........................ 980
-------
Net income for the period......................... $ 1,856
=======
Commitments (note 10)
The accompanying notes are an integral part of these
consolidated financial statements.
F-43
<PAGE>
<TABLE>
<CAPTION>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Consolidated Statement of Changes in Shareholders' Equity
For the period from February 11, 1998 to December 31, 1998.
(tabular amounts expressed in thousands of U.S. dollars)
Class A
voting Nonvoting
preferred common
shares shares Retained
Number Number Amount earnings Total
------ ------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance--beginning of period........................
Issuance of shares to acquire Worldwide
Fiber Networks, Inc. (note 1)................... 100 100 -- -- --
Issuance of shares for extinguishment of note
payable (note 1)................................ 100 100 3,915 -- 3,915
Net income for the period.......................... -- -- -- 1,856 1,856
-- -- ----- ------ ------
Balance--end of period.............................. 200 200 $3,915 $1,856 $5,771
=== === ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-44
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Consolidated Statement of Cash Flows
For the period from February 11, 1998 to December 31, 1998.
(tabular amounts expressed in thousands of U.S. dollars)
Cash flows from operating activities
Net income for the period.................................. $1,856
Changes in non-cash working capital items
Accounts receivable................................... (3,090)
Unbilled revenue...................................... (9,634)
Inventory............................................. (23,835)
Accounts payable...................................... 17,445
Income taxes payable.................................. 980
Due to parent......................................... 21,783
-------
5,505
Cash flows used in investing activities
Fixed asset additions...................................... (7,178)
-------
Cash flows from financing activities
Due to parent.............................................. 3,915
-------
Net increase in cash and cash equivalents, being cash
and cash equivalents at end of period ................... $ 2,242
=======
The accompanying notes are an integral part of these
consolidated financial statements.
F-45
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
1. The Company
Worldwide Fiber (USA), Inc. (the "Company"), formerly known as Pacific
Fiber Link, Inc., was incorporated on August 7, 1998. The Company was inactive
until August 31, 1998. On August 31, 1998, the Company acquired 100% of the
ownership interest of Worldwide Fiber Networks, Inc. ("WFNI") (formerly Pacific
Fiber Link, LLC) from its two members, Ledcor Industries Limited ("Ledcor") and
Mi-Tech Communications, LLC ("Mi-Tech"), in exchange for 100 non-voting common
shares and 100 Class A voting preferred shares of the Company. The acquisition
was accounted for in a manner similar to a pooling of interests on the basis
that the ownership interests before and after the acquisition remained the same.
Accordingly, the financial statements presented include the results of
operations of the Company and WFNI from February 11, 1998, the date that WFNI
was organized.
On December 31, 1998, the Company issued 100 shares of non-voting common
shares and 100 Class A voting preferred shares as consideration for the
settlement of indebtedness owed to Worldwide Fiber Inc. ("WFI" or "parent") of
$3,915,000 increasing WFI's interest from 50% to 75%.
The Company has entered into a shareholders' agreement among WFI, Ledcor,
Mi-Tech and Michels Pipeline Construction Inc. (an affiliate of Mi-Tech)
whereby:
(i) Any sale, transfer, assignment or encumbrance or divestment of any
interest in or control of the Company to a third party is restricted.
In the event of a proposed sale of the shares of the Company held by
WFI, Mi-Tech will have certain tag-along rights. If there is a change
of control of the Company, Mi-Tech has the option to require the
Company to purchase all of the shares owned by Mi-Tech or its
affiliates at the fair market value of such shares. In addition, after
the tenth anniversary of this agreement Mi-Tech has the option to
require the Company to purchase all of the shares owned by Mi-Tech and
its affiliates at fair market value. If Mi-Tech exercises this option,
WFI can elect to sell all of the shares or assets of the Company to a
third party in which case WFI will not be required to purchase
Mi-Tech's shares.
(ii) The Company has an option to purchase from Mi-Tech, 24 fiber optic
strands along certain existing routes owned by Mi-Tech and its
affiliates at fair value. The Company also has an option to purchase
from WFI and its affiliates indefeasible rights of use for 24 fiber
optic strands from its Chicago-New Orleans route if and when built, at
fair value. These options expire one year after the strands are
available.
F-46
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
(iii) If WFI were to issue shares in a public offering having an aggregate
value of at least $20,000,000, Mi-Tech has the option to convert all
of the shares of the Company held by Mi-Tech and its affiliates into
the class and series of shares being offered to the public.
The Company's operations consist of developing, engineering, constructing,
installing and maintaining fiber optic network assets. The Company's primary
customers are telecommunications carriers and fiber optic systems developers
located in the U.S.
2. Summary of significant accounting policies
Basis of presentation
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States and include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated on consolidation.
The Company's financial statements have been prepared for inclusion within
the Offering Memorandum prepared by WFI for the offer of Senior Notes in the
amount of $250,000,000. The consolidated balance sheet of the Company as at
December 31, 1998 has been excluded as WFI's most recent audited consolidated
balance sheet includes the assets and liabilities of the Company.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses for the period reported. Actual results
could differ from those estimates.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current period
and deferred tax liabilities and assets for future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of enacted tax laws; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance, where, based on available evidence, the
probability of realization of the deferred tax asset, does not meet a more
likely than not criteria.
F-47
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Revenue recognition
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.
Foreign currency transactions
The Company uses the U.S. dollar as its functional currency. Gains or
losses from foreign currency transactions are included in the consolidated
income statement.
3. Supplemental cash flow information
Cash paid for income taxes...................................... $--
Cash paid for interest.......................................... --
Supplemental noncash investing and financing activities
Issuance of shares:
To acquire Worldwide Fiber Networks Inc.................... --
In exchange for surrender of note payable to WFI........... 3,915
4. Share capital
a) Preferred shares Authorized
The Company is authorized to issue 125,000 preferred shares without par
value; 25,000 Class A voting preferred shares, and 100,000 Class B non-voting
preferred shares. As of December 31, 1998 there were 200 Class A voting
preferred shares issued.
Voting
The holders of Class A preferred shares are entitled to attend shareholder
meetings and to one vote for each share held. The holders of Class A preferred
shares have no other rights, preferences or privileges. The holders of Class B
preferred shares are not entitled to vote or attend shareholder meetings.
Dividends
The holders of Class B preferred shares are entitled to receive a dividend
when declared by the Board of Directors, payable in preference to the dividends
payable on any other class of shares.
F-48
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Return of capital
In the event the Company is liquidated, dissolved or wound up, the holders
of Class B preferred shares shall be entitled to such rights as expressed in the
resolution for the issue of such Class B shares, adopted by the Board of
Directors.
Redemption and retraction
The Company may redeem or purchase Class B preferred shares at such time
and such price, as expressed in the resolution for the issue of Class B
preferred shares adopted by the Board of Directors.
b) Common shares
The Company is authorized to issue 25,000 non-voting common shares, without
par value. As at December 31, 1998, there were 200 non-voting common shares
issued.
5. Provision for income taxes
The provision for current income taxes attributable to net income consists
of the following:
U.S. federal.................................... $953
U.S. state and local............................ 27
------------
$980
============
The Company's statutory rate of 34% is not materially different to its
effective rate of 34.6%.
6. Concentration of credit risk
Financial instruments that potentially subject the Company to a significant
concentration of credit risk consist primarily of cash and cash equivalents,
accounts receivable and unbilled revenue. Accounts receivable are not
collateralized. The Company limits its exposure to credit loss by placing its
cash and cash equivalents with high credit quality financial institutions.
Concentrations of credit risk with respect to accounts receivable and unbilled
revenue are considered to be limited due to the credit quality of the customers
comprising the Company's customer base.
The Company performs ongoing credit evaluations of its customers' financial
condition to determine the need for an allowance for doubtful accounts. The
Company has not experienced significant credit losses to date. At December 31,
1998 seven customers accounted for the entire accounts receivable and unbilled
revenue balances.
F-49
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
7. Revenue and significant customers
During the period ended December 31, 1998, the Company's revenue from its
three largest customers represented individually 35%, 30% and 13% of total
revenue.
8. Related party transactions
The Company reimburses Ledcor and Mi-Tech for expenses incurred on the
Company's behalf. For the period ended December 31, 1998 the amount of these
transactions with Ledcor and Mi-Tech was $1,469,000 and $1,401,000 respectively.
As at December 31, 1998 accounts payable includes $478,000 owed to Ledcor and
$524,000 owed to Mi-Tech.
9. Segmented information
The Company operates within a single operating segment being the
construction and installation of fiber optic network assets in the United
States. All revenues are earned from U.S. sources and all long-lived assets are
located in the U.S.
10. Commitments
Network developments
The Company has, in the normal course of business, entered into agreements
to provide construction services and fiber optic network assets to third parties
in Canada and the United States.
Right of way access agreements
The Company has entered into various agreements during the year to secure
the rights of ways along its network routes. In general, most agreements have an
option renewal clause stating that grantors cannot unjustly withhold their
acceptance of a renewal.
F-50
<PAGE>
Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
Operating leases
The Company leases certain facilities and equipment used in its operations
under operating leases. Future minimum lease payments under these lease
agreements at December 31, 1998 are as follows:
1999......................................................... $205
2000......................................................... 83
2001......................................................... 50
2002......................................................... 34
2003 and thereafter.......................................... -
F-51
<PAGE>
AUDITORS' REPORT
To the Directors of
Ledcor Industries Limited
We have audited the divisional balance sheets of Ledcor Industries
Limited--Telecommunications Division as at May 31, 1998, August 31, 1997 and
August 31, 1996 and the divisional statements of operations and retained
earnings and cash flows for the nine months ended May 31, 1998, year ended
August 31, 1997, five months ended August 31, 1996 and year ended March 31,
1996. These financial statements are the responsibility of the Division'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. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these divisional financial statements present fairly, in
all material respects, the financial position of the Division as at May 31,
1998, August 31, 1997 and August 31, 1996 and the results of its operations and
cash flows for the periods ended May 31, 1998, August 31, 1997, August 31, 1996
and March 31, 1996 in accordance with generally accepted accounting principles
in the United States.
Deloitte & Touche LLP
Edmonton, Canada
November 30, 1998
F-52
<PAGE>
<TABLE>
<CAPTION>
LEDCOR INDUSTRIES LIMITED--
TELECOMMUNICATIONS DIVISION
Divisional Balance Sheets
(All figures are in U.S. dollars)
August 31, August 31,
May 31, 1998 1997 1996
------------ ------------ ------------
ASSETS
CURRENT
<S> <C> <C> <C>
Trade accounts receivable (Note 4)................... $5,538,543 $18,501,710 $845,173
Accounts receivable holdbacks (Note 4)............... 4,474,731 3,446,571 153,652
Unbilled revenue (Note 5)............................ 5,842,845 3,608,010 5,013,428
Inventory............................................ 15,710,561 5,240,252 --
----------- ----------- --------
31,566,680 30,796,543 6,012,253
FIXED ASSETS (Note 6).................................... 7,982,103 1,471,043 463,651
----------- ----------- ----------
$39,548,783 $32,267,586 $6,475,904
=========== =========== ==========
LIABILITIES
CURRENT
Trade accounts payable............................... $3,148,456 $12,855,863 $1,719,591
Accrued payroll...................................... 3,431,709 1,008,791 --
Accrued liabilities.................................. 587,750 954,362 --
Accounts payable holdbacks........................... 4,412,221 86,262 --
Income taxes payable................................. 5,509,000 338,000 5,000
----------- ---------- ---------
17,089,136 15,243,278 1,724,591
DEFERRED TAX LIABILITIES (Note 7)........................ 2,657,000 4,426,000 1,212,000
INTER-DIVISIONAL ACCOUNT (Note 8)........................ 10,932,703 6,773,709 2,066,663
----------- ---------- ---------
30,678,839 26,442,987 5,003,254
----------- ---------- ---------
COMMITMENTS (Note 9)
DIVISIONAL EQUITY
Cumulative foreign exchange (loss) gain.............. (1,641,049) 6,688 (5,967)
Divisional retained earnings......................... 10,510,993 5,817,911 1,478,617
----------- ----------- ----------
8,869,944 5,824,599 1,472,650
----------- ----------- ----------
$39,548,783 $32,267,586 $6,475,904
=========== =========== ==========
</TABLE>
See accompanying notes to the divisional financial statements.
F-53
<PAGE>
<TABLE>
<CAPTION>
LEDCOR INDUSTRIES LIMITED
TELECOMMUNICATIONS DIVISION
Divisional Statements of
Operations and Retained Earnings
(All figures are in U.S. dollars)
Nine Months Five Months
ended Year ended ended Year ended
May 31, August 31, August 31, March 31,
1998 1997 1996 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue generated from contracts............ $54,633,888 $58,007,652 $7,372,942 $3,823,790
Contract costs.............................. 45,321,566 49,184,985 5,768,543 3,463,514
----------- ---------- ---------- ----------
Gross margin................................ 9,312,322 8,822,667 1,604,399 360,276
General and administrative expenses......... 710,240 863,373 90,993 57,357
----------- ---------- ---------- ----------
Net divisional income for the period,
before taxes............................. 8,602,082 7,959,294 1,513,406 302,919
Income tax expense (recovery)
Current..................................... 5,509,000 338,000 5,000 3,000
Deferred.................................... (1,600,000) 3,282,000 681,000 136,000
----------- ----------- ---------- ----------
Net divisional income for the period........ 4,693,082 4,339,294 827,406 163,919
DIVISIONAL RETAINED EARNINGS, BEGINNING OF
PERIOD................................... 5,817,911 1,478,617 651,211 487,292
DIVISIONAL RETAINED EARNINGS, END OF PERIOD.
$10,510,993 $5,817,911 $1,478,617 $ 651,211
=========== ========== ========== ==========
</TABLE>
See accompanying notes to the divisional financial statements.
F-54
<PAGE>
<TABLE>
<CAPTION>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Divisional Statements of Cash Flow
(All figures are in U.S. dollars)
Five months
Nine months Year ended ended Year ended
ended May 31, August 31, August 31, March 31,
1998 1997 1997 1996
-------------- -------------- -------------- --------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net divisional income for the period........... $4,693,082 $4,339,294 $827,406 $163,919
Adjustments to reconcile net divisional income
to net cash provided by operating
activities
Depreciation and amortization.............. 316,597 111,791 15,376 23,754
Deferred taxes............................. (1,600,000) 3,282,000 681,000 136,000
Foreign exchange (gain) loss............... (169,000) (68,000) (5,000) 9,000
Changes in assets and liabilities
Decrease (increase) in accounts receivable. 12,963,167 (17,656,537) (467,268) (331,199)
Increase in accounts receivable holdbacks.. (1,028,160) (3,292,919) (77,684) (75,969)
Decrease (increase) in unbilled revenue.... (2,234,835) 1,405,418 (5,599,836) 590,114
Increase in inventory...................... (10,470,309) (5,240,252) - -
Increase (decrease) in accounts payable.... (9,707,407) 11,136,272 1,551,305 142,886
Increase in accrued payroll................ 2,422,918 1,008,791 - -
(Decrease) increase in accrued liabilities. (366,612) 954,362 - -
Increase in accounts payable holdbacks..... 4,325,959 86,262 - -
Change in cumulative foreign exchange (loss) (1,647,737) 12,655 (3,205) 7,926
------------ ----------- ------------ ---------
gain...........................................
Net cash provided (used) by operating (2,502,337) (3,920,863) (3,077,906) 666,431
------------ ------------ ------------ --------
activities.................................
INVESTING ACTIVITIES
Purchase of construction equipment and other... (2,403,827) (1,119,183) (180,923) (71,706)
Fiber optic strands under construction......... (4,423,830) -- -- --
------------ ---------- ---------- --------
Net cash used by investing activities.......... (6,827,657) (1,119,183) (180,923) (71,706)
------------ ------------ ------------ ---------
FINANCING ACTIVITIES
Increase in income taxes payable............... 5,171,000 333,000 5,000 -
Net advances to (from) the division............ 4,158,994 4,707,046 3,253,829 (594,725)
----------- ---------- ----------- -----------
Net cash provided (used) by financing 9,329,994 5,040,046 3,258,829 (594,725)
----------- ---------- ----------- -----------
activities..................................
NET CHANGE IN CASH, END OF PERIOD.............. $ -- $ -- $ -- $ --
=========== ========== ========== =========
Additional amounts paid by the Company and
allocated to the Division
Interest....................................... $ 115,311 $ 677,715 $ 14,496 $ --
Rent........................................... 1,198,360 497,265 55,953 38,670
Income taxes................................... 338,000 5,000 3,000 --
---------- ----------- ---------- ---------
$ 1,651,671 $1,179,980 $ 73,449 $ 38,670
=========== ========== ========== =========
</TABLE>
See accompanying notes to the divisional financial statements.
F-55
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
1. DESCRIPTION OF BUSINESS
The Telecommunications Division (the "Division") is a division of Ledcor
Industries Limited ("LIL") which, in turn, is a wholly-owned subsidiary of
Ledcor Inc. The Division is in the business of providing long-haul fiber optic
systems, including planning, design, construction and maintenance to
telecommunications clients. The Division headquarters are in Vancouver, Canada
and its principal geographic areas of operation for these fiber optic systems
are Canada and the United States.
The accompanying divisional financial statements include the assets,
liabilities, revenues and expenses of the Division. Since the Division has been
operating as a fully integrated part of the Company, all construction equipment
owned by LIL, but used in the Division's operations, was identified by LIL's
management and allocated to the Division. In addition, certain assets,
liabilities, revenues and expenses have been recorded by the Division using
management's best estimates (Note 3).
The divisional financial statements have been prepared from the divisional
records maintained by LIL and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Division
had been operated as a stand-alone company.
The Division does not hold any cash or cash equivalents. LIL uses central
bank accounts to deposit receipts and make payments on behalf of the Division.
These transactions are reflected in the inter-divisional account (Note 8).
On May 31, 1998, LIL transferred the net assets (at book value) and the
operations of the Division to Worldwide Fiber Inc. (indirectly a wholly-owned
subsidiary of Ledcor Inc.).
2. ACCOUNTING POLICIES
a) Basis of accounting
These divisional financial statements have been prepared in accordance
with accounting principles generally accepted in the United States,
which differ in some respects from those in Canada. The impact of any
differences in accounting policies on the financial statements is not
significant and therefore has not been discussed.
b) Accounting for contracts
Revenue and income from construction contracts to develop fiber optic
systems are determined on the percentage of completion basis using the
cost-to-cost method. Due to the risks inherent in these contracts,
management makes a provision for risk using their best estimate. This
method is used because management considers costs incurred to be the
best available measure of progress on
F-56
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
these contracts. Provision is made for all anticipated losses as soon
as they become evident. Claims for additional contract compensation
are not recognized until resolved.
c) Unbilled revenue
Unbilled revenue comprises costs incurred and margin in excess of
billings and advance deposits, representing unperformed work, on
uncompleted contracts.
d) Inventory
Inventory consists of fiber optic strands under construction and is
valued at the lower of cost or market. Cost is determined using the
full absorption method whereby the fiber optic strands have been
allocated their proportionate share of materials, labour and overhead
incurred.
e) Fixed assets
Construction equipment, fiber optic strands and other assets are
recorded at cost. Fixed assets are depreciated using the following
rates and methods:
o Construction equipment--hourly usage rates, estimated to
depreciate the equipment, over estimated useful lives, ranging
from three to five years.
o Fiber optic strands, under construction--depreciation, at
appropriate rates, will be provided for when the related fiber
optic systems are in use.
o Other assets-straight--line method over the estimated useful
lives of the assets, ranging from three to five years.
f) Income taxes
These are the financial statements of a Division, and not of a taxable
legal entity. However, these financial statements present income taxes
as if the Division was a stand-alone taxable legal entity. Current and
deferred income taxes have been determined by applying the asset and
liability method.
The asset and liability method of accounting for income taxes
recognizes deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
F-57
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
g) Translation of foreign currency
The functional currency of the Division is the Canadian dollar. The
financial statements are translated into United States dollars using
the period end exchange rate for assets and liabilities and weighted
average exchange rates for the period for revenues and expenses.
Translation gains and losses are deferred and included in divisional
equity. Net gains and losses resulting from foreign exchange
transactions are included in the statement of operations.
3. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the divisional financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Unbilled revenue, inventory, fiber optic strands capitalized, and revenue
have all been calculated using management's best estimates. Total estimated
costs is a component of the percentage of completion calculation which
determines revenue recognized, unbilled revenue, inventory and fiber optic
strands capitalized. However, there may be unforeseen conditions which could
include weather patterns, the continuing deterioration of the Canadian dollar,
and the outcome of ongoing negotiations. Such conditions could substantially
change the values of the above mentioned items reflected in these financial
statements. The impact of these unforeseen conditions cannot be estimated by
management as at May 31, 1998.
Corporate expenses are allocated from LIL to the Division based on a
percentage of the Division's revenue. Management is of the opinion that this
allocation percentage is reasonable since all divisions fully absorb LIL's
corporate expenses. Management regularly reviews this allocation basis and
considers the amounts allocated to fairly represent actual corporate expenses
incurred, on behalf of the Division, for the periods reported on. Because the
Division is fully integrated, management is unable to estimate the actual
corporate expenses that would have been incurred if the Division had operated on
a stand-alone basis.
Interest is allocated from LIL by charging a floating rate of prime plus 1%
on the net cash position of the Division's projects at the end of each month.
Statement of Financial Accounting Standards No. 34, "Capitalization of Interest
Cost", requires that interest be capitalized as part of the historical cost of
constructing assets held for sale or lease. Management has capitalized interest
by capitalizing the portion of interest costs incurred to date which relates to
inventory and capital assets.
The Division has no additional debt accruing interest which should be
capitalized. In addition, LIL has no additional debt which would result in
significant interest being allocated and capitalized.
F-58
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
4. TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE HOLDBACKS
Trade accounts receivable are presented net of the allowance for doubtful
accounts (which was nil for all years reported on since the Division has not
experienced any bad debts).
Accounts receivable holdbacks represent amounts billed but not yet paid
under retainage provisions in the project contracts. These provisions state that
holdbacks will be collected upon substantial completion of the projects.
5. UNBILLED REVENUE
Costs and billings on uncompleted contracts included in the divisional
financial statements are as follows:
<TABLE>
<CAPTION>
May 31, August 31,
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts..................... $45,321,566 $49,184,985 $5,768,543
Margin...................................................... 9,312,322 8,822,667 1,604,399
Customer advance deposits applied against contracts......... (25,259,100) (7,646,685) --
Less billings to date....................................... (23,531,943) (46,752,957) (2,359,514)
------------ ----------- ----------
$ 5,842,845 $ 3,608,010 $5,013,428
------------ ----------- ----------
6. FIXED ASSETS
May 31, August 31,
1998 1997 1996
---------- ---------- ----------
Construction equipment...................................... $3,796,102 $1,869,048 $802,548
Fiber optic strands, under construction..................... 4,423,830 -- --
Other....................................................... 529,456 52,683 --
............................................................ 8,749,388 1,921,731 802,548
Less accumulated depreciation............................... 767,285 450,688 338,897
---------- ---------- --------
............................................................ $7,982,103 $1,471,043 $463,651
========== ========== ========
</TABLE>
F-59
<PAGE>
<TABLE>
<CAPTION>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
7. DEFERRED TAX LIABILITIES
The components of the deferred tax liabilities are as follows:
May 31, August 31,
1998 1997 1996
----------- ---------- ----------
Deferred tax assets
<S> <C> <C> <C>
Accounts payable holdback................................ $ 1,986,000 $ 39,000 $ --
Loss carryforward........................................ $ -- $ -- 1,113,000
---------- -------- ----------
Gross deferred tax assets................................ 1,986,000 39,000 1,113,000
----------- --------- ----------
Deferred tax liabilities
Accounts receivable holdback............................. 2,014,000 1,551,000 69,000
Unbilled revenue......................................... 2,629,000 1,623,000 2,256,000
Inter-divisional account loss carryforward............... -- 1,291,000 --
--------- ---------- ---------
Gross deferred tax liabilities........................... 4,643,000 4,465,000 2,325,000
---------- ---------- ----------
............................................................ $2,657,000 $4,426,000 $1,212,000
========== ========== ==========
Reconciliation of deferred tax liabilities:
May 31, August 31,
1998 1997 1996
---------- ---------- ----------
Deferred tax liabilities, beginning of period............... $4,426,000 $1,212,000 $ 536,000
Deferred tax (recovery) expense............................. (1,600,000) 3,282,000 681,000
Foreign exchange gain....................................... (169,000) (68,000) (5,000)
---------- ---------- ----------
Deferred tax liabilities, end of period..................... $2,657,000 $4,426,000 $1,212,000
---------- ---------- ----------
</TABLE>
The Division's provision for deferred taxes approximates the amounts
computed by applying the Canadian and United States statutory rates to income
before taxes. There are no permanent differences or other reconciling items that
would result in an effective tax rate which is different from the statutory
rates applied.
F-60
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
8. INTERDIVISIONAL ACCOUNT
This account comprises the balance due to other divisions in connection
with working capital advances. The balance due has no repayment terms and
interest is allocated, from LIL, on the basis as described in Note 3.
9. COMMITMENTS
a) Fiber Optic Construction Project
In 1996, the Division commenced construction of a Canadian-U.S. fiber
optic telecommunications system (the Canadian FOTS) that is scheduled
for completion in early 1999.
b) fONOROLA Contract
In a variety of contracts, commencing in April, 1997, the Division
sold fiber optic strands of the Canadian FOTS. The Division has a
commitment to complete construction of the fiber optic strands.
c) Bell Canada Contract
In February, 1998, the Division sold fiber optic strands of the
Canadian FOTS. The Division has a commitment to complete construction
of the fiber optic strands.
d) MetroNet Contract
Subsequent to period end (September, 1998), the Division sold fiber
optic strands of the Canadian FOTS. The Division has a commitment to
complete construction of the fiber optic strands.
e) Lease Commitments
The Division is committed under non-cancellable leases for equipment
for the period ending April, 1999 in the amount of $826,271. The
Division has an option to withdraw from all leases in April, 1999 and
therefore has no commitments beyond that date. Lease expenses were the
following:
Nine months ending May 31, 1998 $1,198,360
Year ended August 31, 1997 497,265
Five months ended August 31, 1996 55,953
Year ended March 31, 1996 38,670
F-61
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
10. SIGNIFICANT CONCENTRATION OF CREDIT AND SUPPLY RISK
The following customers/supplier have accounted individually for 10% or
more of the Division's total revenues/contract costs in one or more periods, as
follows:
<TABLE>
<CAPTION>
Nine months ended Year ended Five months ended Year ended
May 31, 1998 August 31 1997 August 31, 1996 March 31, 1996
----------------- -------------- ----------------- --------------
Customers
<S> <C> <C> <C> <C>
fONOROLA................... 62% 64% 51% 91%
Bell Canada................ 28% - - -
Alaska Filter Star......... - 25% - -
Sprint Canada.............. - - 24% -
AT&T Canada................ - - 24% -
Supplier
Pirelli Cables............. 13% 27% 79% -
</TABLE>
The Division also had significant accounts receivable from fONOROLA which
accounted for the following percentages of trade accounts receivable:
<TABLE>
<CAPTION>
May 31, 1998 August 31, 1997 August 31, 1996
------------ --------------- ---------------
<S> <C> <C> <C>
fONOROLA.............................................. 39% 52% 94%
</TABLE>
The Division is receiving cash from this customer on a consistent basis and
management expects to collect on all other accounts receivables. Therefore no
provision for bad debts has been recorded for the reported periods. Based on
this significant customer's creditworthiness, the Division has not required it
to provide collateral against these receivables.
There were no significant accounts payable to significant suppliers at the
balance sheet dates. However, since significant purchases are made from Pirelli
Cables, should this supplier fail to honor its contract and the Division was not
able to find a substitute supplier, the Division would not be able to meet its
commitments to complete the construction of the Canadian FOTS, as noted in 9(a).
11. FINANCIAL INSTRUMENTS
Financial instruments consist of recorded accounts receivables (and other
like accounts) which will result in future cash receipts, as well as accounts
payables, (and other like accounts) that will result in future cash outlays.
F-62
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
The carrying values of the financial instruments of the Division as at May
31, 1998, August 31, 1997 and August 31, 1996 were approximately equal to their
estimated fair market values at these dates, due to the short-term nature of
these instruments. Subjective judgment and uncertainties arise in the
determination of estimated fair market values. Accordingly, the aggregate fair
value should not be interpreted as being realizable in an immediate settlement
of the instruments.
12. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Division currently operates in one industry segment (fiber optic
installations) and in two geographic segments (the Canadian FOTS is being
constructed in Canada and the U.S.). Revenue and total identifiable assets for
these geographic segments is as follows:
<TABLE>
<CAPTION>
Canada U.S.
---------------------------------- --------------------------------
Revenue Amount Percentage of Total Amount Percentage of Total
------- ------ ------------------- ------ -------------------
<S> <C> <C> <C> <C> <C> <C>
May 31, 1998.................... $ 35,826,795 66% $ 18,807,093 34%
August 31, 1997................. $ 42,611,672 73% $ 15,395,980 27%
August 31, 1996................. $ 7,372,942 100% $ -- --
March 31, 1996.................. $ 3,823,790 100% $ -- --
Canada U.S.
Total Identifiable ------ ----
Assets Amount Percentage of Total Amount Percentage of Total
------ ------ ------------------- ------ -------------------
May 31, 1998..................... $ 29,204,452 71% $ 11,928,580 29%
August 31, 1997.................. $ 25,464,071 79% $ 6,803,515 21%
August 31, 1996.................. $ 6,475,904 100% $ -- --
</TABLE>
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after, January 1, 2000 and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect the Division's ability to conduct normal business operations.
It is not possible to be certain
F-63
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Notes to the Divisional Financial Statements
(All figures are in U.S. dollars)
that all aspects of the Year 2000 Issue affecting the Division, including those
related to the efforts of customers, suppliers, or other third parties, will be
fully resolved.
14. SUBSEQUENT EVENTS
a) Agreements with WFI
Effective May 31 1998, LIL entered into a series of agreements to sell
the equipment, fiber optic strands and certain other assets related to
the business of Worldwide Fiber Inc. (an indirect wholly-owned
subsidiary of Ledcor Inc.) ("WFI"). In addition, WFI was granted a
licence by LIL to use certain processes related to the business. This
licence agreement is for an initial term of ten years and will be
renewable annually upon completion of the initial term. As part of
this transaction, LIL retained all existing construction contracts
related to the business. This transaction was between entities under
common control and has been accounted for using the carrying amounts
recorded in LIL's accounts. As consideration for the transaction, LIL
was issued 200 Class A shares by WFI.
b) Disposition of fiber assets
As part of these agreements WFI undertook to purchase from LIL certain
fiber optic system assets, located in both Canada and the U.S., which
were not completed at May 31, 1998. These assets will be purchased by
WFI upon their completion, which is estimated to be late 1998 or early
1999. As consideration, WFI will issue a total of 19,999,700 Class A
common shares to LIL. These transactions are between entities under
common control and, will be accounted for at their original
construction costs.
c) Construction services
WFI has agreed to provide construction services to LIL to complete
certain construction contracts for fiber optic strands and related
facilities to third party customers.
F-64
<PAGE>
================================================================================
January 21, 2000
WORLDWIDE FIBER
[OBJECT OMITTED]
WORLDWIDE FIBER'S LOGO
Worldwide Fiber Inc.
$500,000,000
12% senior notes due 2009
-------------
PROSPECTUS
-------------
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We have not authorized any dealer, salesperson or other person to give you
written information other than this Prospectus or to make representations as to
matters not stated in this Prospectus. You must not rely on unauthorized
information. This Prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this Prospectus nor any
sales made hereunder after the date of this Prospectus shall create an
implication that the information contained herein or the affairs of the Company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
================================================================================
