As filed with the Securities and Exchange Commission on January 28, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WORLDWIDE FIBER INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Canada 4813 Not Applicable
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
1500-1066 West Hastings Street
Vancouver, British Columbia
Canada V6E 3X1
(604) 681-1994
(Address, including ZIP Code and telephone number, including area
code, of registrant's principal executive offices)
----------
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 590-9200
(Name, address, including ZIP Code and telephone number, including
area code, of agent for service)
Copies to:
Roger Andrus, Esq. Steven Della Rocca, Esq.
Cahill Gordon & Reindel Latham & Watkins
80 Pine Street 885 Third Avenue, Suite 1000
New York, New York 10005 New York, New York 10022
U.S.A. U.S.A.
(212) 701-3000 (212) 906-1200
Cameron G. Belsher, Esq. J. Mark DesLauriers, Esq.
Farris, Vaughan, Wills & Murphy Osler, Hoskin & Harcourt LLP
2600-700 West Georgia Street 1 First Canadian Place
Vancouver, British Columbia Toronto, Ontario
Canada V7Y 1B3 Canada M5X 1B8
(604) 684-9151 (416) 362-2111
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration
statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / / __________
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CALCULATION OF REGISTRATION FEE
============================== ======================= ====================== =========================== =========================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered (1) Price Per Unit Aggregate Offering Price Registration Fee(3)
(2)
- ------------------------------ ----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C>
Class A Non-Voting Shares $ $862,500,000 $227,700
============================== ======================= ====================== =========================== =========================
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(1) Includes shares which the underwriters have the option to purchase to
cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended (the "Securities Act").
(3) Calculated pursuant to Rule 457(o) under the Securities Act.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated January 28, 2000.
Shares
Worldwide Fiber Inc.
Class A Non-Voting Shares
---------------
This is an initial public offering of Class A Non-Voting Shares of
Worldwide Fiber Inc.
We are offering of our Class A Non-Voting Shares to be sold in the
offering. The selling shareholders identified in this prospectus are offering an
additional Class A Non-Voting Shares. We will not receive any of the proceeds
from the sale of the shares being sold by the selling shareholders.
Prior to this offering, there has been no public market for the Class A
Non-Voting Shares. Application will be made to approve the Class A Non-Voting
Shares for quotation on the Nasdaq National Market under the symbol " " and for
listing on The Toronto Stock Exchange under the symbol " ".
See "Risk Factors" on page 9 to read about factors you should consider
before buying our Class A Non-Voting Shares.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
---------------
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Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................. $ $
Underwriting discount......................................... $ $
Proceeds, before expenses, to Worldwide Fiber Inc............. $ $
Proceeds, before expenses, to selling shareholders............ $ $
</TABLE>
To the extent that the underwriters sell more than Class A Non-Voting
Shares, the underwriters have the option to purchase up to an additional Class A
Non-Voting Shares from us, solely to cover over-allotments, at the initial
public offering price less the underwriting discount.
The underwriters expect to deliver the Class A Non-Voting Shares
against payment in New York, New York on , 2000. Joint Book-Running Managers
Goldman, Sachs & Co. Donaldson, Lufkin & Jenrette
----------------------------------
Credit Suisse First Boston TD Securities
Bear, Stearns & Co. Inc.
Morgan Stanley Dean Witter
Nesbitt Burns
Chase H&Q RBC Dominion Securities Corp. Warburg Dillon Read LLC
----------------------------------
Prospectus dated , 2000.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully. References in this
prospectus to "Worldwide Fiber," "we," "our" and "us" refer to Worldwide Fiber
Inc. (and its predecessor) and all of its subsidiaries as a combined entity,
except where it is clear that those terms mean only the parent company.
The Company
We are a leading independent, facilities-based international provider of fiber
optic communications network products and services. By the first quarter of
2001, our network will consist of approximately 37,800 route miles comprised of:
o 24,100 route miles in North America (of which more than 12,000
route miles have been developed to date);
o approximately 6,100 route miles in Europe as a result of swaps
and co-development agreements; and
o a 7,600 route mile transatlantic cable.
We intend to expand our network to provide further global connectivity. In
addition, we will continue to develop bandwidth services on our network to meet
our customers' demands and enable Internet services. Our network's design uses
state-of-the-art optical technologies that we believe greatly reduces complexity
and cost while allowing us to offer increased reliability and a wide range of
products and services.
We believe that there is growing demand for fiber optic capacity to transmit
high-bandwidth data, voice and video. This growing demand is being accelerated
by improvements in "last mile" technology such as digital subscriber line, fixed
and third generation wireless access and cable modems. In this changing market
environment, we believe that we are in a favorable competitive position to
satisfy this demand relative to other service providers due to our low-cost
structure. Our market position and operating flexibility has allowed us to
achieve a low-cost structure by utilizing:
o our construction skills;
o co-development and swaps along some corridors of our network;
o the use of equity as payment for important elements such as bulk
rights-of-way; and
o optical design and technologies which eliminate layers of
equipment traditionally required to support legacy systems.
Our current and targeted customers include new and incumbent telecommunications
service providers, Internet service providers, application service providers and
large organizations with enterprise network needs. We believe that these
customers have a limited choice of independent service providers capable of
offering high-capacity, reliable, secure and cost-effective services, including
enabling Internet services, between major population centers in North America
and Europe. As a result, we believe that our targeted customers will buy
services from us rather than purchase from another source or build these service
capabilities themselves. To meet our customers' demands, we offer a wide range
of services on a scalable basis, across an extensive geographic network. Our
services include:
o bandwidth services--optical channels, private line transmission,
packet-based data services such as Internet protocol transport
and Asynchronous Transfer Mode, and virtual voice trunking; and
o network infrastructure--dark fiber and conduit for sale, grant of
indefeasible right to use or lease and construction services
supporting the development of our network.
1
<PAGE>
We also intend to expand our business to include:
o facilities, such as carrier hotels that will enable us to provide
services such as Internet data centers, co-location, applications
hosting, electronic commerce support and web hosting; and
o network services such as video transport, independent Internet
access for transport and peering and management services to allow
carriers to migrate from circuit-switched technologies to
packet-based technologies.
Business Strategy
To exploit the growing demand for bandwidth, our strategy is to:
o provide high-bandwidth connectivity between major global
population centers;
o develop and operate a technologically advanced, high-capacity,
low-cost network;
o extend the reach of our network through development and swaps of
fiber and capacity;
o expand our marketing capabilities;
o increase the number of products and services that we offer,
including Internet enabling services;
o capitalize on management experience and relationships; and
o pursue additional strategic alliances.
The Network
Our 37,800 route mile network is scheduled to be completed by the first quarter
of 2001. We plan to further develop and expand our network footprint in response
to customer demand. Our network consists of fiber optic assets and capacity that
we have installed or acquired from other developers and carriers through swaps
or purchases along diverse rights-of-way.
o North America. In North America, our network is expected to cover
approximately 24,100 route miles, encompassing both long-haul and
intra-city route miles and providing connectivity between
approximately 50 major population centers.
o Europe. In Europe, our network is expected to cover approximately
6,100 long-haul route miles (assuming, with respect to 1,300
route miles, the exercise of an option that we have) providing
connectivity between approximately 20 major population centers by
the first quarter of 2001.
o Hibernia Undersea Cable. Our 7,600 mile transatlantic cable will
be a 1.92 terabits per second, high-capacity, self-healing ring
that will connect landing sites in Boston, Halifax, Dublin and
Liverpool.
o Future Expansion. In addition to expanding our network through
North America and Europe and our Hibernia undersea cable (which
will comprise an aggregate of more than 1.1 million fiber miles)
to more population centers, we are reviewing opportunities to
expand the geographic reach of our network to have transpacific
connectivity and extend into Asia and Latin America. We will also
consider building additional city rings in the major population
centers reached by our network.
2
<PAGE>
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, where he had responsibilities for
Microsoft's worldwide financial, corporate development and
strategic partnership initiatives. Prior to joining us, Mr.
Maffei purchased approximately 8% of our total equity determined
on a fully diluted basis as of December 22, 1999. Some 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. to grant to them an
indefeasible right of use for bandwidth capacity between
Vancouver and Chicago under which we will deliver this capacity
by the end of March 2000. In addition, we will provide them with
operations and other services. Some details of this agreement are
subject to finalization.
o Europe. In December 1999, we signed contracts with Telia AB,
Telewest Communications Group Limited and Carrier1 International
GmbH. 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. Our agreement with
Carrier1 provides us with wholesale capacity from London to 18
major European population centers. We also have options from
Carrier1 to acquire dark fiber strands in Germany and/or
wavelengths in France.
Investors
o Private Equity Investment. In September 1999, we completed a
private placement of our redeemable convertible preferred shares
to affiliates of Tyco International Ltd., Providence Equity
Partners Inc., DLJ Merchant Banking Partners II L.P. and GS
Capital Partners III, L.P. for $345 million. Together, these
private placements represent a minority equity interest in us.
Under the terms of the sale, each purchaser is entitled to
nominate a representative to our board of directors. Currently
three such nominees serve as our directors. Concurrently with the
completion of this offering, the redeemable convertible preferred
shares will automatically convert into Class A Non-Voting Shares.
Principal Executive Offices
Our principal executive offices are located at 1500-1066 West Hastings
Street, Vancouver, British Columbia, Canada V6E 3X1, and our electronic mail
address is [email protected]. Our main phone number is (604) 681-1994.
3
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The Offering
Class A Non-Voting Shares offered (a):
By us................................................
By the selling shareholders..........................
Shares to be outstanding following the offering (a):
Class A Non-Voting Shares............................
Class C Multiple Voting Shares.......................
Total................................................
Concurrent debt offerings.................... Concurrently with this offer-
ing, we are offering in
transactions under Rule 144A
and Regulation S of the
Securities Act by a separate
offering memorandum:
o $ million in aggregate
principal amount of Senior
Notes due 20 ; and
o Euro $ million ($
million) in aggregate amount
of Senior Notes due 20 . The
closing of this offering is
not conditioned on the closing
of the debt offerings, and the
closing of the debt offerings
is not conditioned on the
closing of this offering.
Use of proceeds............................. We intend to use the net
proceeds of this offering:
o to further develop and light
our network;
o to develop new facilities to
enable us to provide value
added network services;
o for investments,
acquisitions or strategic
alliances that we may identify
in the future; and
o........to fund operating
losses, for working capital
and for general corporate
purposes.
Proposed listing symbols:
Nasdaq National Market...............................
The Toronto Stock Exchange...........................
(a) Does not include Class A Non-Voting Shares that will be offered by us if the
underwriters' overallotment option is exercised in full.
4
<PAGE>
Summary Financial Data
We were incorporated on February 5, 1998 and are indirectly a
subsidiary of Ledcor Industries Limited, one of Ledcor Inc.'s subsidiaries. On
May 31, 1998 we began our operations after some assets of the telecommunications
division of Ledcor Industries were transferred to us. Prior to June 1, 1998, the
operations were carried out by the telecommunications division.
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 Industries, are derived from the audited financial statements
of the predecessor division, which have been audited by Deloitte & Touche LLP,
independent auditors.
Our summary consolidated historical financial data presented for the
period from February 5, 1998 to December 31, 1998 are derived from our audited
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors. Our unaudited pro forma
financial data for the year ended December 31, 1998 are derived from our audited
consolidated financial statements, the financial statements of the predecessor
division and the consolidated financial statements of Worldwide Fiber (USA),
Inc. included elsewhere in this prospectus and give effect to the following
transactions as if they had occurred on January 1, 1998:
o the transfer of operations and assets to us from the
telecommunications division of Ledcor Industries;
o the acquisition by us of an additional 25% interest in Worldwide Fiber
(USA), Inc., which increased our interest to 75%;
o the interest expense on the $175 million senior notes and $500 million
senior notes; and
o the amortization of goodwill arising from the acquisition of the
Canadian National Railway Company and Illinois Central Railroad
Company minority equity interests.
The summary consolidated historical financial data as of and for the periods
ended September 30, 1999 and 1998 are derived from our unaudited consolidated
financial statements and include, in the opinion of our 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 our unaudited interim consolidated financial
statements for the nine month period ended September 30, 1999 included elsewhere
in this prospectus. The unaudited pro forma income statement for the nine months
ended September 30, 1999 gives effect to the following transactions as if they
occurred on January 1, 1998:
o the interest expense on the $500 million senior notes; and
o the amortization of goodwill arising from the acquisition of the
Canadian National Railway Company and Illinois Central Railroad
Company minority equity interests.
The unaudited pro forma as adjusted balance sheet data at September 30, 1999
gives effect to the following transactions as if they occurred on September 30,
1999:
o the issuance of Class A Non-Voting Shares for proceeds of $ ;
o the issuance of $ notes in the concurrent debt offerings;
o the conversion of our redeemable convertible preferred shares into
Class A Non-Voting Shares;
5
<PAGE>
o the acquisition of the Canadian National Railway Company and Illinois
Central Railroad Company minority equity interests;
o the completion of the $565.0 million Hibernia bank facility, of which
$ has been drawn;
o the completion of the $115 million senior credit facility (with
additional senior secured revolving purchase money facilities of $35
million), of which $ has been drawn;
o the receipt of a promissory note from one of our executive officers
and the issuance of our shares to the executive officer; and
o the issuance of $1.0 million worth of Class A Non-Voting Shares to a
consultant.
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.
EBITDA presented in the following table 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 that it is a useful indicator
of our 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 acceptable 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.
For purposes of calculating the ratio of earnings to fixed charges,
earnings consists of earnings (loss) before equity income, income tax expense
(recovery), income attributable to minority interest, amortization of goodwill
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 approximately $74.5 million, and pro forma loss for the nine month period
ended September 30, 1999 would have been insufficient to cover fixed charges by
approximately $11.9 million.
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.
The following table presents summary consolidated financial data
derived from our consolidated financial statements. You should read the
following information along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements and the
related notes included elsewhere in this prospectus.
6
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<CAPTION>
Summary Financial Data
(Dollars in thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------------
Worldwide Fiber
---------------------------------------------------------------------------------
Pro Forma
February 5, February 5, Pro Forma Nine Months Nine Months
1998 to 1998 to Year Ended Ended Ended
September 30, December 31, December 31, September 30, September 30,
1998 1998 1998 1999 1999
------------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue.................... $ 104,819 $ 164,319 $ 207,038 $ 235,138 $ 235,138
Operating expenses:
Costs................... 90,909 147,621 182,518 165,263 165,263
General and administrative 1,318 2,274 8,140 17,263 18,138
Depreciation............ 260 464 639 871 871
Amortization of good-will -- -- 4,875 -- 3,656
----------- ----------- ----------- ----------- -----------
Total operating expenses... 92,487 150,359 196,172 183,397 187,928
----------- ----------- ----------- ----------- -----------
Operating income........... 12,332 13,960 10,866 51,741 47,210
Interest expense, net...... -- 225 85,352 12,448 49,248
Equity income (loss)....... (48) 928 -- -- --
Earnings (loss) before
income taxes............ 12,284 14,663 (74,486) 39,293 (2,038)
Income tax expense (recovery) 5,402 5,643 (26,710) 20,175 3,571
----------- ----------- ----------- ----------- -----------
6,882 9,020 (47,776) 19,118 (5,609)
Income attributable
to minority interest.... -- -- 464 5,747 3,247
----------- ----------- ----------- ----------- -----------
Net income (loss).......... $ 6,882 $ 9,020 $ (48,240) $ 13,371 $ (8,856)
=========== =========== =========== =========== ===========
Basic and diluted earnings
(loss) per share .......... $ 2.19 $ 0.86 $ (3.90) $ 0.05 $ (0.11)
Shares used to calculate
earnings (loss) per share:
Basic................. 3,140,871 10,482,089 12,360,578 140,973,458 140,973,458
Diluted............... 3,140,871 10,482,089 12,360,578 153,116,346 140,973,458
Other Financial Data:
EBITDA .................... $ 12,544 $ 15,352 $ 16,380 $ 52,612 $ 51,737
Capital expenditures....... -- 1,065 -- 61,124 --
Ratio of earnings to fixed
charges ................... 374.7x 26.8x -- 2.0x --
Statement of Cash
Flows Data:
Operating activities....... $ 99 $ (13,059) $ -- $ (38,427) $ --
Investing activities....... -- 1,177 -- (229,927) --
Financing activities....... -- 168,350 -- 787,000 --
Operating Data:
Route miles................ -- 2,735 -- 8,807 --
September 30, 1999
--------------------------------
Pro Forma
Actual As Adjusted
Balance Sheet Data:
Cash and cash equivalents.................................................. $ 675,175 $
Fixed assets, net.......................................................... 107,264
Total assets............................................................... 1,216,194
Total debt................................................................. 675,000
Redeemable convertible preferred shares.................................... 345,157
Shareholder's equity....................................................... 30,806
</TABLE>
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<TABLE>
<CAPTION>
Predecessor Division
Five Months
Ended Year Ended Nine Months
Year Ended August 31, August 31, 1997 Ended
March 31, 1996 1996 May 31, 1998
<S> <C> <C> <C> <C>
Income Statement Data:
Revenue.............................. $ 3,824 $ 7,373 $ 58,008 $ 54,634
Operating expenses:
Costs............................. 3,440 5,739 48,474 44,919
General and administrative........ 57 91 863 710
Depreciation...................... 24 15 112 317
----------- ----------- ----------- -----------
Total operating expenses............. 3,521 5,845 49,449 45,946
----------- ----------- ----------- -----------
Operating income..................... 303 1,528 8,559 8,688
Interest expense, net................ -- 15 600 86
Equity income........................ -- -- -- --
----------- ----------- ----------- -----------
Earnings before income
taxes............................. 303 1,513 7,959 8,602
Income tax expense................... 139 686 3,620 3,909
----------- ----------- ----------- -----------
164 827 4,339 4,693
Income attributable
to minority interest.............. -- -- -- --
----------- ----------- ----------- -----------
Net income (loss).................... $ 164 $ 827 $ 4,339 $ 4,693
=========== =========== =========== ===========
Other Financial Data:
EBITDA............................... $ 327 $ 1,543 $ 8,671 $ 9,005
Capital expenditures................. 72 181 1,119 6,828
Ratio of earnings to fixed
charges........................... 24.3x 45.5x 10.3x 17.7x
Statement of Cash Flows Data:
Operating activities................. $ 666 $ (3,078) $ (3,921) $ (2,502)
Investing activities................. (72) (181) (1,119) (6,828)
Financing activities................. (595) 3,259 5,040 9,330
Operating Data:
Route miles.......................... -- -- 1,090 1,430
Fiber miles ......................... -- -- 22,740 34,320
Balance Sheet Data:
Cash and cash equivalents............ $ -- $ -- $ -- $ --
Fixed assets, net.................... -- 464 1,471 7,982
Total assets......................... -- 6,476 32,268 39,549
Total debt........................... -- 2,067 6,774 10,933
Redeemable convertible preferred shares -- -- -- --
Shareholder's equity................. -- 1,473 5,825 8,870
</TABLE>
8
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RISK FACTORS
You should carefully consider the risks described below before
deciding whether to invest in our Class A Non-Voting Shares. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us may also impair our business
operations.
If we do not successfully address any of the risks described below,
there could be a material adverse effect on our business, financial condition or
results of operations. As a result, the trading price of our Class A Non-Voting
Shares may decline and you may lose all or part of your investment. We cannot
assure you that we will successfully address these risks.
General Business
Limited History of Operations--Given our limited operating history, you should
consider our shares 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 our Class A
Non-Voting Shares. 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 Industries. We believe that 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.
Risks Associated with Development and Expansion of Our Network--Our inability to
implement our business strategy and manage our growth could impair our operating
results.
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 personnel. Adverse economic or competitive conditions or the
failure to obtain the necessary authorizations or to hire and retain qualified
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 acceptable conditions:
o obtain continued access to capital markets;
o design, engineer and operate 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
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, equipment or skilled labor;
o unforeseen engineering, environmental or geological problems; and
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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 success will depend, to a significant degree, upon our ability to
secure a market for our network capacity and obtain and maintain contractual and
other relationships with telecommunications service providers, Internet service
providers, application service providers and large organizations with enterprise
network needs. 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. Some 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
or our partners supply the venture with dark fiber and 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.
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 hardware and 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.
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
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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 revenues and 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.
Limited Experience--We have little experience in the offering of bandwidth and
value added 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 value added services. We have limited experience
offering these services. Presently, we derive substantially all of our revenues
from the sale, grant of an indefeasible right of use or lease of dark fiber and
conduit and construction services. See "Business--Customers" and
"--Competition."
Pricing Pressures--We anticipate that prices for bandwidth services and fiber
assets will 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 will compete with our network;
o installation by us and our competitors of fiber capacity in excess of
actual demand;
o recent technological advances that enable 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, that increase our customers' purchasing
power.
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
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. Some 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 Radio-television and Telecommunications Commission to
prescribe the terms and conditions of access to street crossings and other
municipal properties in the City of Vancouver. See "--Extensive
Regulation--Canada--Canadian Radio-television and Telecommunications Commission
Applications." In addition, landholders who granted rights-of-way to some
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 Canadian National Railway Company and Illinois Central Railroad
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--Rights-of-way and Permitting."
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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 assets may not be returned.
We are continually evaluating potential joint ventures and strategic
opportunities to expand our network, enhance our connectivity and add traffic to
our network. 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
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;
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 targets.
Other risks associated with our international plans, including our
expansion into Europe, are:
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;
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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.
Competition--Our business is very competitive and increased competition could
adversely affect us.
The telecommunications industry is extremely competitive, particularly
concerning price and service. It is relatively common for telecommunication
service providers to be both customers and competitors. This is a concept
referred to as co-opetition. Therefore, we face competition and co-opetition
from existing and planned telecommunications service providers and customers on
each of our planned routes. Our competitors include:
o interexchange carriers, including AT&T Corp., MCI WorldCom, Inc.,
Sprint Corporation (MCI WorldCom, Inc. and Sprint Corporation have
recently entered into an agreement to merge), British
Telecommunications plc, Deutsche Telekom AG, France Telecom S.A. and
KPNQwest N.V.;
o wholesale providers of terrestrial and undersea connectivity,
including Williams Communications Group, Inc., Broadwing
Communications Services Inc., Global Crossing Ltd., KPNQwest N.V.,
Colt Telecom Group plc and Level 3 Communications, Inc.;
o incumbent local exchange carriers, which currently dominate their
local telecommunications markets, including SBC Communications Inc.
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 and wireless telephone operators.
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 we do and could directly compete with us in marketing 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.
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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."
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 fiber optic cable and 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 assure 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 need to
offer bandwidth services. We believe that there are alternative suppliers or
alternative components for all of the components, including fiber optic cable
and transmission equipment contained in the network or required to offer
bandwidth services. However, any delay or extended interruption in the supply of
fiber optic cable or any other key network 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. 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.
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 some 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.
Potential Conflicts of Interest with Ledcor Inc.--We are controlled by Ledcor
and rely on it for particular things. Its interests may conflict with your
interests.
As of the date of this prospectus, Ledcor Inc. holds shares in us
which entitle Ledcor Inc. to approximately 90% of the votes attached to our
shares and Ledcor Inc. has the ability to control our affairs and business. This
will continue to be the case following the closing of the offering. It is
possible that Ledcor Inc.'s interests could conflict with your interests. In
addition, Ledcor Inc. 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 Inc. 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 Inc. Ledcor Inc. 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 Inc. As a result, if a change of control of Worldwide
Fiber Inc. were to occur, Ledcor Inc. would be legally entitled to compete with
us and to grant a license for the use and other ex-
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ploitation 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 "Relationships and Related Party
Transactions--Transactions with Ledcor--Description of reorganization and
related agreements."
We also rely on Ledcor Inc. to provide us with administrative and
other services. Ledcor Inc. has the right to cease providing these services at
any time. See "Relationships and Related Party Transactions--Transactions with
Ledcor--Description of reorganization and related agreements."
Leverage
Negative Cash Flows--Given our negative cash flows while our network is being
built, you should consider an investment in our Class A Non-Voting Shares to be
highly speculative.
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 our existing indebtedness,
capital expenditure requirements or working capital needs.
We intend to use most of the proceeds from the sale of these Class A
Non-Voting Shares to develop and construct our network and expand our bandwidth
services business. 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 our high yield
notes.
We have substantial debt and debt service requirements.
Our substantial indebtedness could have important consequences to you.
For example, it could:
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
o place us at a competitive disadvantage compared to our competitors
that have less debt.
We intend to obtain credit facilities from institutional lenders in an
aggregate amount of up to $115 million. Borrowings under these credit facilities
may be secured by some of our assets. See "Description of 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
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by the assets being financed. The following chart shows some important credit
statistics as of the date or for the periods specified below:
As of September 30, 1999
-----------------------------------------
(dollars in millions)
Pro Forma
Actual As Adjusted (1)
Total indebtedness.................. $675.0
Shareholder's equity................ $ 30.8
Debt to equity ratio................ 21.9x
- ---------------------
(1) Gives pro forma effect and adjustment to:
o the issuance of $ Class A Non-Voting Shares for proceeds of $ ;
o the issuance of $ notes in concurrent debt offerings;
o the conversion of our redeemable convertible preferred shares into
Class A Non-Voting Shares;
o the acquisition of the Canadian National Railway Company and Illinois
Central Railroad Company minority equity interests;
o the completion of the $565.0 million Hibernia bank facility, of which
$ has been drawn;
o the completion of the $115 million senior credit facility (with
additional senior secured revolving purchase money facilities of $35
million), of which $ has been drawn;
o the receipt of a promissory note from one of our executive officers
and the issuance of shares to the executive officer; and
o the issuance of $1.0 million worth of Class A Non-Voting Shares to a
consultant.
The initial annual interest expense on the $500 million 12% senior
notes is $62.4 million and the initial annual interest expense on our $175
million 12 1/2% senior notes is $23.2 million.
Pro forma loss for the year ended December 31, 1998 would have been
insufficient to cover fixed charges by approximately $74.5 million and pro forma
loss for the nine month period ended September 30, 1999 would have been
insufficient to cover fixed charges by approximately $11.9 million.
Additional Borrowings Required --Despite our current debt level, we
and our subsidiaries may 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 development of our planned network
and fulfill our long-term business strategies. The terms of our indentures
generally permit us and our restricted subsidiaries to incur additional debt to
finance the cost of designing and building or acquiring our network. The
indentures also allow us to incur additional indebtedness for other purposes,
subject to some limitations. In addition, the indentures permit us to create
"unrestricted subsidiaries" that will be allowed to incur debt without regard to
the limitations on debt incurrence contained in the indentures. Our ability to
arrange financing and the cost of financing depend upon many factors, including:
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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;
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
million 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
indentures. 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 our 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 network development 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
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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 our indebtedness.
Our operating cash flow and our ability to service our indebtedness,
including our 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 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 our
indebtedness if there is an event of default.
If an event of default occurs under any of our credit facilities or
indentures, 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. Our indentures limit, among other things, our ability to incur
additional indebtedness, pay dividends and make certain other restricted
payments, incur liens, enter into some transactions with affiliates and
consummate asset sales and impose restrictions on our ability to merge or
consolidate 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 indentures. 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 of our future
accounts receivable and inventory 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.
Telecommunications Regulation
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
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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 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 Communications
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.
Some 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 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
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various programs will not have a material adverse effect upon our results of
operations and financial condition and our ability to meet our obligations.
The continuation of tariff filing requirements for interstate domestic
services provided by non-dominant carriers is in dispute. The Federal
Communications Commission has ordered that all non-dominant 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 non-dominant 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 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 Federal
Communications Commission 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.
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--Competitive Local Exchange Carrier
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 non-discriminatory 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
competitive local exchange carrier interstate access charges are generally
regulated as non-dominant carrier offerings and subject to minimal burdens, the
Federal Communications Commission 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
We are 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.
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<PAGE>
Other Federal Communications Regulations
With limited exceptions, the current policy of the Federal
Communications Commission prohibits incumbent local exchange carriers from
lowering prices to certain 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 some customers, as it has done in a few cases, and permit 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. 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 carriers interstate access services.
The Telecommunications Act of 1996 currently requires Regional Bell
Operating Companies to obtain Federal Communications Commission authorization
prior to providing inter-local area and transport area telecommunications. 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 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 Federal Communications Commission 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
some 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.
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<PAGE>
Canada
Regulation under the Telecommunications Act (Canada)
We offer fiber capacity to our customers on a sale, grant of
indefeasible right of use, lease or swap basis. As a result, we are subject to
the provisions of the Telecommunications Act (Canada) and to regulation by
Canada's telecommunications regulatory authority, the Canadian Radio-television
and Telecommunications Commission. Although we do not believe that these
activities are 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 provide qualify
under this decision as non-dominant carrier services. As such, we do not believe
that our operations in Canada are 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 "telecommunications common carrier" is not eligible to operate in Canada
unless it is owned and controlled by Canadians. Furthermore, no more than 20% of
the members of the board of directors of a telecommunications common carrier may
be non-Canadians, and no more than 20% of the voting shares of a
telecommunications common 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 of a telecommunications common carrier may be beneficially owned or
controlled by non-Canadians and neither the telecommunications common carrier
nor its parent may be otherwise controlled in fact by non-Canadians.
As we make available the retained fiber in our network in Canada on an
indefeasible right of use or lease basis, the operating company is subject to
the Canadian ownership provisions of the Telecommunications Act and Worldwide
Fiber Inc. is subject to the non-operating parent corporation provisions.
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 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 right of use interest in an
international submarine cable would not necessarily fall within the definition
of a telecommunications common carrier. As a result, acquirers 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 right of
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<PAGE>
use interests held in international submarine cables, as well as the fact that
indefeasible right 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.
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 carriers' 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 to 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.
Canadian Radio-television and Telecommunications Commission
Applications
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 some 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
23
<PAGE>
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 the Canadian Radio-television and
Telecommunications Commission could have a material adverse effect on our
business, financial condition and results of operations.
Other Foreign Regulation
We have operations based in Canada and anticipate operations in Europe
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 some 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;
and
o changes in United States laws and regulations relating to foreign
trade and investment.
Capital Markets
Currency Exchange Rate Fluctuations Could Adversely Affect Our Financial Results
Fluctuations in foreign currency exchange rates may affect our results
of operations and the value of our foreign assets, which in turn may adversely
affect reported earnings and the comparability of period-to-period results of
operations. Changes in currency exchange rates may affect the relative prices at
which we and foreign competitors sell products in the same market. In addition,
changes in the value of the relevant currencies may affect the cost of items
required in our operations.
Our Class A Non-Voting Shares Have Never Been Publicly Traded and Their Price
May Be Volatile
Prior to the equity offering, you could not buy or sell our Class A
Non-Voting Shares publicly. For a discussion of the factors, the underwriters
will consider in determining the initial public offering price, see the section
of this prospectus entitled "Underwriting." Although an application will be made
to list our Class A Non-Voting Shares on the Nasdaq National Market and The
Toronto Stock Exchange an active public market for our shares might not develop
or be sustained after the equity offering. Moreover, even if such a market does
develop, the market price of our shares may decline below the initial public
offering price. The market price of our shares could be subject to significant
fluctuations due to a variety of factors, including actual or anticipated
fluctuations in our operating results and financial performance, announcements
of technological innovations by our existing or future competitors or changes in
financial estimates by securities analysts.
Historically, the market price for securities of emerging companies in
the communications industry have been highly volatile. In addition, the stock
market has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of our shares. Furthermore, following periods of
volatility in the market price of a company's securities, stockholders of such a
company have often instituted securities class action litigation against the
company. Any such litigation against us could result in substantial costs and a
diversion of management's attention and resources, which could adversely affect
the conduct of our business.
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<PAGE>
Future Sales of Stock May Adversely Affect Our Stock Price
The market price of our Class A Non-Voting Shares could drop in
response to possible sales of a large number of shares in the market after the
equity offering or to the perception that such sales could occur. As a result,
we may be unable to raise additional capital through the sale of equity at
prices acceptable to us. Following the equity offering, we will have
approximately shares outstanding, or approximately shares outstanding if the
underwriters exercise their over-allotment option in full. Of these shares,
persons other than our "affiliates" (as this term is defined under the
Securities Act and which includes Ledcor Inc.) may freely transfer the shares
sold in the equity offering without restriction or further registration under
the Securities Act. We, Ledcor Inc. and our executive officers, directors and
substantially all of our shareholders have agreed not to offer, sell, contract
to sell, pledge or grant any option to purchase or otherwise dispose of their
shares for a period of 180 days after the date of this prospectus without the
prior written consent of Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette
Securities Corporation, subject to some exceptions. See the section of this
prospectus entitled "Shares Eligible for Future Sale" for more information.
We have entered into registration rights agreements with Ledcor Inc.,
Michels Pipeline Construction Inc., Canadian National Railway Company, the
investors in our private placement of redeemable convertible preferred shares, a
consultant and certain of our executive officers which in each case enables them
to require us to register their shares and to include those shares in
registrations of shares made by us in the future. See the section of this
prospectus entitled "Share Capital Reorganization and Description of Capital
Stock--Registration Rights" for more information.
A Third Party May Be Deterred From Acquiring Us
Our restated articles of incorporation include provisions that could
delay, deter or prevent a future takeover or change in control of our company.
These provisions include the disproportionate voting rights of the Class C
Multiple Voting Shares (relative to the Class A Non-Voting Shares and Class B
Subordinate Voting Shares) to elect the members of our board of directors and
the authorization of our board to issue, without stockholder approval, one or
more series of Preferred Shares. These provisions may have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of our company, even though such a change in ownership would be
economically beneficial to our company and our stockholders. See the section of
this prospectus entitled "Description of Capital Stock" for more information.
We Do Not Anticipate Paying Cash Dividends
We intend to retain future earnings, if any, to finance the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Our ability to pay dividends is limited by our debt
instruments. See the section of this prospectus entitled "Dividend Policy" for
more information.
Investors Who Purchase Class A Non-Voting Shares in the Offering Will Experience
Immediate and Substantial Dilution
If you purchase our Class A Non-Voting Shares in the offering, you
will experience immediate and significant dilution in the tangible book value of
the shares you purchase. This means that the price you pay will be significantly
greater than the net tangible book value of the shares you acquire. This
dilution is due to the fact that the effective cash cost to our existing
shareholders of the shares they have purchased in the past is significantly less
than the price at which our shares being offered to the public in these
offerings. See "Dilution."
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<PAGE>
USE OF PROCEEDS
The estimated net proceeds from the sale of our Class A Non-Voting
Shares are expected to be $ , net of underwriting discounts and other costs and
expenses payable by us. We expect our net proceeds from the concurrent debt
offerings to be $ and Euro ($ ). The closings of the Class A Non-Voting Shares
offering and the debt offerings are not contingent on each other.
We expect to use the net proceeds from the offerings and funds from
operations, primarily to further develop and light our network. We will also
seek to identify opportunities to develop new facilities to enable us to provide
value added network services such as carrier hotels and other communications
services and products.
We also expect to use a portion of the net proceeds from this offering
for future investments, acquisitions or strategic alliances in businesses or
assets that are related or complementary to our existing business. However, we
cannot assure you that we will successfully complete nor are we presently
committed to make any such investments, acquisitions or strategic alliances.
We will also use these proceeds, borrowings and other funds to fund
operating losses, for working capital and for general corporate purposes.
We currently intend to allocate substantial proceeds to each of the
foregoing uses. However, the precise allocation of funds among these uses will
depend on future commercial, technological, regulatory and other developments
which may affect our business, the competitive climate in which we operate and
the emergence of future opportunities. Because of the number and variability of
factors that determine our use of the net proceeds of this offering, we cannot
assure you that our application of the net proceeds will not vary substantially
from our current intentions. Pending these uses, we intend to invest the net
proceeds of this offering in short-term U.S. investment grade and government
securities.
Our Hibernia project, which has an estimated total cost of $865.0
million, will be paid for with borrowings under our $565.0 million credit
facility and $300.0 million from private equity investors. The Hibernia credit
facility will be provided to a group of our subsidiaries and will be
non-recourse to us.
For more information about our anticipated funding sources and our
uses of these funds, see the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares. We
intend to retain any future earnings to support operations and to finance the
growth and development of our business and do not anticipate paying cash
dividends on our shares for the foreseeable future. In addition, the instruments
governing our debt restrict the payment of cash dividends on our shares.
DESCRIPTION OF OUR CAPITAL STOCK
On the closing of the offering, our capital stock will consist of the
following classes of shares:
o Class A Non-Voting Shares;
o Class B Subordinate Voting Shares;
o Class C Multiple Voting Shares; and
o Preferred Shares, issuable in series.
We will be authorized to issue an unlimited number of shares of each
of the foregoing classes. On the closing of the offering, we will have Class A
Non-Voting Shares issued and outstanding, no Class B Subordinate Voting Shares
issued and outstanding, Class C Multiple Voting Shares issued and outstanding
and no Preferred Shares issued and outstanding.
Our Class A Non-Voting Shares, Class B Subordinate Voting Shares and
Class C Multiple Voting Shares will be identical except that:
o except in some limited circumstances, each Class A Non-Voting Share is
non-voting, each Class B Subordinate Voting Share entitles the holder
to one vote and each Class C Multiple Voting Share entitles the holder
to ten votes;
o each Class C Multiple Voting Share is convertible at the option of the
holder into one Class A Non-Voting Share; and
o if the foreign ownership and control restrictions under the
Telecommunications Act (Canada) and under any other applicable statute
are eliminated, each Class A Non-Voting Share will automatically be
converted into one Class B Subordinate Voting Share.
We have appointed as the transfer agent and registrar for the Class A
Non-Voting Shares. For a description of our share capital reorganization which
will occur immediately prior to closing and a more detailed description of the
rights and attributes of our capital stock, see "Share Capital Reorganization
and Description of Capital Stock."
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<PAGE>
EXCHANGE RATES
Unless otherwise indicated, all references to "$" or dollars in this
prospectus refer to United States dollars and all references to "Cdn.$" refer to
Canadian dollars. As of January 21, 2000, the noon buying rate in New York City
for cable transfers in Canadian dollars was U.S.$1.00 = Cdn.$1.4397.
The following table sets forth, for each period presented, the high
and low exchange rates, the average of the exchange rates on the last day of
each month during the period indicated and the exchange rates at the end of the
period indicated for one Canadian dollar, expressed in United States dollars,
based on the noon buying rate in New York City for cable transfer payable in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
End of Period............................... 1.4455 1.5295 1.4293 1.3706 1.3641
Average for the period...................... 1.4945 1.4940 1.3875 1.3560 1.3770
High for the period......................... 1.5470 1.5845 1.4413 1.3865 1.4267
Low for the period.......................... 1.4420 1.4037 1.3338 1.3263 1.3270
</TABLE>
In this prospectus references to euros are converted to dollars at .
DILUTION
As of September 30, 1999, our combined net tangible book value was $ ,
or $ per share. "Combined net tangible book value per share" represents the
total amount of our combined tangible assets, reduced by the amount of total
combined liabilities and divided by the number of Class A Non-Voting Shares
outstanding. Tangible assets are defined as our combined assets, excluding
intangible assets such as goodwill. After giving effect to the equity offering,
after deducting underwriting discounts and commissions and estimated expenses,
our net combined tangible book value at September 30, 1999 would have been
approximately $ , or $ per share. This represents an immediate increase in
combined net tangible book value of approximately $ per share to the existing
shareholders and an immediate dilution of $ per share to new investors in the
equity offering.
Dilution per share represents the difference between the price per
share to be paid by new investors and the net combined tangible book value per
share immediately after the equity offering. The following table illustrates the
per share dilution as of September 30, 1999.
Assumed initial public offering price per share................. $
Combined net tangible book value before the equity offering..... $
Combined increase per share attributable to new investors....... $
Adjusted combined net tangible book value per share after the
equity offering............................................ $
-------
Combined net tangible book value dilution per share to new
investors.................................................. $
=======
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<PAGE>
CAPITALIZATION
The following table sets forth our consolidated cash and
capitalization as of September 30, 1999 on an actual basis, as adjusted to give
effect to:
o the issuance of Class A Non-Voting Shares for proceeds of $ ;
o the issuance of $ notes in the concurrent debt offerings;
o the conversion of our redeemable convertible preferred shares into
Class A Non-Voting Shares;
o the acquisition of the Canadian National Railway Company ("CN") and
Illinois Central Railroad Company ("IC") minority equity interests;
o the completion of the $565 million Hibernia bank facility, of which $
has been drawn;
o the completion of the $115 million senior credit facility (with
additional senior secured revolving purchase money facilities of $35
million), of which $ has been drawn;
o the receipt of a promissory note from one of our executive officers
and the issuance of shares to the executive officer; and
o the issuance of $1.0 million worth of Class A Non-Voting Shares to a
consultant.
This table should be read in conjunction with our consolidated
financial statements, including the notes thereto, and the "Unaudited Pro Forma
Condensed Consolidated Financial Data" and notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
Pro forma
Actual As adjusted
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Cash and cash equivalents............................. $675,175 $
Debt (including current portion):
Hibernia bank facility........................... --
12 1/2% senior notes due 2005.................... 175,000
12% senior notes due 2009........................ 500,000
New Notes-$ ............................. --
New Notes-Euro ($ )................ --
----------- ----------
Total debt....................................... 675,000
----------- ----------
Redeemable convertible preferred shares............... $345,157 $ --
Shareholders' equity (1).............................. 30,806
----------- ----------
Total capitalization.................................. $ 1,050,963 $
============= ==========
</TABLE>
- -----------------
(1) Does not give effect to Class A Non-Voting Shares reserved for issuance
upon exercise of options under our stock option plan.
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<PAGE>
SELECTED FINANCIAL DATA
We were incorporated on February 5, 1998 and are indirectly a
subsidiary of Ledcor Industries Limited ("Ledcor Industries"), one of Ledcor
Inc.'s ("Ledcor") subsidiaries. On May 31, 1998 we began our operations after
some assets of the telecommunications division of Ledcor Industries were
transferred to us. Prior to June 1, 1998, the operations were carried out by the
telecommunications division.
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 Industries, are derived from the audited
financial statements of the predecessor division, which have been audited by
Deloitte & Touche LLP, independent auditors.
Our selected historical financial data presented for the period
February 5, 1998 through December 31, 1998 are derived from our audited
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent auditors. Our unaudited pro forma
financial data for the year ended December 31, 1998 are derived from our audited
consolidated financial statements, the financial statements of the predecessor
division and the consolidated financial statements of Worldwide Fiber (USA),
Inc. included elsewhere in this prospectus and give effect to the following
transactions as if they had occurred on January 1, 1998:
o the transfer of operations and assets to us from the
telecommunications division of Ledcor Industries;
o the acquisition by us of an additional 25% interest in Worldwide Fiber
(USA), Inc., which increased our interest to 75%;
o the interest expense on the $175 million senior notes and $500 million
senior notes; and
o the amortization of goodwill arising from the acquisition of the CN
and IC minority equity interests.
The selected historical financial data presented as of and for the
periods ended September 30, 1999 and 1998 are derived from our unaudited
consolidated financial statements and include, in the opinion of our 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 our unaudited interim consolidated financial
statements for the nine month period ended September 30, 1999 included elsewhere
in this prospectus. The unaudited pro forma income statement for the nine months
ended September 30, 1999 gives effect to the following transactions as if they
occurred on January 1, 1998:
o the interest expense on the $500 million senior notes; and
o the amortization of goodwill arising from the acquisition of the CN
and IC minority equity interests.
The unaudited pro forma as adjusted balance sheet data at September 30, 1999
gives effect to the following transactions as if they occurred on September 30,
1999:
o the issuance of Class A Non-Voting Shares from proceeds of $ ;
o the issuance of $ notes in the concurrent debt offerings;
o the acquisition of the CN and IC minority equity interests;
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o the completion of the $565.0 million Hibernia bank facility, of which
$ has been drawn;
o the completion of the $115 million senior credit facility (with
additional senior secured revolving purchase money facilities of
$35 million), of which $ has been drawn; and
o the receipt of a promissory note from one of our executive officers
and the issuance of shares to the executive officer.
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.
EBITDA presented in the following table 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 that it is a useful indicator
of the 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
acceptable 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.
For purposes of calculating the ratio of earnings to fixed charges,
earnings consists of earnings (loss) before equity income, income tax expense
(recovery), income attributable to minority interest, amortization of goodwill
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 approximately $74.5 million, and pro forma loss for the nine month period
ended September 30, 1999 would have been insufficient to cover fixed charges by
approximately $11.9 million.
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.
The following table presents selected consolidated financial data
derived from our consolidated financial statements. 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.
31
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
Worldwide Fiber
-------------------------------------------------------------------------------
February 5, February 5, Pro Forma Nine Months Pro Forma Nine
1998 to 1998 to Year Ended Ended Months Ended
September 30, December 31, December 31, September 30, September 30,
1998 1998 1998 1999 1999
------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue...................... $ 104,819 $ 164,319 $ 207,038 $ 235,138 $ 235,138
Operating expenses:
Costs..................... 90,909 147,621 182,518 165,263 165,263
General and administrative 1,318 2,274 8,140 17,263 18,138
Depreciation.............. 260 464 639 871 871
Amortization of goodwill..... -- 4,875 -- 3,656
--------- --------- --------- --------- ---------
Total operating expenses..... 92,487 150,359 196,172 183,397 187,928
--------- --------- --------- --------- ---------
Operating income............. 12,332 13,960 10,866 51,741 47,210
Interest expense, net........ -- 225 85,352 12,448 49,248
Equity income (loss)......... (48) 928 -- -- --
Earnings (loss) before income 12,284 14,663 (74,486) 39,293 (2,038)
taxes.....................
Income tax expense (recovery) 5,402 5,643 (26,710) 20,175 3,571
--------- --------- --------- --------- ---------
6,882 9,020 (47,776) 19,118 (5,609)
Income attributable
to minority interest...... -- -- 464 5,747 3,247
--------- --------- --------- --------- ---------
Net income (loss)............ $ 6,882 $ 9,020 $ (48,240) $ 13,371 $ (8,856)
========= ========= ========= ========= =========
Basic diluted earnings (loss)
per share ................ $ 2.19 $ 0.86 $ (3.90) $ 0.05 $ (0.11)
Shares used to calculate
earnings per share........
Basic..................... 3,140,871 10,482,089 12,360,578 140,973,458 140,973,458
Diluted................... 3,140,871 10,482,089 12,360,578 153,116,346 140,973,458
Other Financial Data:
EBITDA....................... $ 12,544 $ 15,352 $ 16,380 $ 52,612 51,737
Capital expenditures......... -- 1,065 -- 61,124 --
Ratio of earnings to fixed
charges................... 374.7x 26.8x -- 2.0x --
Statement of Cash Flows Data:
Operating activities......... $ 99 $ (13,059) $ -- $ (38,427) --
Investing activities......... -- 1,177 -- (229,927) --
Financing activities......... -- $ 168,350 -- $ 787,000 --
Operating Data: --
Route miles.................. -- 2,735 -- 8,807 --
September 30, 1999
--------------------------
Balance Sheet Data: Pro forma
Actual As Adjusted
---------- -----------
Cash and cash equivalents.......... $ 675,175 $
Fixed assets, net.................. 107,264
Total assets....................... 1,216,194
Total debt......................... 675,000
Redeemable convertible preferred 345,157
shares.............................
Shareholders' equity............... $ 30,806
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Predecessor Division
---------------------------------------------------------------------
Five Months
Ended Year Ended Nine Months
Year Ended August 31, August 31, 1997 Ended
March 31, 1996 1996 May 31, 1998
-------------- ----------- --------------- ---------------
Income Statement Data:
<S> <C> <C> <C> <C>
Revenue................................. $ 3,824 $ 7,373 $ 58,008 $ 54,634
Operating expenses:
Costs................................ 3,440 5,739 48,474 44,919
General and administrative........... 57 91 863 710
Depreciation......................... 24 15 112 317
Amortization of goodwill............. -- -- -- --
---------- --------- --------- -----------
Total operating expenses................ 3,521 5,845 49,449 45,946
---------- --------- --------- -----------
Operating income........................ 303 1,528 8,559 8,688
Interest expense, net................... -- 15 600 86
Equity income........................... -- -- -- --
---------- --------- --------- -----------
Earnings before income taxes............ 303 1,513 7,959 8,602
---------- --------- --------- -----------
Income tax expense ..................... 139 686 3,620 3,909
---------- --------- --------- -----------
Income attributable to minority interest -- -- -- --
---------- --------- --------- -----------
Net income (loss)....................... $ 164 $ 827 $ 4,339 $ 4,693
========== ========= ========= ===========
Other Financial Data:
EBITDA.................................. $ 327 $ 1,543 $ 8,671 $ 9,005
Capital expenditures.................... 72 181 1,119 6,828
Ratio of earnings to fixed charges...... 24.3x 45.5x 10.3x 17.7x
Statement of Cash Flows Data:
Operating activities.................... $ 666 $ (3,078) $ (3,921) $ (2,502)
Investing activities.................... (72) (181) (1,119) (6,828)
Financing activities.................... (595) 3,259 5,040 9,330
Operating Data:
Route miles............................. -- -- 1,090 1,430
Fiber miles ............................ -- -- 22,740 34,320
Balance Sheet Data:
Cash and cash equivalents............... $ -- $ -- $ -- $ --
Fixed assets, net....................... -- 464 1,471 7,982
Total assets............................ -- 6,476 32,268 39,549
Total debt.............................. -- 2,067 6,774 10,933
Redeemable convertible preferred shares -- -- -- --
Shareholder's equity.................... -- 1,473 5,825 8,870
</TABLE>
33
<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, including the related notes, included elsewhere
in this prospectus.
History
We were incorporated on February 5, 1998, but did not commence
operations until May 31, 1998. As of May 31, 1998 we entered into a series of
agreements, which we refer to as the reorganization, whereby Ledcor transferred
to us the construction equipment, some fiber optic strands and some other assets
of Ledcor Industries' telecommunications division. 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 some builds along the Fiber Optic Transmission System ("FOTS") across
Canada and the northern United States. In return, Ledcor paid us an amount equal
to 115% of our costs. 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 "Relationships and Related
Party Transactions--Transactions with Ledcor--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 Industries' 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 Industries' 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 agreements has not been
significant on our consolidated financial statements.
Revenues and Costs
Since December 31, 1998 our revenues have been primarily generated
from the sale, lease or grant of indefeasible right of use ("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 and packet-based data services
including Internet protocol ("IP") transport and Asynchronous Transfer Mode
("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 percentage of revenue on a consolidated basis
and be a significant source of income.
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.
We recognize revenue for co-development agreements on a percentage of
completion basis. Following completion of a build, our retained fiber or conduit
may be sold, granted through an IRU or leased to a third party. Lease revenues
are recognized as earned over the life of the lease.
34
<PAGE>
In June 1999, the Financial Accounting Standards Board 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, title must transfer to a lessee in order for a lease transaction
to be accounted for as a sales-type lease.
All future sales and grants of IRUs of dark fiber or capacity will be
evaluated under the new interpretation. If we do not pass title on the integral
equipment pursuant to the agreements related to future transactions involving
dark fiber or capacity sales and/or IRUs, or if such transactions otherwise do
not meet the criteria in FASB statement No. 66, we will recognize the transfer
prices as revenue ratably over the terms of the applicable agreements, rather
than when the applicable segments of our network are delivered to, and accepted
by, the purchaser. Although the application of the new interpretation may affect
the times of recognition of revenue from dark fiber and capacity sales, we
expect there will be no effect on our financial position or cash flows from this
prospective change in accounting.
Cost of sales of network infrastructure, particularly dark fiber and
conduit, consist of direct costs such as the conduit, fiber optic cable,
construction of regeneration facilities, sales and commissions and labor and an
allocation of indirect costs such as rights-of-way ("ROW") environmental
restoration, equipment costs, insurance and interest charges. Costs of sales of
network services include only the direct costs of sales commissions and
points-of-presence ("POP") space. Indirect costs of network services are
included in general and administrative expenses and depreciation.
Elimination of Minority Interests
We have recently acquired the minority interest in each of WFI - CN
Fibre Inc. and Worldwide Fiber IC Holding Inc. in a cash and share exchange
transaction, as a result of which CN acquired Class A Non-Voting Shares. In
addition, we have acquired the remaining 25% minority interest in Worldwide
Fiber (USA) Inc. from Michels Pipeline Construction Inc. ("Michels") in exchange
for Class A Non-Voting Shares.
Results of Operations
Worldwide Fiber Inc.
Nine Months Ended September 30, 1999 and 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 (70% 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, ROW 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 (7% 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
35
<PAGE>
expenses are expected to continue to increase as we develop our systems, hire
additional personnel and implement our bandwidth services strategy.
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's and 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% 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 our Canadian and
U.S. taxes of $2,599,000 and $3,044,000, respectively.
Telecommunications Division -- Ledcor Industries
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.
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% 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 Ledcor Indus-
36
<PAGE>
tries. The difference 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
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 the 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 Ledcor Industries 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 Ledcor Industries would construct and develop fiber optic systems on a
contract basis for specific telecommunications clients. Since this was a new
business for Ledcor Industries 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 2% 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 Ledcor Industries. 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
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% 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 45%. As a division, we would have been consolidated within the tax
returns filed by Ledcor Industries. 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.
37
<PAGE>
Liquidity and Capital Resources
We have an aggressive business plan to build out our network. By the
first quarter of 2001, our planned network will consist of approximately 37,800
route miles in North America and Europe including a transatlantic cable. We
intend to expand our network including bandwidth services to provide further
global connectivity to meet our customers' demands and enable Internet services.
Building out the network will require a significant investment in the
development of fiber and conduits held for sale, grant of IRU, or lease and the
purchase of additional network infrastructure and equipment to establish
transmission facilities.
We estimate that the total cost to develop and light our network is
approximately $2.8 billion.
o We estimate that the total cost to complete and light our network of
24,100 route miles in North America will be $1.6 billion.
o We estimate that the total cost to complete and light our network in
Europe will be $320.0 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 multiple strands over approximately 4,000 route miles of
Telia's European network.
o We estimate the total cost of the Hibernia undersea cable project to
be approximately $865.0 million. The majority of the cost of the
Hibernia undersea cable project is subject to a fixed price contract.
In order to finance our network development:
o We have issued $675.0 million of senior notes and plan to issue an
additional $1 billion in the concurrent debt offerings.
o We have issued $345.0 million of redeemable convertible preferred
shares 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.
o We intend to enter into the $565.0 million Hibernia credit facility.
The proceeds of the Hibernia credit facility will be dedicated to
building and lighting the Hibernia undersea cable project. The
Hibernia credit facility will be provided to a group of our
subsidiaries and will be non-recourse to us.
o We intend to consummate the offering of the Class A Non-Voting Shares
with anticipated proceeds of $ .
Our estimated capital expenditures for our current network development
plans for the year ending December 31, 2000 are $1.7 billion, of which
approximately $500 million will be used for Hibernia and approximately $1.2
billion will be used for our network. We anticipate that these funding sources
will provide us with sufficient capital to complete our terrestrial and undersea
networks 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 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.
38
<PAGE>
In addition to our planned network, we expect to pursue opportunities
to expand geographically or enhance the services that we offer our customers. We
will also seek to identify opportunities to develop new facilities to enable us
to provide value added network services such as carrier hotels and other
communications services and products. Accordingly, from time to time we may seek
to raise additional capital in the debt and/or equity capital markets prior to
completion of our planned network. We cannot assure you that we will be
successful in raising the capital necessary for the completion of construction
for the remainder of our planned network development, the implementation of our
bandwidth services strategy, the Hibernia project or for other opportunities on
a timely basis or on terms that are acceptable to us, or at all.
At September 30, 1999, we had working capital of $816.1 million,
including $675.2 million in cash or cash equivalents. Cash used in operations
during the nine months ended September 30, 1999 totaled $38.4 million. We also
intend to enter into a senior secured credit facility of up to $115.0 million,
with additional senior secured revolving purchase money facilities of $35
million, to fund working capital and for general corporate purposes.
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 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments, including some derivative instruments embedded in other contracts
and for hedging activities. We do not expect the adoption of SFAS No. 133 to
have a material impact on our consolidated financial statements.
In June 1999, the Financial Accounting Standards Boards (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, title must transfer to a lessee in order for a lease transaction
to be accounted for as a sales-type lease. After June 30, 1999, the effective
date of FASB Interpretation No. 43, sales-type lease accounting will only be
appropriate for dark fiber and capacity leases where title under the lease is
transferred to the lessee or if the agreement was entered into after June 30,
1999. Transactions will be accounted for as operating leases where title is not
transferred to the lessee.
Market Risk Disclosures
Interest Rate Risk
We have interest rate risk exposure related to our senior notes, which
have a fixed interest rate. The 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 movements through the use of interest
rate swaps or other derivative instruments. However, subsequent to the offering
we may choose to manage our risk associated with interest rate movements 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 pay interest at fixed rates.
39
<PAGE>
The table below provides information about our senior notes.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
------- -------- -------- -------- -------- --------- --------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Notes
Due December 15, 2005 $ - $ - $ - $ - $ - $175.0 $175.0 $184.6
Fixed Rate 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% - -
Due August 1, 2009 - - - - - $500.00 $500.0 $516.3
Fixed Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% - -
------ ------ ------ ------ ------ ------ ------ -------
$ - $ - $ - $ - $ - $675.0 $675.0 $700.9
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
The senior notes are comprised of $175.0 million 12.5% notes due
December 15, 2005 with interest paid semi-annually and $500.0 million 12.0%
notes due August 1, 2009 with interest paid semi-annually. These senior notes
have provisions which, in certain circumstances, permit or oblige us 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.
40
<PAGE>
BUSINESS
We are a leading independent, facilities-based international provider
of fiber optic communications network products and services. By the first
quarter of 2001, our network will consist of approximately 37,800 route miles in
North America and Europe including a transatlantic cable. We intend to expand
our network to provide further global connectivity. In addition, we will
continue to develop bandwidth and other Internet enhancing services on our
network to meet our customers' demands. Our network's design uses
state-of-the-art optical technologies that we believe greatly reduces complexity
and cost while allowing us to offer increased reliability and a wide range of
products and services. Our network is scheduled to be completed by the first
quarter of 2001.
Our network consists of fiber optic assets and capacity that we have
installed or acquired from other developers and carriers through swaps or
purchases along diverse ROW. Our network in North America is expected to cover
approximately 24,100 route miles, of which more than 12,000 route miles have
been developed to date, encompassing both long-haul and intra-city route miles
and providing connectivity between approximately 50 major population centers.
Our network in Europe is expected to cover approximately 6,100 long-haul route
miles between approximately 20 major population centers, assuming the exercise
of an option we have. Our 7,600 route mile transatlantic cable will be a 1.92
terabits per second ("tbps"), high-capacity, self-healing ring that will connect
landing sites in Boston, Halifax, Dublin and Liverpool to serve the continuing
growth of demand for bandwidth in the transatlantic market. In addition to
expanding our North America and Europe and our Hibernia undersea cable (which
will comprise an aggregate of more than 1.1 million fiber miles) to more
population centers, we are reviewing opportunities to expand the geographic
reach of our network to have transpacific connectivity and extend into Asia and
Latin America. We will also consider building additional city rings in the major
population centers reached by our network.
We believe that there is growing demand for fiber optic capacity to transmit
high-bandwidth data, voice and video. This growing demand is being accelerated
by improvements in "last mile" technology such as digital subscriber line
("DSL") fixed and third generation ("3G") wireless access and cable modems. In
this changing market environment, we believe that we are in a favorable
competitive position to satisfy this demand relative to other service providers
due to our low-cost structure. Our market position and operating flexibility has
allowed us to achieve a low-cost structure by utilizing:
o our construction skills;
o co-development and swaps along some corridors of our network;
o the use of equity as payment for important elements such as bulk
rights-of-way; and
o optical design and technologies which eliminate layers of equipment
traditionally required to support legacy systems.
Our current and targeted customers include new and incumbent
telecommunications service providers ("TSPs"), Internet service providers
("ISPs"), application service providers ("ASPs") and large organizations
("LORGs") with enterprise network needs. We believe that these customers have a
limited choice of independent service providers capable of offering
high-capacity, reliable, secure and cost-effective services, including enabling
Internet services, between major population centers in North America and Europe.
As a result, we believe that our targeted customers will buy services from us
rather than purchase them from another source or build these service
capabilities themselves. To meet our customers' demands, we offer a wide range
of services on a scalable basis, across an extensive geographic network. Our
services include:
o bandwidth services--optical channels, private line transmission,
packet-based data services such as IP transport and ATM, and virtual
voice trunking; and
o network infrastructure--dark fiber and conduit for sale, grant of IRU
or lease and construction services supporting the development of our
network.
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We also intend to expand our business to include:
o facilities such as carrier hotels that will enable us to provide
services like co-location, applications hosting, electronic commerce
support and web hosting;
o network services such as video transport services, independent
Internet access for transport and peering, and management services to
allow carriers to migrate from circuit-switched technologies to
packet-based technologies.
We plan to realize the value of the network through managed bandwidth
services and the sale, grant of IRU, lease or swap of dark fiber and conduit. We
are adding the necessary transmission equipment to enable us to provide
bandwidth services and other value-added services to carriers and other service
providers along segments of our network. We intend to enhance the connectivity
of the network and satisfy customer demand through purchases, leases and swaps
of bandwidth and through joint ventures.
Market Opportunity
Our network is designed to provide our customers with secure,
independent transmission facilities and sufficient capacity on a local,
regional, national or international 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 continue to increase 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.
Improvements in "last mile" technology, such as DSL, cable modems and
fixed and 3G wireless access are contributing to the significant
increase in the number of subscribers using such applications. In
addition, the anticipated proliferation of wireless Internet and data
technologies and devices such as 3G broadband technology are also
expected to contribute to increases in demand for bandwidth.
o Increasing demand for high-bandwidth applications, largely driven by
the increase in Internet traffic. There has been, and according to the
Yankee Group there will continue to be a significant growth in demand
for Internet, local loop data, video services and long distance. 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.
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. Our
high-bandwidth platform allows both new entrants to compete in this
market and existing service providers to expand into new markets.
Business Strategy
We believe that demand for high-bandwidth data transmission capacity
from TSPs, ISPs, ASPs and LORGs with enterprise network needs will increase
substantially over the next several years. The key elements of our business
strategy to exploit the growing demand for bandwidth are to:
Provide high-bandwidth connectivity between major global population
centers. The footprint of our network is designed with the input of our
customers and, when complete, our combination of terrestrial and undersea fiber
networks will allow us to offer our customers seamless and scalable connectivity
between major population centers in North America and Europe, areas in which
bandwidth demand is high and is expected to
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grow rapidly. We are currently considering adding transpacific connectivity and
extending our network into Asia and Latin America. We will also consider
building additional city rings in the major population centers reached by our
network.
Develop and operate a technologically advanced, high-capacity, low-cost
network. We design our network with the most advanced commercially available
technology to provide the highest levels of reliability, security and
flexibility demanded by our customers. Generally when we commence construction
to add to our network we do so after we have pre-sold sufficient strands and
conduit to cover approximately 50% of our anticipated cost of that segment,
thereby reducing capital risk and creating a low-cost position relative to our
competitors. In some segments we may seek a co-developer to fund a portion of
the project in exchange for receiving fiber or conduit assets. In appropriate
circumstances, the strategic nature of a segment may cause us to retain a higher
percentage of fiber and conduit, and associated costs, for our own account. We
believe that our network will have a low-cost basis relative to other
telecommunications carriers for the following reasons:
o Our sophisticated network architecture based on DWDM optics and packet
switching reduces the complexity and the number of component systems
that were previously required to deliver voice, Internet and data
services. This simplified approach reduces our capital expenditures
and operating expenses relating to billing support, program manage-
ment and systems support.
o Our policy of installing multiple fibers per route mile and spare
conduits reduces the per fiber mile cost to construct, operate and
upgrade our network.
o Some of our current ROW, licenses, permits and franchises are valuable
assets that would be costly and difficult for others to procure or
replicate in the future.
o Our policy is to retain fiber assets for our own use along routes
where we complete third-party construction.
Our low-cost position should allow us to remain price competitive with
other providers of broadband communications infrastructure and Internet
connectivity services while sustaining margins and providing customers a
cost-effective alternative to constructing their own networks.
Extend the reach of our network through development and swaps of fiber
and capacity. We plan to continue to develop our network to extend its
connectivity to major global population centers. For example, we have recently
entered into a joint build agreement with Telewest in the United Kingdom.
Further, we intend to continue to explore strategic opportunities and the use of
swaps of fiber and capacity to extend the reach of our network at a low
incremental cost. Our recent agreement with Telia to expand our network
footprint in Europe through a fiber swap is an example of this strategy.
Expand our marketing capabilities. We are focused on providing our
broadband fiber network and bandwidth services to TSPs, ISPs, ASPs and LORGs
with enterprise network needs. In North America, our customer relationships are
cultivated and maintained by our direct sales force and marketing staff. We
intend to expand our European sales and marketing efforts by hiring additional
managers and salespeople in new regional European sales offices by the end of
the year.
Increase the number of products and services that we offer. We offer
our customers managed bandwidth services and the flexibility to control their
own service platforms. We plan to develop an extensive range of innovative
products and services which will use our state-of-the-art IP-based network
infrastructure. We also intend to expand our business to include carrier hotels
that will enable us to provide services such as applications hosting and
electronic commerce services, as well as web hosting and co-location services.
Capitalize on management experience and relationships and pursue
additional strategic alliances. We have assembled and will continue to build a
strong management team and board of directors with communications expertise and
extensive experience in network design, construction, operations and sales.
Members of
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our board of directors and our new Chief Executive Officer, Gregory Maffei, have
extensive experience in initiating, pursuing and implementing strategic
alliances in communications and technology industries. We will pursue additional
strategic alliances with communications providers that have high-bandwidth needs
and are willing to offer us long-term, high capacity commitments for traffic on
our network. Such strategic alliances could also allow us to combine our
capabilities with those of our strategic alliance partners and thereby offer our
customers additional products and services.
The Network
Our network will cover approximately 37,800 route miles and will
encompass long-haul and intra-city routes and a transatlantic fiber optic cable.
Our network consists of fiber optic assets and capacity that we have installed
or acquired from other developers and carriers through swaps or purchases along
diverse ROW. We intend to expand our network including bandwidth and other
Internat enhancing services to provide further global connectivity to meet our
customers' demands and in response to our needs for connectivity for our
telecommunications business.
North America
In North America, our network is expected to cover approximately
24,100 route miles, encompassing both long-haul and intra-city route 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. Our network in North America will serve approximately 50
major population centers; 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.
Europe
In Europe, our network is currently expected to cover approximately
6,100 long-haul route miles (assuming, with respect to 1,300 route miles, the
exercise of an option that we have) providing connectivity between approximately
20 major population centers by the first quarter of 2001.
The fiber we acquired via the Telia, Telewest and Carrier1
transactions places our assets in seven European countries. The planned
footprint will consist of five rings connecting the following cities:
o Liverpool, Manchester, Birmingham, Bristol, London, Cambridge and
Sheffield;
o London, Paris, Strasbourg, Frankfurt, Dusseldorf, Hamburg and
Amsterdam;
o Hamburg, Kolding and Copenhagen;
o Copenhagen, Stockholm and Oslo; and
o Frankfurt, Stuttgart, Munich, Dresden, Berlin, Hamburg and Cologne.
These routes will be acquired through the following agreements:
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
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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. The
contract contemplates that 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, we will provide
each other with co-location services, regeneration sites, points of
presence in main cities and operations and maintenance services.
o Telewest. In December 1999, we signed a co-development agreement with
Telewest to provide us with multiple conduits on an approximate 780
mile ring network which will connect Liverpool to London via
Manchester, Birmingham and 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 Carrier1. In December 1999, we signed a contract with Carrier1
enabling us to order wholesale capacity on their network connecting
London to 18 major population centers beginning March 1, 2001. In
addition, the contract provides us with the option to acquire dark
fiber strands in Germany and/or wavelengths in France.
Hibernia Undersea Cable
Our 7,600 route mile transatlantic cable project will be a 1.92 tbps,
high-capacity, self-healing ring that will connect landing sites in Boston,
Halifax, Dublin and Liverpool. 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, 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 tbps on
each segment using 4 fiber pair with state-of-the-art, 48-wavelength technology
on each fiber pair. Tyco is required to complete and deliver our Hibernia
undersea cable by the first quarter of 2001.
Future Network Development
We believe that there may be opportunities in North America and Europe
to further develop our network. In addition to expanding our network through
North America and Europe and our Hibernia undersea cable (which will comprise an
aggregate of more than 1.1 fiber miles) to more population centers, we are
reviewing opportunities to expand the geographic reach of our network to have
transpacific connectivity and extend into Asia and Latin America. We will also
consider building additional city rings in the major population centers reached
by our network. We believe that these further developments will enhance the
connectivity and value of our network.
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Network Development Plan
We expect to complete the development of our currently planned network
in 2001. Although the following table summarizes our current plans for
completing the terrestrial network, the segments, actual route miles, 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 of Scheduled Proposed Participant/
Estimated December 31, Completion Major Population Co-developer/Swaps/Joint
Segment Route Miles 1999 Date Centers Connected Ventures
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Transcontinental FOTS: 5,068 5,068 Complete Vancouver, Edmonton, Call-Net, Bell Canada
Calgary, Winnipeg, and AT&T Canada
Minneapolis, Chicago,
Toronto and Detroit
--------------------------------------------------------------------------------------------------------------------------
Canada Build: 2,050 1,243 Fourth Quarter Edmonton, Winnipeg and Telus
2000 Toronto
--------------------------------------------------------------------------------------------------------------------------
West Coast Build: 4,102 1,286 Fourth Quarter Edmonton, Vancouver, Telus, Call-Net, FTV,
2000 Seattle, Portland, GST, Level 3,
Sacramento, Los Angeles, Metromedia, NEXTLINK,
San Diego, Phoenix and Qwest, Williams
San Antonio Communications,
Caprock, Enron and
Telia
--------------------------------------------------------------------------------------------------------------------------
Northeast Build: 3,314 1,611 Fourth Quarter New York, Boston, AT&T Canada, Telus,
2000 Buffalo, Albany, Detroit, CN, Level 3, Williams,
Toronto, Montreal, Quebec Telia, Enron, Qwest
City and Halifax
--------------------------------------------------------------------------------------------------------------------------
East Coast Build: 3,616 2,601 First Quarter New York, Washington DC, Metromedia and Qwest
2001 Atlanta, Jacksonville,
Memphis, Miami and New
Orleans
--------------------------------------------------------------------------------------------------------------------------
Central Build: 1,120 - Fourth Quarter Chicago and New Orleans Enron
2000
--------------------------------------------------------------------------------------------------------------------------
Mid-America Build: 4,330 408 First Quarter Chicago, Denver, New Pathnet, Telia, Enron
2001 Orleans, Omaha and
Sacramento, Salt Lake City
--------------------------------------------------------------------------------------------------------------------------
Intra-City Networks: 511 - Fourth Quarter Calgary, Montreal, GST, Level 3,
2000 Ottawa, Seattle, Toronto, Metromedia, Qwest and
Vancouver and Edmonton NEXTLINK
--------------------------------------------------------------------------------------------------------------------------
Total Route Miles 24,111 12,217
====== ======
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Europe and Hibernia
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Scheduled Proposed Participant/
Estimated Completion Major Population Co-developer/Swaps/Joint
Segment Route Miles Date Centers Connected Ventures
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UK 796 Third Quarter London, Liverpool, Telewest, Telia
2000 Manchester
-----------------------------------------------------------------------------------------------------------------
Germany 2,612 Second Quarter Strasbourg, Frankfurt, Telia, Carrier1
2001 Hamburg, Munich,
Dusseldorf
-----------------------------------------------------------------------------------------------------------------
Holland/France 1,053 Fourth Quarter Amsterdam, Paris Telia
2000
-----------------------------------------------------------------------------------------------------------------
Scandinavia 1,628 Fourth Quarter Copenhagen, Stockholm, Telia
2000 Oslo
-----------------------------------------------------------------------------------------------------------------
Hibernia (transatlantic) 7,600 First Quarter Dublin, Liverpool, --
2001 Boston, Halifax
-----------------------------------------------------------------------------------------------------------------
Total Route Miles 13,689
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Products and Services
We believe that our customers have a limited choice of independent
service providers capable of offering high-capacity, reliable, secure and
cost-effective services on a point-to-point basis between major population
centers in North America and Europe. To meet our customers' demands, we offer a
wide range of services on a scalable basis, across an extensive geographic
network, including:
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Bandwidth services
The services we offer through our sale of bandwidth capacity include:
Optical Transmission Services. Dense wave division multiplexing
("DWDM") technology in our network allows 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 may install its own switching and routing equipment
and has 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, with add/drop along routes available.
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.
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.
Our ATM service includes:
o DS-3 to OC-48 interface rates;
o all 5 classes of ATM service; and
o switched virtual circuits available on customer premises equipment
edge.
Our IP transport includes:
o protocol supports including Private Network to Network Interface
("PNNI"), ATM and packet over synchronous optical network technology
("SONET");
o nodes in all major Internet-network access points; and
o IP voice and modem transport and distribution, including virtual
switching and compression.
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
local exchange carriers ("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;
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o SS7 signaling transport; and
o advanced services, including compression.
Network Infrastructure
Dark fiber and conduit for sale or grant of IRUs. 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 $3,000 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 right of use, usually
of 10 to 20 years, with an option period for the user to renew at lower rates.
At the end of an IRU title may be passed to the user. 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.
Construction services supporting the development of our network. We
are continuing to construct and maintain fiber optic networks for third parties
on a contract basis. We focus on projects where we can retain fiber or conduit
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.
Customers
We are focused on providing our broadband fiber optic network and
bandwidth services to TSPs, ISPs, ASPs and LORGs with enterprise network needs.
Typical targeted customers include a broad range of companies, such as:
o long distance companies;
o incumbent local exchange carriers;
o competitive local exchange carriers;
o multi-service operators; and
o local multipoint distribution service providers.
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.
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Sales and Marketing
We are building a highly motivated and experienced direct sales force and
customer care organization designed to capture new customers and to increase our
volume of business with existing customers. Because our target customers are
other TSPs, ISPs, ASPs and LORGs with enterprise network needs, our sales and
marketing departments are focused and small compared to competitors that have a
broader retail strategy. Our direct sales organization consists of senior level
management personnel, experienced sales representatives and sales engineers. Our
sales force is made up of individuals with strong communications and technical
backgrounds which allows us to meet the needs of our target customers. Direct
sales tactics include direct contacts with targeted ISPs and other potential
corporate accounts by our sales representatives and engineering support. In
addition to helping to generate initial sales, the sales engineer is responsible
for ongoing technical support and identifying new revenue opportunities with
existing customers. Our sales and marketing organization is segmented
geographically between North America, Europe and undersea to ensure they are
able to meet the specific needs of their target customers. We believe that the
relationships established by our sales team and management result in interactive
exchanges that help us to design and market our products in response to the
needs of our potential customers.
We believe that our new Chief Executive Officer brings additional
valuable relationships and contacts in the computer services, Internet, media
and financial communities in addition to traditional communications carriers
that will allow us to more easily gain access to these markets.
North America
Our North American sales and marketing organization is divided into two
groups to meet the specific needs of our bandwidth customers and network
infrastructure customers.
Bandwidth Services. 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. We market a broad
and technically advanced range of bandwidth products and services. Consequently,
we are developing a dedicated sales and marketing team with the necessary
technical expertise.
We commenced marketing our bandwidth services in the second quarter of
1999 to targeted customers through a number of focused direct sales methods. Our
experienced sales team will qualify potential customers from their personal
contacts and direct sales efforts. In addition to our direct sales efforts, we
identify highly qualified prospective bandwidth customers through our network
infrastructure sales and marketing efforts. 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.
Network Infrastructure. Our strategy is to market to customers on a
local, regional and national basis. We market participation in infrastructure
segments of our network through personal contacts and relationships with
prospective customers, which consist primarily of large telecommunications
companies. We believe that we are known to most of our target customer group and
that we have good relations with them.
Our current targeted customer base is comprised of approximately 200
companies. Most of our marketing and sales team have prior industry experience
with these companies, including MCI WorldCom, Inc. ("MCI WorldCom"), Sprint
Corporation ("Sprint"), AT&T Corp. ("AT&T"), KPNQwest N.V. ("KPNQwest") 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 are also able to identify
potential participant and co-development customers that initially approach us
because of our reputation and experience in the design, construction and
development of fiber optic facilities.
49
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Europe
Bandwidth Services. Our strategy in Europe is to target customers by
specific geographic regions who have a need for bandwidth services in areas
covered by those portions of our network. In Europe, we intend to build out
separate sales and marketing organizations by region to enable us to address the
specific market, product and regulatory needs of our customers. Initially, we
intend to have regional offices in England, France, Germany and Scandinavia and
will add additional offices as we expand our European network. Each sales and
marketing managing director will report directly to our head of European sales
and marketing who will be responsible for coordinating our European efforts with
our North American and transatlantic teams. This structure will allow us to
provide our customers seamless service from anywhere in Europe to anywhere in
North America.
Hibernia Undersea Cable
Our Hibernia cable project was designed to be responsive to potential
customers' concerns, including the offer of diverse routes and landing sites,
protected capacity on two separate cables, seamless city-to-city availability
using our extensive backhaul terrestrial network and a firm, near-term delivery
date. In North America we have teams segregated by service provision type and in
Europe geographically by country. We are currently developing our sales
organization in the United States and Europe to market and distribute capacity
on our cable. In addition to our direct sales efforts, we have received
referenced introductions from our suppliers.
Our pricing strategy is to offer capacity at the lowest cost in the
market to our initial customers and reflects our belief that large buyers of
capacity will seek significant discounts and flexible payment terms in order to
contract for purchases prior to the ready-for-service date. We are offering a
program which gives initial buyers of capacity the option to make additional
purchases on system upgrades, at a cost which is a significant discount to
current market prices. Similarly, our proposed pricing of ongoing operations and
maintenance services reflects significant volume discounts and lower prices for
upgrade capacity versus the flat unit pricing traditionally offered in the
marketplace.
Network Design and Infrastructure
Our network utilizes state-of-the-art technologies based on DWDM optics
and packet-switched routing. This approach greatly reduces the complexity and
number of component systems that previously were required to deliver voice and
data services. Our network has the following characteristics:
Advanced Fiber Optic Cable. Our network benefits from technologically
advanced fiber optic cable, including Corning E-leaf and single mode fiber that
allows us to expand our DWDM system to maximize the potential of DWDM
technologies.
Dense Wave Division Multiplexing. DWDM allows for increased network
capacity through the transmission of multiple waves of light over a single fiber
optic strand. Our DWDM optical system electronics are installed in shelters and
POPs in carrier interconnect locations along the route. Each route includes
several spans that are comprised of optical terminals at the ends of the span
and a combination of optical line amplifiers, electrical signal regeneration and
optical add/drop terminals to complete the path. Each system operates on a
single fiber providing bi-directional transport of up to 160 channels of OC-192
(10 gbps) wavelengths. The current network plan calls for a minimum of four
OC-48 channels per route, with four OC-192 channels installed in routes where we
believe that there will be sufficient market demand.
Optical Technology. Our network's optical design will enable us to
upgrade installed equipment or to add new equipment 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. We will use optical ring
protection devices where a customer requires redundant services.
ATM Core Switching and Protection. In place of the SONET equipment used
by older network architectures, we have chosen to use ATM as both the protection
and the switching layers to deliver services in addi-
50
<PAGE>
tion to optical channels derived on the DWDM equipment. ATM core switching is a
packet-based switching and transmission technology which sends various types of
information, including voice, data and video, in fixed-size cells. We utilize
advanced equipment by Marconi which enables packet-based networks to carry voice
and data more efficiently and at a lower cost than traditional voice and data
networks. The initial core switches have a throughput capacity of 40 gbps and
network link speed of 2.5 gbps.
The ATM packet elements use multiple optical channels connecting
directly to the DWDM equipment providing meshed topology, a method of circuit
protection that is more reliable than a simple ring topology. The use of the
PNNI hierarchical routing protocol collects circuits into virtual paths and
greatly reduces the number of channels that the ATM switch is required to
restore in the event of an optical failure. This approach allows for the
scalability and the restoration timeframes that are as good as, or better than,
those of a traditional SONET-based architecture. Due to the nature of the ATM
configuration, all of the circuits are fully protected and there are no single
points of failure other than the customer connection port. This enables us to
offer traditional as well as dedicated IP services with guaranteed availability
in excess of 99.9% compared to the market standard of 99.7%.
Multi-service Platform. Our multi-service operating systems allow
voice, data and Internet services to be provided using a single ATM operating
system. Most communications service providers in North America and Europe use
multiple platforms for the provision of different services, which create
distinct networks and increased operating and capital costs for each service
provided.
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 a NOC in Vancouver, which provides services 24 x 7. We will
have redundant network services through Nortel until June 30, 2000.
We are in the process of designing our NOC in Dublin, Ireland. Our
Dublin NOC will be primarily responsible for European operations and will be on
line in October 2000. Each NOC will serve as a back up to the other.
In addition to the two main NOCs in Vancouver and Dublin, we are also
designing support centers in Denver to maintain North American 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 integrates 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
particular management services to our customers in a secure and reliable way.
Network Construction
We design the portions of our network that we are constructing to
maximize expandability and flexibility. We plan to continue to install an
average of 144 fiber optic strands on major builds throughout the network.
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<PAGE>
In high demand areas, we may install 264 fibers or more in order to meet
anticipated demand as well as to enable us to swap fiber for fiber in other
geographic areas both in the North American market and internationally.
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 our patented
railplow. The railplow reduces the time necessary to install network
infrastructure on railroad ROW because it allows us to move on and off the
tracks on short notice to allow trains to pass. As a result, we can construct
networks on railroad ROW much more quickly and efficiently than our competitors
who use traditional plow trains, which are not able to move on and off railroad
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 some circumstances, our ownership of this
company would be subject to change and our license would become non-exclusive.
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 some 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 an average of 45 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. 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.
Rights-of-Way and Permitting
To implement our business plan successfully, we must obtain licenses
and permits from third-party landowners and governmental authorities and
complete particular 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. ROW agreements and permits provide
us with a contractual interest and do not create an interest in land. See "Risk
Factors - Need for Rights-of-Way." 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. Alternative ROW for some route
miles must be identified, negotiated and obtained in the event that the original
route cannot be secured.
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<PAGE>
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 CN and IC 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. We believe that these ROW will be valuable to us, particularly
with the advantages of the railplow and the ROW's geographic location. The ROW
obtained from each of CN and IC may be subject to legal challenge. See "Risk
Factors -- Need for Rights-of-Way."
In Europe, all of our current and planned network assets have been
acquired through purchases or swaps of North American fiber optic cable, so
there has been no need thus far to obtain ROW in Europe. 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 the
United States, Ireland and the United Kingdom. One license for which we applied
in Canada has been approved and a second license application in Canada is
pending. We also applied for various permits and consents for Hibernia in
Ireland, Canada, the United Kingdom and the United States. Approximately 45% of
these permits and consents have been granted and the remaining 55% 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.
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
The telecommunications industry is extremely competitive particularly
concerning price and service. It is relatively common for TSPs to be both
customers and competitors. This is a concept referred to as co-opetition.
Therefore, we face competition and co-opetition from existing and planned TSPs
and customers on each of our planned routes. We compete primarily on the basis
of price, availability, transmission quality and reliability, customer service
and the location of our systems.
We believe that our competitive advantages in North America and Europe
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 that
independence, services designed for the wholesale market and simple billing
systems will enable us to gain a significant position in this market niche. We
believe that our competitive advantages in providing our undersea cable include
our ability to provide end-to-end connectivity between major North American and
European cities and attractive pricing of capacity by initial purchasers of
capacity.
North America
There are currently several communications companies with long distance
and intra-city fiber optic networks in North America. These include companies
such as Level 3 Communications, Inc. ("Level 3"), Qwest and Williams
Communications Group, Inc. ("Williams"). We believe that other companies are
planning networks that, if constructed, could employ advanced technology similar
to that of our network. These competitors, as well as the three traditional
nationwide carriers, AT&T, MCI Worldcom and Sprint (MCI Worldcom and Sprint have
recently entered into an agreement to merge), may compete directly with us for
customers.
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<PAGE>
Europe
Many communications companies have recently completed or are currently
in the process of developing long distance and intra-city fiber optic networks
in Europe. These include companies such as MCI Worldcom, Global Crossing Ltd.
("Global Crossing"), Global Telesystems Europe B.V., Level 3, Viatel Inc.,
KPNQwest, Colt Telecom Group plc, Energis plc and Carrier1 International S.A. We
believe that other companies are planning networks that, if constructed, could
employ advanced technology similar to that of our network. These competitors, as
well as traditional carriers including Deutsche Telekom AG, France Telecom S.A.,
British Telecommunications plc, Mannesmann AG and Cable & Wireless plc, may
compete directly with us for customers.
Undersea
The route addressed by Hibernia is currently served by several undersea
cables. We anticipate that we will face competition primarily from new
transatlantic cable systems, including:
(i) AC-2, a transatlantic cable system which is being developed by Global
Crossing;
(ii) FLAG Atlantic, a 50/50 joint venture between Global Telesystems Inc.
and Flag Telecom;
(iii) Level 3's linear Yellow cable project; and
(iv) Tyco's proposed transatlantic cable project.
Three of these systems, including Hibernia, will have fully protected
ring designs. Hibernia will be the first of the new systems to be ready for
commercial service, and will be competing for clients directly with the other
two new ring systems.
Employees
As of December 31, 1999, we had approximately 1,000 full-time and
seasonal employees. 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
We have executive and administrative offices in Vancouver, British
Columbia and Seattle, Washington. We also have administrative, sales,
engineering and operations offices located in Vancouver, Denver and Toronto. Our
North American NOC is located in Vancouver, British Columbia.
All of our offices are leased on a short-term basis except for our
Toronto office, which we occupy under a lease expiring in 2009. We expect to
open additional offices in multiple jurisdictions globally as required.
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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<PAGE>
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 Inc. See "Relationships
and Related Party Transactions--Transactions with Ledcor." As we develop
value-added data services we intend, when appropriate, to seek patents and other
intellectual property protection on an on-going basis. We currently do not have
patentable rights with respect to any value-added data services, and we cannot
assure you that we will in the future develop any such rights.
55
<PAGE>
MANAGEMENT
Directors and Officers
Our directors and executive officers are listed below:
Name Age Position
- ---- --- --------
David Lede (2)(3)........ 52 Chairman of the Board
Gregory Maffei........... 39 Chief Executive Officer and Director
Clifford Lede (1)........ 44 Vice Chairman
Larry Olsen (3).......... 50 Vice Chairman and Chief Financial Officer
Ron Stevenson (3)........ 48 President and Director
Stephen Stow............. 45 Executive Vice President and Director
Jim Voelker.............. 46 Director
Glenn Creamer (2)........ 37 Director
Robert Gheewalla......... 32 Director
Andrew Rush (1).......... 42 Director
Claude Mongeau (1)(2).... 38 Director
William Ramsey........... 48 Director
- --------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the stock compensation committee.
David Lede has served as Chairman of our board since our inception, was
Chief Executive Officer from our inception until January 2000, has served as
Chairman of the Board and Chief Executive Officer of Ledcor Inc. since 1983. Mr.
Lede has been with Ledcor for 32 years, and, before becoming Chairman of the
Board and Chief Executive Officer of Ledcor Inc., held various management
positions such as President, Vice President, Operations Manager and
Superintendent.
Gregory Maffei has served as Chief Executive Officer and a Director
since January 2000. Prior to that Mr. Maffei served as the Chief Financial
Officer of Microsoft Corporation. Mr. Maffei joined Microsoft in 1993 and, prior
to becoming Chief Financial Officer, served as Vice President, Corporate
Development, and Treasurer. Mr. Maffei serves as non-executive Chairman of
Expedia, Inc. and a director of Starbucks Corporation. He has previously served
on boards of telecommunications related companies including ServiceCo LLC (Road
Runner), United Global Com (UGC) and Asian Global Crossing.
Clifford Lede has served as Vice Chairman of our board since our
inception, has been Vice Chairman and Chief Operating Officer of Ledcor Inc.
since 1983 and has served as President of Ledcor Industries since 1983 and Chief
Executive Officer since August 1999. Mr. Lede has been with Ledcor for 25 years.
Clifford Lede and David Lede are brothers.
Larry Olsen has served as Vice Chairman of our board 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 Managing Director of Promet Petroleum.
Ron Stevenson has served as President and a Director since our
inception and is a Director of Ledcor Inc. Before joining us, Mr. Stevenson
56
<PAGE>
spent 28 years with Ledcor. From 1989 to 1998, Mr. Stevenson was Senior Vice
President of Operations for Ledcor Industries' 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, 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. 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 a 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. Mr. Creamer is a Director of American Cellular
Corporation, Carrier1 International S.A. ("Carrier1"), Celpage, Inc., Epoch
Networks Inc., Hubco Inc. and Wireless One Network L.P.
Robert Gheewalla joined us as a Director in September 1999. Mr.
Gheewalla is Vice President, Principal Investment Area for Goldman, Sachs & Co.
Mr. Gheewalla is also a Director of Diginet Americas, Group Telecom, Tunes.com,
Digital Access 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'Ethanol de Synthese, Nextel Partners and
American Tissue Inc.
Claude Mongeau joined us as a Director in January 2000. Mr. Mongeau
was recently named Senior Vice-President and Chief Financial Officer of CN.
Prior to that appointment and since 1995, Mr. Mongeau was Vice-President,
Strategic and Financial Planning of CN.
Arrangements with Respect to Directors' Nominations
Under the terms of a shareholders' agreement among all shareholders holding
our shares immediately prior to the completion of the offering, we agreed to set
the maximum number of our board of directors at eighteen members and to nominate
as directors:
o one designee from each of our private equity investors, namely affiliates
of Tyco International Ltd., Providence Equity Partners Inc., DLJ Merchant
Banking Partners II L.P. and GS Capital Partners III, L.P., so long as, in
each case, each investor continues to hold a prescribed number of our Class
A Non-Voting Shares;
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<PAGE>
o Mr. Maffei together with two of his additional designees so long as he
remains our Chief Executive Officer; and
o the balance from designees of a subsidiary of Ledcor Inc.
Under the terms of the shareholders' agreement, each shareholder also
agreed to vote for the foregoing nominees in connection with their election to
our board of directors.
Employment Agreement
Mr. Maffei became our Chief Executive Officer effective January 18,
2000 pursuant to an employment agreement entered into on December 22, 1999. The
employment agreement has a term ending on June 30, 2003, subject to annual
extensions thereafter. Mr. Maffei will receive an initial salary of $150,000 per
year and is entitled to participate in any executive bonus plan that we may
adopt. If Mr. Maffei dies or becomes disabled during his employment, he will be
entitled to receive a lump sum payment of $10 million. If Mr. Maffei's
employment terminates otherwise than for cause, he will be entitled to receive a
payment equal to three times his then base salary.
Board Committees
Upon the completion of the offering, our board of directors will have
three standing committees: an Audit Committee, a Compensation Committee and a
Stock Compensation Committee. A majority of the members of our Audit Committee
will be persons who are not officers or employees of the Company or any of its
affiliates. The Audit Committee will select and engage, on our behalf, the
independent public accountants to audit our annual financial statements, and
will review and approve the planned scope of the annual audit. The Compensation
Committee will establish remuneration levels for our senior officers and will
perform such functions as provided under our stock option plan as it relates to
executive officers. The Stock Compensation Committee will be responsible for the
administration of our stock option plan as it relates to our employees other
than our executive officers.
Compensation of Directors
The independent directors, other than those designated by our private
equity investors, will be paid an annual fee of $10,000. Other directors will
not receive any fees for their service on the board. We will reimburse directors
for their out-of-pocket expenses in connection with their service on the board.
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Executive Compensation
The following table sets forth the compensation that was paid by us
during the fiscal year ending on December 31, 1999 and 1998, respectively, to
our then Chief Executive Officer and the four individuals who were the most
highly compensated executive officers during fiscal year 1999 (the "Named
Executive Officers").
<TABLE>
Annual Compensation Long-Term Compensation
------------------- ----------------------
<CAPTION>
Other Securities
Annual Restricted Underlying
Compen- Stock Options LTIP
Salary Bonus satio Awards Granted Payouts All Other
Name and Principal Position Year(1) ($) ($) ($) ($) (#) ($) Compen-sation
- --------------------------- ------- --- --- ------ --- --- --- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Lede(2) 1999 -- -- -- -- 800,000 -- --
Chief Executive Officer 1998 -- -- -- -- -- -- --
Ron Stevenson 1999 182,086 350,000 7,619 -- 800,000 -- --
President 1998 78,045 54,618 13,722 -- -- -- --
Larry Olsen(3) 1999 136,054 350,000 -- -- 800,000 -- --
Vice Chairman & Chief 1998 78,045 54,618 4,685 -- -- -- --
Financial Officer
Stephen Stow(4) 1999 136,054 235,000 -- -- 800,000 -- --
Executive Vice-President 1998 78,045 54,618 2,677 -- -- -- --
Lionel Desmarais 1999 133,307 235,000 4,422 -- 800,000 -- --
Senior Vice-President 1998 70,281 48,193 8,668 -- -- -- --
Directors and Officers (as 1999 1,026,712 1,455,715 36,970 -- 5,440,000 -- --
a Group) 1998 421,553 239,357 48,728 -- -- -- --
- ----------------------
<FN>
(1) We commenced operations on June 1, 1998.
(2) We paid Ledcor Cdn.$200,000 per month under the Management Services
Agreement which commenced on June 1, 1998. The provision of Mr. Lede's
services on our behalf are included within that agreement. David Lede and
Clifford Lede, our Vice-Chairman, do not receive remuneration from us for
their services.
(3) The amounts indicated represent fees paid to a company wholly owned and
controlled by Mr. Olsen.
(4) The amounts indicated represent fees paid to a company wholly owned and
controlled by Mr. Stow and his spouse.
</FN>
</TABLE>
The following table sets forth particular information concerning
options with respect to shares granted to the Named Executive Officers during
the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Title and Percent of
Number of Total
Securities Options/SAR's Unexercised
Underlying Granted to Options at
Options/SAR's Employees in Exercise or December 31,
Granted Fiscal Year 1999 Base Price 1999 (#) Expiration
Name (#) (%) ($/Share) Exercisable/ Date
Unexercisable(1)
- ---------------------- ---------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
David Lede 800,000/nil 3.7 1.25 200,000/600,000 January 5, 2009
Ron Stevenson 800,000/nil 3.7 1.25 200,000/600,000 January 5, 2009
Stephen Stow 800,000/nil 3.7 1.25 200,000/600,000 January 5, 2009
Larry Olsen 800,000/nil 3.7 1.25 200,000/600,000 January 5, 2009
Lionel Desmarais 800,000/nil 3.7 1.25 200,000/600,000 January 5, 2009
_____________
<FN>
(1) The options are exercisable in four equal annual installments commencing on
June 30, 1999.
</FN>
</TABLE>
Stock Option Plan
Our 1998 Long Term Incentive and Share Award Plan (as amended) permits
the grant of non-qualified stock options, incentive stock options, share
appreciation rights, restricted shares, restricted share units, performance
shares, performance units, dividend equivalents and other share-based awards to
employees and directors of ours or of our affiliates and subsidiaries. Any other
person who provides ongoing services to us or our affiliates
59
<PAGE>
is also eligible for an award under the plan. A maximum of 35,566,504 Class A
Non-Voting Shares may be subject to awards by us under the plan, and the maximum
number of Class A Non-Voting Shares for which options and share appreciation
rights may be granted by us during a calendar year to any eligible person under
the plan is 4,000,000. The number of Class A Non-Voting Shares issued or
reserved pursuant to the plan (or pursuant to outstanding awards) is subject to
adjustment on account of share splits, share exchanges, mergers and other
changes in the Class A Non-Voting Shares, to prevent dilution or enlargement of
a participant's rights under the plan. If any grants under the plan are
cancelled, surrendered or otherwise terminated without a distribution of Class A
Non-Voting Shares, then those shares will again be available for further awards
by us under the plan.
Administration
The plan is administered by the compensation committee and stock
compensation committee of our board of directors, which may delegate its duties
and powers to officers or managers of ours or of our affiliates and
subsidiaries. Our compensation committee has the sole discretion to determine
the eligible persons to whom awards may be granted under the plan, the type and
number of awards to be granted, and to what extent an award may be settled in
cash, Class A Non-Voting Shares, property or other awards.
Options
The plan permits our stock compensation committee and compensation
committee to grant rights to purchase Class A Non-Voting Shares. The exercise
price for each option granted under the plan is set by the compensation
committee. Unless otherwise determined by our compensation committee, the term
of each option will be ten years from the date of the grant and the option will
become exercisable in four equal annual installments beginning on the first
anniversary of the date of the grant.
Incentive stock options may be granted to our employees and those of
our subsidiaries, while non-qualified stock options may be issued to all
eligible participants. Any incentive stock options that are awarded by our
compensation committees will comply in all respects with Section 422 of the U.S.
Internal Revenue Code.
Share Appreciation Rights
Our compensation committees may grant share appreciation rights
independent of or in connection with an option. Each share appreciation right
will entitle a participant upon exercise to an amount equal to the excess of (1)
the fair market value on the exercise date of one Class A Non-Voting Share over
(2) the exercise price of the share appreciation right as determined by our
compensation committees as of the date of grant of the share appreciation right.
Payment will be made in Class A Non-Voting Shares, cash or property, as
specified in the award agreement or as determined by our compensation committee.
Restricted Shares
Restricted shares awarded by our compensation committees under the plan
will be subject to restrictions on transferability and other restrictions. The
restrictions will lapse as our compensation committees determine. If the
employment of a holder of restricted shares is terminated during a restriction
period, any Class A Non-Voting Shares then subject to restrictions, and any
accrued and unpaid dividends, or dividend equivalents, will be forfeited unless
our compensation committees waive the forfeiture. Except to the extent
restricted by the award agreement, holders of restricted shares will have the
right to vote the restricted shares.
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<PAGE>
Restricted Shares Units
Our compensation committees may grant a right under the plan to receive
Class A Non-Voting Shares or cash at the end of a specified period. Our
compensation committees may impose additional restrictions on the restricted
share units. If employment of a participant is terminated, or upon failure to
satisfy other conditions precedent to the delivery of cash or Class A Non-Voting
Shares under the grant, all restricted share units still subject to a
restriction will be forfeited unless our compensation committee waives the
forfeiture.
Performance Shares and Performance Units
The plan permits our compensation committees to make awards based on
the attainment of performance objectives set by the committees for a performance
period of one or more years. At the beginning of a performance period, our
compensation committees will determine the range of Class A Non-Voting Shares,
in the case of performance shares, and the range of dollar values, in the case
of performance units, which will be paid if the relevant measure of performance
is met.
Dividend Equivalents
Our compensation committees may grant dividend equivalents under the
plan which give the participant the right to receive cash, Class A Non-Voting
Shares or other property equal in value to dividends paid with respect to a
specified number of Class A Non-Voting Shares. Dividend equivalents may be
awarded by our compensation committees alone or in connection with another type
of award and may be paid concurrently or on a deferred basis.
Other Share Based Awards
The plan permits our compensation committees, subject to limitations
under applicable law, to grant to eligible persons awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Class A Non-Voting Shares as deemed by our
compensation committees to be consistent with the purposes of the plan.
Transferability
Unless otherwise determined by our compensation committees, awards
granted under the plan are not transferable other than by will or by the laws of
descent and distribution.
Change in Control
In the event of a change of control (as defined in the plan), all
outstanding awards then held by participants which have restrictions or
limitations shall become fully exercisable at the time of the change of control,
and all performance criteria and other conditions to the payment of awards will
be deemed to be achieved and will be waived by us at the time of the change of
control.
Amendment and Termination
Our board of directors may amend, alter, suspend, discontinue or
terminate the plan in any respect, at any time, without the consent of holders
of awards or our shareholders (except to the extent shareholder approval is
required by Section 422 of the U.S. Internal Revenue Code), provided, however,
no amendment, alteration, suspension, discontinuation, or termination of the
plan may materially and adversely affect the rights of a holder of an award and
without his or her consent.
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Outstanding Options to Purchase Securities
The following describes, as of January 25, 2000, our outstanding
options granted to our executive officers, directors, employees and others:
<TABLE>
<CAPTION>
Exercise Price
Number of Class A Per Class A
Non-Voting Shares Non-Voting
Subject to Option Share(1) Expiry Date
----------------- -------- -----------
<S> <C> <C> <C>
Executive Officers (Six persons in total)...... 4,000,000 $1.25 January 5, 2009
Directors who are not also executive officers
(Seven persons in total)........................ 800,000 $1.25 June 21, 2009
320,000 $1.25 January 5, 2009
Employees (325 persons in total)............... 10,553,440 $1.25 January 5, 2009 to
August 23, 2009
4,259,600 $2.50 June 17, 2009 to
November 15, 2009
1,027,500 $10.00 January 24, 2009
Employees of affiliates other than subsidiaries
(58 persons in total)........................... 1,080,000 $1.25 January 5, 2009
815,200 $2.50 June 17, 2009
120,000 $10.00 January 24, 2010
- ---------
- ---------------------------
<FN>
(1) The market value is not determinable as the Class A Non-Voting Shares were
not publicly traded at the date of grant. We believe the exercise price
represents the fair value of the Class A Non-Voting Shares at the date of
grant.
</FN>
</TABLE>
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PRINCIPAL AND SELLING SHAREHOLDERS
Principal Shareholders
The following table describes the beneficial ownership of our Class C
Multiple Voting Shares as of January 25, 2000 by (i) each person or company
known by us to own more than 10% of our Class C Multiple Voting Shares, and (ii)
all of our directors and officers as a group. As of January 25, 2000, there were
40,920,000 Class C Multiple Voting Shares outstanding.
To calculate a shareholder's percentage of beneficial ownership, we
must include in the numerator and denominator those shares underlying options
beneficially owned by that shareholder. Options held by other shareholders,
however, are disregarded in this calculation. Therefore, in both this table and
the following table, the denominator used in calculating beneficial ownership
among our shareholders may differ.
January 25, 2000
----------------
Name of Number of shares Percentage of class
Beneficial Owner beneficially owned beneficially owned
---------------- ------------------ ------------------
Ten percent holders:
Worldwide Fiber Holdings Ltd... 32,400,000 79.2%
All directors and
officers as a group ........... 6,720,000 16.4%
Selling Shareholder
The following table describes the ownership of our Class A Non-Voting
Shares by our selling shareholder as of January 25, 2000 and as adjusted to
reflect the sale of Class A Non-Voting Shares by such selling shareholder in the
offering. As of January 25, 2000 there were 176,713,200 Class A Non-Voting
Shares outstanding and 86,577,712 Class A Non-Voting Shares issuable upon
conversion of all outstanding Preferred Shares.
<TABLE>
<CAPTION>
Percentage
Number of shares beneficially Number of Number of shares Percentage
beneficially owned prior shares beneficially beneficially
Name of owned prior to to the offered in owned after the owned after
Selling Shareholder the offering offering this offering offering the offering
------------------- ------------ -------- ------------- -------- ------------
<S> <C>
Ledcor Limited Partnership (1) 150,633,200
- --------------------------------------
<FN>
(1) The general partner of Ledcor Limited Partnership is Ledcor Industries Limited.
</FN>
</TABLE>
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RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions with Ledcor
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 some other assets
related to the business of Ledcor Industries' 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 February , 2000, WFI-USA became our
wholly owned subsidiary.
The material agreements we entered into with Ledcor in connection with
the reorganization are as follows:
Railplow. Effective May 31, 1998, the patent for the railplow which we
use in connection with the construction of some portions of our network on
railroad ROW were transferred to a subsidiary of Ledcor that we refer to as
"Patent Co.," and we were concurrently granted a non-exclusive license for its
use at our request. 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 us. 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. We have entered into a management
services agreement with Ledcor. Under this agreement, Ledcor provides us with
management staff and administrative and other support services. Prior to January
1, 2000, we reimbursed Ledcor for some of their costs and paid a monthly fee of
Cdn.$200,000 under the agreement. Beginning January 1, 2000, the Cdn. $200,000
monthly obligation was eliminated. This agreement is terminable at any time by
either party.
Employee services agreements. We have entered into two employee
services agreements with Ledcor. Under these agreements, Ledcor provided us with
personnel for the design, engineering, construction and installation of the
network, and we reimbursed Ledcor for the direct costs of these personnel. On
January 1, 1999, the majority of the personnel covered by the employee services
agreements, together with the majority of officers involved in our day-to-day
management, became our employees. These agreements are terminable at any time by
either party.
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 some 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 particular 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 us.
Sale and transfer agreements. We entered into a series of agreements
that transferred equipment and other assets of Ledcor Industries'
telecommunications division including a minimum of 12 strands of dark fiber
along the FOTS.
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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, construction and construction management of fiber optic
network assets
On September 27, 1999, we concluded a transaction with Ledcor whereby
we acquired particular fiber optic network assets in consideration of the issue
of 36,000,000 of our Class C Multiple Voting Shares. In addition, we assumed
defined rights and obligations of the affiliates under their build agreements
with a third party, including obligations relating to the completion of those
builds and particular support structure, maintenance, license and access and
underlying rights obligations.
On June 25, 1999, we concluded a transaction with Ledcor whereby Ledcor
would complete an approximate 156-mile portion of the fiber optic build between
Portland and Sacramento for approximately $23.7 million.
Effective as of May 1, 1999, we concluded a transaction with Ledcor
whereby personnel of Ledcor who were involved in the designing and planning of
the Hibernia cable stations will oversee management and supervision of
construction of these facilities for a fee of approximately $1.7 million.
Leases
Ledcor leases our facilities in Toronto to us for approximately
$825,000 per year under agreements that expire in 2009.
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.$900 million for the fiscal year ended August 31, 1999
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, MTS Netcom
Inc., AT&T, AT&T Canada, Alaska Fiber Star, fONOROLA Inc., Mi-Link
Communications, LLC, Champlain Telephone and World Net Communications Inc.
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 fONOROLA,
Sprint Canada and AT&T Canada. After the successful completion of this project,
Ledcor began, as a developer, the FOTS, the first trans-Canadian fiber optic
cable network.
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The foundation of Ledcor's success and growth over the last 52 years
has been built on the strength of its dedicated people, ability to control costs
and its conservative but entrepreneurial approach to business. Ledcor 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.
Transactions with Canadian National
We recently acquired the minority interest in each of WFI-CN Fibre Inc. and
Worldwide Fiber IC Holdings Inc., as a result of which CN acquired Class A
Non-Voting Shares. In addition, Claude Mongeau, the Chief Financial Officer of
CN, recently became one of our directors.
Purchase of Shares by Chief Executive Officer
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.
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SHARE CAPITAL REORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize us to issue an unlimited number
of Class A Non-Voting Shares, an unlimited number of Class B Subordinate Voting
Shares and an unlimited number of Class C Multiple Voting Shares. Concurrent
with the closing of the offering we will reorganize our share capital by
eliminating our existing Preferred Shares, following conversion into Class A
Non-Voting Shares of all our issued and outstanding Series A Non-Voting
Preferred Shares held by our private equity investors, and creating and
authorizing an unlimited number of new Preferred Shares, issuable in series,
with the rights and attributes described below.
Class A Non-Voting Shares
Except as provided by law, holders of Class A Non-Voting Shares are not
entitled to vote at any meeting of our shareholders. Holders of Class A
Non-Voting Shares are entitled to receive notice of and attend meetings of
voting shareholders except meetings at which only holders of a specified class
of shares are entitled to vote. To the extent the holders of Class A Non-Voting
Shares are entitled to vote on any matter, each Class A Non-Voting Share will
carry one vote per share. Subject to preferences of any outstanding Preferred
Shares, the holders of Class A Non-Voting Shares are entitled to participate
equally with holders of Class B Subordinate Voting Shares and Class C Multiple
Voting Shares in any dividends our board of directors declare out of funds
legally available for the payment of dividends. If we are liquidated, dissolved
or wound-up, holders of Class A Non-Voting Shares are entitled to share ratably
with holders of Class B Subordinate Voting Shares and Class C Multiple Voting
Shares in all assets remaining after payment of our liabilities and any
liquidation preferences of any outstanding Preferred Shares.
Each outstanding Class A Non-Voting Share will be automatically
converted into one Class B Subordinate Voting Share if all of the restrictions
on the ownership of our voting shares, and the control in fact of us, by
non-Canadians under the Telecommunications Act, and any other statute applicable
to us which restricts non-Canadian ownership and control of us or any of our
affiliates, are eliminated and non-Canadian ownership and control of us is not
otherwise restricted or expected to be restricted by law. Upon the conversion of
the Class A Non-Voting Shares into Class B Subordinate Voting Shares, subject to
regulatory approval, we will seek contemporaneously to list the Class B
Subordinate Voting Shares on all stock exchanges on which the Class A Non-Voting
Shares are then listed.
The Class A Non-Voting Shares may not be subdivided, consolidated,
reclassified or otherwise changed unless, at the same time, the Class B
Subordinate Voting Shares and the Class C Multiple Voting Shares are subdivided,
consolidated, reclassified or otherwise changed equally, share-for-share, in the
same proportion and in the same manner.
Class B Subordinate Voting Shares
Generally, holders of Class B Subordinate Voting Shares are entitled to
one vote at any meeting of our shareholders. However, if we propose to sell,
lease or exchange all or substantially all of our assets with a person other
than one of our wholly owned subsidiaries, or if we propose to liquidate,
dissolve, wind-up or distribute our assets to our shareholders for the purposes
of winding-up our affairs, then each holder of Class B Subordinate Voting Shares
will be entitled to 10 votes per share in respect of such matter. Subject to
preferences of any outstanding Preferred Shares, the holders of Class B
Subordinate Voting Shares are entitled to participate equally with holders of
Class A Non-Voting Voting Shares and Class C Multiple Voting Shares in any
dividends our board of directors declare out of funds legally available for the
payment of dividends. If we are liquidated, dissolved or wound-up, holders of
Class B Subordinate Voting Shares are entitled to share ratably with holders of
Class A Non-Voting Shares and Class C Multiple Voting Shares in all assets
remaining after payment of our liabilities and any liquidation preferences of
any outstanding Preferred Shares. The Class B Subordinate Voting Shares may not
be subdivided, consolidated, reclassified or otherwise changed unless, at the
same time, the Class A Non-Voting Shares and the Class C Multiple Voting Shares
are subdivided, consolidated, reclassified or otherwise changed equally,
share-for-share, in the same proportion and in the same manner.
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Class C Multiple Voting Shares
Holders of Class C Multiple Voting Shares are entitled to ten votes at
any meeting of our shareholders. Subject to preferences of any outstanding
Preferred Shares, the holders of Class C Multiple Voting Shares are entitled to
participate equally with holders of Class A Non-Voting Shares and Class B
Subordinate Voting Shares in any dividends our board of directors declare out of
funds legally available for the payment of dividends. If we are liquidated,
dissolved or wound-up, holders of Class C Multiple Voting Shares are entitled to
share ratably in all assets remaining after payment of our liabilities and any
liquidation preferences of any outstanding Preferred Shares. Each Class C
Multiple Voting Share is convertible at any time, at the option of the holder,
into one Class A Non-Voting Share or one Class B Subordinate Voting Share. The
Class C Multiple Voting Shares may not be subdivided, consolidated, reclassified
or otherwise changed unless, at the same time, the Class A Non-Voting Shares and
the Class B Subordinate Voting Shares are subdivided, consolidated, reclassified
or otherwise changed equally, share-for-share, in the same proportion and in the
same manner.
New Preferred Shares Issuable in Series
On the closing of the offering, our board of directors will be
authorized, without further action by the shareholders, to issue Preferred
Shares in one or more series and to set the number of shares constituting any
such series and the designation, rights, privileges, restrictions and conditions
attaching to the shares of such series including dividend rights and rates,
redemption provisions (including sinking fund provisions), rights of conversion
or exchange, liquidation preferences and voting rights, if any. The Preferred
Shares as a class are entitled to priority over the Class A Non-Voting Shares,
Class B Subordinate Voting Shares and Class C Multiple Voting Shares if our
board of directors decides to pay any dividends, and, if we are dissolved,
liquidated or wound-up, the Preferred Shares are entitled as a class to priority
of return of capital. Except as required by law or the provisions of any
designated series of Preferred Shares, the holders of Preferred Shares as a
class are not entitled to receive notice of, attend or vote at any meeting of
our shareholders.
Constrained Share Provisions
Our articles of incorporation provide that we may, in connection with
the issue, transfer or ownership of our voting shares, take any action or refuse
to take any action, as the case may be, to the extent necessary to ensure that
we are in a position to comply with the Canadian ownership and control
requirements of the Telecommunications Act (Canada) and related regulations or
any other statute which affects our ability to qualify under applicable law to
carry on business and to obtain, maintain, amend or renew licenses which are
necessary to carry on our business.
We have designed our capital structure to facilitate compliance with
the Canadian ownership and control requirements. Our articles of incorporation
provide that non-voting shares may not be converted into voting shares if the
exercise of such conversion rights would affect our ability to qualify under
applicable law to carry on business and to obtain, maintain, amend or renew
licenses which are necessary to carry on our business. In addition, the
regulations under the Telecommunications Act (Canada) provide us with the time
and ability to rectify ineligibility resulting from insufficient Canadian
ownership of voting shares, notwithstanding any provision of our articles or
by-laws. In particular, but without limitation, we may, to the extent
applicable:
o refuse to issue any voting shares;
o refuse to allow any transfer of voting shares to be recorded in our share
register;
o suspend the rights of a holder of voting shares to vote at a meeting of
shareholders; and
o sell, repurchase or redeem any of our voting shares.
Although we believe that we have been at all times in compliance with
the relevant legislation, and that we will remain in compliance if the offering
is consummated, there can be no assurance that a future Canadian
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Radio-television and Telecommunications Commission ("CRTC") determination or
events beyond our control will not result in us ceasing to comply with the
relevant legislation. Should this occur, our ability to operate under the
Telecommunications Act (Canada) could be jeopardized and our business could be
materially adversely affected. See "Risk Factors--Telecommunication Regulation"
and "Regulation--Canada".
Take-over Bid Protection
Under applicable Canadian law, an offer to purchase Class C Multiple
Voting Shares would not necessarily require that an offer be made to purchase
Class A Non-Voting Shares. As a result, and to comply with policies adopted by
Canadian securities regulatory authorities and The Toronto Stock Exchange, our
voting shareholders will enter into a transfer restriction agreement (the
"Transfer Restriction Agreement") with respect to not less than 80% of our Class
C Multiple Voting Shares, effective upon the closing of this offering, with , as
trustee, and us in order to provide the holders of Class A Non-Voting Shares
with particular rights in the event of a "take-over bid" for Class C Multiple
Voting Shares under Canadian law. A take-over bid, generally defined, is an
offer to acquire outstanding equity or voting shares of a class where, upon
completion of the offer, the offeror would own more than 20% of the shares of
the class.
Under the Transfer Restriction Agreement, the parties will agree not
to sell the Class C Multiple Voting Shares owned, directly or indirectly, by
them or their affiliates, and which are subject to the Transfer Restriction
Agreement, to any person under circumstances in which (i) the offer or
acceptance constitutes a take-over bid under the Securities Act (Ontario) or the
Securities Act (Quebec) and (ii) securities legislation would have required the
same offer to be made to all holders of Class A Non-Voting Shares if the offer
had been for Class A Non-Voting Shares rather than Class C Multiple Voting
Shares. One circumstance where the Securities Act (Ontario) would not require
the same offer to be made to all holders of Class A Non-Voting Shares is if (i)
the purchase is made from not more than five persons, (ii) the bid is not made
generally to holders of the Class C Multiple Voting Shares and (iii) the price
does not exceed 115% of the market price of the Class A Non-Voting Shares. The
prohibition on sales of Class C Multiple Voting Shares will not apply if an
offer identical in all material respects is made concurrently to purchase Class
A Non-Voting Shares, which identical offer has no condition attached other than
the right not to take up and pay for shares tendered if no shares are purchased
pursuant to the offer for Class C Multiple Voting Shares.
Under the Transfer Restriction Agreement, the parties will also agree
not to transfer any Class C Multiple Voting Shares which are subject to the
Transfer Restriction Agreement (other than a transfer to a pledgee as security
or to another party to the Transfer Restriction Agreement), unless the purchaser
is or becomes a party to the Transfer Restriction Agreement.
On the closing of this offering, no Class B Subordinate Voting Shares
will be issued and outstanding. The Transfer Restriction Agreement will,
however, provide that, if any Class B Subordinate Voting Shares are issued in
the future, (i) the holders of Class B Subordinate Voting Shares will have
substantially similar rights in the event of a take-over bid for Class C
Multiple Voting Shares and (ii) the holders of Class A Non-Voting Shares will
have substantially similar rights in the event of a take-over bid for Class B
Subordinate Voting Shares.
Registration Rights
Canadian National
CN may demand registration one year after our filing of an underwritten
public offering of our securities and has the right to two demand registrations
provided that the aggregate proceeds from such offering are expected to exceed
$5 million.
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Michels
Michels may demand registration one year after our filing of an
underwritten public offering of our securities and has the right to two demand
registrations provided that the aggregate proceeds from such offering are
expected to exceed $5 million.
Private Investor Group
Our private equity investors will have demand registration rights
following the closing of this offering. Each investor has the right to two
demand registrations. These investors have piggyback registration rights in
connection with most other types of offerings of our securities.
Mr. Maffei
Mr. Maffei is entitled to one demand registration and to piggyback
registration rights in conjunction with the private equity investors subject to
a minimum demand registration amount of 25% of his holdings.
Other
A consultant, an unaffiliated corporation and one of our officers, who
own an aggregate of 15,268,939 Class A Non-Voting Shares and 3,600,000 Class C
Multiple Voting Shares, have registration rights which are effective after this
offering.
Each individual or entity who has registration rights in this offering
has agreed to waive these rights.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our Class A
Non-Voting Shares. Future sales of substantial amounts of our Class A Non-Voting
Shares in the public market could adversely affect prevailing market prices.
Sales of substantial amounts of our Class A Non-Voting Shares in the public
market after any restrictions on sale lapse could adversely affect the
prevailing market price of the Class A Non-Voting Shares and impair our ability
to raise equity capital in the future.
Upon completion of the offering, we will have Class A Non-Voting Shares
outstanding and outstanding options to purchase Class A Non-Voting Shares,
assuming no additional option or warrant grants or exercises after January 25,
2000. Of the Class A Non-Voting Shares sold in the offering, Class A Non-Voting
Shares will be subject to the lock-up agreements described below assuming that
we sell all shares reserved under our directed share program to the entities or
persons for whom these shares have been reserved. We expect that the remaining
Class A Non-Voting Shares, plus any shares issued upon exercise of the
underwriters' over-allotment option, will be freely tradable without restriction
under the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act.
The remaining Class A Non-Voting Shares outstanding and Class A
Non-Voting Shares subject to outstanding options are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if the sale is registered or if it qualifies for an exemption from
registration, such as under Rule 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of restricted securities in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the Class A Non-Voting Shares.
Lock-Up Agreements
Our directors, officers and various other shareholders, who together
hold substantially all of our securities, have entered into lock-up agreements
in connection with this offering. These lock-up agreements generally provide
that these holders will not offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of our Class A Non-Voting Shares or any securities
exercisable for or convertible into our Class A Non-Voting Shares owned by them
for a period of 180 days after the date of this prospectus without the prior
written consent of the representatives of the underwriters of this offering. The
lock-up agreements executed by our directors also cover any Class A Non-Voting
Shares they may acquire through our directed share program. Notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, shares subject to lock-up agreements may not be sold until these
agreements expire or are waived by the representatives of the underwriters of
this offering. Assuming that the representatives of the underwriters of this
offering do not release any security holders from the lock-up agreements, the
following Class A Non-Voting Shares will be eligible for sale in the public
market at the following times:
o Beginning on the effective date of the registration statement of which this
prospectus forms a part, of the Class A Non-Voting Shares sold in this
offering will be immediately available for sale in the public market.
o Beginning 180 days after the effective date, an additional Class A
Non-Voting Shares will be eligible for sale pursuant to Rule 144, Rule
144(k) and Rule 701.
Rule 144
In general, under Rule 144 as currently in effect, after the expiration
of the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o one percent of the number of shares of Class A Non-Voting Shares then
outstanding, which will equal approximately shares immediately after this
offering; and
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o the average weekly trading volume of our Class A Non-Voting Shares during
the four calendar weeks preceding the sale, which we cannot determine at
this time.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, may
sell these shares without complying with the manner of sale, public information,
volume limitation or notice requirements of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144, but without
compliance with some restrictions. Rule 701 provides that affiliates may sell
their Rule 701 shares under Rule 144 ninety days after effectiveness without
complying with the holding period requirement and that non-affiliates may sell
such shares in reliance on Rule 144 ninety days after effectiveness without
complying with the holding period, public information, volume limitation or
notice requirements of Rule 144.
Registration Rights
We have granted various registration rights to some of our
shareholders, which will enable these shareholders to cause us to register their
shares for sale either in connection with the exercise of a demand registration
right or, subject to particular cutbacks by managing underwriters, "piggyback"
registration rights. For a summary of these rights, please refer to the section
of this prospectus entitled "Share Capital Reorganization and Description of
Capital Stock--Registration Rights."
Canadian Resale Restrictions
The Class A Non-Voting Shares outstanding immediately prior to the
offering or issued pursuant to the exercise of options granted prior to the
offering may not be sold or otherwise disposed of for value in Canada, except
pursuant to either a prospectus, a discretionary exemption or a statutory
exemption available only in specific limited circumstances, unless or until,
among other things, we have been a reporting issuer for at least twelve months
and disclosure to applicable Canadian securities regulatory authorities has been
made. We intend to apply to applicable Canadian securities regulatory
authorities to permit sales of such shares without the requirement that we be a
reporting issuer for at least twelve months prior to such sales. We will become
a reporting issuer in each of the provinces of Canada upon the filing of this
prospectus with, and the issuance of a receipt therefor by, such Canadian
securities regulatory authorities. In addition, sales of our shares in Canada by
our control shareholders (generally, persons or companies who alone or in
combination with others hold a sufficient number of securities to affect
materially the control of the issuer) will be restricted.
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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 "Risk Factors--Telecommunications
Regulation--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 competitive local exchange
carrier ("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 four 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 LECs, 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 Federal Communications
Commission ("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 LECs.
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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. A
decision to this effect has been appealed to federal court. A decision on this
appeal reversing or remanding the FCC's conclusion could require that our
services be treated as common carriage. Some 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 some 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 non-dominant common carrier. The FCC imposes
regulations on common carriers such as the Regional Bell Operating Companies
("RBOCs") that have some degree of market power ("dominant carriers"). The FCC
imposes less regulation on common carriers without market power ("non-dominant
carriers"). Under the FCC's rules, we would be a non-dominant 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 incumbent local exchange carriers ("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,
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among other things, the extent to which we are owned or controlled by non-U.S.
entities. However, FCC policy permits 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 non-dominant interstate
interexchange carriers ("IXCs") 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 LECs. 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 particular
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 non-dominant
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 non-dominant IXCs 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 some 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 subscriber's name, telephone number and address, if that information
is published or accepted for publication in any
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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 2000 because we had no
significant end user revenues in 1999. 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 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.
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Competitive Local Exchange Carriers Offerings
It is unclear whether we would be viewed as a LEC with respect to the
provision of some of our services. A LEC 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 LEC 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-local access
and transport area ("LATA") services and for intra-LATA toll services.
LECs are required to implement dialing parity for intra-LATA toll
services during 1999.
Access to ROW. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and ROW at
reasonable and nondiscriminatory rates, terms and conditions.
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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 particular 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
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 some 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
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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, some 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.
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:
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o require the certification of TSPs,
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 have 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 we do 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 challenged. None of our tariffs has
been changed to date. Various state regulators may attempt to regulate our 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.
Canada
Companies that own or operate transmission facilities in Canada that
are 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
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 TSPs
are subject to exclusive CRTC regulatory jurisdiction.
Historically, the Canadian telecommunications industry has been
characterized by a number of regionally based ILECs. These regional companies,
who later evolved into the Stentor alliance of telephone companies, were the
sole facilities-based providers of both local and long distance telephone
services in Canada. Each incumbent telephone company, with the exception of Bell
Canada, effectively operated in a province (with BC
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TEL serving most of British Columbia, TELUS Communications Inc. ("Telus")
serving Alberta, SaskTel serving Saskatchewan, MTS Communications Inc. serving
Manitoba, Bell Canada serving most of Ontario and Quebec, Maritime Tel & Tel
Limited serving Nova Scotia, The New Brunswick Telephone Company, Limited
serving New Brunswick, NewTel Communications Inc. serving Newfoundland and The
Island Telephone Company Limited serving Prince Edward Island).
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 some 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 some private line services offered by the ILECs finding them to no
longer possess significant market power in these market segments.
We offer fiber capacity to our customers on a sale, IRU, swap or lease
basis. As some of these activities bring us within the definition of a TCC, 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 provide qualify under this decision as non-dominant carrier
services. As such, we do not believe that our operations in Canada are 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 should be
converted into a revenue-based regime under which contribution would be paid on
a percentage of a TSP'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 activities in Canada are subject to the
requirement to pay contribution under the current contribution regime, except
with the possible exception of some of our "lit" fiber services. 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.
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Restrictions on Foreign Ownership
Under the Canadian ownership provisions of the Telecommunications Act,
a "telecommunications common carrier" is not eligible to operate in Canada
unless it is owned and controlled by Canadians. Furthermore, no more than 20% of
the members of the board of directors of a telecommunications common carrier may
be non-Canadian and no more than 20% of the voting shares of a
telecommunications common 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 of a telecommunications common carrier may be beneficially owned or
controlled by non-Canadians and neither the telecommunications common carrier
nor its parent may be otherwise controlled in fact by non-Canadians.
As we make available the retained fiber in our network in Canada on an
IRU or lease basis, the operating company is subject to the Canadian ownership
provisions of the Telecommunications Act and Worldwide Fiber Inc. is subject to
the non-operating parent corporation provisions. 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 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 TCC. As a result, acquirers 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 TSPs 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, TSPs 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.
On September 18, 1998, the Stentor alliance announced that, while it
will continue to coordinate national network management for the regionally based
ILECs, it will cease other joint initiatives in national product development,
marketing and other areas. We believe that the restructuring of the Stentor
alliance, the launch by Bell Canada of its national telecommunications company,
the merger of BC TELECOM Inc. and TELUS to create BCT.Telus and the merger of
ILECs in Atlantic Canada to create Aliant will create increased opportunities
for us in the Canadian carrier market as the ILECs expand beyond their
traditional serving territories.
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CRTC Proceedings
On March 19, 1999, we filed an application with the CRTC 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 took the
position that we were not eligible to apply to the CRTC for relief under the
Telecommunications Act. On the same day, the City filed an application with the
CRTC requesting orders which would permit some of the carriers that have
obtained IRUs from us to continue to construct, operate and maintain those
facilities on a zero rate, interim basis, until the CRTC 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 CRTC granted the City's request for an interim order
directing each of the carriers that obtained IRUs 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 CRTC 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 CRTC 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 CRTC 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 the CRTC could have a material adverse effect on our
business, financial condition and results of operations.
European Union
Regulations of telecommunications in the European Union (Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
The Netherlands, Portugal, Spain, Sweden and the United Kingdom) is subject to
the requirements of European Union Law. Apart from general antitrust rules, the
relevant European Union law mainly consists of directives adopted by the
European Council and the European Commission (pursuant to the Treaty of Rome),
which are addressed to, and are binding on, the member states of the European
Union, and which require implementation in the national laws of those states.
These directives are intended to establish harmonized core regulatory
requirements across the European Union. They do not, however, cover every aspect
of telecommunications regulation. In addition, in some cases they give a choice
of different options to the member countries, or are limited to giving general
principles, the detailed implementation of which must be established by the
relevant national legislation.
European Union law requires that many of the rules concerning
licensing, interconnection, retail service and technical issues should have
substantially the same effect in all member countries. However, due to the
permitted discretion as to how EU rules are given effect within national
boundaries, and/or due to ambiguity in the EU rules giving rise to different
interpretations and/or due to failure by member states to properly implement
such rules by the required deadline or correctly, there are often important
differences in the applicable rules between member states. Private parties may,
in reliance on European Union Directives, be able to bring actions in their
national courts against national laws or regulations which fail to properly
implement EU Directives but legal proceedings are costly and take a long time.
The European Commission may bring actions in the European Court of Justice
against the member states for failure to implement EU legislation properly, but
such action may also take a long time, and the European Commission does not
always take such action or only takes such action after a considerable delay. In
consequence, for practical purposes, there may be significant differences
between the rules applying in different member states, even where European Law
is intended to introduce rules which are similar in effect.
A Commission Directive known as the Full Competition Directive required
all member states except those with express derogations (Greece, Ireland,
Luxembourg, Portugal and Spain) to permit competition in all telecommunications
services by removing restrictions on the provision of telecommunications
services and telecommunications infrastructure by 1 January 1998.
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A directive known as the Licensing Directive establishes a framework
for the granting of national authorizations and licenses "for the purpose of
providing telecommunications services, including authorizations for the
establishment and/or operation of telecommunications networks required for the
provision of such services." We are advised that there is substantial support
for the view that this directive, and/or other directives only enable member
states to require telecommunications licenses, authorizations, or other forms of
permission, to the extent that a telecommunications service is being provided
and that absent such service, as in the case of the mere construction or control
of or provision of unlit optical fiber cables, no telecommunications license,
authorization or other permission can be required under European Union law.
However we are also advised not all member states may interpret the requirements
of European Union law in this manner, and that for practical purposes it is
therefore necessary to analyze national law and regulation in each case. When we
are operating or in control of fiber which is functioning or "lit" we are
advised that we may on the other hand, in any particular member state, be
required, to apply for an individual license if we are deemed to be providing a
public telecommunications network or publicly available voice telephony
services, or that we may benefit from applying for such a license to gain the
rights to numbers and to gain access to ROW in respect of land. Alternatively,
in some countries, we may simply be required to comply with a notification or
registration procedures.
A directive known as the Interconnection Directive requires that in any
member state where we eventually offer leased lines to user premises, or control
access to network termination points identified by numbers in the national
numbering plan, we will have the right to negotiate interconnection with any
other operators and the obligation to negotiate such interconnection when so
requested. In addition, to the extent that we offer "bearer capabilities,"
individual member states may give us the right (and, if so, the obligation) to
negotiate interconnection with other operators.
The Interconnection Directive also requires that to the extent that we
are included by any member state in the class of operators with a right and
obligation to interconnect as just described, then fixed network operators
deemed by the member state regulator, to have "significant market power" (as
defined in that directive) must offer us interconnection on standard, cost
oriented, non-discriminatory and transparent terms. However, to the extent that
we are not granted any interconnection rights in any member state, we will not
be entitled to cost-oriented charges from such an operator, and may be required
to pay tariffs which are significantly higher in most member states.
The European Commission has recommended that cost-oriented
interconnection charges which some fixed network operators with significant
market power are required to apply, should be based on long run incremental
costs, which is similar to TELRIC, the cost model used by the FCC in the US.
However, in the absence of appropriate accounts or models of such rates, the
Commission has published benchmark interconnection rates, above which national
regulators should seek justification from the relevant fixed network operator.
Each European Union member state in which we currently conduct our
business has a different regulatory regime and such differences are expected to
continue. In addition, in connection with the Telia agreement we will be
operating a segment of our European network in Norway, which is not a member of
the European Union and therefore not subject to the various rules and
regulations governing European Union member states. Norway does however have its
own regulatory regime to which our operations will be subject.
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DESCRIPTION OF INDEBTEDNESS
1999 Notes
General. The 1999 Notes are senior obligations of ours, limited to $500
million in principal amount, and mature on August 1, 2009. The 1999 Notes, which
were issued pursuant to the 1999 Indenture, accrue interest at a rate of 12% per
annum. Interest is payable each August 1 and February 1, commencing on February
1, 2000.
Ranking. The 1999 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 1998 Notes (see below).
Optional Redemption. The 1999 Notes are not redeemable prior to August
1, 2004. Thereafter, the 1999 Notes will be redeemable, in whole or in part, at
our option, at the redemption prices set forth in the 1999 Indenture, plus
accrued and unpaid interest to the applicable redemption date. Specifically, if
redeemed during the 12-month period beginning on August 1 of the years set forth
below, the redemption price will be that amount, expressed as a percentage of
the principal amount of the 1999 Notes, listed below:
Year Redemption Price
- ---- ----------------
2004........................................ 106.000%
2005........................................ 104.000%
2006........................................ 102.000%
2007........................................ 100.000%
In addition, (1) prior to August 1, 2002, we may redeem up to 35% of
the sum of a) the originally issued principal amount of the 1999 Notes and b)
any subsequent notes issued under the 1999 Indenture, at 112% 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 sum of a) the originally issued principal amount of the
1999 Notes and b) any subsequent notes issued under the 1999 Indenture, remains
outstanding after the occurrence of the redemption and (2) we may redeem the
1999 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 1999 Notes will have the right to require us to repurchase all or any
part of that holder's 1999 Notes at a purchase price in cash equal to 101% of
their principal amount, plus accrued and unpaid interest to the date of
purchase.
Covenants. The 1999 Indenture contains certain covenants that, among other
things, limit our ability and the ability of our restricted 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.
Events of Default. The 1999 Indenture contains customary events of
default, including:
o defaults in the payment of principal, premium or interest;
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o defaults in the compliance with covenants contained in the 1999 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 Inc. or certain of its subsidiaries.
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.
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Covenants. The 1998 indenture contains certain covenants that, among other
things, limit our ability and the ability of our restricted 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.
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 Inc. 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 with additional senior secured revolving purchase
money facilities of $35 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.
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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
L.P., DLJ Capital Funding, Inc. and Credit Suisse First Boston, to arrange,
subject to some standard conditions, including completion of definitive
documentation, up to $565 million in senior secured credit facilities consisting
of two term loan facilities aggregating $540 million and a $25 million working
capital revolving credit facility.
The indebtedness outstanding under the proposed credit facility would
be borrowed by a group 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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MATERIAL UNITED STATES AND CANADIAN INCOME TAX CONSIDERATIONS
In this section we summarize the material U.S. federal and Canadian
federal income tax consequences of the ownership and disposition of Class A
Non-Voting Shares beneficially owned by individuals and corporations which:
o for purposes of the U.S. Internal Revenue Code of 1986 (the "Code"), are
U.S. persons and, for purposes of the Income Tax Act (Canada) (the "Income
Tax Act") and the Canada-United States Income Tax Convention, are residents
of the United States and not resident in Canada;
o hold Class A Non-Voting Shares as capital assets for purposes of the Code
and capital property for purposes of the Income Tax Act;
o deal at arm's length with us for purposes of the Income Tax Act; and
o do not and will not use or hold the Class A Non-Voting Shares in carrying
on a business in Canada.
We will refer to persons who satisfy the above conditions as "Unconnected U.S.
Shareholders."
The tax consequences of an investment in Class A Non-Voting Shares by
persons who are not Unconnected U.S. Shareholders may differ materially from the
tax consequences discussed in this section. The Income Tax Act contains rules
relating to securities held by some financial institutions. We do not discuss
these rules and holders that are financial institutions should consult their own
tax advisors.
This discussion is based upon the following, all as currently in
effect:
o the Income Tax Act and regulations under the Income Tax Act;
o the Code and Treasury regulations under the Code;
o the Canada-United States Income Tax Convention (1980);
o the administrative policies and practices published by the Canadian Customs
and Revenue Agency, formerly Revenue Canada;
o all specific proposals to amend the Income Tax Act and the regulations
under the Income Tax Act that have been publicly announced by or on behalf
of the Minister of Finance (Canada) prior to the date of this registration
statement;
o the administrative policies published by the U.S. Internal Revenue Service;
and
o judicial decisions.
All of the foregoing are subject to change either prospectively or
retroactively. We do not take into account the tax laws of the various provinces
or territories of Canada or the tax laws of the various state and local
jurisdictions of the United States or foreign jurisdictions.
This discussion summarizes the material U.S. federal and Canadian
federal income tax considerations of the ownership and disposition of Class A
Non-Voting Shares. This discussion does not address all possible tax
consequences relating to an investment in Class A Non-Voting Shares. We have not
taken into account your particular circumstances and do not address consequences
peculiar to you if you are subject to special provisions of U.S. or Canadian
income tax law (including, without limitation, dealers in
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securities or foreign currency, tax-exempt entities, banks, insurance companies
or other financial institutions, persons that hold Class A Non-Voting Shares as
part of a "straddle," "hedge" or "conversion transaction," and unconnected U.S.
Shareholders that have a "functional currency" other than the U.S. dollar or
that own Class A Non-Voting Shares through a partnership or other pass-through
entity). Therefore, you should consult your own tax advisor regarding the tax
consequences of purchasing Class A Non-Voting Shares in this offering.
U.S. Federal Income Tax Considerations
As an Unconnected U.S. Shareholder, you generally will be required to
include in income dividend distributions paid by us to the extent of our current
or accumulated earnings and profits as computed based on U.S. income tax
principles. The amount of any cash distribution paid in Canadian dollars will be
equal to the U.S. dollar value of the Canadian dollars on the date of receipt
based on the exchange rate on such date, regardless of whether the payment is in
fact converted to U.S. dollars and without reduction for Canadian withholding
tax. (For a discussion of Canadian withholding taxes applicable to dividends
paid by us, see "Certain Canadian Federal Income Tax Considerations.") You will
generally be entitled to a foreign tax credit or deduction in an amount equal to
the Canadian tax withheld. To the extent distributions paid by us on the Class A
Non-Voting Shares exceed our current or accumulated earnings and profits, they
will be treated first as a return of capital up to your adjusted tax basis in
the shares and then as capital gain from the sale or exchange of the shares.
Dividends paid by us generally will constitute foreign source dividend
income and "passive income" for purposes of the foreign tax credit, which could
reduce the amount of foreign tax credits available to you. The Code applies
various limitations on the amount of foreign tax credits that may be available
to a U.S. taxpayer. Because of the complexity of those limitations, you should
consult your own tax advisor with respect to the availability of foreign tax
credits.
Dividends paid by us on the Class A Non-Voting Shares generally will
not be eligible for the "dividends received" deduction.
If you sell the Class A Non-Voting Shares, you generally will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale and your adjusted tax basis in the shares. Any such gain or loss will
be long-term or short-term capital gain or loss, depending on whether the shares
have been held by you for more than one year, and will generally be U.S. source
gain or loss.
Dividends paid by us on the Class A Non-Voting Shares generally will
not be subject to U.S. information reporting or the 31% backup withholding tax
unless they are paid in the United States through a U.S. or U.S.-related paying
agent, including a broker. If you furnish the paying agent with a duly completed
and signed Form W-9, such dividends will not be subject to the backup
withholding tax. You will be allowed a refund or a credit equal to any amount
withheld under the U.S. backup withholding tax rules against your U.S. federal
income tax liability, provided you furnish the required information to the
Internal Revenue Service.
Foreign Personal Holding Company Rules
Special U.S. tax rules apply to a shareholder of a foreign personal
holding company ("FPHC"). We would be classified as a FPHC in any taxable year
if both of the following tests are satisfied:
o five or fewer individuals who are U.S. citizens or residents own or are
deemed to own more than 50% of the total voting power of all classes of our
stock entitled to vote or the total value of our stock; and
o at least 60% of our gross income consists of "foreign personal holding
company income," which generally includes passive income such as dividends,
interest, gains from the sale or exchange of stock or securities, rents and
royalties.
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We believe that we are not a FPHC, and we do not expect to become a
FPHC as a result of the offering. However, we can not assure you that we will
not qualify as a FPHC in the future.
Passive Foreign Investment Company Rules
The passive foreign investment company ("PFIC") provisions of the Code
can have significant tax effects on Unconnected U.S. Shareholders. We could be
classified as a PFIC if, after the application of certain "look through" rules,
for any taxable year, either:
o 75% or more of our gross income is "passive income," which includes
interest, dividends and certain rents and royalties; or
o the average quarterly percentage, by fair market value of our assets that
produce or are held for the production of "passive income" is 50% or more
of the fair market value of all our assets.
To the extent we own at least 25% by value of the stock of another
corporation, we are treated for purposes of the PFIC tests as owning our
proportionate share of the assets of such corporation, and as receiving directly
our proportionate share of the income of such corporation.
Distributions which constitute "excess distributions" from a PFIC and
dispositions of Class A Non-Voting Shares of a PFIC are subject to the following
special rules: (1) the excess distributions (generally any distributions
received by an Unconnected U.S. Shareholder on the shares in any taxable year
that are greater than 125% of the average annual distributions received by such
Unconnected U.S. Shareholder in the three preceding taxable years, or the
Unconnected U.S. Shareholder's holding period for the shares, if shorter) or
gain would be allocated ratably over an Unconnected U.S. shareholder's holding
period for the shares, (2) the amount allocated to the current taxable year and
any taxable year prior to the first taxable year in which we are a PFIC would be
treated as ordinary income in the current taxable year, and (3) the amount
allocated to each of the other taxable years would be subject to the highest
rate of tax on ordinary income in effect for that year and to an interest charge
based on the value of the tax deferred during the period during which the shares
are owned.
Subject to specific limitations, Unconnected U.S. Shareholders who
actually or constructively own marketable shares in a PFIC may make an election
under section 1296 of the Code to mark those shares to market annually, rather
than being subject to the above-described rules. Amounts included in or deducted
from income under this mark-to-market election and actual gains and losses
realized upon disposition, subject to specific limitations, will be treated as
ordinary gains or losses. For this purpose, we believe that our shares will be
treated as "marketable securities" within the meaning of Section 1296(e)(1) of
the Code.
We believe that we will not be a PFIC for the current fiscal year and
we do not expect to become a PFIC in future years. Whether we are a PFIC in any
year and the tax consequences relating to PFIC status will depend on the
composition of our income and assets, including cash. You should be aware,
however, that if we are or become a PFIC we may not be able or willing to
satisfy record-keeping requirements that would enable you to make a "qualified
electing fund" election. You should consult your tax advisor with respect to how
the PFIC rules affect your tax situation.
Controlled Foreign Corporation Rules
If more than 50% of the voting power or total value of all classes of
our shares is owned, directly or indirectly, by U.S. shareholders, each of which
owns 10% or more of the total combined voting power of all classes of our
shares, we could be treated as a controlled foreign corporation ("CFC") under
Subpart F of the Code. This classification would require such 10% or greater
shareholders to include in income their pro rata shares of our "Subpart F
Income," as defined in the Code. In addition, under Section 1248 of the Code,
gain from the sale or exchange of shares by an Unconnected U.S. Shareholder who
is or was a 10% or greater shareholder at any time during the five year period
ending with the sale or exchange will be ordinary dividend income to the extent
of our earnings and profits attributable to the shares sold or exchanged.
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<PAGE>
We believe that we are not a CFC and we will not become a CFC as a
result of the offering. However, we can not assure you that we will not become a
CFC in the future.
Certain Canadian Federal Income Tax Considerations
In this section, we summarize the material anticipated Canadian federal
income tax considerations relevant to your purchase of Class A Non-Voting
Shares.
Under the Income Tax Act, assuming you are an Unconnected U.S.
Shareholder, and provided the Class A Non-Voting Shares are listed on a
prescribed stock exchange, which includes the TSE and Nasdaq, you will generally
be exempt from Canadian tax on a capital gain realized on an actual or deemed
disposition of the Class A Non-Voting Shares unless you alone or together with
persons with whom you did not deal at arm's length owned or had rights to
acquire 25% or more of our issued shares of any class at any time during the
five year period before the actual or deemed disposition.
Dividends paid, credited or deemed to have been paid or credited on
the Class A Non-Voting Shares to Unconnected U.S. Shareholders will be subject
to a Canadian withholding tax at a rate of 25% under the Income Tax Act. Under
the Canada-United States Income Tax Convention, the rate of withholding tax on
dividends generally applicable to Unconnected U.S. Shareholders who beneficially
own the dividends is reduced to 15%. In the case of Unconnected U.S.
Shareholders that are corporations that beneficially own at least 10% of our
voting shares, the rate of withholding tax on dividends is reduced to 5%, and
for those who do own at least 10% of our voting shares, the rate of withholding
tax is reduced to 15%.
Canada does not currently impose any estate taxes or succession duties.
However, if you die, there is generally a deemed disposition of the Class A
Non-Voting Shares held at that time for proceeds of disposition equal to the
fair market value of the Class A Non-Voting Shares immediately before the death.
Capital gains realized on the deemed disposition, if any, will have the income
tax consequences described above.
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<PAGE>
UNDERWRITING
We, the selling shareholders and the underwriters for the offering (the
"Underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette
Securities Corporation, Credit Suisse First Boston Corporation, TD Securities
Inc., Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, Nesbitt Burns
Inc., Hambrecht & Quist LLC, RBC Dominion Securities Inc. and Warburg Dillon
Read LLC are the representatives of the Underwriters.
Underwriters Number of Shares
- ------------ ----------------
Goldman, Sachs & Co. .................................
Donaldson, Lufkin & Jenrette Securities Corporation ..
Credit Suisse First Boston Corporation ...............
TD Securities Inc. ...................................
Bear, Stearns & Co. Inc. .............................
Morgan Stanley & Co. Incorporated ....................
Nesbitt Burns Inc. ...................................
Hambrecht & Quist LLC ................................
RBC Dominion Securities Inc. .........................
Warburg Dillon Read LLC ..............................
Total....................................... ===============
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, TD Securities Inc., Bear, Stearns & Co.,
Inc., Morgan Stanley & Co. Incorporated, Nesbitt Burns Inc., Hambrecht & Quist
LLC, RBC Dominion Securities Inc. and Warburg Dillon Read LLC will, either
directly or through their U.S. broker-dealer affiliates, offer the Class A
Non-Voting Shares in the U.S. Goldman, Sachs & Co. (through its Canadian dealer
affiliate, Goldman Sachs Canada Inc.), Credit Suisse First Boston Corporation
(through its Canadian dealer affiliate, Credit Suisse First Boston Securities
Canada Inc.), TD Securities Inc., Morgan Stanley & Co. Incorporated (through its
Canadian dealer affiliate, Morgan Stanley Canada Limited), Nesbitt Burns Inc.,
RBC Dominion Securities Inc. and Warburg Dillon Read LLC (through its Canadian
dealer affiliate, Bunting Warburg Dillon Read Inc.) will offer the Class A
Non-Voting Shares for sale in Canada. In addition, the Underwriters, through
their international affiliates, will offer the Class A Non-Voting Shares for
sale outside of the United States and Canada. The public offering price and
underwriting commission per Class A Non-Voting Share for shares offered in the
United States, Canada and outside of the United States and Canada will be
approximately equivalent, based on the noon buying rate in effect on the date
hereof.
If the Underwriters sell more shares than the total number set forth in
the table above, the Underwriters have an option to buy up to an additional
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the Underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the Underwriters by us. Such amounts are
shown assuming both no exercise and full exercise of the Underwriters' option to
purchase additional shares.
Paid by Worldwide Fiber Inc.
No Exercise Full Exercise
Per share..................... $ $
Total................ $ $
The following table shows the per share and total underwriting
discounts and commissions to be paid to the Underwriters by the selling
shareholders.
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<PAGE>
Paid by selling shareholders
Per share........................................................ $
Total................................................... $
Shares sold by the Underwriters to the public will initially be offered
at the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to the public. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price to
public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
The underwriting agreement provides that the obligations of the
Underwriters to purchase the Class A Non-Voting Shares listed above are subject
to certain conditions set forth therein. The Underwriters are committed to
purchase all of the Class A Non-Voting Shares offered by this prospectus (other
than those covered by the Underwriters' over-allotment option described below),
if any are purchased. In the event of default by any Underwriter, the
underwriting agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting Underwriters may be increased or the
underwriting agreement may be terminated. The obligations of the Underwriters
under the underwriting agreement are several and may be terminated in their
discretion on the basis of their assessment of the state of the financial
markets and upon the occurrence of certain stated events.
We, our officers, directors and substantially all of our shareholders
have agreed with the Underwriters not to dispose of or hedge any of their Class
A Non-Voting Shares or securities convertible into or exchangeable for shares of
Class A Non-Voting Shares during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This agreement does not
apply to any existing employee benefit plans. See "Shares Eligible for Future
Sale" for a discussion of certain transfer restrictions.
In connection with the offering, in the U.S. the Underwriters may
purchase Class A Non-Voting Shares in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
Non-Voting Shares while the offering is in progress.
In addition, in the U.S. the Underwriters also may impose a penalty
bid. This occurs when a particular Underwriter repays to the Underwriters a
portion of the underwriting discount received by it because the representatives
have repurchased shares sold by or for the account of such Underwriter in
stabilizing or short covering transactions. These activities by the Underwriters
may stabilize, maintain or otherwise affect the market price of the Class A
Non-Voting Shares. As a result, the price of the Class A Non-Voting Shares may
be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the Underwriters at any
time. These transactions may be effected on the Nasdaq National Market
("Nasdaq"), in the over-the-counter market or otherwise.
Pursuant to policy statements issued by the Ontario Securities
Commission and the Commission des valeurs mobilieres du Quebec, the Underwriters
may not, throughout the period of distribution, bid for or purchase Class A
Non-Voting Shares. The foregoing restriction is subject to certain exceptions,
on the condition that the bid or purchase not be engaged in for the purpose of
creating actual or apparent active trading in or raising the price of the Class
A Non-Voting Shares. Those exceptions include a bid or purchase permitted under
the by-laws and rules of The Toronto Stock Exchange relating to market
stabilization and passive market making activities and a bid or purchase made
for or on behalf of a customer where the order was not solicited during the
period of distribution. Subject to the foregoing, in connection with this
offering and pursuant to the first-mentioned exception, the Underwriters may
over-allot or effect transactions which stabilize or maintain the mar-
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<PAGE>
ket price of the Class A Non-Voting Shares at levels other than those which
might otherwise prevail on the open market. Such transactions, if commenced, may
be discontinued at any time.
Application will be made to approve the Class A Non-Voting Shares for
quotation on the Nasdaq under the symbol " " and for listing on The Toronto
Stock Exchange under the symbol " ".
Prior to the offering, there has been no public market for the Class A
Non-Voting Shares. Consequently, the initial public offering price has been
determined through negotiations among us and Goldman, Sachs & Co. and Donaldson,
Lufkin & Jenrette Securities Corporation on behalf of the Underwriters. Among
the factors considered in making such determination were the prevailing market
conditions, our financial condition, our prospects and the prospects for our
industry in general, our management and the market prices of securities for
companies in businesses similar to ours.
We estimate that our share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $ and $
, respectively.
We and the selling shareholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
At the request of Worldwide Fiber Inc., the Underwriters have reserved,
at the initial public offering price, up to Class A Non-Voting Shares for sale
to our directors, employees and certain other persons.
The number of shares available for sale to the general public will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as other shares offered hereby.
On September 9, 1999, affiliates of each of Goldman, Sachs & Co. and
Donaldson, Lufkin & Jenrette Securities Corporation invested in a private
placement of our redeemable convertible preferred shares. These shares
automatically convert into Class A Non-Voting Shares concurrently with the
closing of this offering. In addition, under a shareholders agreement entered
into in connection with the share purchase, each such affiliate received the
right to designate a member to our board of directors. For more information,
please refer to the section entitled "Management."
In addition, in connection with our $565 million Hibernia credit
facility, affiliates of each of Goldman, Sachs & Co., Donaldson, Lufkin &
Jenrette Securities Corporation and Credit Suisse First Boston Corporation are
acting as lead arrangers and affiliates of each of TD Securities Inc. and
Nesbitt Burns Inc. are acting as managing agents, for which they expect to
receive customary fees and expense reimbursements.
An affiliate of Morgan Stanley & Co. Incorporated is currently
providing financial valuation services to one of our subsidiaries.
In addition to the foregoing, from time to time the Underwriters or
their affiliates may in the future engage in investment banking services with
us, for which they will receive customary compensation.
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<PAGE>
LEGAL MATTERS
The validity of the Class A Non-Voting Shares offered in this
prospectus and certain legal matters concerning the Class A Non-Voting Shares in
connection with the offerings will be passed upon for us 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).
Certain legal matters concerning the Class A Non-Voting Shares in
connection with the offering will be passed upon for the Underwriters by Latham
& Watkins, New York, New York (concerning matters of U.S. law) and Osler, Hoskin
& Harcourt LLP, Toronto, Ontario (concerning matters of Canadian law).
EXPERTS
We have included in this prospectus our audited consolidated financial
statements as of December 31, 1998 and for the period then ended along with
PricewaterhouseCoopers LLP's auditors' report on these financial statements.
PricewaterhouseCoopers LLP, chartered accountants, Vancouver, British Columbia,
issued the report as experts in auditing and accounting.
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.
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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form F-1 under the Securities Act, and the rules and
regulations promulgated thereunder, concerning the Class A Non-Voting Shares
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. Any statement in
this prospectus about any of our contracts or other documents is not necessarily
complete. If the contract or document is filed as an exhibit to the registration
statement, the contract or document is deemed to modify the description
contained in this prospectus. You must review the exhibits themselves for a
complete description of the contract or document.
You may review a copy of the registration statement, including exhibits
and schedules filed with it, at the Commission's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such materials from the Public Reference Section of the Commis-
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<PAGE>
sion, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.,
20549, at prescribed rates. You may call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
You may read and copy any reports, statements or other information that
we file with the Commission at the addresses indicated above, and you may also
access them electronically at the web site set forth above. These Commission
filings are also available to the public from commercial document retrieval
services.
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.
Following consummation of the offering, we will be required to file
reports and other information with the securities commission in all provinces of
Canada. You are invited to read and copy any reports, statements or other
information, other than confidential filings, that we file with the provincial
securities commissions at their public reference rooms. These filings are also
electronically available from the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent
of the Commission's electronic document gathering and retrieval system.
Copies of any documents referred to in this prospectus and filed with
the Commission can be obtained without charge to any holders of notes by
contacting Stephen Stow c/o Worldwide Fiber Inc., 1500-1066 West Hastings
Street, Vancouver, BC Canada V6E 3X1. Telephone number: (604) 681-1994. In order
to obtain timely delivery of these documents you must request this information
no later than five business days before the date on which they would like to
receive their documents.
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<PAGE>
Worldwide Fiber Inc.
Index to Pro Forma Financial Information
(Unaudited)
<TABLE>
Page
----
<S> <C>
Pro Forma Consolidated Balance Sheet as at September 30, 1999............................ PF-2
Pro Forma Consolidated Income Statements:
o For the nine month period ended September 30, 1999..................................... PF-3
o For the year ended December 31, 1998................................................... PF-4
Notes to Pro Forma Financial Information................................................. PF-5
</TABLE>
PF-1
<PAGE>
Worldwide Fiber Inc.
Pro Forma Consolidated Balance Sheet
(Unaudited)
September 30, 1999
(tabular amounts expressed in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Pro forma
Worldwide Pro forma Consolidated
Fiber Inc. Adjustments Balance Sheet
$ $ $
---------------- ---------------- -----------------
<S> <C> <C> <C>
Assets
Current Assets
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............................................ 127,282 -- 127,282
------- -------
974,160 -- 974,160
Fixed Assets......................................... 107,264 -- 107,264
Deposits on long-term construction contract.......... 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............. 117,779 -- 117,779
Deferred Revenue..................................... 25,000 -- 25,000
Income taxes payable................................. 15,262 -- 15,262
---------------- ---------------- -----------------
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................................. 30,806 4(i)-- 130,806
4(ii)100,000
4(iii)--
---------------- ---------------- -----------------
1,216,194 97,500 1,313,694
================ ================ =================
</TABLE>
PF-2
<PAGE>
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
except per share amounts)
<TABLE>
<CAPTION>
Pro forma
Worldwide Pro forma Consolidated
Fiber Inc. Adjustments Income 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 3,571
5(ii)(17,260)
------- -------- -------
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)
======= ======== =======
Basic and fully diluted loss per share........... $(0.11)
Weighted average number of shares used to compute
basic and fully diluted loss per share:..........
140,973,458
</TABLE>
PF-3
<PAGE>
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
except per share amounts)
<TABLE>
<CAPTION>
Ledor Industries
Worldwide Limited
Fiber Inc. Tele-communications Pro forma
(June 1 to Division Worldwide Fiber Consolidated
December 31, (January 1 to (USA), Inc. Pro forma Income
1998) May 31, 1998) $ Subtotal Adjustments Statement
$ $ $ $ $
--------------- ------------------- --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... 164,319 20,537 21,071 205,927 5(vi) 1,111 207,038
Costs...................... 147,621 11,398 16,533 175,552 5(vi) 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 5(vii) 394 8,140
5(iii) 2,500
Depreciation............... 464 175 -- 639 -- 639
Amortization of goodwill... _ -- -- -- -- 5(iv) 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 5(v) (72) 85,600
5(i) 85,108
Interest income............ 267 -- 53 320 5(v) (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 5(v) (928) --
-------- -------- -------- -------- -------- ---------
Income (loss) before income 14,663 7,675 2,836 25,174 (99,660) (74,486)
taxes and minority
interest...............
Provision for (recovery of) 5(iii) 1,900
income taxes........... 5,643 3,323 980 9,946 5(ii) (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...... -- -- -- -- 5(v) 464 464
------- ------- ------- ------- -------- --------
Net income (loss) for the
year................... 9,020 4,352 1,856 15,228 (63,468) (48,240)
======= ======= ======= ======= ======== ========
Basic and fully diluted loss $(3.90)
per share..............
Weighted average number of
shares used to compute
basic and fully diluted 12,360,578
loss per share.........
</TABLE>
PF-4
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(unaudited)
As of and 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. Nature and Purpose of Pro-Forma Financial Information
The 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 receipt of a promissory note from 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; (ii) the
Company's acquisition of CN's Shares in WFI-CN Fibre 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; and (iii) the issuance of
$1,000,000 worth of Class A Non-Voting Shares as consideration for consulting
services.
The 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 $500,000,000 12%
senior notes issued July 28, 1999 (the "Notes"), and (ii) the amortization of
goodwill arising from the CN/IC minority interest acquisition.
The 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"), as a result of the Company's agreement to increase its
interest in WFI USA from 50% to 75% on December 31, 1998 in exchange for the
conversion of a note amounting to $3,915,000, (iii) the effect of the interest
expense, including amortization of deferred financing costs, relating to the
Notes and the $175,000,000 12 1/2% senior notes issued December 23, 1998 (the
"1998 Notes"), and (iv) the amortization of goodwill arising from the CN/IC
minority interest acquisition.
2. Basis of presentation
The unaudited pro forma consolidated 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 and 5.
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, 1998 adopted by the Company. The pro forma consolidated income
statement for the year ended December 31, 1998 is based on the historical
PF-5
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(unaudited)
As of and 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)
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.
4. Pro forma consolidated balance sheet assumptions and adjustments as at
September 30, 1999
(i) Issuance of Shares
This adjustment records the receipt of a promissory note from an
executive officer of the Company. This adjustment also records the issuance at
the estimated fair market value, on the date of issuance, of 26,080,000 Class A
Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares to the executive
officer. The excess of the estimated fair value over the consideration received
from this executive officer is recorded as unearned compensation and included in
shareholders' equity. The unearned compensation will be amortized to earnings
over the vesting period. Accordingly, the issuance of shares will result in
compensation expense in future periods. No adjustment for compensation expense
has been recorded for these pro forma financial statements as the services to be
provided will only be received in the future and have no effect 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 Fibre 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
carrying value of net assets has been allocated to goodwill. Goodwill will be
amortized over 20 years which is the estimated useful life of the fiber optic
network assets being constructed on the CN/IC routes.
PF-6
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(unaudited)
As of and 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) Issuance of Shares for Consulting Services
This adjustment records the issuance of $1,000,000 worth of Class A
Non-Voting Shares as consideration for consulting services.
5. Pro Forma Consolidated Income Statement assumptions and adjustments
for the nine month period ended September 30, 1999 and year ended
December 31, 1998
(i) Interest expense
This adjustment records the interest expense, including amortization of
deferred financing costs of $36,800,000 for the nine month period ended
September 30, 1999 ("1999") and $85,108,000 for the year ended December 31, 1998
("1998"), 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 method. The Company
would have capitalized a portion of interest expense related to the Notes and
the 1998 Notes to the cost of the fiber optic network assets constructed for
1999 and 1998, which is not reflected in these pro forma statements.
(ii) Income taxes
This adjustment records income tax expense of $3,571,000 for 1999 and
income tax recovery of $27,593,000 for 1998 using an effective tax rate of
41.1%. 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.
(iii) Capital taxes
This adjustment records estimated additional BC Corporation Capital
taxes of $875,000 for 1999 and $2,500,000 for 1998 and Federal Large Corporation
taxes of $656,000 for 1999 and $1,900,000 for 1998 resulting from the issuance
of the Notes and 1998 Notes.
(iv) Amortization of Goodwill
This adjustment records amortization of goodwill of $3,656,000 for 1999
and $4,875,000 for 1998 arising from the acquisition of the CN/IC minority
interest. This adjustment also eliminates income attributable to minority
interest of $2,500,000 in 1999 as a result of the acquisition of the CN/IC
minority interest.
(v) Acquisition of additional interest in WFI USA
It has been assumed that the Company's acquisition on December 31, 1998
of the additional 25% interest in WFI USA occurred on February 11, 1998, the
date WFI USA commenced operations.
PF-7
<PAGE>
Worldwide Fiber Inc.
Notes to Pro Forma Financial Information
(unaudited)
As of and 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)
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.
Adjustments (vi) and (vii) described below have been made for 1998 to
reflect the retention of various contracts by Ledcor and the provision of
general and administrative services to the Company from Ledcor.
(vi) 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.
(vii) 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.
(viii) Loss per share
The weighted average number of shares used to compute pro forma loss
per share for the year ended December 31, 1998 has been adjusted by 1,878,489
shares assuming the shares issued by the Company at inception and on transfer of
the telecommunications division assets at May 31, 1998 occured on January 1,
1998.
PF-8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
WORLDWIDE FIBER INC. UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998 AND AUDITED FINANCIAL STATEMENTS FOR THE PERIOD
ENDED DECEMBER 31, 1998
Auditors' Report................................................................................. F-2
Consolidated Balance Sheets...................................................................... F-3
Consolidated Income Statements................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity....................................... F-6
Consolidated Statements of Cash Flows............................................................ F-7
Notes to Consolidated Financial Statements....................................................... F-8
WORLDWIDE FIBER (USA), INC. AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
DECEMBER 31, 1998
Report of Independent Accountants................................................................ F-30
Consolidated Income Statement.................................................................... F-31
Consolidated Statement of Changes in Shareholders' Equity........................................ F-32
Consolidated Statement of Cash Flows............................................................. F-33
Notes to Consolidated Financial Statements....................................................... F-34
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Auditors' Report................................................................................. F-40
Divisional Balance Sheets........................................................................ F-41
Divisional Statements of Operations and Retained Earnings........................................ F-42
Divisional Statements of Cash Flows.............................................................. F-43
Notes to the Divisional Financial Statements..................................................... F-44
</TABLE>
F-1
<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. 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 27, 2000.
F-2
<PAGE>
Worldwide Fiber Inc.
Consolidated Balance Sheets
(tabular amounts expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Assets September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets (unaudited)
Cash and cash equivalents......................................... $675,175 $156,366
Short term investments............................................ 68,616 --
Accounts receivable (note 4)...................................... 19,114 3,272
Unbilled revenue (note 4)......................................... 83,973 10,582
Inventory (note 4)................................................ 127,282 29,230
Due from parent-net (note 6)...................................... -- 13,412
---------- ---------
974,160 212,862
Fixed assets (note 4)............................................. 107,264 15,475
Deposits on long-term construction contract 100,187 --
(note 13)....................................................
Deferred income taxes (note 10)................................... 12,167 1,273
Deferred financing costs.......................................... 22,416 6,650
------------- ------------
$1,216,194 $236,260
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
Worldwide Fiber Inc.
Consolidated Balance Sheets
(tabular amounts expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Liabilities September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Current liabilities (unaudited)
Accounts payable and accrued liabilities (note 4)........................ $117,779 $ 20,296
Deferred revenue (note 1)................................................ 25,000 --
Advances on contracts.................................................... -- 13,651
Income taxes payable..................................................... 15,262 7,609
------ --------
158,041 41,556
Senior notes (note 7).................................................... 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 Redeemable 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 Redeemable Convertible Preferred Shares (including
accretion of discount from redemption value of $1,190 and net of
issuance costs of $1,033) (note 8)...................................
345,157 --
Shareholders' Equity
Capital 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 Shares
(note 9)............................................................ 35,419 7,400
36,000,000 Class C Multiple Voting Shares (note 9).............. 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 13)
Subsequent events (note 14)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
Worldwide Fiber Inc.
Consolidated Income Statements
For the nine month period ended September 30, 1999 and periods from
February 5, 1998 (date of incorporatioon) to September 30, 1998 and
December 31, 1998. The Company's operations commenced on June 1, 1998
(tabular amounts expressed in thousands of U.S. Dollars
except per share amounts)
<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998 December 31, 1998
---- ---- -----------------
(unaudited)
<S> <C> <C> <C>
Revenue........................................... 235,138 104,819 $164,319
Costs............................................. 165,263 90,909 147,621
------- ------ --------
Gross profit...................................... 69,875 13,910 16,698
------ ------ --------
Expenses
General and administrative................... 17,263 1,318 2,274
Depreciation................................. 871 260 464
-------- ------ --------
18,134 1,578 2,738
------ ----- -------
51,741 12,332 13,960
Interest expense.................................. 20,468 -- 492
Interest income................................... 8,020 -- 267
------- ------ -------
Income before equity income, income taxes and
minority interest............................ 39,293 12,332 13,735
Equity (loss) income ............................. -- (48) 928
------ -------- -------
Income before income taxes and minority interest..
39,293 12,284 14,663
Provision for income taxes (note 10).............. 20,175 5,402 5,643
------ ------ -------
Income before minority interest................... 19,118 6,882 $ 9,020
Minority interest................................. 5,747 -- --
----- ------ ------
Net income for the period......................... $13,371 $6,882 $9,020
======= ====== ======
Earnings per share:
Basic $0.05 $2.19 $0.86
Fully diluted................................ $0.05 $2.19 $0.86
Weighted average number of Shares used to compute
earnings per share:
Basic........................................ 140,973,458 3,140,871 10,482,089
Fully diluted................................ 153,116,346 3,140,871 10,482,089
</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
(tabular amounts expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Class B Subordinate
Voting Shares Class C Multiple
(formerly Class A Common) Voting Shares Other Shareholders' Equity
------------------------- ----------------------- --------------------------------------------
Additional
Contributed Paid in Unearned
Shares Amount Shares Amount Surplus Capital Compensation
------------ --------- ------------ --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-February 5, 1998
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
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
Comprehensive income..
Net income for the
period..............
Accumulated other
comprehensive
income-foreign
currency translation
----------- --------- ------------ --------- -------------- ------------ ------------
Balance-December 31,
1998 ............... 40,002,400 $ 7,400 -- $-- $ 2,242 $-- $--
Issuance of shares
for certain Ledcor
assets with
deferred tax asset
(note 1)............ 159,997,600 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)...... (200,000,000) (32,419)
190,748,000 32,419
Issuance of 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 shares
for certain Ledcor
assets with
deferred tax asset 36,000,000 11,109
(note 1)............
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-September 30,
1999 (unaudited).... 191,948,000 $35,419 36,000,000 $11,109 $ 2,242 $16,447 $(10,947)
----------- --------- ------------ --------- -------------- ------------ ------------
<CAPTION>
Accumulated
(Deficit) Other Total
Retained Comprehensive Shareholders
Earnings Income Equity
-------------- ---------------- ------------------
<S> <C> <C> <C>
Balance-February 5, 1998
Incorporation Shares
issued, February 5, $-- $-- $--
1998................
Issuance of shares
for certain Ledcor
assets with
deferred tax asset
(note 5)............ 8,488
Issuance of shares
for investments
(note 5)............
Excess of proceeds
over cost on fiber
optic strands to be
reacquired from
parent company
(note 1)............ 1,154
Comprehensive income..
Net income for the
period.............. 9,020 9,020
Accumulated other
comprehensive
income-foreign
currency translation (401) (401)
-------------- ---------------- ------------------
Balance-December 31,
1998 ................ $ 9,020 $ (401) $18,261
Issuance of shares
for certain Ledcor
assets with
deferred tax asset
(note 1)............ 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 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 shares
for certain Ledcor
assets with
deferred tax asset
(note 1)............ 11,109
Accretion of
Preferred Stock to (1,190) (1,190)
redemption value....
Unearned compensation.
Amortization of
compensation expense 5,500
Comprehensive income
Net Income for the 13,371 13,371
period..............
Accumulated other
comprehensive
income-foreign 736 736
currency translation
-------------- ---------------- ------------------
Total comprehensive 13,371 736 14,107
income..............
-------------- ---------------- ------------------
Balance-September 30,
1999 (unaudited).... $(23,799) $ 335 $ 30,806
============== ================ ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
Worldwide Fiber Inc.
Consolidated Statements of Cash Flows
For the nine month period ended September 30, 1999
and periods from February 5, 1998 (date of
incorporation) to September 30, 1998 and December
31, 1998. The Company's operations commenced on
June 1, 1998
(tabular amounts expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------ -------------
1999 1998 1998
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash flows used in operating activities
Net income for the period................................. $13,371 $6,882 $9,020
Adjustments to reconcile net income to net cash used for
operating activities
Depreciation......................................... 871 260 464
Amortization of deferred financing costs............. 1,033 -- --
Equity loss (income)................................. -- 48 (928)
Stock based compensation............................. 5,500 -- --
Changes in non-cash working capital items
Accounts receivable.................................. (15,842) (12) (196)
Unbilled revenue..................................... (73,391) -- (992)
Inventory............................................ (98,052) (89) (3,949)
Deposits ............................................ -- -- (1,568)
Due from parent...................................... 13,412 (12,357) (16,230)
Accounts payable and accrued liabilities............. 95,669 -- 2,904
Deferred revenue..................................... 25,000 -- --
Advances on contracts................................ (13,651) -- 13,708
Income taxes payable................................. 7,653 5,367 6,491
Advances to WFI USA.................................. -- -- (21,783)
-------- ------ -------
(38,427) 99 (13,059)
-------- ------ -------
Cash flows from (used in) investing activities
Deposits on long-term construction contract............... (100,187) -- --
Fixed asset additions..................................... (61,124) -- (1,065)
Purchase of short-term investments........................ (68,616) -- --
Cash acquired on acquisition of WFI USA................... -- -- 2,242
-------- ------ ------
(229,927) -- 1,177
-------- ------ -------
Cash flows from (used in) financing activities
Proceeds from issuance of capital stock................... 348,000 -- --
Issuance of notes......................................... 500,000 -- 175,000
Deferred financing costs.................................. (16,000) -- (6,650)
Repurchase of Series C redeemable preferred Shares (45,000) -- --
------- ------ -------
787,000 -- 168,350
------- ------ -------
Effect of exchange rate changes on cash................... 163 (20) (102)
------- ------ -------
Net increase in cash and cash equivalents................. 518,809 79 156,366
------- ------ -------
Cash and cash equivalents, beginning of period............ 156,366 -- --
------- ------ -------
Cash and cash equivalents, end of period.................. $675,175 $ 79 $156,366
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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
(i) On May 31, 1998, the Company entered into undertaking
agreements 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 Voting 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 was 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 is
reflected as a deferred tax asset.
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 $28,350,000 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.
(ii) Construction Services Agreements entered into May 31,
1998, 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
F-8
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
optic network assets from Ledcor, the revenues and costs associated
with this portion of the agreement have not been reflected in the
income statement for the period ended December 31, 1998. The costs to
construct the network were reflected on completion of construction and
the issuance of the Shares. 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 $945,000, has been excluded from
the consolidated income statement and has been reported as contributed
surplus.
(iii) Management Services Agreement entered into May 31, 1998
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 entered into May 31, 1998
whereby the Company obtains the services of certain employees from
Ledcor on a cost reimbursement basis.
(v) The Company has entered into an agreement with Ledcor,
whereby personnel of Ledcor who were involved in the designing and
planning of the transatlantic Hibernia cable stations will oversee
management and supervision of construction of these facilities for a
fee of approximately $1,700,000.
Share capital transactions
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 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 8).
F-9
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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"), WFI-CN Fiber Inc. and
Worldwide Fiber IC LLC. 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.
The unaudited interim consolidated financial statements for the periods
ended September 30, 1999 and 1998 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.
All share amounts have been presented on a post stock split basis
(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.
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.
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-10
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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.
Unbilled revenue
Revenue recognized using the percentage-of-completion basis (see
"Revenue recognition") less billings to date is recorded as unbilled revenue.
F-11
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 periods ended September 30, 1999 was $7,794,000 (September
30 and December 31, 1998 - $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 translation and 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 gains and
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.
Fair value of financial instruments
The fair value of the Company's financial instruments, consisting of
cash and cash equivalents, short-term investments, accounts receivable, unbilled
revenue, deposit, due from parent, accounts pay-
F-12
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
able and accrued liabilities, advances on contracts, and income taxes payable
approximate their carrying values due to their short-term nature. As at
September 30, 1999, the fair value of the $500,000,000 12% Senior Notes was
$516,250,000 and the fair value of the $175,000,000 12.5% Senior Notes ("1998
Notes) was $184,625,000. The fair value of the 1998 Notes at December 31, 1998
approximated its carrying value.
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.
Earnings per Share
Basic earnings per share is computed by dividing net income available
to common shareholders by the weighted average number of common Shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities by including other common share equivalents, including
stock options and redeemable convertible preferred shares, in the weighted
average number of common shares outstanding for a period, if dilutive.
F-13
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
September 30, December 31,
------------ ------------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Net income................................................ $13,371 $6,882 $9,020
Stock dividend............................................ (5,000) -- --
Preferred stock accretion................................. (1,190) -- --
----------- --------- ----------
Net income available to common stockholders (A)........... $7,181 $6,882 $9,020
=========== ========= ==========
Weighted average number of common shares (B).............. 140,973,458 3,140,871 10,482,089
Dilutive effect of:
Stock options........................................ 12,142,888 -- --
----------- --------- ----------
Diluted weighted average shares (C).................. 153,116,346 3,140,871 10,482,089
=========== ========= ==========
Earnings per share:
Basic (A/B).......................................... $0.05 $2.19 $0.86
Diluted (A/C)........................................ $0.05 $2.19 $0.86
</TABLE>
Redeemable Convertible Preferred Shares are not included in the computation of
fully diluted earnings per share as their effect is anti-dilutive.
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.
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 Boards (FASB) issued
Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement
No. 66." The interpretation is effective for
F-14
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
sales of real estate with property improvements or integral equipment entered
into after June 30, 1999. Under this interpretation, title must transfer to a
lessee in order for a lease transaction to be accounted for as a sales-type
lease. After June 30, 1999, the effective date of FASB Interpretation No. 43,
sales-type lease accounting will only be appropriate for dark fiber and capacity
leases where title under the lease is transferred to the lessee or if the
agreement was entered into prior to June 30, 1999. Transactions will be
accounted for as operating leases where title is not transferred to the lessee.
3. Supplemental cash flow information
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid for income taxes.................................... 12,778 -- $--
Cash paid for interest........................................ 10,451 -- --
Supplemental non-cash investing and financing activities
Issuance of common Shares for:
Certain Ledcor assets.................................. 75,726 8,488 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
Series C redeemable preferred stock dividend............. 5,000 -- --
Accretion of preferred stock to redemption value......... 1,190 -- --
Stock based compensation................................. 5,500 -- --
</TABLE>
F-15
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
4. Balance Sheet components
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Accounts receivable
Trade accounts receivable.................... $15,938 $3,107
Interest receivable and other................ 3,176 165
------- ------
$19,114 $3,272
======= ======
Unbilled revenue
Revenue earned on uncompleted contracts...... $235,138 $22,236
Less: Billings to date...................... $151,165 $11,654
-------- -------
$ 83,973 $10,582
======== =======
</TABLE>
F-16
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
<S> <C> <C>
Inventory
Fiber optic network assets........................ $ 126,733 $28,085
Construction supplies and small tools............. 549 1,145
--------- -------
127,282 $29,230
========= =======
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
========= =======
</TABLE>
The Company has not provided for any depreciation on fiber optic
network assets for the periods ended September 30, 1999 and December 31, 1998 as
these assets were under construction.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Accounts payable and accrued liabilities
Subcontractor and supplier costs.................... $56,057 $13,468
Subcontractor holdbacks payable..................... 22,867 4,843
Other............................................... 21,398 1,493
Interest payable.................................... 17,457 492
--------- --------
$117,779 $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
F-17
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 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 1600 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 16,000,000 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 24,000,000 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
F-18
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
WFI 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-19
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
6. Due from parent
The components of the amount due from parent consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
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.......................... 2,889 2,816
Deferred financing costs............................ 268
------- -------
2,889 166,798
------- -------
(2,889) 13,795
-------
Net advance received..................................... -- (383)
------- --------
(Due to) from parent $(2,889) $ 13,412
======== ========
</TABLE>
The amounts due to and from parent 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, for the period ended December 31, 1998, due to fiber optic
network assets to be transferred to the Company as described in note 1(ii). The
balance as at September 30, 1999 is included in accounts payable.
7. Senior notes
On July 28, 1999 the Company issued $500,000,000 12% Senior notes (the
"Notes"). 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, 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.
F-20
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
On December 23, 1998, the Company issued $175,000,000 12.5% senior
notes (the "1998 Notes"). The 1998 Notes are unsecured obligations of the
Company bearing interest at 12.5% payable semi-annually. The 1998 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 1998 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 1998 Notes
Indenture, the holders of the 1998 Notes can require the Company to repurchase
all or part of the 1998 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 1998 Notes Indenture, exceeds $10,000,000, the
Company is required to make an offer to repurchase the maximum principal amounts
of 1998 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 1998 Notes. Under
this Excess Cash Flow provision, the Company is not required to repurchase more
than 25% of the original principal amount of the 1998 Notes prior to December
31, 2003.
The Notes and 1998 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,
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 rates on the Notes and the 1998 Notes are 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 and 1998 Notes Indentures.
8. Redeemable Convertible Preferred Stock
On September 9, 1999 the Company authorized the following series of
preferred stock (note 1):
<TABLE>
<S> <C>
100,000,000,000 Series A Non-Voting Redeemable Convertible Preferred Shares
100,000,000,000 Series B Subordinate Voting Convertible Preferred Shares
45,000,000 (pre-split) Series C Redeemable Preferred Shares
</TABLE>
F-21
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 capital 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
$4.86 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.
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 capital 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 $4.86 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.
F-22
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 (pre-split) Series C Redeemable
Preferred Shares ("Series C Preferred Shares") were issued pursuant to a stock
dividend and 40,000,000 (pre-split) Series C Preferred Shares were issued
pursuant to a share re-organization. Subsequently, the Company repurchased the
45,000,000 (pre-split) issued Series C Preferred Shares for $45,000,000 (note
1). 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. As at September 30, 1999, no Series C Preferred Shares are
outstanding.
9. Capital stock
On September 9, 1999 the Company authorized the following classes of
capital 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 in
dividends declared subject to any preference priority on other classes of
Shares.
F-23
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 capital 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.
Stock Option Plan
The Company has a Long Term Incentive and Share Award Plan that permits
the grant of non-qualified stock options, incentive stock options, share
appreciation rights, restricted shares, restricted share units, performance
shares, performance units, dividend equivalents and other share-based awards to
employees and directors. A maximum of 35,566,504 Class A Non-Voting Shares may
be subject to awards under the plan, which generally have a vesting period of
four years. During the nine months ended September 30, 1999, the Company granted
16,753,440 options at $1.25 per share and 4,438,400 options at $2.50 per share
to employees and officers of the Company. No options were exercised or cancelled
during the period and 3,828,000 options were available to be exercised at
September 30, 1999. The stock options have terms expiring on or before September
30, 2009.
10. Income taxes
Income before equity income and income taxes.
The components of income before equity income and income taxes are as
follows:
<TABLE>
<CAPTION>
September 30,
------------- December 31,
1999 1998 1998
---- ---- -----------
<S> <C> <C> <C>
Canadian...................................... 13,839 7,838 $5,683
U.S........................................... 25,454 4,494 8,052
------ ----- -----
39,293 12,332 $13,735
====== ====== =======
</TABLE>
F-24
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
Current income taxes
The provision for current income taxes consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1998
---- ---- ------------
<S> <C> <C> <C>
Canadian...................................... 9,130 3,625 $2,599
U.S. federal.................................. 8,946 1,438 2,563
U.S. state and local.......................... 2,099 339 481
------ ----- ------
20,175 5,402 $5,643
====== ===== ======
</TABLE>
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 which is taxed at
a rate of 38%.
Deferred income taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Fixed assets.................................. 12,167 $1,088
Other......................................... -- 185
Valuation allowance........................... -- --
-------- --------
Net deferred tax assets....................... 12,167 $1,273
====== ======
</TABLE>
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.
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, short-term investments, 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 and short-term investments
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
F-25
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
credit losses to date. Accounts receivable was comprised of 14 customers at
September 30, 1999 and 12 customers at December 31, 1998.
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
periods ended September 30 and 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>
Revenues Fixed Assets Deferred financing costs
----------------------------------- ---------------------------- -----------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
1999 1998 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Canada $102,873 $67,715 $84,534 $ 27,302 $8,218 $22,416 $6,650
US 132,265 37,104 79,785 79,962 7,257 -- --
-------- -------- -------- -------- ------- ------- ------
$235,138 $104,819 $164,319 $107,264 $15,475 $22,416 $6,650
======== ======== ======== ======== ======= ======= ======
</TABLE>
The revenues are based on the location of the construction activities.
In addition, deposits on long-term construction contracts of $100 million
(September 30 and December 31, 1998 - $Nil) are located in Barbados.
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.
Right of way access agreements
The Company has entered into various agreements during the periods 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-26
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
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 September 30, 1999 are as follows:
2000................................................. $6,731
2001................................................. $5,117
2002................................................. $3,224
2003................................................. $1,994
2004 ................................................ $1,468
The Company pays Ledcor approximately $825,000 per year in connection with its
lease of the Toronto facilities. The lease expires in 2009.
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 called
"Hibernia". The initial contract price is approximately $607 million. The
Company has paid $100 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. (Note 14)
F-27
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
14. 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 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.
CN/IC
The Company has entered into a commitment with CN and IC to acquire
their respective 25% interests in WFI-CN Fibre 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 sell 26,080,000 Class A Non-Voting Shares and 4,920,000 Class C
Multiple Voting Shares. In addition, the Company received a promissory note in
the amount of $77,500,000 from the executive officer.
On December 22, 1999, the Company issued 4,541,192 Series A Non-Voting
Redeemable Convertible Preferred Shares to the holders of such shares pursuant
to the terms of their original purchase agreement dated September 7, 1999.
F-28
<PAGE>
Worldwide Fiber Inc.
Notes to Consolidated Financial Statements (continued)
(tabular amounts expressed in thousands of U.S. dollars)
(Information as at September 30, 1999 and for the periods ended
September 30, 1999 and 1998 is unaudited)
Stock Options
Subsequent to September 30, 1999, the Company granted 1,783,900 options
to employees and officers of the Company.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
Worldwide Fiber (USA), 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. 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-30
<PAGE>
Worldwide Fiber (USA), 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-31
<PAGE>
Worldwide Fiber (USA), 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)
<TABLE>
<CAPTION>
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-32
<PAGE>
Worldwide Fiber (USA), 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)
<TABLE>
<S> <C>
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
aat end of period.......................................................... $ 2,242
========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-33
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
1. The Company
Worldwide Fiber (USA), Inc. (the "Company"), 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") 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-34
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
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.
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
F-35
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
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.
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.
F-36
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
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.
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.
F-37
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(tabular amounts expressed in thousands of U.S. dollars)
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-38
<PAGE>
Worldwide Fiber (USA), Inc.
Notes to Consolidated Financial Statements
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-39
<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-40
<PAGE>
LEDCOR INDUSTRIES LIMITED--
TELECOMMUNICATIONS DIVISION
Divisional Balance Sheets
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
August 31, August 31,
May 31, 1998 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT
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-41
<PAGE>
LEDCOR INDUSTRIES LIMITED
TELECOMMUNICATIONS DIVISION
Divisional Statements of
Operations and Retained Earnings
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
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-42
<PAGE>
LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION
Divisional Statements of Cash Flow
(All figures are in U.S. dollars)
<TABLE>
<CAPTION>
Five months
Nine months Year ended ended Year ended
ended May 31, August 31, August 31, March 31,
1998 1997 1996 1996
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
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) gain..... (1,647,737) 12,655 (3,205) 7,926
------------ ----------- ------------ ---------
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 activities...... 9,329,994 5,040,046 3,258,829 (594,725)
----------- ---------- ----------- -----------
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-43
<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 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
F-44
<PAGE>
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.
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.
F-45
<PAGE>
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.
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:
F-46
<PAGE>
<TABLE>
<CAPTION>
August 31,
May 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
============= ============ ===========
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
August 31,
May 31, --------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
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-47
<PAGE>
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:
<TABLE>
<CAPTION>
August 31,
May 31, --------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets
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
========== ========== ==========
</TABLE>
Reconciliation of deferred tax liabilities:
<TABLE>
<CAPTION>
August 31,
May 31, ---------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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.
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.
F-48
<PAGE>
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-49
<PAGE>
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
----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Customers
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.
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 uncertain-
F-50
<PAGE>
ties 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>
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% $ -- --
</TABLE>
<TABLE>
<CAPTION>
Canada U.S.
------ ----
Total Identifiable
Assets Amount Percentage of Total Amount Percentage of Total
------------------- ------ ------------------- ------ -------------------
<S> <C> <C> <C> <C>
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 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.
F-51
<PAGE>
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-52
<PAGE>
<TABLE>
<CAPTION>
========================================================= ======================================================
<S> <C>
No dealer, salesperson or other person is authorized
to give any information or to represent anything not
contained in this prospectus. You must not rely on any Shares
unauthorized information or representations. This
prospectus is an offer to sell only the Class A Worldwide Fiber Inc.
Non-Voting Shares offered hereby, but only under Class A Non-Voting Shares
circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus
is current only as of its date.
--------------------
TABLE OF CONTENTS
Page
Prospectus Summary............................. 1
Risk Factors................................... 9 ___________________
Use of Proceeds................................26
Dividend Policy................................27
Description of Our Capital Stock...............27 ___________________
Exchange Rates.................................28
Dilution.......................................28
Capitalization.................................29 Goldman, Sachs & Co.
Selected Financial Data........................30
Management's Discussion and Analysis Donaldson, Lufkin &
of Financial Condition and Results of Jenrette
Operations..................................34
Business.......................................41 Credit Suisse First Boston
Management.....................................56 TD Securities
Principal and Selling Shareholders.............63 Bear, Stearns & Co. Inc.
Relationships and Related Party Transactions...64 Morgan Stanley Dean Witter
Share Capital Reorganization and Description of Nesbitt Burns
Capital Stock...............................67 Chase H&Q
Shares Eligible for Future Sale................71 RBC Dominion Securities Corp.
Regulation.....................................73 Warburg Dillon Read LLC
Descriptions of Indebtedness...................85
Material United States and Canadian
Income Tax Considerations...................89
Underwriting...................................93
Legal Matters..................................96
Experts........................................96
Enforceability of Civil Liabilities
Against Foreign Persons.....................96
Where You Can Find More Information............96
Index to Pro Forma Financial Information.....PF-1
Index to Financial Statements.................F-1
--------------------
Until , 2000, all dealers that effect transac-
tions in these securities, whether or not participating
in this offering, may be required to deliver a pro-
spectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or sub-
scriptions.
========================================================= ======================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Class A Non-Voting Shares being registered (all amounts are
estimated except the SEC Registration Fee and the Nasdaq National Market Systems
Listing Fee):
Amount to
be Paid
------------
SEC Registration Fee.......................................... $227,700
NASD Filing Fee............................................... 30,500
Transfer Agent Fee............................................
Nasdaq National Market System Listing Fee.....................
The Toronto Stock Exchange Listing Fee........................
Blue Sky Qualification Fees and Expenses......................
Accounting Fees and Expenses..................................
Legal Fees and Expenses.......................................
Printing Expenses.............................................
Stamp Duty Tax................................................
Miscellaneous.................................................
------------
Total.................................................... $
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the By-laws of the Company, as amended, subject to Section
124 of the Canada Business Corporations Act (the "Act"), a director or officer
of the Company, a former director or officer of the Company or a person who acts
or acted at the Company's request as a director or officer of a body corporate
of which the Company is or was a shareholder or creditor, and his or her heirs
and legal representatives:
1. may be indemnified by the Company against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is
made a party by reason of being or having been a director or officer of
such Company or body corporate.
2. may be indemnified by the Company, with the approval of a court,
against all costs, charges and expenses reasonably incurred by him or
her in connection with an action by or on behalf of the Company or body
corporate to procure a judgment in its favor, to which he or she is
made a party by reason of being or having been a director or an officer
of the Company or body corporate; and
<PAGE>
3. is entitled to indemnity from the Company in respect of all costs,
charges and expenses reasonably incurred by him or her in connection
with the defense of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or
having been a director or officer of the Company or body corporate, if
the person seeking indemnity was substantially successful on the merits
in his or her defense of the actions or proceeding:
provided, in all cases, such person fulfills the conditions that (a) he or she
acted honestly and in good faith with a view to the best interests of the
Company, and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful.
As contemplated by Section 124 of the Canada Business Corporations Act,
the Company has purchased insurance against potential claims against the
directors and officers of the registrant and against loss for which the
registrant may be required or permitted by law to indemnify such directors and
officers.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) The Company has issued and sold the following unregistered
securities in the following transactions (unless otherwise indicated share
numbers reflect our 8 for 1 stock split):
(1) On our incorporation on February 5, 1998, we issued 800 Class "A"
Voting Common Shares (now Class B Subordinate Voting Shares) to Ledcor
Industries Limited for $70.
(2) On May 31, 1998, we issued 1600 Class "A" Voting Common Shares (now
Class B Subordinate Voting Shares) to Ledcor Industries Limited for equipment,
fiber optic strands and other assets related to the telecommunications division
of Ledcor Industries Limited.
(3) On August 31, 1998, we issued 24,000,000 Class "A" Voting Common
Shares (now Class B Subordinate Voting Shares) to Worldwide Fiber Holdings Ltd.
as partial consideration for a 50% interest in, and a promissory note of
$3,915,000 from, Worldwide Fiber (USA) Inc.
(4) On December 1, 1998 we issued 16,000,000 Class "A" Voting Common
Shares (now Class B Subordinate Voting Shares) to Worldwide Fiber Holdings Ltd.
for 50 Class A common shares of Ledcor Holdings Ltd.
(5) Pursuant to an Indenture dated December 23, 1998, the Company
issued senior notes with a face value of $175,000,000 to Qualified Institutional
Buyers in reliance on the exemption found in Rule 144A of the Securities Act of
1933, as amended, or to persons outside the United States in compliance with
Regulation S, of the Securities Act of 1933, as amended. The notes are unsecured
obligations of the Company bearing interest at 12-1/2% interest payable
semi-annually.
(6) On March 31, 1999 the Company completed a series of transactions
whereby certain fiber optic network assets were transferred to the Company by
Worldwide Fiber Holdings Ltd. in exchange for 159,997,600 Class "A" Voting
Common Shares (now Class B Subordinate Voting 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.
II-2
<PAGE>
(7) Pursuant to an Indenture dated July 28, 1999, the Company issued
senior notes with a face value of $500,000,000, to Qualified Institutional
Buyers in reliance on the exemption found in Rule 144A of the Securities Act of
1933, as amended, or to persons outside the United States in compliance with
Regulation S, of the Securities Act of 1933, as amended. The notes are unsecured
obligations of the Company bearing interest at 12% interest payable
semi-annually.
(8) On August 31, 1999 the Company issued 1,200,000 Class "A" Voting
Common Shares (now Class B Subordinate Voting Shares) to Mackenzie Partners, LLC
for $3,000,000 cash.
(9) On September 9, 1999, the Company repurchased 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-subdivision) Series C Redeemable Preferred Shares.
(10) On September 9, 1999 and December 22, 1999, respectively, the
Company issued 70,934,464 and 4,541,192, respectively, Series A Non-Voting
Preferred Shares to our private equity investors for $345,000,000 in cash.
(11) On September 27, 1999, the Company issued 36,000,000 Class C
Multiple Voting Shares to Ledcor and assumed certain other rights and
obligations in consideration for certain fiber optic network assets valued at
cost in the accounts of Ledcor at $26,349,800.
(12) On December 22, 1999, 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.
(13) From January 5, 1999 through January 24, 2000, the Company issued
options to purchase an aggregate of 22,892,540 Class A Non-Voting Shares to
directors, officers and employees of the Company and its affiliates. Each option
was for a ten year term and the options are exercisable at prices ranging from
$1.25 to $10.00.
(b) The issuances of the securities set forth in paragraphs 1 through
13 above were deemed to be exempt from registration under the Securities Act in
reliance, unless otherwise indicated, on Section 4(2) of the Securities Act and,
in certain circumstances, Regulation D promulgated under the Securities Act, or
Rule 701 promulgated under the Securities Act as transactions by an issuer not
involving any public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipients of such securities represented their intentions to acquire the
securities for investment only and not with a view to, or for sale in connection
with, any distribution thereof and appropriate legends were affixed to the
certificates representing the securities issued in such transactions.
II-3
<PAGE>
Item 16. EXHIBITS.
The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Description
- ----------- -----------
1** Underwriting Agreement between Worldwide Fiber Inc. and the
Underwriters dated , 2000.
3.1* Articles of Continuance of Worldwide Fiber Inc.
3.2* Articles of Amendment of Worldwide Fiber Inc.
3.3* By-Laws of Worldwide Fiber Inc., as amended.
4.1* Indenture between Worldwide Fiber Inc. and HSBC Bank USA
(formerly Marine Midland Bank) dated December 23, 1998.
4.2* Form of 12 1/2% Series A Senior Notes due 2005.
4.3* Form of 12 1/2% Series B Senior Notes due 2005.
4.4* Registration Rights Agreement between Worldwide Fiber Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and TD
Securities (USA) Inc. dated December 23, 1998.
4.5* Indenture between Worldwide Fiber Inc. and HSBC Bank USA
(formerly Marine Midland Bank) dated July 28, 1999.
4.6* Form of 12% Series A Senior Notes due 2009 (included in
exhibit 4.5 hereto).
4.7* Form of 12% Series B Senior Notes due 2009 (included in
exhibit 4.5 hereto).
4.8* Registration Rights Agreement between Worldwide Fiber Inc.
and the Initial Purchasers dated July 28, 1999.
5.1** Opinion of Farris, Vaughan, Wills & Murphy regarding the
legality of the securities being registered.
10.1* Shareholders Agreement between Worldwide Fiber Inc.,
Worldwide Fiber Networks Ltd., Ledcor Communications Ltd.,
Ledcor Industries, Inc., Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.), MI-Tech Communications,
LLC, Ledcor Inc., and Michels Pipeline Construction, Inc.
dated December 31, 1998.
II-4
<PAGE>
10.2* Railplow License Agreement between Ledcor Industries Limited
and Worldwide Fiber Communications Ltd. (formerly 786520
Alberta Ltd.) dated May 31, 1998.
10.3* Non-exclusive Railplow License Agreement between Ledcor
Industries Limited and Ledcom Holdings Ltd. (formerly
Starfiber Communications Ltd.) dated May 31, 1998.
10.4* Letter from Ledcor, Inc. committing Ledcom Holdings Ltd. to
grant an exclusive Railplow license to Worldwide Fiber
Communications Ltd. dated December 1, 1998.
10.5* Management Services Agreement between Ledcor Industries
Limited and Worldwide Fiber Inc. (formerly Worldwide
Fiberlink Ltd.) dated May 31, 1998.
10.6* Employment Agreement between Ledcor Industries Limited and
Ledcor Communications Ltd., a wholly owned subsidiary of the
Worldwide Fiber Inc. dated May 31, 1998.
10.7* Employment Agreement between Ledcor Industries Inc. and
Ledcor Communications Inc., a subsidiary of Worldwide Fiber
Inc. dated May 31, 1998.
10.8* Construction Services Agreement between Ledcor Industries
Limited and Ledcor Communications Ltd., a wholly-owned
subsidiary of the Worldwide Fiber Inc. dated May 31, 1998.
10.9* Construction Services Agreement between Ledcor Industries
Inc. and Ledcor Communications Ltd. (formerly Ledcor
Communications Inc.) dated May 31, 1998.
10.10* Non-Competition Agreement between Worldwide Fiber Inc.
(formerly Starfiber Inc.) and Ledcor, Inc., dated May 31,
1998.
10.11* Roll-over Agreement between Ledcor Industries Limited and
Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.)
dated May 31, 1998 transferring certain technology of Ledcor
Industries Limited.
10.12* Roll-over Agreement between Ledcor Industries Limited,
Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link,
Inc.) and Ledcor Industries Inc. dated August 31, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.13* Roll-over Agreement between Mi-Tech Communications, LLC,
Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link,
Inc.) dated August 31, 1998 transferring assets of Ledcor
Inc.'s telecommunications division.
II-5
<PAGE>
10.14* Roll-over Agreement between Ledcor Industries Limited and
Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink
Holdings Ltd., dated August 31, 1998 transferring assets of
Ledcor Inc.'s telecommunications division.
10.15* Roll-over Agreement between Worldwide Fiber Holdings Ltd.
(formerly Worldwide Fiberlink Holdings Ltd., and Worldwide
Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated August
31, 1998 transferring assets of Ledcor Inc.'s
telecommunications division.
10.16* Roll-over Agreement between Worldwide Fiber Inc. (formerly
Worldwide Fiberlink Ltd.) and Worldwide Fiber Networks Ltd.
(formerly Worldwide Fiber Ltd.) dated August 31, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.17* Roll-over Agreement between Ledcor Inc. And Worldwide Fiber
Holdings Ltd. dated December 1, 1998 transferring assets of
Ledcor Inc.'s telecommunications division.
10.18* Roll-over Agreement between Worldwide Fiber Holdings Ltd. and
Worldwide Fiber Inc. dated December 1, 1998 transferring
assets of Ledcor Inc.'s telecommunications division.
10.19* Roll-over Agreement between Worldwide Fiber Inc. and
Worldwide Fiber Communications Ltd. dated December 1, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.20* License Agreement among WFI-CN Fiber Inc., Worldwide Fiber
Inc. and Canadian National Railway Company, dated May 28,
1999.
10.21* Unanimous Shareholders Agreement among Worldwide Fiber
Networks Ltd., Canadian National Railway Company and WFI-CN
Fiber Inc. dated May 28, 1999.
10.22* Limited Liability Company Agreement of Worldwide Fiber IC LLC
between Worldwide Fiber IC Holdings, Inc., and IC Fiber
Holding Inc., dated May 28, 1999.
10.23* Form of License Agreement among Worldwide Fiber Inc.,
Illinois Central Railroad Company and each of IC Fiber
Alabama LLC, IC Fiber Illinois LLC, IC Fiber Iowa LLC, IC
Fiber Kentucky LLC, IC Fiber Louisiana LLC, IC Fiber
Mississippi LLC and IC Fiber Tennessee LLC, dated as of May
28, 1999.
10.24* Amended and Restated Share Purchase Agreement by and between
Ledcor Industries Limited, Ledcor Industries Inc. and
Worldwide Fiber Inc. dated May 28, 1999.
II-6
<PAGE>
10.25* Supply contract for Hibernia Undersea Cable System between
Worldwide Telecom (Bermuda) Ltd. and Tyco Submarine Systems
Ltd. dated June 18, 1999.
10.26* Preferred Share Purchase Agreement by and among Worldwide
Fiber Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados)
SRL, Providence Equity Fiber L.P., and Tyco Group S.A.R.L.
dated as of September 7, 1999.
10.27* Shareholders Agreement by and among Worldwide Fiber Inc., DWF
SRL, GS Capital Partners III, L.P., GSCP3 WWF (Barbados) SRL,
Providence Equity Fiber, L.P., Tyco Group S.a.r.l., Worldwide
Fiber Holdings Ltd., Ledcor Inc. and the Several Shareholders
named in Schedule 1.15 thereto dated as of September 9, 1999.
10.28* Registration Rights Agreement by and among Worldwide Fiber
Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados) SRL,
Providence Equity Fiber, L.P., and Tyco Group S.a.r.l. dated
as of September 9, 1999.
10.29* Amended and Restated Share Purchase Agreement between Ledcor
Industries Limited, Ledcor Industries Inc. and Worldwide
Fiber Inc. dated September 7, 1999.
10.30* Letter Agreement between Ledcor Industries Limited, Ledcor
Industries Inc., Worldwide Fiber Inc. and Worldwide Fiber
(F.O.T.S.) No. 3, Ltd. dated September 27, 1999.
10.31* Stock Purchase Agreement by and between Worldwide Fiber Inc.
and Gregory B. Maffei, dated December 22, 1999.
21* Subsidiaries of Worldwide Fiber Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
23.3** Consent of Farris, Vaughan, Wills & Murphy (included in
Exhibit 5.1).
II-7
<PAGE>
24.1 Powers of Attorney authorizing execution of Registration
Statement on Form F-1 on behalf of certain directors of
Registrant (included on signature pages to this Registration
Statement).
24.2 Power of Attorney authorizing execution of Registration
Statement on Form F-1 on behalf of WFI Fiber Inc.
- -----------------------------
* Previously filed .
** To be filed by amendment.
II-8
<PAGE>
Item 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue;
(2) That, for purposes of determining any liability under the
Securities act of 1933, the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective; and
(3) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, the
undersigned Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form F-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Vancouver, BC, Canada on January 28, 2000.
WORLDWIDE FIBER INC.
By: /s/ DAVID LEDE
-----------------------------
Name: David Lede
Title: Chairman of the Board
II-10
<PAGE>
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints David Lede and
Larry Olsen and each of them (with full power to each of them to act alone) his
true and lawful attorney-in-fact, with power of substitution and resubstitution,
in his name, place and stand, in any and all capacities, to sign any and all
amendments (including post-effective amendments) and supplements to this
Registration Statement and to file the same, with exhibits thereto and other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any or them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DAVID LEDE Chairman of the Board January 28, 2000
- --------------------------------
David Lede
/s/ GREGORY MAFFEI Director January 28, 2000
- -------------------------------- (Principal Executive
Gregory Maffei Officer)
/s/ CLIFFORD LEDE Vice Chairman January 28, 2000
- --------------------------------
Clifford Lede
Vice Chairman January 28, 2000
/s/ LARRY OLSEN (Principal Financial and
- -------------------------------- Accounting
Larry Olsen Officer)
/s/ RON STEVENSON Director January 28, 2000
- --------------------------------
Ron Stevenson
/s/ STEPHEN STOW Director January 28, 2000
- --------------------------------
Stephen Stow
/s/ CLAUDE MONGEAU Director January 28, 2000
- --------------------------------
Claude Mongeau
</TABLE>
II-11
<PAGE>
<TABLE>
<S> <C> <C>
Director January 28, 2000
- --------------------------------
Jim Voelker
/s/ WILLIAM RAMSEY Director January 28, 2000
- --------------------------------
William Ramsey
/s/ ANDREW RUSH Director January 28, 2000
- --------------------------------
Andrew Rush
Director January 28, 2000
- --------------------------------
Robert Gheewalla
/s/ GLENN CREAMER Director January 28, 2000
- --------------------------------
Glenn Creamer
Director January 28, 2000
- --------------------------------
Neil Garvey
WFI Fiber Inc. WFI Fiber Inc. January 28, 2000
(Authorized U.S.
Representative)
By: /s/ LARRY OLSEN
-----------------------------
Larry Olsen, Authorized Signatory
</TABLE>
II-12
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
1** Underwriting Agreement between Worldwide Fiber Inc. and the
Underwriters dated , 2000.
3.1* Articles of Continuance of Worldwide Fiber Inc.
3.2* Articles of Amendment of Worldwide Fiber Inc.
3.3* By-Laws of Worldwide Fiber Inc., as amended.
4.1* Indenture between Worldwide Fiber Inc. and HSBC Bank USA
(formerly Marine Midland Bank) dated December 23, 1998.
4.2* Form of 12 1/2% Series A Senior Notes due 2005.
4.3* Form of 12 1/2% Series B Senior Notes due 2005.
4.4* Registration Rights Agreement between Worldwide Fiber Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and TD
Securities (USA) Inc. dated December 23, 1998.
4.5* Indenture between Worldwide Fiber Inc. and HSBC Bank USA
(formerly Marine Midland Bank) dated July 28, 1999.
4.6* Form of 12% Series A Senior Notes due 2009 (included in
exhibit 4.5 hereto).
4.7* Form of 12% Series B Senior Notes due 2009 (included in
exhibit 4.5 hereto).
4.8* Registration Rights Agreement between Worldwide Fiber Inc.
and the Initial Purchasers dated July 28, 1999.
5.1** Opinion of Farris, Vaughan, Wills & Murphy regarding the
legality of the securities being registered.
10.1* Shareholders Agreement between Worldwide Fiber Inc.,
Worldwide Fiber Networks Ltd., Ledcor Communications Ltd.,
Ledcor Industries, Inc., Worldwide Fiber (USA), Inc.
(formerly Pacific Fiber Link, Inc.), MI-Tech Communications,
LLC, Ledcor Inc., and Michels Pipeline Construction, Inc.
dated December 31, 1998
10.2* Railplow License Agreement between Ledcor Industries Limited
and Worldwide Fiber Communications Ltd. (formerly 786520
Alberta Ltd.) dated May 31, 1998.
II-13
<PAGE>
10.3* Non-exclusive Railplow License Agreement between Ledcor
Industries Limited and Ledcom Holdings Ltd. (formerly
Starfiber Communications Ltd.) dated May 31, 1998.
10.4* Letter from Ledcor, Inc. committing Ledcom Holdings Ltd. to
grant an exclusive Railplow license to Worldwide Fiber
Communications Ltd. dated December 1, 1998.
10.5* Management Services Agreement between Ledcor Industries
Limited and Worldwide Fiber Inc. (formerly Worldwide
Fiberlink Ltd.) dated May 31, 1998.
10.6* Employment Agreement between Ledcor Industries Limited and
Ledcor Communications Ltd., a wholly owned subsidiary of the
Worldwide Fiber Inc. dated May 31, 1998.
10.7* Employment Agreement between Ledcor Industries Inc. and
Ledcor Communications Inc., a subsidiary of Worldwide Fiber
Inc. dated May 31, 1998.
10.8* Construction Services Agreement between Ledcor Industries
Limited and Ledcor Communications Ltd., a wholly-owned
subsidiary of the Worldwide Fiber Inc. dated May 31, 1998.
10.9* Construction Services Agreement between Ledcor Industries
Inc. and Ledcor Communications Ltd. (formerly Ledcor
Communications Inc.) dated May 31, 1998.
10.10* Non-Competition Agreement between Worldwide Fiber Inc.
(formerly Starfiber Inc.) and Ledcor, Inc., dated May 31,
1998.
10.11* Roll-over Agreement between Ledcor Industries Limited and
Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.)
dated May 31, 1998 transferring certain technology of Ledcor
Industries Limited.
10.12* Roll-over Agreement between Ledcor Industries Limited,
Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link,
Inc.) and Ledcor Industries Inc. dated August 31, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.13* Roll-over Agreement between Mi-Tech Communications, LLC,
Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link,
Inc.) dated August 31, 1998 transferring assets of Ledcor
Inc.'s telecommunications division.
10.14* Roll-over Agreement between Ledcor Industries Limited and
Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink
Holdings Ltd., dated August 31, 1998 transferring assets of
Ledcor Inc.'s telecommunications division.
II-14
<PAGE>
10.15* Roll-over Agreement between Worldwide Fiber Holdings Ltd.
(formerly Worldwide Fiberlink Holdings Ltd., and Worldwide
Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated August
31, 1998 transferring assets of Ledcor Inc.'s
telecommunications division.
10.16* Roll-over Agreement between Worldwide Fiber Inc. (formerly
Worldwide Fiberlink Ltd.) and Worldwide Fiber Networks Ltd.
(formerly Worldwide Fiber Ltd.) dated August 31, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.17* Roll-over Agreement between Ledcor Inc. And Worldwide Fiber
Holdings Ltd. dated December 1, 1998 transferring assets of
Ledcor Inc.'s telecommunications division.
10.18* Roll-over Agreement between Worldwide Fiber Holdings Ltd. and
Worldwide Fiber Inc. dated December 1, 1998 transferring
assets of Ledcor Inc.'s telecommunications division.
10.19* Roll-over Agreement between Worldwide Fiber Inc. and
Worldwide Fiber Communications Ltd. dated December 1, 1998
transferring assets of Ledcor Inc.'s telecommunications
division.
10.20* License Agreement among WFI-CN Fiber Inc., Worldwide Fiber
Inc. and Canadian National Railway Company, dated May 28,
1999.
10.21* Unanimous Shareholders Agreement among Worldwide Fiber
Networks Ltd., Canadian National Railway Company and WFI-CN
Fiber Inc. dated May 28, 1999.
10.22* Limited Liability Company Agreement of Worldwide Fiber IC LLC
between Worldwide Fiber IC Holdings, Inc., and IC Fiber
Holding Inc., dated May 28, 1999.
10.23* Form of License Agreement among Worldwide Fiber
Inc., Illinois Central Railroad Company and each of
IC Fiber Alabama LLC, IC Fiber Illinois LLC, IC
Fiber Iowa LLC, IC Fiber Kentucky LLC, IC Fiber
Louisiana LLC, IC Fiber Mississippi LLC and IC
Fiber Tennessee LLC, dated as of May 28, 1999.
10.24* Amended and Restated Share Purchase Agreement by and between
Ledcor Industries Limited, Ledcor Industries Inc. and
Worldwide Fiber Inc. dated May 28, 1999.
10.25* Supply contract for Hibernia Undersea Cable System between
Worldwide Telecom (Bermuda) Ltd. and Tyco Submarine Systems
Ltd. dated June 18, 1999.
II-15
<PAGE>
10.26* Preferred Share Purchase Agreement by and among Worldwide
Fiber Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados)
SRL, Providence Equity Fiber L.P., and Tyco Group S.A.R.L.
dated as of September 7, 1999.
10.27* Shareholders Agreement by and among Worldwide Fiber Inc., DWF
SRL, GS Capital Partners III, L.P., GSCP3 WWF (Barbados) SRL,
Providence Equity Fiber, L.P., Tyco Group S.a.r.l., Worldwide
Fiber Holdings Ltd., Ledcor Inc. and the Several Shareholders
named in Schedule 1.15 thereto dated as of September 9, 1999.
10.28* Registration Rights Agreement by and among Worldwide Fiber
Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados) SRL,
Providence Equity Fiber, L.P., and Tyco Group S.a.r.l. dated
as of September 9, 1999.
10.29* Amended and Restated Share Purchase Agreement between Ledcor
Industries Limited, Ledcor Industries Inc. and Worldwide
Fiber Inc. dated September 7, 1999.
10.30* Letter Agreement between Ledcor Industries Limited, Ledcor
Industries Inc., Worldwide Fiber Inc. and Worldwide Fiber
(F.O.T.S.) No. 3, Ltd. dated September 27, 1999.
10.31* Stock Purchase Agreement by and between Worldwide Fiber Inc.
and Gregory B. Maffei, dated December 22, 1999.
21* Subsidiaries of Worldwide Fiber Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
23.3** Consent of Farris, Vaughan, Wills & Murphy (included in
Exhibit 5.1).
24.1 Powers of Attorney authorizing execution of Registration
Statement on Form F-1 on behalf of certain directors of
Registrant (included on signature pages to this Registration
Statement).
II-16
<PAGE>
24.2 Power of Attorney authorizing execution of Registration
Statement on Form F-1 on behalf of WFI Fiber Inc.
- ------------------------------
* Previously filed .
** To be filed by amendment.
II-17
[Letterhead of PricewaterhouseCoopers LLP]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form F-1 of our report dated March 12, 1999, except as
to the subsequent events described in note 14 which are as of January 27, 2000
relating to the consolidated financial statements of Worldwide Fiber Inc., which
appear in such Prospectus.
We also hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form F-1 of our report dated March 12, 1999 relating
to the consolidated income statement and statements of changes in shareholders'
equity and of cash flows of Worldwide Fiber (USA), Inc., which appears in such
Prospectus.
We also consent to the references to us under the headings "Experts", Summary
Financial Data and "Selected Financial Data" in such Prospectus. However, it
should be noted that PricewaterhouseCoopers LLP has not prepared or certified
such Summary Financial Data and "Selected Financial Data".
/s/ PRICEWATERHOUSECOOPERS LLP
Vancouver, Canada
January 27, 2000
[Letterhead of Deloitte & Touche LLP]
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form F-1 of our report dated November 30, 1998,
relating to the divisional financial statements of Ledeor Industries Limited -
Telecommunications Division as at and for the periods ended May 31, 1998, August
31, 1997 and August 31, 1996 and the divisional statements of operations and
retained earnings and cash flows for the year ended March 31, 1996, which
appears in such Prospectus.
We also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
Deloitte & Touche LLP has not prepared or certified such "Selected Financial
Data".
/s/ DELOITTE & TOUCHE LLP
Edmonton, Canada
January 26, 2000
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Larry
Olsen, Director of WFI Fiber Inc. its true and lawful attorney-in-fact, with
power of substitution and resubstitution, in its name, place and stand, in any
and all capacities, to sign as authorized representative, the Registration
Statement on Form F-1 registering Class A Non-Voting Common Stock of Worldwide
Fiber Inc. and any and all amendments (including post-effective amendments) and
supplements thereto and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In WITNESS WHEREOF, the undersigned, has caused this Power of
Attorney to be executed on this the 28th day of January, 2000.
WFI Fiber Inc.
By: /s/ STEPHEN STOW
------------------------------
Name: Stephen Stow
Title: Director
