<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRSTMARK COMMUNICATIONS EUROPE S.A.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
LUXEMBOURG 4813 N/A
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
------------------------------
3 RUE JEAN PIRET,
L-2350, LUXEMBOURG
+352 26499800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
FIRSTMARK COMMUNICATIONS INTERNATIONAL L.L.C.
660 MADISON AVENUE
22ND FLOOR
NEW YORK, NY 10021
212 699 4400
(Address, including zip code, and telephone number, including area code, of
registrant's agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
TIMOTHY E. PETERSON, ESQ. STEWART M. ROBERTSON, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON SULLIVAN & CROMWELL
4 CHISWELL STREET ST. OLAVE'S HOUSE
LONDON EC1Y 4UP 9A IRONMONGER LANE
+44 20 7972 9600 LONDON EC2V 8EY
+44 20 7710 6500
</TABLE>
------------------------------
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 statement number of the earlier effective registration statement
for the same offering. / /
------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering. / /
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE(2)
<S> <C> <C> <C>
Class B common stock, $1.50 par value per share(1) $ $225,000,000
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Class B common stock, $1.50 par value per share(1) $59,400
</TABLE>
(1) Includes (i) shares of Class B common stock that are to be offered in the
form of shares or American Depositary Shares, (ii) shares of Class B common
stock that the Underwriters may purchase in the form of shares or American
Depositary Shares to cover over-allotments, if any, and (iii) shares that
are to be offered and sold to persons outside the United States but that may
be resold from time to time in the United States. The American Depositary
Shares (each representing one share of Class B common stock) evidenced by
American Depositary Receipts upon deposit of the shares of Class B common
stock registered hereby are being registered under a separate registration
statement on Form F-6.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
------------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
ISSUED AUGUST 11, 2000
[LOGO]
SHARES OF CLASS B COMMON STOCK
IN THE FORM OF SHARES OR AMERICAN DEPOSITARY SHARES
FIRSTMARK COMMUNICATIONS
EUROPE S.A.
------------------------
THIS IS AN INITIAL PUBLIC OFFERING OF SHARES OF CLASS B COMMON STOCK OF
FIRSTMARK COMMUNICATIONS EUROPE S.A. OF THE SHARES OF CLASS B COMMON STOCK
BEING OFFERED, SHARES OF CLASS B COMMON STOCK ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND SHARES OF
CLASS B COMMON STOCK ARE BEING OFFERED OUTSIDE THE UNITED STATES AND CANADA AND
TO INSTITUTIONAL AND RETAIL INVESTORS IN GERMANY BY THE INTERNATIONAL
UNDERWRITERS UNDER A SEPARATE PROSPECTUS. THE SHARES OF CLASS B COMMON STOCK
OFFERED IN THIS PROSPECTUS WILL BE SOLD IN THE FORM OF REGISTERED SHARES OR,
UPON REQUEST IN THE U.S. OFFERING ONLY, IN THE FORM OF AMERICAN DEPOSITARY
SHARES. EACH AMERICAN DEPOSITARY SHARE REPRESENTS THE RIGHT TO RECEIVE ONE SHARE
OF CLASS B COMMON STOCK. THE AMERICAN DEPOSITARY SHARES WILL BE EVIDENCED BY
AMERICAN DEPOSITARY RECEIPTS.
------------------------
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES OR
AMERICAN DEPOSITARY SHARES IN THE UNITED STATES OR ELSEWHERE. FIRSTMARK
COMMUNICATIONS EUROPE S.A. CURRENTLY ANTICIPATES THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN [EURO] AND [EURO] , WHICH IS
EQUIVALENT TO $ AND $ PER AMERICAN DEPOSITARY SHARE AT AN EXCHANGE RATE OF
[EURO]1.00=$ .
------------------------
FIRSTMARK COMMUNICATIONS EUROPE S.A. WILL APPLY TO HAVE THE AMERICAN
DEPOSITARY SHARES QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "FMRK"
AND TO HAVE THE CLASS B COMMON STOCK LISTED ON THE NEUER MARKT SEGMENT OF THE
FRANKFURT STOCK EXCHANGE UNDER THE SYMBOL " ".
INVESTING IN THE SHARES OR AMERICAN DEPOSITARY SHARES INVOLVES SIGNIFICANT
RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 15.
------------------------
PRICE [EURO] A SHARE AND $ AN AMERICAN DEPOSITARY SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS US
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE................................................... [EURO] [EURO] [EURO]
PER AMERICAN DEPOSITARY SHARE............................... $ $ $
TOTAL, ASSUMING ALL SALES ARE IN AMERICAN DEPOSITARY
SHARES.................................................. $ $ $
</TABLE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. HAS GRANTED THE U.S. UNDERWRITERS THE
RIGHT TO PURCHASE UP TO AN ADDITIONAL SHARES OR AMERICAN DEPOSITARY SHARES
TO COVER OVER-ALLOTMENTS. FIRSTMARK COMMUNICATIONS EUROPE S.A. HAS GRANTED THE
INTERNATIONAL UNDERWRITERS A SIMILAR RIGHT TO PURCHASE UP TO AN ADDITIONAL
SHARES. THE U.S. AND INTERNATIONAL UNDERWRITERS EXPECT TO DELIVER THE SHARES OR
AMERICAN DEPOSITARY SHARES TO PURCHASERS ON OR ABOUT , 2000.
THE U.S. SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
JOINT GLOBAL COORDINATORS
MORGAN STANLEY DEAN WITTER ABN AMRO ROTHSCHILD
---------------------
JOINT LEAD MANAGERS
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
<PAGE>
[Inside Front Cover Page]
Gatefold cover including the company logo with a network map.
2
<PAGE>
\
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FORWARD-LOOKING STATEMENTS............ 4
SUMMARY............................... 7
RISK FACTORS.......................... 15
HOW WE INTEND TO USE THE PROCEEDS OF
THIS OFFERING....................... 33
DIVIDEND POLICY....................... 33
DILUTION.............................. 34
CAPITALIZATION........................ 35
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 37
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION............... 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 48
BUSINESS.............................. 58
REGULATION............................ 87
MANAGEMENT............................ 105
CERTAIN RELATIONSHIPS................. 121
SUMMARY OF MATERIAL AGREEMENTS........ 123
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PRINCIPAL SHAREHOLDERS................ 142
DESCRIPTION OF SHARE CAPITAL.......... 146
DESCRIPTION OF AMERICAN DEPOSITARY
RECEIPTS............................ 154
SHARES ELIGIBLE FOR FUTURE SALE....... 161
MARKET INFORMATION.................... 162
TAXATION.............................. 164
UNDERWRITERS.......................... 169
VALIDITY OF SECURITIES................ 172
EXPERTS............................... 172
WHERE YOU CAN FIND MORE INFORMATION... 172
SERVICE OF PROCESS AND ENFORCEABILITY
OF CIVIL LIABILITIES................ 173
INFORMATION REQUIRED FOR LISTING ON
THE NEUER MARKT SEGMENT OF THE
FRANKFURT STOCK EXCHANGE............ 173
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell the shares and American
Depositary Shares or ADSs only in jurisdictions where offers and sales are
permitted. The information contained in this document is accurate only as of the
date of this document, regardless of the time of delivery of this prospectus or
any sale of the shares and ADSs.
In this prospectus "FirstMark," the "company," "we," "us" and "our" refer to
FirstMark Communications Europe S.A., any of its majority owned subsidiaries or
any of its joint ventures other than its associated company in Portugal.
We have not taken any action that would permit a public offering to occur in
any jurisdiction other than the United States and Germany. Persons who possess
this prospectus should learn about and observe any restrictions as to the
offering of the shares and ADSs and the distribution of this prospectus.
3
<PAGE>
------------------------
FORWARD-LOOKING STATEMENTS
Forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by words
such as "may," "will," "should," "expects," "plans," "projects," "anticipates,"
"believes," "estimates," "predicts," "potential" or other comparable
expressions. This prospectus includes forward-looking statements based on our
current expectations and projections about future events, including:
- economic and business conditions in each of the countries where we operate
or plan to operate,
- prospects for the global broadband internet industry,
- prospects for the European internet industry,
- competition,
- our business strategy and development plans,
- market acceptance of our products and services,
- our key personnel,
- the availability of capital,
- construction of our broadband internet network,
- regulatory developments,
- future cash sources and requirements, and
- when and if we expect to have positive cash flow.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under "Risk Factors." These
factors may cause our actual results to differ materially from any
forward-looking statement. The risks described in "Risk Factors" are not
exhaustive. Other sections of this prospectus may describe additional factors
that could adversely affect our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New risk factors
emerge from time to time, and it is not possible for us to predict all such risk
factors. We cannot assess the impact of all such risk factors on our business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. We are under no duty, and assume no obligation, to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results.
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to give you any information or to make any
representations about the transactions we discuss in this prospectus other than
those contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy securities anywhere or to anyone where or to
whom we are not permitted to offer or sell securities under applicable law. The
delivery of this prospectus or the securities offered by this prospectus does
not, under any circumstances, mean that there has not been a change in our
affairs since the date of this prospectus. It also does not mean that the
information in this prospectus is correct after this date.
------------------------
Until , 2000 (25 days after the commencement of this offering),
all dealers that buy, sell or trade shares or ADSs, whether or not participating
in this offering, may be required to deliver a
4
<PAGE>
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in connection with this offering and
with respect to unsold allotments or subscriptions.
------------------------
CERTAIN REGULATORY ISSUES
For investors outside the United States and Germany: no action has been or
will be taken in any jurisdiction by any underwriter or by us that would permit
a public offering of the shares or ADSs or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other
than in the United States and Germany. Persons into whose possession this
prospectus comes are required by the underwriters and by us to inform themselves
about, and to observe any restrictions as to, the offering of the shares and
ADSs and the distribution of this prospectus.
The distribution of this document and the offering of the shares and ADSs in
the United Kingdom is restricted. This document has not been drawn up in
accordance with the United Kingdom's Public Offers of Securities
Regulations 1995, as amended (the "POS Regulations"), and a copy has not been
delivered to the Registrar of Companies in England and Wales for registration.
Accordingly, the shares and ADSs may not be offered or sold in the United
Kingdom other than to persons whose ordinary activities involve them in the
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses within the meaning of regulation 7(2)(a) of
the POS Regulations or otherwise in circumstances that do not constitute an
offer to the public in the United Kingdom.
This prospectus is only being distributed in the United Kingdom to persons
of the kind described in: (a) Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended);
(b) Article 6 of that Order; or (c) Article 8 of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) (No. 2) Order 1995 or to whom it would
otherwise be lawful to distribute it. This prospectus is only directed at such
persons in the UK, and it would be imprudent for persons of any other kind to
respond to it.
PRESENTATION OF FINANCIAL INFORMATION
We report our financial statements in U.S. dollars and prepare our financial
statements in accordance with generally accepted accounting principles in the
United States. We have adopted a fiscal year end of December 31.
In this prospectus, except where otherwise indicated, references to:
(1) "$" or "U.S. dollars" are to the lawful currency of the United
States,
(2) "[EURO]" or "euro" are to the single currency at the start of the
third stage of European economic and monetary union on January 1,
1999, pursuant to the treaty establishing the European Economic
Community, as amended by the treaty on European Union, signed at
Maastricht on February 7, 1992,
(3) "BEF" are to the lawful currency of Belgium,
(4) "CHF" are to the lawful currency of Switzerland,
(5) "DM" or "Deutsche Mark" are to the lawful currency of Germany,
(6) "FFR" are to the lawful currency of France,
(7) "ptas" are to the lawful currency of Spain, and
(8) "PTE" are to the lawful currency of Portugal.
5
<PAGE>
Our functional currency is the euro. Our financial statements are translated
into US dollars, our reporting currency. Assets and liabilities are translated
using exchange rates on the respective balance sheet dates. Income and expense
items are translated using the average rates of exchange for the periods
involved.
Material (non US dollar denominated) financial events occurring between
quarterly reporting periods are translated into US dollars at the prevailing
exchange rate when the event occurred.
All information in this prospectus assumes that all existing preferred
shares have been converted into either Class A common stock or non-voting junior
preferred stock, which conversion is expected to occur on or prior to the
consummation of this offering.
------------------------
As a result of this offering, we will be subject to the informational
requirements of the U.S. Securities Exchange Act of 1934, as amended. We intend
to furnish to our stockholders annual reports containing audited consolidated
financial statements.
6
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE
DISCUSSION UNDER "RISK FACTORS" AND THE FINANCIAL DATA AND RELATED NOTES, BEFORE
INVESTING IN OUR CLASS B COMMON STOCK.
OUR COMPANY
We aim to be a rapidly growing broadband internet service provider of
business-to-business network, voice, video and data communications, and on-net
application/information technology services in Europe. Our strategy is to become
one of the first providers of pervasive broadband internet access and on-net
business solutions on a pan-European basis to small and medium size businesses.
We are building what we believe will be a premier business-to-business broadband
internet service in Europe, including:
- an end-to-end broadband infrastructure from the source of applications,
content and other traffic to the desktop of a business customer,
- a pervasive access network using wireless local loop, digital subscriber
lines, or DSL, and fiber to provide wide coverage of business customers
across Europe,
- an extensive, high-capacity optical, internet protocol, fiber backbone for
the transport of inter-city traffic,
- "solution hotels" available for a range of internet service providers,
content providers, application service providers and other providers to
connect to the network and a strategy of bundling chosen solutions for
end-users,
- a set of differentiated products with a focus on data and internet
services,
- a fully integrated customer relationship management capability across all
services,
- a wide set of distribution channels including indirect and direct
channels, and
- a strong local presence across a range of European markets.
We refer to our broadband internet platform and the symbiotic interactions
among us, providers of content and applications and users of those services as
our EUROPEAN BROADBAND INTERNET ECOSYSTEM.
OUR PRESENCE AND PROPOSITION
Currently, we believe we are the largest holder of wireless local loop
licenses and spectrum in western Europe. We are present in seven European
countries covering a total population of approximately 153 million. In Germany,
we have secured co-location space for the launch of DSL services in over 596
central offices and plan to launch DSL services through over 100 central offices
in Germany by the end of this year. We have also leased over 10,000 square
meters of space for customer co-location and hosting services. We also operate a
leased 3,500 kilometer fiber optic backbone network covering 21 cities in
Germany. We have launched our wireless local loop services initially in Germany,
Luxembourg and Portugal, which we intend to be followed by Spain, France,
Switzerland and Finland. We are in the process of applying for wireless local
loop licenses and spectrum in other European countries. To date, we have
launched pilot services through our wireless local loop trials in Belgium and
France, commenced wireless local loop services to end users in Germany and
Luxembourg, and together with Teleweb, commenced wireless local loop services in
Portugal. We have signed a nationwide lease in France for existing, unused fiber
optic cable, which we call dark fiber, and plan to deploy a 4,800 kilometer
fiber optic backbone network covering 16 cities in France. We also plan to sign
another 450 kilometer dark fiber lease reaching a further two cities in France
and complete the
7
<PAGE>
network by the beginning of 2001. We are currently planning to deploy a fiber
optic backbone network in major Spanish cities by the middle of 2001. We plan to
create a pan-European fiber optic network by interconnecting our national fiber
optic networks and by establishing connections with cities in neighboring
countries.
We plan to develop an end-to-end broadband communications network in all
major European countries, consisting of hosting facilities, fiber optic
backbones and "last mile" access connections directly to our customers' sites.
Traditionally, incumbent telecommunications providers have maintained control of
the last mile of telecommunications services through their ownership of the
copper telephone lines connecting each business to the telephone network. As
deregulation of the last mile continues, we expect to gain access to the last
mile through the opportunistic use of multiple access technologies which we
believe will enable us to offer cost-effective access technology for our chosen
market segment. Although the choice of access technology will depend on our
customers' requirements, the applicable regulatory regime and the costs of
deploying the specific access technology, in general, we intend to use a
combination of wireless local loop technology, using new microwave transmission
systems, DSL, using existing copper lines, and local fiber optic links. Using
these different access technologies, we intend to provide a full suite of
internet, voice, video, data, value-added services and solutions to small and
medium size businesses.
In addition to targeting small and medium size businesses, we plan to
provide a range of network and hosting services for internet service providers
(which provide access to the internet), content providers (which provide news,
entertainment, resource information and other data), application service
providers (which provide software and other computer applications on-line) and
alternative or non-incumbent telecommunications carriers. These services will
include co-location, managed hosting and distribution of their content and
applications to our small and medium size business customers. We intend to enter
into strategic partnerships with providers of applications, content and systems
integration for the delivery of on-line services to small and medium size
businesses. To date, we have begun to develop strategic relationships with
companies such as Microsoft, Compaq, Siemens and Nortel Networks.
The development of our broadband internet network and services will require
significant additional capital to fund capital expenditures, working capital,
debt service and cash flow deficits. We are currently exploring various
financing sources to meet these capital requirements.
OUR BUSINESS STRATEGY
We are executing our broadband internet strategy in Europe by implementing
the following initiatives:
- developing a pan-European network with integrated broadband local access,
backbone and hosting,
- establishing local operations by hiring local management and forming
partnerships with local companies,
- building strategic relationships through our local partnerships, sales
channel agreements, supplier relationships, application bundling
agreements and systems integration agreements,
- expanding our addressable market through geographical extension, product
and technology expansion,
- developing focused and differentiated products and services using simple,
turnkey broadband solutions,
- implementing a targeted sales and marketing strategy through extensive
market research and appropriate product and distribution strategies for a
particular customer segment,
8
<PAGE>
- emphasizing technology leadership by deploying leading technologies while
emphasizing reliability, proven capability and scaleability, and
- providing quality service through end-to-end network control and focusing
on customer care.
We plan to pursue a combination of organic growth, strategic acquisitions,
joint ventures and investments in order to enhance the implementation of our
business strategy.
MANAGEMENT, PARTNERS AND EQUITY SPONSORS
We have assembled a management team with extensive experience in building
successful telecommunications businesses, including senior management in six
countries. Further, we have signed shareholder agreements with leading European
companies in five European countries. We have teamed with key local businesses
in many countries to aid our obtaining appropriate licenses, to assist in
marketing and to provide other strategic assistance. We believe that our
strategy of hiring local management and forming local partnerships allows us to
acquire assets such as licenses, dark fiber and co-location space more
effectively, build up operations more quickly and benefit from the significant
installed base of customers and distribution capabilities of our partners.
In Belgium, France, Portugal, Spain and the UK we have teamed with local
partners to manage the acquisition of wireless local loop licenses and to
develop the wireless local loop business in these countries once we are awarded
a license. In four of these five countries we hold the largest shareholding in
our consortium. In Portugal, the majority shareholder controls the business.
Currently, we hold wireless local loop licenses jointly with our local partners
in Portugal, Spain and France. In Belgium and the UK, wireless local loop
licenses have not yet been awarded. We, together with these strategic partners,
jointly control these businesses, except in Portugal. In this prospectus, all
discussions relating to the wireless local loop business in any of these five
countries refers to these jointly controlled businesses.
Timothy Samples, our Chief Executive Officer, and other members of our
management have extensive experience in the telecommunications markets. Our
management, including our directors, collectively hold 43.0% of our outstanding
shares on a fully diluted basis. We also have management with significant
experience in many of our proposed countries of operations: in Germany, Dieter
Finke; in Spain, Jose Fernandez Lizaran and Luis Rodriguez Lescure; in France,
Thierry Mileo and Vincent Teissier; in Luxembourg, Peter Sodermans; in the UK
and Switzerland, William Jones; and in Italy, Dario Cassinelli.
Our board of directors consists of our founders and co-chairmen, Lynn
Forester and Michael J. Price, Timothy Samples, our Chief Executive Officer, and
Victor Bischoff, Juan Luis Cebrian, Edward A. Gilhuly, Alan E. Goldberg,
Francois Jaclot, David C. Lee, Sir Evelyn de Rothschild, Lawrence B. Sorrel,
Barry S. Volpert and Helmut Werner all of whom are representatives of our
significant equity investors and/or accomplished European business executives.
Our stockholders include FirstMark Holdings L.L.C., Welsh, Carson,
Anderson & Stowe, Kohlberg Kravis Roberts & Co., Morgan Stanley Dean Witter
Capital Partners, Sandler Capital Management, ABN AMRO Ventures B.V., The
Goldman Sachs Group, Inc., World Online, Credit Suisse First Boston, Groupe
Arnault, Suez Lyonnaise des Eaux, BNP Paribas, the Rallye-Casino Group and
Francarep SA.
FirstMark Holdings is one of our largest stockholders and is controlled by
our co-chairmen. FirstMark Holdings has a distinguished advisory board, which
has provided advice and other assistance in the development of our European
operations and will continue to provide assistance to us in the future. Members
of FirstMark Holdings' advisory board include Vernon Jordan, Dr. Henry
Kissinger, Dr. Nathan Myhrvold, Bert Roberts, Sir Evelyn de Rothschild and
Bernard Smedley.
9
<PAGE>
FINANCING TO DATE
We have raised $661.6 million in equity, including $600 million pursuant to
financing agreements entered into on May 30, 2000.
In addition, on May 30, 2000, we entered into a ten-year finance loan with
Deutsche Bank. The loan is composed of four tranches totaling $445 million
([EURO]480 million). The loan will be used to finance the telecommunication
equipment provided by Siemens and other capital expenditures to build out and
operate our wireless local loop network in Germany.
On January 21, 2000, we entered into a seven-year loan with a consortium of
German banks. The loan is composed of a $10.1 million ([EURO]10 million)
revolving credit line and a $46.2 million ([EURO]46 million) term loan. The loan
will be used to finance the telecommunication equipment provided by Nortel Dasa
for our fiber optic backbone network in Germany.
------------------------
We were organized under the laws of Luxembourg in July 1998 as FirstMark
Communications Europe S.C.A. and converted to FirstMark Communications Europe
S.A. in January 2000. Our principal executive offices in Luxembourg are located
at 3, rue Jean Piret, Luxembourg L-2350 and in London are located at One James
Street, 4th Floor, London W1U 1DW, United Kingdom. Our telephone number is +352
26499800 in Luxembourg and +44 20 7529 5000 in London. Our website domain is
www.firstmark.net. Information contained on our website is not a part of this
prospectus, and our reference to our website here is a textual reference only
and not an active internet link to our site.
10
<PAGE>
SUMMARY OF THE OFFERING
<TABLE>
<S> <C>
Shares offered............................... shares of Class B common stock by us, in the
form of shares or, upon request in the United
States, ADSs.
U.S. offering................................ shares of Class B common stock, in the form
of shares or, upon request, ADSs.
International offering....................... shares of Class B common stock.
Over-allotment option........................ shares of Class B common stock.
Shares to be outstanding after the shares, not including the exercise of any
offering................................... outstanding options or conversion of Class A
common stock and non-voting junior preferred
stock into Class B common stock. As of
March 31, 2000, we had outstanding options
representing shares of Class A common
stock upon exercise and we had shares
of Class A common stock outstanding. Each
share of Class A common stock is convertible
into one share of Class B common stock. We
also had shares of non-voting junior
preferred stock outstanding. Each share of
non-voting junior preferred stock is
convertible into one share of Class A or
Class B common stock subject to adjustment.
Class B common stock......................... The shares offered hereby represent our
shares of Class B common stock. Holders of
Class B common stock are entitled to receive
dividends and vote on a share for share basis
with the Class A common stock, except holders
of Class A common stock have certain
preferential rights relating to the
nomination of a significant majority of the
candidates for election to our board of
directors and other significant corporate
events. We describe our Class B common stock
in more detail in the section titled
"Description of Share Capital."
The ADSs..................................... For shares sold in the form of ADSs, each ADS
represents one share of Class B common stock.
Dividend policy.............................. We have never declared or paid dividends, and
we do not expect to do so in the foreseeable
future.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Lock-ups..................................... FirstMark, its executive officers and
directors and certain stockholders have
generally agreed not to sell any shares or
ADSs or securities convertible into, or
exchangeable for, shares or ADSs during the
180-day period following the date of this
prospectus without the prior consent of the
representatives of the U.S. underwriters.
Please see ``Underwriters" for a more
detailed discussion of this lock-up and the
underwriting arrangements for this offering.
Use of proceeds.............................. We intend to use the net proceeds received by
us from this offering:
- to build out our fiber optic network in
Germany and to develop fiber optic networks
in France and Spain,
- to install wireless local loop equipment in
Finland, France, Germany, Luxembourg,
Portugal, Spain and Switzerland,
- to roll out DSL services in Germany,
- to acquire new wireless local loop
licenses, and
- for working capital and other general
corporate purposes, including funding
operating expenses, acquiring network
assets and business development activities
throughout Europe.
Nasdaq National Market symbol................ "FMRK" for the ADSs.
Neuer Markt symbol........................... " " for the Class B common stock.
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION
We present below our summary historical consolidated data as presented under
generally accepted accounting principles in the United States. We derived the
historical consolidated data for the years ended December 31, 1999 and 1998 from
our audited consolidated financial statements which are included elsewhere in
this prospectus. We began operations in 1998. We derived the historical
consolidated data for the three months ended March 31, 1999 and 2000 from our
unaudited consolidated financial statements which are included elsewhere in this
prospectus. The results for the most recent three months, which, in the opinion
of management, include all adjustments necessary for a fair presentation of the
results for the unaudited periods, should not be viewed as indicative of results
for the year ending December 31, 2000. The unaudited pro forma consolidated
financial information is provided for illustrative purposes only and does not
purport to represent what our actual results of operations or financial position
would have been had the acquisitions occurred on the dates assumed, nor is it
indicative of our future operating results or consolidated financial position.
You should read the following tables in conjunction with the consolidated
financial statements and related notes thereto and the other financial
information contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
2000 1999 1999 1998(1)
----------- ---------- ----------- ----------
(U.S. DOLLARS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF PROFIT AND LOSS DATA:
Revenue........................................ 2,518,752 -- 117,409 --
Cost of revenue................................ (1,277,081) -- (69,088) --
----------- ---------- ----------- ----------
Gross margin................................... 1,241,671 -- 48,321 --
Selling, general and administrative
expenses(2).................................. (27,462,490) (1,189,839) (24,678,920) (1,448,201)
----------- ---------- ----------- ----------
Operating loss................................. (26,220,819) (1,189,839) (24,630,599) (1,448,201)
Interest expense and other(3).................. (5,467,229) -- (6,732,972) --
Interest income and other...................... 29,651 -- 342,182 --
----------- ---------- ----------- ----------
Loss before income taxes....................... (31,658,397) (1,189,839) (31,021,389) (1,448,201)
----------- ---------- ----------- ----------
Income taxes................................... (1,945) -- -- --
Minority interest.............................. 597,734 -- 1,031,240 26,884
----------- ---------- ----------- ----------
Net loss....................................... (31,062,608) (1,189,839) (29,990,149) (1,421,317)
=========== ========== =========== ==========
STATEMENT OF CASH FLOW DATA:
Net cash used in operating activities.......... (21,471,560) (1,022,764) (17,958,336) (1,448,201)
Net cash (used in) provided by investing
activities................................... (16,822,132) (18,462) 15,371,165 (132,627)
Net cash provided by financing activities...... 34,623,066 1,067,368 21,114,254 1,846,206
OTHER FINANCIAL DATA:
EBITDA(4)...................................... (22,807,182) (1,181,566) (22,572,939) (1,448,201)
Capital expenditures(5)........................ (14,965,591) (18,462) (2,368,901) (152,908)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------------
PRO FORMA AS
HISTORICAL PRO FORMA(6) ADJUSTED(7)
----------- ------------- -------------
(U.S. DOLLARS)
<S> <C> <C> <C>
CONSOLIDATED AND PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents(8)......................... 17,887,816 596,887,816 807,512,816
Total assets......................................... 279,692,696 858,692,696 1,069,317,696
Total long-term debt and financing(9)................ 26,381,140 26,381,140 26,381,140
Mandatory redeemable preferred stock................. -- 594,000,000 --
Stockholders' equity................................. 87,560,042 91,353,966 895,978,966
</TABLE>
(CONTINUED ON NEXT PAGE)
13
<PAGE>
(1) Includes only the period from July 8, 1998 (date of inception) to
December 31, 1998.
(2) For purposes of this summary financial information, selling, general and
administrative expenses include license acquisition costs.
(3) For purposes of this summary financial information, interest expense and
other includes net exchange loss and equity in net loss of affiliates.
(4) EBITDA consists of net loss before depreciation and amortization,
amortization of goodwill in consolidation, net interest expense, income
taxes and minority interests. EBITDA is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
our operating results and is not intended to represent cash flow or results
of operations for the periods presented. EBITDA is not a measurement under
U.S. GAAP of financial performance and may not be similar to EBITDA measures
of other companies.
(5) Includes only capital expenditures for property and equipment.
(6) Gives pro forma effect for the following events that occurred in the period
from March 31, 2000 to the date of this prospectus:
- issuance of Series F and F-2 convertible preferred shares as part of the
$600 million private equity issuance pursuant to agreements entered into
on May 30, 2000,
- the repayment of our previous credit facility, and
- the conversion of a loan received from FirstMark Communications
International to equity.
(7) Gives pro forma effect to the effectiveness of this initial public offering
which includes:
- deferred compensation expense resulting from the outstanding stock options
under the existing 1999 stock incentive plan becoming exercisable (to the
extent vested),
- conversion of all existing preferred stock, except Series F-2 convertible
preferred stock into Class A common stock,
- conversion of all Series F-2 convertible preferred stock into non-voting
junior preferred stock, and
- the sale of ADSs and shares offered in this offering at an assumed initial
public offering price of [EURO] per share and $ per ADS (the
mid-point of the price range on the cover page of this prospectus), after
deducting the estimated underwriting discounts and commissions and
offering expenses payable by us.
(8) In the pro forma and pro forma as adjusted columns, $63 million of cash is
restricted, pursuant to a pledge agreement, to collateralize our obligations
under a performance bond issued in connection with the wireless local loop
license award in Spain.
(9) Total long-term debt and financing does not reflect the $63 million
guaranteed performance bond issued in connection with the Spanish wireless
local loop license award. We also have credit facilities which, subject to
certain conditions, would permit additional borrowings of $371.4 million.
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<PAGE>
RISK FACTORS
You should carefully consider the risks described below as well as the other
information in this prospectus, before making a decision to invest in our
company. The consequences of any of these and other risks could materially and
adversely affect our business, financial condition, prospects and results of
future operations. In such case, the trading price of our ADSs and shares could
decline, and you may lose all or part of your investment.
WE HAVE NO MEANINGFUL OPERATING HISTORY OR REVENUES.
We are in an early stage of development and first began offering our
services to carrier customers in Germany in January 2000. Consequently, we have
no meaningful history of operations on which you can evaluate our performance.
We have generated only limited revenues. We plan to expand significantly our
operations in Germany and in other European countries in the near term, which is
expected to require substantial additional capital expenditures. Consequently,
you should consider the risks, expenses, uncertainties and obstacles that we may
face in the markets we are entering and our competition when evaluating our
prospects.
OUR STRATEGY IS UNPROVEN, AND OUR MARKET ASSUMPTIONS MAY BE INCORRECT.
We believe that we will be one of the first companies to offer end-to-end
broadband internet services in multiple markets in Europe. Wireless local loop
services and DSL services have not been widely offered before in many of the
markets in which we plan to operate. As a result, our strategy, which is based
on our market analysis, has not been validated in practice, and there are no
directly comparable companies with meaningful operations and histories on which
you can base an evaluation of our prospects. We believe that the combination of
our unproven business model and the highly competitive and quickly changing
telecommunications market in which we compete makes it difficult to predict the
extent to which our planned products and services will achieve market
acceptance. To be successful, we must develop and market our products and
services to be widely accepted by businesses at profitable prices. We may never
be able to deploy our end-to-end broadband internet network as planned, achieve
significant market acceptance at favorable pricing, achieve favorable operating
results or profitability or generate significant positive cash flow.
WE HAVE EXPERIENCED AND EXPECT TO CONTINUE TO EXPERIENCE NEGATIVE OPERATING CASH
FLOW AND NET OPERATING LOSSES.
From the time we started operations until March 31, 2000, we have had
aggregate negative net operating cash flow of approximately $40.9 million and
aggregate net operating losses of approximately $52.3 million. We expect to
continue to incur significant and increasing negative cash flow and net
operating losses as we deploy our network across Europe, gain additional
licenses, introduce new services and products, expand our marketing efforts and
increase the size and scope of our operations. We cannot be certain that we will
achieve, or if achieved we will be able to maintain, positive cash flow or
operating profits.
The ability to generate positive cash flow and operating profits will depend
on a number of factors, including:
- our ability to build out our broadband internet network on a timely basis,
- our ability to attract customers,
- our ability to obtain regulatory approval to develop and expand our
broadband internet network,
- the uptake and usage levels of our services by our customers at favorable
prices, and
- our ability to control costs associated with building our network,
developing and servicing our customer base and expanding our portfolio of
services.
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<PAGE>
You should read "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for an additional discussion of our negative cash
flow and net operating losses.
OUR BROADBAND INTERNET NETWORK MAY NOT BE DEPLOYED ON A TIMELY BASIS.
The successful deployment of our broadband internet network is critical to
our success. Currently, our network is operating only in Germany, Luxembourg
and, through a minority investment, Portugal. We are in the process of expanding
the broadband internet network in these countries and developing a broadband
internet network in Belgium, Finland, France, the Netherlands, Spain and
Switzerland. We plan to expand aggressively in multiple markets in a very short
time frame. We do not believe that such a rapid and diverse expansion has been
previously attempted. The successful deployment of our network depends on our
ability to coordinate simultaneously a number of activities, including among
other things:
- installing switches and facilities,
- acquiring co-location and other leased space,
- acquiring long term arrangements to lease dark fiber for our fiber optic
backbone network,
- obtaining interconnection with other telecommunications providers at
beneficial rates,
- installing radio transmitters and receivers for wireless local loop
connections and acquiring the roof rights necessary for such
installations,
- installing fiber optic lines for our local loop fiber connections,
- obtaining unbundled access to the local loop copper lines for our DSL
connections,
- designing and installing network management systems and software, and
- hiring and integrating additional personnel.
Each of these tasks needs to be completed on a timely basis in multiple
markets and within expected cost limits. In addition, our ability to develop and
build our broadband internet network within budget and on schedule will be
affected significantly by potential problems that affect a project of this size
and complexity, including:
- failure to obtain licenses, permits and other necessary authorizations or
consents or failure to obtain them on a timely basis,
- failure to meet the build out obligations under our licenses,
- delays in the availability of equipment to be installed,
- failure of our contractors or equipment suppliers to fulfill performance
obligations, and
- failure to integrate, or delays in integrating, the many components of our
network.
Many of the factors integral to the development of our network are beyond
our control.
We could also face cost overruns, the unavailability of additional capital,
strikes, shortages of equipment and personnel, delays in obtaining governmental
or other third-party approvals, other construction delays, natural disasters and
other casualties, delays in the deployment or delivery of network capacity of
others that we have arranged to acquire or have contracted with, and other
events that we cannot foresee.
Failure to complete these tasks on schedule and on budget in any major
market could affect the timing of the roll-out of other portions of our network
in such market or any other market and the introduction of new services, hamper
our ability to attract customers and decrease our future revenues.
16
<PAGE>
WE EXPECT TO INCUR SUBSTANTIAL DEBT WHICH WILL AFFECT OUR OPERATIONS AND
LIQUIDITY.
We will need to increase significantly our level of indebtedness to fund our
business plan. We expect that most of the equipment we purchase will be financed
through vendor financing. Our high level of indebtedness will have important
consequences, such as:
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
funding debt service,
- limiting our ability to obtain additional financing for working capital,
capital expenditures or other purposes,
- increasing our vulnerability to adverse economic and industry conditions,
- increasing our vulnerability to interest rate increases because borrowings
may bear interest at variable rates, and
- increasing our vulnerability to competitive pressures, as many of our
competitors will be less leveraged than we are.
OUR DEBT AGREEMENTS IMPOSE OR WILL IMPOSE OPERATING AND FINANCIAL RESTRICTIONS
THAT MAY PREVENT US FROM CAPITALIZING ON BUSINESS OPPORTUNITIES.
Our existing debt agreements impose, and future debt agreements likely will
impose, significant operating and financial restrictions on us. These
restrictions may substantially limit or prohibit us from taking various actions,
including:
- incurring additional debt,
- restricting our ability to receive cash from our operating subsidiaries,
- making investments,
- paying dividends to our shareholders,
- creating liens,
- selling assets,
- engaging in mergers, consolidations or other business combinations,
- repurchasing or redeeming our shares, and
- otherwise capitalizing on business opportunities.
We have pledged substantially all of our assets in Germany and will also be
required to pledge substantially all of our other assets in these financings.
Failure to comply with the covenants and restrictions in our financing
agreements could trigger defaults under such agreements even if we are able to
pay our debt. If such a default were to occur, our creditors may be able to
accelerate the repayment of our debt and seize our assets, which would have a
material adverse effect on our business.
WE WILL NEED ADDITIONAL CAPITAL TO IMPLEMENT OUR BUSINESS PLAN WHICH WE MAY NOT
BE ABLE TO OBTAIN OR TO OBTAIN ON FAVORABLE TERMS.
WE HAVE SIGNIFICANT CAPITAL EXPENDITURE NEEDS. We currently anticipate that
our cash requirements for capital expenditures, working capital, equity
contributions in minority interests and operating losses from now through the
end of 2001 will be approximately $1.1 billion, including approximately $600
million in capital expenditures associated with the deployment of our broadband
internet network. These expenditures are expected to cover completion of the
fiber optic backbone network in Germany, costs related to establishing wireless
local loop and DSL services in Germany, completion of our
17
<PAGE>
planned fiber optic backbone networks in France and Spain and costs related to
establishing wireless local loop services in Spain, France, Switzerland,
Portugal and Finland.
Our business plan is in a formulative state and is subject to change. For
example, since the application processes for wireless local loop licenses in
some European countries, including in the UK, has not been finalized, we have
not taken into account these potential costs in determining our expenditure
through the end of 2001. These costs could be significant. Significantly, we may
accelerate our plan over the next 18 months to extend our broadband internet
network into more countries or to add new services to our planned services. If
we do expand or accelerate our business plan, we will likely need significant
additional capital prior to the end of 2001 beyond the amounts described above.
We will also need capital to fund our planned expansion and operations after
2001 since our goal is to offer our services in up to 18 European countries
covering up to 150 cities. The timing and amount of these expenditures is
currently uncertain. In the interim, we may utilize the funds then available to
begin these expansion efforts. If we are unable to raise needed capital, we may
be unable to complete even our currently targeted expansion and projects.
THE AMOUNT OF OUR FUTURE CAPITAL EXPENDITURES IS SUBJECT TO MANY
FACTORS. Our future capital requirements will depend on:
- the rate at which we deploy our broadband internet network,
- our success in obtaining additional wireless local loop licenses and the
costs of these licenses,
- equipment costs and other costs to deploy the broadband internet network,
including wireless local loop and digital subscriber line equipment and
our management information systems,
- the types of services we offer,
- staffing levels,
- customer growth,
- how long we continue to generate negative cash flows and operating losses,
- future acquisitions,
- competitive conditions, and
- regulatory and technological developments.
Many of these factors are beyond our control. Our anticipated network
roll-out plan is provisional and has been developed from our current market
research, projections and assumptions.
WE ARE SEEKING SOURCES TO FUND THESE SIGNIFICANT CAPITAL EXPENDITURES, BUT
WE MAY NOT BE SUCCESSFUL. We are currently exploring numerous different
financing sources to meet our current capital requirements, including additional
vendor debt financing, issuance of debt instruments in the public and private
markets and additional equity issuances. We cannot be sure that we will be able
to raise sufficient funds to meet our business plan. Moreover, any debt
financing sources are likely to impose significant restrictions on our business
activities and could also require equity enhancements which could be dilutive to
our shareholders. Any equity issuances could also be dilutive to our
shareholders. If we are unable to raise sufficient capital, we may need to alter
significantly our business plan, which could adversely affect our future
operating results and impair our ability to reach positive cash flow and
profitability.
COMPETITION IN THE TELECOMMUNICATIONS MARKET MAY AFFECT OUR ABILITY TO GENERATE
POSITIVE CASH FLOW OR NET INCOME OR ACQUIRE CUSTOMERS.
We are entering recently liberalized markets in an evolving and highly
competitive industry. In each of our markets, we will face competition from
existing and new providers of the technologies we provide and other competing
technologies. Competition for customers in the telecommunications
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<PAGE>
industry is primarily based on the quality of services offered and price. We
must compete effectively in order to meet the assumptions and projections in our
business plan.
In addition to competition from existing incumbent telecommunications
providers and alternative telecommunications carriers, including competing
services for wireless local loop and DSL, we expect to face competition from
European cable television systems, satellite service providers and other
wireless technology operators that are beginning to offer broadband
telecommunications services to business customers. Many of these competitors
have substantially greater financial, marketing and other resources than we do.
These competitors may use various types of wireless and wire-based technologies.
We expect our competitors continually to improve their product and service
offerings and substantially and continually reduce their prices. If our
competitors devote significant resources to developing their businesses in our
target markets, such action could have a material adverse effect on our
business.
Our competitors have been granted licenses in our markets and additional
license applications are pending or proposed. We expect other competitors will
apply for the same licenses as us in the future. In some situations, we may not
be granted a license because it has been granted to one of our competitors. In
particular, we expect to face substantial competition for wireless local loop
licenses as they are offered in each European country, which if we are able to
get such licenses may result in our having to pay a higher price for such
licenses and/or agree to more burdensome performance requirements.
Initially, we intend to price our services competitively based on our
estimates of our customers' budget for telecommunications and information
technology services. Our estimates may not be accurate and our customers may not
view our services as an adequate replacement for their current
telecommunications and information technology needs or as an adequate substitute
for products and services offered by our competitors. Prices for data
communication services have fallen historically, a trend we expect will continue
and likely accelerate. As price-based competition intensifies, as we believe it
will, we may be left in an unfavorable competitive position, particularly with
our anticipated leveraged capital structure. Significant price reductions for
telecommunications services may create substantial pressure on our margins and
could have a material adverse effect on our business.
WE MAY NOT BE ABLE TO IMPLEMENT OUR PAN-EUROPEAN STRATEGY.
We plan to offer our services in most major European countries and expect to
obtain benefits from offering our services in multiple countries. Our ability to
implement this strategy depends, in part, on our ability to acquire necessary
licenses for wireless local loop services and/or regulatory approval to permit
DSL services by getting access to the last mile in each of these countries. We
may not be able to do this. If we fail to offer services in any of the major
European countries or the provision of such services is significantly delayed,
we may not achieve our goal of providing pan-European service, which could
adversely affect our business plan.
WE MAY NOT BE ABLE TO TAKE ADVANTAGE OF EVERY BUSINESS OPPORTUNITY.
Our business strategy is ambitious and we have targeted a variety of
business opportunities, each of which may involve the expenditure of significant
personnel and financial resources. These resources are limited and we will have
to prioritize business opportunities and allocate resources among them. We may
not be able to fully develop every business opportunity, such as web hosting
opportunities, due to the development of other priorities, including wireless
local loop and DSL services, and the limited nature of our personnel and
financial resources. If we are unable to take advantage of a favorable business
opportunity, our business plan could be adversely affected.
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<PAGE>
WE ARE SUBJECT TO SIGNIFICANT REGULATION, AND FUTURE CHANGES IN THE REGULATORY
ENVIRONMENT MAY ADVERSELY AFFECT OUR BUSINESS.
WE ARE SUBJECT TO EU AND COUNTRY REGULATION. The telecommunications
industry in the EU is highly regulated. The regulatory regimes in the EU member
states were recently liberalized and the process is still evolving. Our ability
to deploy the broadband internet network and provide our proposed services
depends to a significant extent on the continued implementation of this
liberalized regulatory environment.
WE FACE SIGNIFICANT LICENSE CONDITIONS AND COMMITMENTS TO OBTAIN AND RETAIN
LICENSES. We need to obtain a license from each country's licensing authority
before we can offer wireless local loop service. We have obtained licenses for
wireless local loop spectrum in the following European countries: Finland,
France, Germany, Luxembourg, Portugal, Spain and Switzerland. Some of these
licenses required significant licensing fees or payments. We are in the process
of applying for other licenses in several countries, including licenses for
additional areas in Germany. Our ability to expand our network coverage and
range of services depends on our ability to obtain and retain these licenses.
Many of our licenses impose significant conditions on us, including the scope of
services to be offered, coverage and extension commitments and timing
commitments. In Spain and Switzerland we have provided performance guarantees in
connection with such commitments. For a more complete discussion of the
conditions and commitments in our licenses, see "Regulation." Failure to comply
with these conditions, or any other conditions attached to our licenses, may
constitute a breach of that license and result in the license being revoked or
fines being imposed.
WE MAY NOT BE SUCCESSFUL IN GETTING ADDITIONAL LICENSES. Many of the
European countries have not begun granting licenses. Some countries, such as
Belgium, have application processes to award licenses. Other countries such as
the UK auction or plan to auction off at least some of the licenses. We may not
be successful in obtaining the licenses for the areas in which we plan to offer
services. Moreover, the costs of acquiring such licenses may be prohibitive.
THE LOSS OF A LICENSE OR OTHER REGULATORY CHANGES COULD IMPACT US. The loss
of any of our licenses, or a substantial limitation upon the terms of any of our
licenses or any change in the regulatory environment in any country where we
have a license, could have a material adverse effect on us.
Many aspects of the law and regulations applicable to our operations are or
will be new and developing. As a result, it will be difficult to determine how
regulators will interpret regulations or assess compliance and what, if any,
enforcement action they may take.
LACK OF A REGULATORY FRAMEWORK IN TARGET COUNTRIES MAY DELAY THE IMPLEMENTATION
OF OUR BUSINESS PLAN.
Our ability to achieve our business plan requires access to the last mile.
Most European countries have not made provisions for requiring competitive
access conditions to the last mile. We may be incorrect in our assumptions that
the implementation of the liberalization of the telecommunications markets in
Europe will continue to occur in the manner anticipated or that we will be
allowed to continue to provide and to expand our services across Europe.
OUR ABILITY TO BUILD OUR BROADBAND INTERNET NETWORK AND PROVIDE OUR SERVICES
DEPENDS ON SECURING AND MAINTAINING LONG TERM AGREEMENTS TO LEASE DARK FIBER.
We do not currently own any telecommunications transmission lines. As a
result, as we deploy the broadband internet network, we will depend upon
long-term leases of dark fiber, which is existing fiber optic cable that is not
being used, to deploy our planned fiber optic backbone. We plan to obtain dark
fiber from facilities-based telecommunication carriers and other competitors who
are currently in the European telecommunications market or may enter it in the
future. We may have fixed costs under these lease arrangements, while revenues
generated by the utilization of these leases may vary based on traffic volume
and pricing. Accordingly, if we are unable to generate sufficient traffic volume
over
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<PAGE>
particular routes or are unable to charge appropriate rates for such traffic, we
may fail to generate enough revenue to meet the fixed costs associated with our
leases. GasLINE, our dark fiber provider in Germany, may terminate our lease
without our consent if our GasLINE loan agreement is terminated through our
default on interest payments. Our profitability depends in part on our ability
to obtain and use long-term leased fiber optic capacity arrangements on a
cost-effective basis.
WE MUST OBTAIN INTERCONNECTION AGREEMENTS WITH OTHER TELECOMMUNICATION PROVIDERS
AND INTERNET TRANSIT AGREEMENTS WITH INTERNET TRANSMISSION PROVIDERS.
Interconnection is required to complete transmissions that originate on our
broadband internet network but terminate outside our network, or that originate
from outside our network and terminate on our network. We will need to secure
and maintain interconnection arrangements with telecommunications
facilities-based providers in the European countries in which we intend to
operate. In addition, we need to enter unbundling arrangements with the national
incumbent telecommunication carriers to permit us to offer DSL services over
existing copper lines owned or maintained by the local carrier.
In March 2000, we entered into an unbundling agreement and an
interconnection agreement with Deutsche Telekom. In June 2000, we entered into
an interconnection agreement with Enterprise des Postes et Telecommunications,
the incumbent operator in Luxembourg. We have commenced negotiations on an
interconnection agreement with France Telecom. We intend in the near future to
begin negotiating an interconnection agreement with Telefonica in Spain. We may
experience difficulties or delays in negotiating and obtaining favorable
interconnection or unbundling agreements with the national incumbent
telecommunication carriers or other facilities-based providers in the European
countries in which we intend to operate or at reasonable costs and on terms and
conditions that are acceptable to us.
In addition, although EU law mandates that member states ensure that their
incumbents' interconnection rates are transparent and cost-oriented, there is
little experience of how the in-country regulator will regulate or supervise the
national incumbent telecommunication carrier's general interconnection
agreements. A material increase in the interconnection charges to us, or the
failure of interconnection charges to decline in line with general reductions in
telephone service charges, could result in reduced margins for us or an
inability to offer telecommunications services at competitive prices. In the EU,
the implementation of interconnection has been subject to extensive delays and
court challenges.
We also need to enter into agreements with internet backbone operators to
provide our customers access to the internet from our network. In Germany, we
entered into an access agreement with UUnet in April 2000. We will need to enter
into similar agreements with internet backbone providers in other countries. We
cannot assure you that we will be able to obtain such agreements at all or on a
timely basis, at reasonable costs and on terms and conditions that are
acceptable to us.
OUR USE OF WIRELESS LOCAL LOOP CONNECTIONS IS SUBJECT TO POTENTIAL OPERATING
RESTRICTIONS.
Our wireless local loop connections currently require clear lines of sight
to provide the best service coverage. We may not be able to secure appropriate
roof installation rights to ensure such coverage. Our current plan in urban
areas is to install radio equipment on rooftops of tall structures. We are
trying to obtain roof rights to desirable buildings in our markets, which may
require payments in advance whether or not we ultimately exercise these rights.
Increasing competition for roof rights may mean that even if we secure such
rights, we may not be able to obtain adequate rights on commercially reasonable
terms for clear transmission. We may also need to obtain construction, zoning or
other governmental permits to install our equipment, which may delay our
installations once we have obtained roof rights. We may also experience
reception problems due to weather, hills, buildings, trees and foliage. If we
fail to obtain sufficient roof rights, we may be unable to reach as many
customers as we intend or we may have to employ less cost effective methods to
reach these customers. Any of these consequences could prevent us from
generating operating revenues or adversely impact our gross margin.
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We plan to use fixed point to multipoint microwave transmission equipment
which has not been widely used before. Moreover, point to multipoint wireless
local loop technology is not being deployed in larger commercial applications as
we propose to do. Market acceptance of our wireless service may be adversely
affected by customer perception of lack of security associated with wireless
transmission.
In order to provide wireless local loop services, we must install microwave
transmission and reception equipment in a manner which attempts to:
- maximize the use of the spectrum allocated to us in our license,
- avoid radio interference with our equipment or third party equipment,
- take into account potential limitations that could occur due to
precipitation and climate conditions, and
- incorporate the impact of hills, buildings, trees and foliage.
Our failure to adequately meet these concerns could impact our quality of
service, our capacity and the ability to achieve our business plan.
PERCEIVED HEALTH AND SAFETY CONCERNS RELATED TO WIRELESS LOCAL LOOP TECHNOLOGY
MAY HAMPER OUR ABILITY TO ATTRACT CUSTOMERS AND SECURE SITES FOR OUR
EQUIPMENT.
We are aware of the public's perception that there may be health risks
associated with the effects of radio waves from wireless local loop transmitter
masts and outdoor units. The actual or perceived risks associated with wireless
communications equipment could adversely affect us. In some countries,
governments are placing limits on where transmitter equipment can be placed. It
may be difficult for us to obtain sites for our wireless equipment and there may
be reduced demand for our services due to perceived health risks.
DEPLOYMENT OF OUR DSL SERVICES MAY BE DELAYED.
We plan to utilize DSL as a means of connecting to some of our customers.
The deployment of DSL depends on our ability to:
- obtain unbundled access to the local loop copper lines for our DSL
connections,
- obtain sufficient central office co-locations,
- have the copper lines prepared to accept DSL services, and
- install equipment and facilities.
Each of these tasks needs to be completed on a timely basis and within
expected cost limits. Delays in the deployment of our DSL services could:
- limit the geographic scope of our services,
- prevent us from providing services on a cost-effective basis, and
- reduce the number of customers that we can attract and the volume of
traffic we carry.
Failure to complete these tasks on schedule and on budget may affect our
ability to reach other customers or may require us to use less cost effective
methods to reach customers. This could prevent us from generating operating
revenues, adversely impact our gross margins or otherwise materially adversely
affect our business.
WE DEPEND ON INCUMBENT TELECOMMUNICATION CARRIERS FOR CO-LOCATION AND ACCESS TO
COPPER LINES TO CONNECT OUR DSL SERVICES.
We must use copper telephone lines controlled by the incumbent
telecommunication carriers to provide DSL connections to customers. We also
depend on the incumbent telecommunication carriers
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for co-location and to prepare the copper lines properly for our DSL services.
We depend on the incumbent telecommunication carriers to test and maintain the
quality of the copper lines that we use. We do not have a history of obtaining
access to co-location from incumbent telecommunication carriers. In many cases,
we may be unable to obtain access to co-location from the incumbent
telecommunication carriers or to gain access at acceptable rates, terms and
conditions, including timeliness. We have experienced, and expect to experience
in the future, lengthy periods of time between our request for and the actual
provision of the co-location space and telephone lines. An inability to obtain
adequate and timely access to co-location space or prepare the copper lines
properly for our DSL services on acceptable terms and conditions from incumbent
telecommunication carriers could have a material and adverse effect on our
business.
Incumbent telecommunications carriers impose technical standards on DSL
providers using their local loop lines. An incumbent carrier may impose
technical standards that would force us to make costly technology upgrades to
comply with these standards. Significant unanticipated capital expenditures
associated with these technology upgrades could have a material adverse effect
on us. In addition, technologies deployed on copper telephone lines, such as
DSL, have the potential to interfere with other technologies on the copper
telephone lines. Interference, or claims of interference, if widespread, could
have a material and adverse effect on our business. The procedures to resolve
interference issues between incumbent telecommunications carriers and DSL
service providers are still being developed.
Because we compete with incumbent telecommunication carriers in our markets,
they may be reluctant to cooperate with us. The incumbent telecommunication
carriers may experience, or claim to experience, a shortage of co-location
space. If this occurs, we may not have alternate means of connecting our DSL
equipment with the copper lines or connecting our equipment in central offices
to our network. We expect to experience rejections of some of our co-location
applications on the grounds that no space is available or that all available
space has been allocated to our competitors. In addition, the price that the
incumbent telecommunications carrier charges for space in any given co-location
will vary. The price of some co-location space may make it commercially
prohibitive for inclusion in our DSL network. If we are unable to obtain, at
economically viable prices, physical co-location space from incumbent
telecommunication carriers, we may face delays, additional costs or an inability
to provide services in certain locations. Delays in obtaining access to
co-location space or the rejection of our applications for co-location could
result in delays in, and increased expenses associated with, the rollout of our
services, which in turn could have a material and adverse effect on our
business.
Our dependence on the incumbent operators has caused and could continue to
cause us to encounter delays in establishing our networks, provisioning lines
and upgrading our services. These delays could adversely affect our
relationships with our customers, harm our reputation or could otherwise have a
material adverse effect on our business, prospects, financial condition and
results of operations.
WE MAY BE UNABLE TO EXPAND OUR DSL SERVICES EFFECTIVELY AND PROVIDE HIGH
PERFORMANCE TO A SUBSTANTIAL NUMBER OF END USERS.
Our ability to connect and manage a substantial number of end users using
our planned DSL services at high transmission speeds is still unknown. While
peak digital data transmission speeds across our planned DSL network to and from
the central office and the end user are expected to exceed 1.5 megabits per
second, the actual data transmission speeds over our network could be
significantly slower due to:
- the type of DSL technology deployed,
- the distance an end user is located from a central office,
- the configuration of the telecommunications line being used,
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- the existence of and number of data transmission impediments on the
incumbent operator's copper lines,
- the gauge of the copper lines, and
- the presence and severity of interfering transmissions on nearby lines.
WE FACE SIGNIFICANT CHALLENGES IN OPERATING OUR BROADBAND INTERNET NETWORK.
We are in the process of deploying our broadband internet network. Once our
network is deployed, our success will depend on our ability to operate, manage
and maintain the network and to generate and maintain traffic on the network.
Successfully managing the broadband internet network, which we expect to be one
of the first to employ wireless local loop, DSL and fiber lines in one system,
is subject to many risks, including operating and technical problems and
regulatory uncertainties.
A major equipment failure or natural disaster affecting any of our switching
offices or hardware could materially adversely affect our operations. The
broadband internet network will be subject to risks that are outside our
control, such as risks of damage to software and hardware from fire, power loss,
natural disasters and general transmission failures which can be caused by a
number of additional factors. Any failure of our network or other systems or
hardware that causes significant interruption to our operations could materially
affect us. If we have prolonged or significant system failures or our customers
have difficulties in accessing or maintaining connection to our network, our
relationship with our customers could be threatened, we could seriously damage
our reputation, and we could experience customer attrition and financial losses.
WE RELY ON THIRD PARTY SUPPLIERS FOR MANY IMPORTANT ASPECTS OF OUR OPERATIONS.
We plan to use third parties to perform many key functions of deploying our
broadband internet network and to manage the network and our operations. We will
evaluate this decision on a country by country basis. Our ability to outsource
key functions is particularly critical as we are in the process of hiring
personnel for important functions. We may, for example, rely on suppliers, even
on an exclusive basis, for:
- installation of network switching, routing and transmitting equipment,
- the development, implementation and operation of our management
information system,
- customer care services, such as customer care centers, customer bill
preparation and on-site customer equipment installation, and
- advertising.
We will depend on these and other suppliers, many of whom are critical to
our ability to implement our business strategy successfully. Our failure to
enter into satisfactory supply agreements or the failure by these suppliers or
any others to perform under their agreements with us may impact our ability to
grow our business and service our customers, which would have a material adverse
effect on our business.
WE DEPEND ON OTHER SUPPLIERS FOR MANAGEMENT INFORMATION SYSTEMS WHICH ENABLE US
TO PROVIDE KEY CUSTOMER CARE AND BILLING SERVICES THAT WE NEED FOR OUR
BUSINESS.
We need an effective and flexible system to provide customer billing,
customer care functions, accounting and financial statements and other
management functions. To produce customer bills efficiently, we will be required
to record and process service detail records quickly and accurately for all of
the access technologies we intend to deploy. In addition, any such system will
be required to provide billing information for both direct services offered by
us and indirect services offered by other providers. We require management
information systems which will grow as our business expands and change as new
technological developments occur. We are outsourcing the design, development and
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operation and maintenance of the management information systems. However, the
provider of these services may not be successful in establishing such systems
and once established such systems may not meet our needs. We believe that the
successful implementation and integration of new management information systems
and back-office support will be important to our growth, as well as our ability
to monitor and control costs, to bill customers accurately and in a timely
fashion and to achieve operating efficiencies. There may be delays or
cost-overruns or other adverse consequences in implementing these systems. Our
inability to assume and implement systems, or to integrate new technologies in a
timely and cost-effective manner, could negatively impact our ability to service
our customers which may cause us to lose existing customers and prevent us from
acquiring new ones. This would result in lower than anticipated revenues and
could materially and adversely affect our business.
WE MAY LOSE OUR EXPECTED EARLY MARKET ADVANTAGE DUE TO DELAYS.
Our strategy is to be one of the first operators to provide broadband
internet services to small and medium size businesses on a pan-European basis.
If we suffer any delay in deploying our network in any country or our
competitors deploy networks sooner than we anticipate, we may lose our expected
early market advantage, which would affect our future results of operations and
cash flow.
Delays in the continued deployment of our network could:
- limit the geographic scope of our services,
- prevent us from providing services on a cost-effective basis,
- reduce the number of customers and internet service providers, content
providers, application service providers and alternative
telecommunications carriers we can attract and the volume of traffic we
carry, and
- affect our ability to obtain lower cost capacity on other networks by
swapping excess capacity or cause us to incur penalties for untimely
delivery of promised capacity or could result in termination of our swaps.
Any one of these results could prevent or delay us from increasing our
operating revenues or could adversely impact gross margins.
EUROPEAN USE OF THE INTERNET, ELECTRONIC COMMERCE AND THE DEMAND FOR BANDWIDTH
INTENSIVE APPLICATIONS MAY NOT INCREASE AS SUBSTANTIALLY AS WE EXPECT WHICH
WOULD LIMIT DEMAND FOR OUR SERVICES.
Our business plan assumes that European use of the internet, electronic
commerce and other bandwidth intensive applications will increase substantially
in the next few years, in a manner similar to the increased use that the United
States market has experienced over the past few years. If the use of bandwidth
intensive applications in Europe does not increase as anticipated, demand for
some of our services, including our internet and bandwidth services, could be
substantially lower than we currently anticipate and our ability to generate
revenues will be adversely affected. Our expectations are based on our market
review and analysis which may prove to be inaccurate.
Because there has been a limited history in Europe for the types of services
we intend to offer, we have difficulty judging what the customer demand and
market acceptance for those services will be. Nevertheless, based upon certain
assumptions as to market acceptance of and customer demand for our planned
services, we have committed and will continue to commit to:
- significant operating expenses,
- significant capital investments, and
- operating leases, equipment supply contracts and service and financing
arrangements.
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If there is a lower level of overall demand in the European market for our
telecommunications services or we fail to attract sufficient customers, our
ability to generate revenues will be adversely affected.
WE HAVE ENGAGED AND WILL CONTINUE TO ENGAGE IN JOINT VENTURES THAT ARE
ACCOMPANIED BY INHERENT RISKS.
We have formed joint ventures to apply for wireless local loop licenses in
many of the European markets we intend to target, such as France and Spain. In
several of these joint ventures, we cannot control operations without
cooperation from our local partners. In Spain and France, we hold a minority
interest in these ventures and share operational control. In Portugal, we
operate through Teleweb, which is controlled by our local partner, Finantel. We
may enter into future joint ventures with other companies. All joint ventures
are accompanied by risks. These risks include:
- the inability to make certain key strategic decisions in those countries
without our local partners' consent,
- diversion of our resources and management time,
- inconsistent economic, business or legal interests or objectives among
joint venture partners and between joint venture operations in different
countries,
- the possibility that a joint venture partner will default in connection
with a capital contribution or other obligation, thereby forcing us to
fulfill such obligation, and
- difficulty maintaining uniform standards, controls, procedures and
policies.
We discuss our joint venture agreements in more detail in the section titled
"Summary of Material Agreements--Joint Venture Agreements."
TELECOMMUNICATIONS TECHNOLOGY IS CHANGING RAPIDLY, AND WE MAY FAIL TO RESPOND TO
THOSE CHANGES ADEQUATELY OR QUICKLY ENOUGH TO REMAIN COMPETITIVE.
The telecommunications industry is subject to rapid and significant changes
in technology. Such changes could lead to new products and services that compete
with those we offer or plan to offer. Changes could also lead to price decreases
in competing products and services to the point where our products and services
could become non-competitive. As new technologies develop, we may be placed at a
competitive disadvantage and competitive pressures may force us to implement
such new technologies at substantial cost. In addition, our competitors may
implement new technologies before we are able to, allowing them to provide
better services than ours. The effect of technological changes on our businesses
cannot be predicted. In the future, we expect to experience competition from new
or advanced fixed-line, wireless or satellite technologies, including high-speed
wireless optical technology. Even if these factors develop as we anticipate, we
may not be able to implement our strategy or be able to respond to such
competitive pressures and adopt new technologies on a timely basis or at an
acceptable cost. The technologies we plan to use or which we may decide to use
in the future may not enjoy customer preference, may not operate as designed or
may become obsolete. One or more of these factors could materially and adversely
affect our business.
WE MAY BE UNABLE TO ATTRACT AND RETAIN THE NECESSARY OPERATIONAL AND OTHER
PERSONNEL REQUIRED TO ACHIEVE OUR BUSINESS PLAN. WE DEPEND ON THE EXPERIENCE
OF OUR EXECUTIVE OFFICERS AND THE LOCAL KNOWLEDGE OF OUR IN-COUNTRY
MANAGEMENT. ANY DIFFICULTY IN RETAINING OUR CURRENT EMPLOYEES WOULD ADVERSELY
AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.
Our operations are managed by a small number of key executive officers,
including our chief executive officer, Timothy Samples. These officers are
critical to maintaining relationships with our local partners and suppliers and
developing new opportunities for our network and services. In addition, we
depend on a limited number of personnel in each country where we are building
our
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network, since they have extensive local knowledge of the industry and
experience with the national regulators. The loss of any of these individuals
could have a material adverse effect on us.
We recently hired a number of our senior management, including our chief
executive officer and chief financial officer. We need to hire hundreds of other
persons in a short period of time in order to be able to execute our business
plan. We are in the process of recruiting a substantial number of new employees,
including sales and operational employees. Our success depends on our ability to
continue to attract, recruit, integrate and retain these personnel as we grow.
Competition for qualified personnel in Europe is intense, and there is generally
a limited number of persons with the requisite experience in the internet and
telecommunications sectors in which we operate. We may not be able to retain
senior management, integrate new managers or recruit qualified personnel in the
future.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our revenue currently depends upon a relatively small number of significant
customers and contracts. We are also planning to expand our operations. The loss
or addition of one or more of these customers or contracts or difficulties in
our expansion plans could cause significant fluctuations in our financial
performance. In addition, the significant expenses resulting from the expansion
of our network and services are likely to lead to operating results that vary
significantly from quarter to quarter.
IF WE ARE UNABLE TO IMPROVE AND ADAPT OUR OPERATIONS AND SYSTEMS AS WE GROW, WE
COULD LOSE CUSTOMERS AND REVENUES.
We expect our business to continue to grow rapidly, which may significantly
strain our customer support, sales and marketing, accounting and administrative
resources, network operation and management and billing systems. Such a strain
on our operational and administrative capabilities could adversely affect the
quality of our services and our ability to collect revenues. To manage our
growth effectively, we will have to develop our operational support and other
back office systems and procedures and appropriate financial systems and
controls. We will also have to expand and train our growing employee base to
handle the increased volume and complexities of our business. We cannot assure
you that we will maintain adequate internal operating, administrative and
financial systems, procedures and controls, or obtain, train and adequately
manage sufficient personnel to keep pace with our growth, which may result in
our inability to grow our business as planned.
In addition, if we fail to project traffic volume and routing preferences
correctly, or to determine the optimal means of expanding the network, we could
lose customers, make inefficient use of the network, have higher costs and lower
profit margins.
WE FACE MANY DIFFICULTIES AND UNCERTAINTIES IN CONNECTION WITH POTENTIAL
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES.
We may seek to acquire companies or customer bases and businesses from, make
investments in or enter into strategic alliances with, other companies. We will
encounter risks in these acquisitions, investments or strategic alliances,
including:
- the difficulty of identifying appropriate strategic transaction candidates
in the countries in which we do business or intend to do business,
- the difficulty of integrating the operations and personnel of the acquired
entities,
- the potential disruption to our ongoing business caused by senior
management's focus on the strategic transactions,
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments or strategic alliances,
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- the failure to maintain uniform standards, controls, procedures and
policies and the impairment of employee relations as a result of changes
in management and ownership, and
- the costs of acquiring and integrating businesses or engaging in other
strategic transactions.
Because of our limited operating history, we have only limited experience in
managing these risks. Other than as discussed in this prospectus, we have no
definitive agreement with respect to any acquisition, strategic alliance or
investment, although from time to time we have discussions with other companies
and assess opportunities on an ongoing basis.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Our existing stockholders which hold Class A common stock will continue to
hold a majority of our common stock after this offering. Holders of Class A
common stock have the right to nominate for election a substantial majority of
the directors to our board. As a result these stockholders will likely control
the company even after they no longer control a majority of the shares of
Class A and Class B common stock in the aggregate. Moreover, holders of Class A
common stock have the right to vote as a class to approve mergers and other
significant transactions relating to the company. In addition, pursuant to a
stockholders agreement, certain holders of Class A common stock constituting a
minority of our outstanding shares will effectively have the right to approve
certain transactions including: (1) any consolidation, merger or acquisition of
control, (2) any sale of all or substantially all of our assets, (3) any
liquidation or dissolution, and (4) any submission or application to acquire any
material license, other than the recently announced license in France, involving
commitments of more than $20 million individually or more than $100 million in
the aggregate. Certain of these rights terminate after specified events. We
discuss our Class A and Class B common stock in more detail in the section
titled "Description of Share Capital."
This effective control of the company may present conflicts of interest
between these Class A stockholders and us. They may pursue or cause us to pursue
transactions that could enhance their controlling interest, or permit them to
realize upon their investment, in a manner that is not in the interests of all
stockholders or of non-Class A stockholders. These investors or their affiliates
currently have significant investments in other telecommunications companies and
may in the future invest in other entities engaged in the telecommunications
business, some of which may compete with us. They are under no obligation to
bring us any investment or business opportunities of which they are aware, even
if opportunities are within our objectives. Conflicts may also arise in the
negotiation or enforcement of arrangements we may enter into with entities in
which these investors or their affiliates have an interest.
THE PAN-EUROPEAN SCOPE OF OUR OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our strategy is to develop a pan-European broadband internet network and
offer our services on a pan-European basis. As we expand our operations into new
countries, we may face some additional risks, including:
- tariffs and other trade barriers,
- restrictions on repatriation of earnings,
- problems in collecting accounts receivable,
- political risks,
- potentially adverse tax consequences of operating in multiple
jurisdictions, and
- an adverse change in laws, regulation or administrative practices.
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In addition, we are exposed to fluctuations in foreign currencies, since our
revenues, costs, assets and liabilities are denominated in multiple local
currencies. Fluctuations in foreign currencies may also make period to period
comparisons of our results of operations difficult.
WE FACE UNCERTAINTIES AND POTENTIAL HIDDEN COSTS FROM PROSPECTIVE REGULATION OF
THE INTERNET.
To date, regulations have not materially restricted the provision of
internet services in our markets. However, the legal and regulatory environment
that pertains to the internet is uncertain and may change. New laws and
regulations may be adopted. Existing laws may be applied to the internet and new
forms of electronic commerce. New and existing laws may cover issues such as:
- sales or other taxes,
- user privacy,
- pricing controls,
- characteristics and quality of products and services,
- consumer protection and fraud prevention,
- cross-border commerce,
- libel and defamation,
- copyright, trademark and patent infringement,
- other claims based on the nature and content of internet materials, and
- encryption.
Uncertainty and new regulations could increase our costs and prevent our
customers from selling their products and services over the internet using our
platforms. It could also slow the growth of the internet significantly. This
could delay growth in demand for our internet products and limit the growth of
our internet-related revenues.
WE ARE A HOLDING COMPANY SUBJECT TO RESTRICTIONS ON PAYMENTS TO US BY OUR
SUBSIDIARIES AND JOINT VENTURES.
We are a holding company and our only assets, other than the cash proceeds
from financings, are shares of our operating subsidiaries and our interests in
certain joint ventures. We will rely primarily on interest, loan repayments and
other intercompany cash flows from our operating subsidiaries and joint ventures
to generate the funds to pay the money we owe.
Any future debt we borrow directly will be our obligation alone. The ability
of our operating subsidiaries and joint ventures to make funds available to us
to pay interest (or premium, if any) on our debt or to repay our debt at
maturity or otherwise will depend upon a number of factors, including:
- limitations of debt agreements under which our subsidiaries have borrowed
money,
- our operating subsidiaries' and joint ventures' abilities to generate
positive cash flow,
- statutory, taxation and other restrictions,
- earnings, level of statutory reserves and capitalization, and
- the terms and conditions of our various joint venture agreements.
Our operating subsidiaries and joint ventures are separate and distinct
legal entities and will have no obligation whatsoever to pay amounts due
pursuant to our debt or to make funds available to us.
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In addition, dividends and other payments to us from our operating
subsidiaries and joint ventures may have tax consequences that will adversely
affect us.
WE MAY BE CLASSIFIED AS A PASSIVE FOREIGN INVESTMENT COMPANY FOR U.S. FEDERAL
INCOME TAX PURPOSES.
If we were to be considered a passive foreign investment company, or PFIC,
for U.S. federal income tax purposes some U.S. taxpayers would be subject to a
special U.S. federal income tax regime which could result in adverse tax
consequences to those U.S. taxpayers.
We intend to manage our affairs and the affairs of our subsidiaries so as to
avoid or minimize the chances that we will be classified as a PFIC following
this offering to the extent consistent with our other business goals and
commitments. However, because we will not immediately invest the funds from this
offering in active assets and we are likely not eligible for a special exception
for ``start-up" companies, it is possible (depending on the rate of utilization
of those funds) that we will be a PFIC for the current taxable year. We believe,
however, based on our projections that it is unlikely that we would be a PFIC in
years after the current taxable year.
A further discussion of the PFIC rules and the ``QEF election," which, if
timely and effectively made will allow U.S. holders of the Class B common stock
or ADSs to avoid the adverse tax consequences of the PFIC rules, can be found
under the heading ``Taxation--Certain United States Federal Income Tax
Considerations--Passive Foreign Investment Company."
THE ABSENCE OF A PRIOR PUBLIC MARKET FOR OUR SHARES OR THE ADSS CREATES
UNCERTAINTY IN MARKET PRICE.
Prior to this offering, you could not buy or sell our shares publicly. We
plan to apply for quotation of the ADSs on the Nasdaq National Market. We also
plan to seek to list our Class B common stock on the Neuer Markt segment of the
Frankfurt Stock Exchange. However, an active public market for the shares or
ADSs may not develop or be sustained after the offering. Moreover, if a market
does develop, the market price of our shares or ADSs may decline below the
initial public offering price. After the offering, the market price of the
shares and ADSs may fluctuate significantly in response to a number of factors,
some of which are beyond our control, including:
- quarterly variations in our operating results,
- changes in financial estimates by securities analysts,
- changes in market valuations and the regulatory framework for
telecommunications companies,
- announcements by us, or our competitors, of significant contracts,
acquisitions, strategic partnerships, joint ventures, business
combinations, financial results or capital commitments,
- loss of a major customer,
- adverse relationships with our strategic equity partners and wireless
local loop equity partners,
- additions or departures of key personnel, and
- sales of shares or ADSs.
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
SHAREHOLDERS.
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. In addition, the stock
markets have experienced significant price and volume fluctuations that have
affected the market prices of equity securities of technology companies,
particularly internet and telecommunications companies, and that often have been
unrelated to the operating performance of those companies. These broad market
fluctuations may adversely affect the market price of our shares or ADSs.
Furthermore, following periods of volatility in the market price of a company's
securities, shareholders of the company have often instituted securities class
action litigation against the company. Any similar litigation against us could
result in substantial costs and a
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diversion of management's attention and resources, which could adversely affect
the conduct of our business.
INVESTORS IN OUR SHARES AND ADSS WILL INCUR IMMEDIATE DILUTION AND MAY
EXPERIENCE FURTHER DILUTION.
The initial offering price of our shares and ADSs will be substantially
higher than the pro forma net tangible book value per share of the outstanding
shares, including the shares represented by the ADSs, immediately after the
offering. If you purchase shares or ADSs in this offering, you will incur an
immediate and substantial dilution in the pro forma net tangible book value per
share or ADS from the price you will have paid for the shares or ADSs. There are
also options to purchase shares with exercise prices significantly below the
estimated initial public offering price. To the extent such options are
exercised, you will experience further dilution.
THE SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT
OUR STOCK PRICE.
After this offering, there will be outstanding shares of Class B
common stock on a fully diluted basis (assuming conversion of Class A common
stock and non-voting junior preferred stock into Class B common stock),
including shares represented by ADSs. If the underwriters exercise their
over-allotment option in full, there will be shares of Class B common
stock on a fully diluted basis (assuming conversion of Class A common stock and
non-voting junior preferred stock into Class B common stock), including shares
represented by ADSs, outstanding. Of these shares, the shares sold in this
offering will be freely tradable, except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act of 1933. The
currently outstanding shares will not be registered shares and may only be
resold in compliance with the registration requirements under the Securities Act
or pursuant to an exemption therefrom, and following the expiration of any
lock-up agreements entered into with the underwriters. All of our directors and
executive officers have agreed, and all of our other stockholders have agreed,
for a period of 180 days after the date of this prospectus, that they will not,
without the prior written consent of the representatives of the underwriters,
directly or indirectly, offer to sell, sell or otherwise dispose of any shares.
In addition, as of the date of this prospectus, there are outstanding
options to purchase shares which become exercisable over a period of time
and there are options for shares available for grant.
We cannot predict if future sales of our shares or ADSs, or the availability
of our shares or our ADSs for sale, will materially adversely affect the market
price for our shares or ADSs, as the case may be, or our ability to raise
additional capital by offering equity securities.
CONVERSION TO THE EURO MAY RESULT IN INCREASED COSTS AND POSSIBLE ACCOUNTING,
BILLING AND LOGISTICAL DIFFICULTIES IN OPERATING OUR BUSINESS.
Until January 1, 2002, the euro will exist in electronic form only and the
participating countries' individual currencies will persist in tangible form as
legal tender. During the transition period, we must manage transactions in both
the euro and the participating countries' respective individual currencies.
There can be no assurance that we will not incur increased operational costs or
have to modify or upgrade our information systems in order to respond to
possible accounting, billing and other logistical problems resulting from the
conversion to the euro. In addition, there can be no assurance that our
third-party suppliers and customers will be able to successfully implement the
necessary protocols.
ENFORCING JUDGMENTS AGAINST US MAY REQUIRE COMPLIANCE WITH NON-U.S. LAW.
Most of our assets are located outside the United States. You will need to
comply with foreign laws to enforce judgments obtained in a U.S. court against
our assets, including foreclosure upon such assets. In addition, it may not be
possible for you to effect service of process within the United States upon us,
or to enforce U.S. court judgments predicated upon U.S. federal securities law.
31
<PAGE>
OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS.
This prospectus contains forward-looking statements, which you can generally
identify by our use of forward-looking words including "believe," "expect,"
"intend," "may," "will," "should," "could," "anticipate" or "plan" or the
negative or other variations of these terms or comparable terminology, or by
discussion of strategies that involve risks and uncertainties. We often use
these types of statements when discussing:
- our business plans and strategies,
- our anticipation of profitability or cash flow from operations,
- the development of our business,
- the expected market for our services and products,
- our anticipated capital expenditures,
- changes in regulatory requirements, and
- other statements contained in this prospectus regarding matters that are
not historical facts.
We caution you that these forward-looking statements are only predictions
and estimates regarding future events and circumstances. We cannot assure you
that we will achieve the future results reflected in these statements.
32
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING
We estimate that we will receive net proceeds of approximately $210.6
million from this offering, assuming an initial public offering price of
$ per ADS ([EURO] per share of Class B common stock), the
mid-point of our estimated price range. If the underwriters fully exercise their
over-allotment option, we estimate that we will receive net proceeds of
approximately $ million. This estimate is after deducting estimated
underwriting discounts, commissions and other fees and expenses payable by us.
We intend to use the net proceeds of this offering to execute our business plan,
which includes:
- approximately $100.0 million in capital expenditures to:
- build out our fiber optic backbone network in Germany and to develop
fiber optic networks in France and Spain,
- install wireless local loop equipment in Finland, France, Germany,
Luxembourg, Portugal, Spain and Switzerland,
- roll out DSL services in Germany, and
- acquire new wireless local loop licenses; and
- approximately $110.6 million for working capital and other general
corporate purposes, including funding operating expenses, acquiring
network assets and business development activities throughout Europe.
Although we have no commitments or agreements with respect to any specific
future acquisition or strategic investments, we have in the past, currently are
having, and expect in the future to have, negotiations regarding possible
acquisitions of or investments in businesses involved in the telecommunications
and internet business, and, therefore, we may use a portion of the net proceeds
of this offering for the acquisition of or investments in businesses which we
believe are complementary to our own. We may not successfully complete any
acquisitions or investment, or if an acquisition or investment is completed, we
may not successfully integrate it into our business.
We will retain broad discretion in the use of the net proceeds of this
offering. The amounts and timing of our expenditures of the net proceeds will
vary depending on a number of factors, including, if and when we are awarded
additional licenses, the progress of our network deployment, competitive and
technological developments and the rate of growth, if any, of our business. We
cannot assure you that the uses will not vary from our current intentions.
Pending these uses, we intend to invest the net proceeds from this offering
in short-term, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our shares and do not
anticipate declaring or paying any cash dividends on shares of our common stock
in the foreseeable future. We currently intend to retain any future earnings to
finance the expansion and development of our business. Subject to the
ratification by stockholders at the following general meeting of stockholders,
decisions to pay interim dividends may only be made by FirstMark's board of
directors. If we were to pay dividends, we would expect to pay them in either
U.S. dollars or euro. Any cash dividends payable to holders of shares or ADSs
who are nonresidents of Luxembourg would normally be subject to Luxembourg
statutory withholding taxes. We describe this withholding tax in more detail in
the section titled "Taxation--Certain Luxembourg Tax Considerations." Any future
determination with respect to the payment of dividends on our shares will depend
upon, among other things, our earnings, capital requirements, the terms of our
existing indebtedness, applicable requirements of Luxembourg corporate law and
other legal restrictions, general economic conditions and such other factors
considered relevant by our board of directors. Our non-voting junior preferred
stock has a priority dividend payment. In addition, our ability to pay dividends
is restricted under the terms of our debt agreements.
33
<PAGE>
DILUTION
Our net tangible book value (deficit) as of March 31, 2000 was approximately
[EURO] per share or $ per ADS giving effect to the receipt of
the proceeds from our recent private equity issuance of $600 million. Net
tangible book value (deficit) per share represents the amount of our total
tangible assets less our total liabilities, divided by the number of shares
outstanding. After giving effect to the receipt of $210.6 million of estimated
net proceeds from the sale of shares in the offering and the receipt of $600
million in proceeds from our recent private equity commitment, our pro forma net
tangible book value as of March 31, 2000 would have been approximately
$ per share or $ per ADS. This represents an immediate increase
of [EURO] per share, or $ per ADS, to existing shareholders and
an immediate dilution of [EURO] per share, or $ per ADS, to new
investors. The following table illustrates this dilution:
<TABLE>
<CAPTION>
PER SHARE PER ADS
--------- --------
<S> <C> <C>
Assumed initial public offering price.................... [EURO] $
Pro forma net tangible book value (deficit) as of March
31, 2000 after adjustment for our private equity
issuance............................................... [EURO] $
Net tangible book value after adjustment for the
offering...............................................
Dilution in net tangible book value to new investors..... [EURO] $
</TABLE>
The foregoing computations assume conversion of the Class A common stock and
non-voting junior preferred stock into Class B common stock, and no exercise of
any options or warrants or the over-allotment option. As of March 31, 2000,
there were outstanding options to purchase an aggregate of shares at
exercise prices ranging from [EURO] to [EURO] per share for the
options. If all of the foregoing options had been exercised as of March 31,
2000, the net tangible book value at such date would have been [EURO]
per share or $ per ADS, and the pro forma net tangible book value after
giving effect to the offering would have been [EURO] per share or
$ per ADS. This represents an immediate increase of [EURO] per
share, or $ per ADS, to existing shareholders and an immediate dilution
of [EURO] per share, or $ per ADS, to new investors.
For all U.S. dollar calculations, we used an exchange rate of $ per
[EURO]1.00.
The following table summarizes, as of March 31, 2000, the number of shares
purchased, the total consideration paid and the average price per share paid by
the existing shareholders and the average price per share and per ADS paid by
new investors, before deducting the underwriting discount and the estimated
expenses of the offering payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE AVERAGE
------------------- ------------------- PRICE PER PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE ADS
-------- -------- -------- -------- --------- ---------
(U.S. DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders (1)................ $ 661.6 [EURO] $
New investors purchasing in this
offering...............................
--- --- ------- ---
Total................................ 100% 100%
=== === ======= ===
</TABLE>
------------------------
(1) Assumes receipt of the proceeds from our recent private equity commitment of
$600 million.
The foregoing data has been computed based upon the estimated number of
shares to be outstanding after this offering, assuming no exercise of
over-allotment option, and excluding shares reserved for issuance under our
share option plan.
34
<PAGE>
CAPITALIZATION
The following table sets forth our cash position and total capitalization as
of March 31, 2000, on an actual basis and as adjusted for certain events
described below.
You should read this information together with our combined financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ----------------- -------------
(U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents(3)................................ 17,887,816 596,887,816 807,512,816
=========== =========== =============
Total long-term debt and financing(4)....................... 26,381,140 26,381,140 26,381,140
Mandatorily redeemable preferred stock...................... -- 594,000,000 --
Stockholders' equity:
Common stock, $1.50 par value: 110,001 shares authorized,
90,001 shares issued and outstanding, actual; 110,001
shares authorized, 90,001 shares issued and outstanding,
pro forma; no shares authorized, shares issued and
outstanding, pro forma as adjusted...................... 135,002 135,701 135,701
Class A common stock, $1.50 par value: no shares
authorized, issued and outstanding, actual; no shares
authorized, issued and outstanding, pro forma;
shares authorized, shares issued and outstanding, pro
forma as adjusted(5)(6)................................. -- -- 181,172
Class B common stock, $1.50 par value: no shares
authorized, issued and outstanding, actual; no shares
authorized, issued and outstanding, pro forma;
shares authorized, shares issued and outstanding, pro
forma as adjusted(6)(7)................................. -- -- --
Preferred convertible Series A stock, $1.50 par value:
10,100 shares authorized, 10,015 shares issued and
outstanding, actual; 10,100 shares authorized, 10,015
shares issued and outstanding, pro forma; no shares
authorized, issued and outstanding, pro forma as
adjusted................................................ 15,023 15,023 --
Preferred convertible Series B stock, $1.50 par value:
2,525 shares authorized, 2,525 shares issued and
outstanding, actual; 2,525 shares authorized, 2,525
shares issued and outstanding, pro forma; no shares
authorized, issued and outstanding, pro forma as
adjusted................................................ 3,788 3,788 --
Preferred convertible Series C stock, $1.50 par value:
11,043 shares authorized, 11,043 shares issued and
outstanding, actual; 11,043 shares authorized, 11,043
shares issued and outstanding, pro forma; no shares
authorized, issued and outstanding, pro forma as
adjusted................................................ 16,564 16,564 --
Preferred convertible Series E stock, $1.50 par value:
1,198 shares authorized, 1,198 shares issued and
outstanding, actual; 1,198 shares authorized, 1,198
shares issued and outstanding, pro forma; no shares
authorized, issued and outstanding, pro forma as
adjusted................................................ 1,797 1,797 --
Non-voting junior preferred stock, $1.50 par value: no
shares authorized, issued and outstanding, actual and
pro forma; shares authorized, shares issued
and outstanding, pro forma as adjusted(8)............... -- -- 36,000
Additional paid-in capital................................ 154,161,423 156,309,531 960,754,531
Accumulated deficit....................................... (60,203,354) (58,558,237) (58,558,237)
Deferred compensation cost(9)............................. (5,910,904) (5,910,904) (5,910,904)
Accumulated other comprehensive loss...................... (659,297) (659,297) (659,297)
----------- ----------- -------------
Total stockholders' equity.............................. 87,560,042 91,353,966 895,978,966
----------- ----------- -------------
Total capitalization.................................. 113,941,182 711,735,106 922,360,106
=========== =========== =============
</TABLE>
(CONTINUED ON NEXT PAGE)
35
<PAGE>
(1) Gives pro forma effect to the following events that occurred in the period
from March 31, 2000 to the date hereof:
- issuance of Series F and F-2 convertible preferred shares as part of the
$600 million private equity issuance pursuant to agreements entered into
on May 30, 2000,
- the repayment of our previous credit facility, and
- the conversion of a loan received from FirstMark Communications
International to equity.
(2) Gives pro forma effect to the effectiveness of this initial public offering
which includes:
- deferred compensation expenses resulting from the outstanding stock
options under the existing 1999 stock incentive plan becoming exercisable
(to the extent vested),
- conversion of all existing preferred stock except Series F-2 convertible
preferred stock into Class A common stock,
- conversion of all Series F-2 convertible preferred stock into non-voting
junior preferred stock, and
- the sale of ADSs and shares offered in this offering at an assumed
initial public offering price of [EURO] per share and $
per ADS (the mid-point of the price range on the cover page of this
prospectus), after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
(3) In the pro forma and pro forma as adjusted columns, $63 million of cash is
restricted, pursuant to a pledge agreement, to collateralize our obligations
under a performance bond issued in connection with the Spanish wireless
local loop license award in Spain.
(4) Total long-term debt and financing does not reflect the $63 million
guaranteed performance bonds issued in connection with the Spanish wireless
local loop license award. We also have credit facilities which, subject to
certain conditions, would permit additional borrowings of up to
$371.4 million.
(5) Each share of Class A common stock automatically converts into one share of
Class B common stock upon transfer to a person that is not a permitted
holder. Does not reflect the shares of Class A common stock issuable
upon exercise of stock options issued under an existing stock option
incentive plan.
(6) Additional shares of common stock may become issuable (i) upon exchange if
certain rights are exercised by our French and Spanish partners and the
lessor of our German dark fiber and (ii) under an incentive agreement with
our Luxembourg partner.
(7) Since the number of shares of Class B common stock issued in this offering
has not been determined, all proceeds are allocated to additional paid-in
capital. Once this allocation is determined, part of the proceeds will be
allocated to the Class B common stock. Does not reflect shares of Class B
common stock that may become issuable under our new stock option incentive
plan.
(8) Non-voting junior preferred stock converts into either one share of Class A
or Class B common stock, subject to adjustment, upon transfer. The preferred
stock holders are entitled to a dividend at an annual rate equal to $0.0075
per share.
(9) Reflects deferred compensation cost related to shares granted to
shareholders and third parties at values lower than fair market value.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We present below our selected historical consolidated financial data. We
derived the historical consolidated data for the years ended December 31, 1999
and 1998 from our audited consolidated financial statements which have been
audited by Arthur Andersen, independent public accountants, and are included
elsewhere in this prospectus. We began operations in 1998. We derived the
historical consolidated data for the three months ended March 31, 1999 and 2000
from our unaudited consolidated financial statements which are included
elsewhere in this prospectus. The results for the most recent three months,
which, in the opinion of management, include all adjustments necessary for a
fair presentation of the results for the unaudited periods, should not be viewed
as indicative of results for the year ending December 31, 2000. The following
selected consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements, including the notes related thereto, which are included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------
2000 1999 1999 1998(1)
--------------- --------------- ------------ ------------
(U.S. DOLLARS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF PROFIT AND LOSS DATA:
Revenue............................................. 2,518,752 -- 117,409 --
Cost of revenue..................................... (1,277,081) -- (69,088) --
----------- ----------- ----------- ------------
Gross margin........................................ 1,241,671 -- 48,321 --
Selling, general and administrative expenses(2)..... (27,462,490) (1,189,839) (24,678,920) (1,448,201)
----------- ----------- ----------- ------------
Operating loss...................................... (26,220,819) (1,189,839) (24,630,599) (1,448,201)
Other income
Interest income and other......................... 29,651 -- 342,182 --
Interest expense and other(3)..................... (5,467,229) -- (6,732,972) --
----------- ----------- ----------- ------------
Loss before income taxes............................ (31,658,397) (1,189,839) (31,021,389) (1,448,201)
Income taxes........................................ (1,945) -- -- --
Minority interest................................... 597,734 -- 1,031,240 26,884
----------- ----------- ----------- ------------
Net loss............................................ (31,062,608) (1,189,839) (29,990,149) (1,421,317)
=========== =========== =========== ============
Net loss per common share
basic and diluted................................. (345) (13) (333) (16)
=========== =========== =========== ============
Weighted average shares outstanding
basic and diluted(4).............................. 90,001 90,001 90,001 90,001
=========== =========== =========== ============
STATEMENT OF CASH FLOW DATA:
Net cash used in operating activities............... (21,471,560) (1,022,764) (17,958,336) (1,448,201)
Net cash (used in) provided by investing
activities........................................ (16,822,132) (18,462) 15,371,165 (132,627)
Net cash provided by financing activities........... 34,623,066 1,067,368 21,114,254 1,846,206
OTHER FINANCIAL DATA:
EBITDA(5)........................................... (22,807,182) (1,181,566) (22,572,939) (1,448,201)
Capital expenditures(6)............................. (14,965,591) (18,462) (2,368,901) (152,908)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents........................... 17,887,816 291,520 20,886,790 265,378
Total assets........................................ 279,692,696 506,602 155,844,284 418,286
Long-term debt and financing........................ 26,381,140 -- 27,729,828 --
Stockholders' equity (deficit)...................... 87,560,042 (2,490,437) 99,714,115 (1,300,598)
</TABLE>
------------------------------
(1) Includes only the period from July 8, 1998 (date of inception) to
December 31, 1998.
(2) For purposes of this consolidated financial data, selling, general and
administrative expenses include license acquisition costs.
(3) For purposes of this consolidated financial data, interest expense and other
includes net exchange loss and equity in net loss of affiliates.
(4) Does not give effect to proposed split of the Class A common stock and the
non-voting junior preferred stock.
(5) EBITDA stands for earnings before interest, taxes, depreciation and
amortization. EBITDA is used by management and certain investors as an
indicator of a company's ability to service debt and to satisfy its capital
requirements. However, EBITDA is not a measure of financial performance
under US GAAP and should not be considered as an alternative to cash flows
from operating, investing or financing activities, as a measure of liquidity
or an alternative to net income as indicators of our operating performance
or any other measure of performance derived under generally accepted
accounting principles. EBITDA as presented may not be comparable to other
similarly titled measures of other companies or to similarly titled measures
as calculated under our debt agreements.
(6) Includes only capital expenditures for property and equipment.
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information has been prepared
to reflect the following transactions:
(1) Our acquisition of LambdaNet Communications GmbH on January 24, 2000.
This acquisition is reflected in the historic financial statements from
November 15, 1999, which is the date on which our controlling
stockholder, FirstMark Communications International, acquired the
controlling interest in LambdaNet.
(2) The issuance of 96,000 shares of Series F convertible preferred shares
and 24,000 shares of Series F-2 convertible preferred stock effected
through a private equity issuance of $600 million.
(3) The repayment of the $50 million Credit Facility with the proceeds of
the private equity issuance.
(4) The conversion of a loan received from FirstMark Communications
International to equity.
(5) The effect of this offering is as follows:
a. compensation expense to be recorded as a result of stock options to
employees, directors and others becoming exercisable upon the
effectiveness of this initial public offering;
b. the conversion of all existing shares of preferred stock (other than
the Series F-2 Convertible Preferred stock) into Class A common
stock;
c. the conversion of the Series F-2 convertible preferred stock into
non-voting junior preferred stock; and
d. the sale of ADSs and shares offered in this transaction at an
assumed initial public offering price of $ per ADS or
[EURO] per share (the mid-point of the price range on the cover
page of this prospectus), after deducting the estimated underwriting
discounts and commissions and offering expenses payable by us.
The unaudited pro forma consolidated statements of profit and loss for the
fiscal year ended December 31, 1999 and for the three months ended March 31,
2000 have been prepared to reflect these transactions as if they had taken place
on January 1, 1999, except for the acquisition of LambdaNet, which is included
in the consolidated statements of profit and loss as if it had occurred on
April 21, 1999, the date on which LambdaNet was incorporated. The unaudited pro
forma consolidated balance sheet reflects the same transactions as if they had
taken place on March 31, 2000.
The unaudited pro forma consolidated financial information has been prepared
from our unaudited consolidated financial statements for the three months ended
March 31, 2000, from our audited consolidated financial statements for the year
ended December 31, 1999, and from the audited financial statements of LambdaNet
for the period from April 21, 1999 (date of incorporation) to November 15, 1999,
the date from which LambdaNet has been reflected in our consolidated financial
statements.
The unaudited pro forma consolidated financial information is provided for
illustrative purposes only. It does not purport to represent what our actual
results of operations or financial position would have been had the transactions
occurred on the respective dates assumed. It is also not necessarily indicative
of our future operating results or consolidated financial position. The
unaudited pro forma consolidated financial information should be read in
conjunction with "Capitalization," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus.
38
<PAGE>
The pro forma adjustments reflected in the accompanying unaudited pro forma
consolidated financial information reflect estimates and assumptions made by our
management that it believes to be reasonable.
No account has been taken of any possible synergies or cost savings that
could have been realized had the acquisition of LambdaNet taken place on the
date assumed.
Since both entities have incurred substantial losses since incorporation, no
tax adjustments have been reflected in the pro forma financial information on
the basis that a 100% valuation allowance would be recorded against any tax
losses arising and any income would be sheltered by the availability of tax
losses brought forward.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF PROFIT AND LOSS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FIRSTMARK LAMBDANET ------------------------------
COMMUNICATIONS COMMUNICATIONS
EUROPE S.A. AND GMBH LAMBDANET
SUBSIDIARIES FOR THE PERIOD COMMUNICATIONS
FOR THE YEAR FROM APRIL 21, GMBH
ENDED 1999 TO ACQUISITION CONVERSION OF
DECEMBER 31, NOVEMBER 15, ADJUSTMENTS FMCI LOAN
1999 1999 (1) (4)
--------------- --------------- -------------- -------------
(U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue............................................. 117,409
Cost of revenue..................................... (69,088)
----------- ----------- ---------- -------
Gross margin........................................ 48,321
Selling, general and administrative expenses........ (24,543,589) (16,802,220) (4,126,888)(d)
License acquisition costs........................... (135,331)
----------- ----------- ---------- -------
OPERATING LOSS........................................ (24,630,599) (16,802,220) (4,126,888) --
Interest expense and other.......................... (369,730) 2,384(a) 148,495
Interest income and other........................... 342,182 99,803 (2,384)(a)
Exchange loss, net.................................. (429,124)
Equity in net loss of affiliates.................... (5,934,118) 4,557,972(b)
----------- ----------- ---------- -------
LOSS.................................................. (31,021,389) (16,702,417) 431,084 148,495
Minority interest..................................... 1,031,240 3,340,483(c)
----------- ----------- ---------- -------
NET LOSS.............................................. (29,990,149) (16,702,417) 3,771,567 148,495
=========== =========== ========== =======
Weighted average number of shares outstanding during
the period.......................................... 90,001
Basic and diluted loss per common share(6)............ (333)
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------
UNAUDITED
PRO FORMA
FOR THE YEAR
ENDED
OFFERING DECEMBER 31,
SUB TOTAL (5) 1999
----------- ---------- -------------
(U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue............................................. 117,409 117,409
Cost of revenue..................................... (69,088) (69,088)
----------- -------- -----------
Gross margin........................................ 48,321 48,321
Selling, general and administrative expenses........ (45,472,697) (555,927) (46,028,624)
License acquisition costs........................... (135,331) (135,331)
----------- -------- -----------
OPERATING LOSS........................................ (45,559,707) (555,927) (46,115,634)
Interest expense and other.......................... (218,851) (218,851)
Interest income and other........................... 439,601 439,601
Exchange loss, net.................................. (429,124) (429,124)
Equity in net loss of affiliates.................... (1,376,146) (1,376,146)
----------- -------- -----------
LOSS.................................................. (47,144,227) (555,927) (47,700,154)
Minority interest..................................... 4,371,723 4,371,723
----------- -------- -----------
NET LOSS.............................................. (42,772,504) (555,927) (43,328,431)
=========== ======== ===========
Weighted average number of shares outstanding during
the period.......................................... 90,001
Basic and diluted loss per common share(6)............ (481)
</TABLE>
40
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FIRSTMARK -------------------------------------------------------------
COMMUNICATIONS
EUROPE S.A.
AND REPAYMENT OF
SUBSIDIARIES PRIVATE THE CREDIT UNAUDITED
AT EQUITY ROUND FACILITY OFFERING PRO FORMA AT
MARCH 31, 2000 (2) (3) SUB TOTAL (5) MARCH 31, 2000
--------------- ------------- ------------ ----------- ---------------- --------------
(U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.... 17,887,816 531,000,000 (15,000,000) 533,887,816 210,625,000 744,512,816
Restricted cash.............. 63,000,000 63,000,000 63,000,000
----------- ----------- ----------- ----------- ----------- -------------
17,887,816 594,000,000 (15,000,000) 596,887,816 210,625,000 807,512,816
Accounts receivable--
Trade........................ 2,068,459 2,068,459 2,068,459
From affiliated companies.... 3,776,436 3,776,436 3,776,436
Other........................ 9,831,373 9,831,373 9,831,373
----------- ----------- ----------- ----------- ----------- -------------
15,676,268 -- -- 15,676,268 -- 15,676,268
Deferred charges............. 5,972,675 5,972,675 5,972,675
Prepaid expenses and other
current assets............. 2,032,451 2,032,451 2,032,451
----------- ----------- ----------- ----------- ----------- -------------
TOTAL CURRENT ASSETS....... 41,569,210 594,000,000 (15,000,000) 620,569,210 210,625,000 831,194,210
----------- ----------- ----------- ----------- ----------- -------------
PROPERTY AND EQUIPMENT,
AT COST...................... 37,046,323 37,046,323 37,046,323
Less--accumulated
depreciation............... (1,549,350) (1,549,350) (1,549,350)
----------- ----------- ----------- ----------- ----------- -------------
35,496,973 -- -- 35,496,973 -- 35,496,973
----------- ----------- ----------- ----------- ----------- -------------
INTANGIBLE ASSETS, AT COST
Goodwill..................... 76,154,757 76,154,757 76,154,757
Licenses..................... 113,294,443 113,294,443 113,294,443
GasLINE Agreement............ 11,517,201 11,517,201 11,517,201
Other........................ 5,496,091 5,496,091 5,496,091
----------- ----------- ----------- ----------- ----------- -------------
206,462,492 -- -- 206,462,492 -- 206,462,492
Less--accumulated
depreciation............... (3,835,979) (3,835,979) (3,835,979)
----------- ----------- ----------- ----------- ----------- -------------
202,626,513 -- -- 202,626,513 -- 202,626,513
----------- ----------- ----------- ----------- ----------- -------------
-- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -------------
TOTAL ASSETS............. 279,692,696 594,000,000 (15,000,000) 858,692,696 210,625,000 1,069,317,696
=========== =========== =========== =========== =========== =============
</TABLE>
41
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FIRSTMARK --------------------------------------------
COMMUNICATIONS
EUROPE S.A.
AND REPAYMENT OF
SUBSIDIARIES PRIVATE THE CREDIT CONVERSION OF
AT EQUITY ROUND FACILITY FMCI LOAN
MARCH 31, 2000 (2) (3) (4)
--------------- ------------- ------------ -------------
(U.S. DOLLARS)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade........................ 125,784,348
Other........................ 9,424,727
----------- ----------- ----------- ----------
135,209,075 -- -- --
Accrued liabilities.............. 7,792,680 (1,463,924)
Short term debt.................. 15,000,000 (15,000,000) --
Long-term debt maturing within
one year....................... --
----------- ----------- ----------- ----------
158,001,755 -- (16,463,924) --
----------- ----------- ----------- ----------
LONG TERM LIABILITIES:
Long-term debt and financing..... 26,381,140
Advances from stockholders....... 2,581,587 (2,330,000)
----------- ----------- ----------- ----------
28,962,727 -- -- (2,330,000)
----------- ----------- ----------- ----------
TOTAL LIABILITIES............ 186,964,482 -- (16,463,924) (2,330,000)
----------- ----------- ----------- ----------
MINORITY INTEREST.................. 5,168,172
----------- ----------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED
STOCK............................ 594,000,000
----------- ----------- ----------- ----------
STOCKHOLDERS' EQUITY
Common stock..................... 135,002 699
Class A common stock, $1.50 par
value.......................... --
Class B common stock, $1.50 par
value.......................... --
Preferred convertible Series A
stock, $1.50 par value......... 15,023
Preferred convertible Series B
stock, $1.50 par value......... 3,788
Preferred convertible Series C
stock, $1.50 par value......... 16,564
Preferred convertible Series E
stock, $1.50 par value......... 1,797
Non-voting junior preferred
stock, $1.50 par value......... --
Additional paid-in capital....... 154,161,423 2,148,108
Accumulated deficit.............. (60,203,354) 1,463,924 181,193
Deferred compensation cost....... (5,910,904)
Accumulated other comprehensive
income......................... (659,297)
----------- ----------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY... 87,560,042 -- 1,463,924 2,330,000
----------- ----------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY....... 279,692,696 594,000,000 (15,000,000) --
=========== =========== =========== ==========
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------
UNAUDITED
OFFERING PRO FORMA AT
SUB TOTAL (5) MARCH 31, 2000
------------ ----------------- ---------------
(U.S. DOLLARS)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade........................ 125,784,348 125,784,348
Other........................ 9,424,727 9,424,727
----------- ------------ -------------
135,209,075 -- 135,209,075
Accrued liabilities.............. 6,328,756 6,328,756
Short term debt.................. -- -- --
Long-term debt maturing within
one year....................... -- --
----------- ------------ -------------
141,537,831 -- 141,537,831
----------- ------------ -------------
LONG TERM LIABILITIES:
Long-term debt and financing..... 26,381,140 26,381,140
Advances from stockholders....... 251,587 -- 251,587
----------- ------------ -------------
26,632,727 -- 26,632,727
----------- ------------ -------------
TOTAL LIABILITIES............ 168,170,558 -- 168,170,558
----------- ------------ -------------
MINORITY INTEREST.................. 5,168,172 5,168,172
----------- ------------ -------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED
STOCK............................ 594,000,000 (594,000,000) --
----------- ------------ -------------
STOCKHOLDERS' EQUITY
Common stock..................... 135,701 -- 135,701
Class A common stock, $1.50 par
value.......................... -- 181,172 181,172
Class B common stock, $1.50 par
value.......................... -- --
Preferred convertible Series A
stock, $1.50 par value......... 15,023 (15,023) --
Preferred convertible Series B
stock, $1.50 par value......... 3,788 (3,788) --
Preferred convertible Series C
stock, $1.50 par value......... 16,564 (16,564) --
Preferred convertible Series E
stock, $1.50 par value......... 1,797 (1,797) --
Non-voting junior preferred
stock, $1.50 par value......... -- 36,000 36,000
Additional paid-in capital....... 156,309,531 804,445,000 960,754,531
Accumulated deficit.............. (58,558,237) (58,558,237)
Deferred compensation cost....... (5,910,904) (5,910,904)
Accumulated other comprehensive
income......................... (659,297) (659,297)
----------- ------------ -------------
TOTAL STOCKHOLDERS' EQUITY... 91,353,966 804,625,000 895,978,966
----------- ------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY....... 858,692,696 210,625,000 1,069,317,696
=========== ============ =============
</TABLE>
42
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF PROFIT AND LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FIRSTMARK --------------------------------------------------------
COMMUNICATIONS
EUROPE S.A.
AND REPAYMENT UNAUDITED
SUBSIDIARIES FOR OF THE PRO FORMA FOR
THE THREE CREDIT CONVERSION OF THE THREE
MONTHS ENDED FACILITY FMCI LOAN OFFERING MONTHS ENDED
MARCH 31, 2000 (3) (4) SUB TOTAL (5) MARCH 31, 2000
---------------- ---------- ------------- ----------- ------------- --------------
(U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenue.......................... 2,518,752 2,518,752 2,518,752
Cost of revenue.................. (1,277,081) (1,277,081) (1,277,081)
----------- ----------- -----------
Gross margin..................... 1,241,671 1,241,671 1,241,671
Selling, general and
administrative expenses........ (27,163,922) (27,163,922) (1,219,073) (28,382,995)
License acquisition costs........ (298,568) (298,568) (298,568)
----------- --------- ------ ----------- ---------- -----------
OPERATING LOSS................... (26,220,819) -- -- (26,220,819) (1,219,073) (27,439,892)
Interest expense and other....... (3,306,078) 1,463,924 32,698 (1,809,456) (1,809,456)
Interest income and other........ 29,651 29,651 29,651
Exchange loss, net............... (288,268) (288,268) (288,268)
Equity in net loss of
affiliates..................... (1,872,883) (1,872,883) (1,872,883)
----------- --------- ------ ----------- ---------- -----------
LOSS BEFORE INCOME TAXES......... (31,658,397) 1,463,924 32,698 (30,161,775) (1,219,073) (31,380,848)
Income taxes..................... (1,945) (1,945) (1,945)
----------- --------- ------ ----------- ---------- -----------
LOSS AFTER INCOME TAXES (31,660,342) 1,463,924 32,698 (30,163,720) (1,219,073) (31,382,793)
Minority interest................ 597,734 597,734 597,734
----------- --------- ------ ----------- ---------- -----------
NET LOSS......................... (31,062,608) 1,463,924 32,698 (29,565,986) (1,219,073) (30,785,059)
=========== ========= ====== =========== ========== ===========
Weighted average number of shares
outstanding during the
period......................... 90,001 90,001
Basic and diluted loss per common
share(6)....................... (345) (342)
</TABLE>
43
<PAGE>
NOTES TO THE PRO FORMA FINANCIAL INFORMATION
(1) ACQUISITION ADJUSTMENTS FOR LAMBDANET COMMUNICATIONS GMBH:
On April 21, 1999, FirstMark Fiber Holdings LLC, along with the current
LambdaNet management team, incorporated LambdaNet with a total contribution
of approximately $26,000. FirstMark Fiber Holdings received 80% of the
common stock of LambdaNet with LambdaNet management and external consultants
receiving the remaining 20%. On July 14, 1999, FirstMark Fiber Holdings
subscribed for its proportion of the additional shares as a result of the
signing of the GasLINE agreement and paid 100% of the share premium for an
aggregate consideration of $33.5 million in cash. In November 1999, the fund
investors in FirstMark Fiber Holdings contributed their interest to
FirstMark Communications International in exchange for shares in FirstMark
Communications International. FirstMark Communications International then
controlled 80% of LambdaNet. On January 24, 2000, FirstMark Fiber Holdings
contributed its 80% ownership interest in LambdaNet to us in exchange for
9,937 newly issued shares of Series C convertible preferred stock. At the
date of this transaction, both we and FirstMark Fiber Holdings were under
the common control of FirstMark Communications International.
The adjustments included in the pro forma in respect of the above are as
follows:
a. Elimination of interest in the amount of $2,384 charged by FirstMark on
the advances granted to LambdaNet for the period ended November 15, 1999;
b. Elimination of an initial equity investment approximating 28% in
LambdaNet and the equity in the net loss of LambdaNet for the period from
April 21, 1999 to November 15, 1999;
c. The recognition of a minority interest of 20% based on the assumption
that we owned 80% of LambdaNet since its inception; and
d. Amortization of the purchase goodwill in the amount of $4,126,888, which
was recorded when LambdaNet was acquired on November 15, 1999 for the
period from April 21, 1999 to November 15, 1999. Refer to Note 14 of our
consolidated financial statements for the year ended December 31, 1999
appearing elsewhere in this prospectus for further detail on the
allocation of the consideration paid for the net assets acquired.
(2) ISSUANCES OF SERIES F AND SERIES F-2 CONVERTIBLE PREFERRED SHARES IN THE
PRIVATE EQUITY ISSUANCE:
a. The adjustment reflects receipt of net proceeds from the private equity
issuance, reflecting the issuance of 96,000 shares of Series F
convertible preferred stock and 24,000 shares of Series F-2 convertible
preferred stock. The aggregate net proceeds were $594 million, including
a deduction of $6 million reflecting the direct costs of issuance. The
difference between gross and net proceeds received will be accreted over
the period to redemption. The shares of the Series F convertible
preferred stock are convertible into common stock at any time at the
option of the holder and are mandatorily redeemable on June 30, 2007 if
they have not yet been converted to common shares.
b. On April 7, 2000, FirstMark issued 10,392 shares of Series F-1
convertible preferred stock at a price of $6,062 per share for aggregate
proceeds of $63 million in return for obtaining ABN AMRO's commitment for
a Spanish performance bond. These 10,392 shares of Series F-1 convertible
preferred stock were repurchased and cancelled at par value by FirstMark
immediately preceding the private equity issuance. In addition, from the
proceeds of the private equity issuance, FirstMark collateralized the
Spanish performance bond with a cash deposit of $63 million as reflected
in restricted cash.
c. On April 27, 2000, FirstMark issued 383 shares of Series E convertible
preferred stock at a par value of $1.50 per share in return for ABN
AMRO's increase of the Convertible Facility.
44
<PAGE>
These 383 shares of Series E convertible preferred stock were cancelled
at par value by FirstMark immediately preceding the private equity
issuance. As these two transactions do not result in a net effect on the
financial statements of FirstMark, they are not reflected in the pro
forma information.
(3) REPAYMENT OF CREDIT FACILITY:
a. As of March 31, 2000, FirstMark had drawn $15 million on the Credit
Facility. By June 1, 2000 FirstMark drew the remaining $35 million. With
proceeds from the private equity offering, FirstMark fully repaid the $50
million outstanding on the Credit Facility. Consequently, we eliminated
the related deferred loan cost in the pro forma balance sheet in the
amount of $5,972,675. The immediate write-offs of the deferred loan cost
of $5,972,675 is not reflected in the pro forma income statement since it
will be classified as an extraordinary item.
Interest Expense related to the Credit Facility of $1,463,924 for the
period January 19, 2000 (inception of the Credit Facility) through
March 31, 2000 has not been eliminated from the pro forma Income
Statement.
(4) CONVERSION OF FMCI LOAN TO EQUITY:
a. On June 16, 2000 FMCI converted its outstanding loan to FirstMark into
Class A common stock. As a result, the pro forma reflects the reversal of
the related interest expense in the amount of $148,495 and $32,698 for
December 31, 1999 and for the three months ended March 31, 2000,
respectively.
(5) ADJUSTMENTS RESULTING FROM THE EFFECTIVENESS OF THIS INITIAL PUBLIC
OFFERING:
a. The outstanding stock options under the existing 1999 stock incentive
plan become exercisable (to the extent vested) following an initial
public offering. Consequently, deferred compensation expense in the
amount of $1,775,000 has been calculated and included as a pro forma
adjustment. This deferred compensation expense is amortized over the
vesting period or 48 months beginning on the employees commencement date
resulting in an increase in selling general and administrative expenses
of $555,927 and $1,219,073 for the fiscal year ended December 31, 1999
and for the three months ended March 31, 2000, respectively. For the full
year ended December 31, 2000 deferred compensation would amount to
$11,616,927, December 31, 2001 and 2002; $10,491,625, December 31, 2003;
$8,699,156, December 31, 2004; $667,167. The balance sheet at March 31,
2000 reflects this compensation cost.
b. All existing shares of preferred stock, including the mandatorily
redeemable preferred shares, and except Series F-2 convertible preferred
stock, are automatically converted into Class A common stock immediately
prior to the close of the initial public offering.
c. All shares of Series F-2 convertible preferred stock are automatically
converted into non-voting junior preferred stock immediately prior to the
close of the initial public offering.
d. Proceeds in the amount of $225 million received from this initial public
offering adjusted for aggregate transaction fees in the amount of $14.4
million.
The adjustments are summarized in the following tables.
45
<PAGE>
Unaudited Pro Forma Consolidated Statement of Profit and Loss
for the Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
RESULTING FROM
5.A. 5.B. 5.C. 5.D. THE OFFERING
------------ ------------ ------------ ----------- --------------
US$ US$ US$ US$ US$
------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses...... (555,927) (555,927)
------------ ------------ ------------ ----------- ------------
Operating loss...................................... (555,927) -- -- -- (555,927)
------------ ------------ ------------ ----------- ------------
Net loss............................................ (555,927) -- -- -- (555,927)
============ ============ ============ =========== ============
</TABLE>
Unaudited Pro Forma Consolidated Statement of Profit and Loss
for the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
ADJUSTMENTS
RESULTING FROM
5.A. 5.B. 5.C. 5.D. THE OFFERING
------------ ------------ ------------ ----------- --------------
US$ US$ US$ US$ US$
------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses...... (1,219,073) (1,219,073)
------------ ------------ ------------ ----------- ------------
Operating loss...................................... (1,219,073) -- -- -- (1,219,073)
------------ ------------ ------------ ----------- ------------
Net loss............................................ (1,219,073) -- -- -- (1,219,073)
============ ============ ============ =========== ============
</TABLE>
Unaudited Pro Forma Consolidated Balance Sheet at March 31, 2000
<TABLE>
<CAPTION>
ADJUSTMENTS
RESULTING FROM
5.A. 5.B. 5.C. 5.D. THE OFFERING
------------ ------------ ------------ ------------ --------------
US$ US$ US$ US$ US$
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ 210,625,000 210,625,000
------------ ------------ ------------ ------------ ------------
210,625,000 210,625,000
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
MANDATORILY REDEEMABLE PREFERRED STOCK............. (475,200,000) (118,800,000) (594,000,000)
------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Class A common stock............................... 181,172 181,172
Preferred convertible Series A stock (10,100 shares
authorized and 10,015 shares issued with par
value of $1.50).................................. (15,023) (15,023)
Preferred convertible Series B stock (2,525 shares
authorized and issued with par value of $1.50)... (3,788) (3,788)
Preferred convertible Series C stock (11,043 shares
authorized and issued with par value of $1.50)... (16,564) (16,564)
Preferred convertible Series E stock (1,198 shares
authorized and issued with par value of $1.50)... (1,797) (1,797)
Junior preferred stock (24,000 shares authorized
and issued with par value of $1.50).............. 36,000 36,000
Additional paid-in capital......................... 475,056,000 118,764,000 210,625,000 804,445,000
------------ ------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY....................... -- 475,200,000 118,800,000 210,625,000 804,625,000
------------ ------------ ------------ ------------ ------------
-- (4,800,000) (1,200,000) 210,625,000 204,625,000
============ ============ ============ ============ ============
</TABLE>
46
<PAGE>
(6) LOSS PER COMMON SHARE:
Loss per share has been calculated to reflect the acquisition of LambdaNet,
the conversion of preferred stock to common stock, and the initial public
offering. In calculating the loss per share, the following assumptions were
made:
(a) No account has been taken of the immediate charge of $ to
accumulated deficit that will occur when the shares of preferred
stock are convertible to common stock because this is a one-off
nonrecurring charge.
(b) No account has been taken of the shares offered in this offering
since all the proceeds will be used for general corporate purposes.
See "Use of Proceeds" for further details.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with our consolidated financial statements and the notes thereto
appearing elsewhere in this prospectus.
All statements in this section of this prospectus that are not clearly
historical in nature are forward-looking. These forward-looking statements are
inherently predictive and speculative and no assurance can be given that any
such statements will prove to be correct. Actual results and developments may be
materially different from those expressed or implied by such statements.
OVERVIEW
We aim to be a rapidly growing broadband internet services provider of
business-to-business network, voice, video and data communications, and on-net,
application/information technology services in Europe. Our strategy is to become
one of the first providers of pervasive broadband internet access and on-net
business solutions on a pan-European basis to small and medium size businesses.
We plan to establish broadband communications networks in all major European
countries. Currently, we, together with our local partners, hold wireless local
loop licenses and spectrum in seven European countries covering a total
population of approximately 153 million. In Germany, we have secured co-location
space for the launch of DSL services in over 596 central offices and have leased
over 10,000 square meters of space for customer co-location and hosting
services. We also operate a leased 3,500 km fiber backbone covering 21 cities in
Germany. We are launching our broadband internet services initially in Germany
(commenced in May 2000), Luxembourg (commenced in May 2000), Portugal (commenced
in July 2000), Spain (by end of 2000), Switzerland (by March 2001), France (by
mid-2001) and Finland (by end of 2001) and are in the process of applying for
wireless local loop services and spectrum in other European countries, including
Austria, Denmark and the UK. We have signed a nationwide dark fiber lease and
plan to deploy a 4,800 kilometer fiber optic backbone network covering 16 cities
in France. We also plan to sign another 450 kilometer dark fiber lease reaching
a further two cities in France and complete the network by the beginning of
2001. We are currently planning to deploy a fiber optic backbone network in
major Spanish cities by the middle of 2001. We plan to create a pan-European
fiber optic network by interconnecting our national fiber optic networks and by
establishing connections with cities in neighboring countries.
In April 1999, FirstMark Communications International LLC, which is one of
our stockholders, and funds managed by Sandler Capital Management incorporated
FirstMark Fiber Holdings LLC with FirstMark Communications International owning
35% of FirstMark Fiber Holdings. FirstMark Fiber Holdings and certain members of
LambdaNet's management team then formed LambdaNet Communications GmbH to build a
fiber optic network in Germany. As a result, FirstMark Fiber Holdings owned 80%
of LambdaNet. In November 1999, the fund investors in FirstMark Fiber Holdings
contributed their interest to FirstMark Communications International in exchange
for shares in FirstMark Communications International. FirstMark Communications
International then controlled 80% of LambdaNet, and as a result LambdaNet's
financial results have been consolidated with ours for the last two months of
1999 and will be consolidated going forward. In January 2000, FirstMark
Communications International contributed its 80% interest in LambdaNet to
FirstMark Communications Europe, making LambdaNet one of our subsidiaries.
Management of LambdaNet holds the remaining shares. In the first half of 2000,
we repurchased 6.6% of the remaining 20% minority interest in LambdaNet from
Bernd Jaeger and Stefan Sattler, two of the founding shareholders.
48
<PAGE>
FACTORS AFFECTING FUTURE OPERATIONS
We recently started our operations with the opening of our fiber optic
backbone network in Germany in January 2000, and wireless local loop services in
Germany and Luxembourg in May 2000 and in Portugal in July 2000. Our planned
rapid expansion of operations will place a significant strain on our management,
financial and other resources. Our ability to manage our expansion effectively
will depend upon, among other things, monitoring operations, controlling costs,
maintaining regulatory compliance, maintaining effective quality controls,
significantly expanding our internal management, technical, information and
accounting systems, and attracting, assimilating and retaining qualified
management and technical personnel. If we are unable to hire and retain staff,
expand our facilities, purchase adequate supplies of equipment and deploy and
maintain efficient management information systems, customers could experience
delays in connection of service and/or lower levels of customer service. Failure
to meet the demands of our customers and to manage the expansion of our business
and operations would have a material adverse effect on our business, financial
condition and results of operations. For further information on some of the
risks to our business, see the "Risk Factors" section of this prospectus.
We conduct many of our operations through joint ventures and other
collaborative efforts and expect to continue to do so in the future. We may have
a minority position in some of these entities. As a result, we do not have
management control of the operations and the results of operations of these
entities may not be fully consolidated with our results of operations for
financial reporting purposes. Our proportionate share of these operations will
be recorded under "Equity in net income (losses) in affiliates."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
REVENUES
We generated revenues of $2.5 million in the first quarter of 2000,
primarily from capacity sales and co-location services on our fiber optic
backbone network in Germany. We had no revenue for the first quarter of 1999.
The revenue in the first quarter of 2000 reflects the start-up of our fiber
optic backbone network in Germany and we expect revenue will increase as we
deploy our operations throughout Europe.
We expect to offer products and services that are targeted to be
competitively priced and to provide a set of innovative services to our
customers, including:
- data services, including managed bandwidth services, leased wavelengths
and asynchronous transfer mode and internet protocol services,
- local, long distance and enhanced voice services, which we expect will
enable us to provide a full service communications bundle to our target
customers,
- internet services, including internet access and bandwidth on demand,
- hosting services, including telehousing, web hosting and solution hosting
services, and
- value added services, including video conferencing, e-fax, firewall,
unified messaging platform hosting, intelligent voice networking and
virtual private networks.
We expect to generate most of our revenue for the next 12 months by offering
end-to-end "clear-bandwidth" and co-location services to alternative operators
and internet service providers for hosting and transport of data, voice, video
and internet services. Most of our revenue will be derived initially from our
fiber optic backbone network in Germany. As we expand our services in Germany
and in
49
<PAGE>
other countries, we expect to generate revenue from a variety of other services,
such as broadband access via wireless local loop and DSL.
As we develop our network and relationships with application service
providers, we expect to increase our revenues from small and medium size
businesses. We currently expect that our gross profit margin for sales to small
and medium size businesses will be higher than the gross profit margin for sales
to alternative telecommunications operators internet service providers and
application service providers. We will be operating in highly competitive
markets and we expect to price our products and services competitively. As a
result, we expect significant downward pressure on the margins that we can
generate over time. Our ability to maintain our prices and profit margins will
depend in part on our ability to provide a high quality of service to our
customers.
COST OF SALES
Cost of sales amounted to $1.3 million in the first quarter of 2000. Cost of
sales primarily consisted of the connection costs from points of presence to
customer sites. We had no cost of sales in the first quarter of 1999.
We anticipate cost of sales to be significantly higher as we generate
additional sales. Cost of sales will primarily consist of the cost of leased
lines, the cost to interconnect and terminate traffic with other network
providers and the rental cost of the points of presence. We are likely to need
to incur expenditures for co-location space, leased lines for DSL services and
various telecommunications equipment in advance of sales generated from these
activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses amounted to $27.2 million
for the first quarter of 2000 and $1.2 million for the first quarter of 1999.
Selling, general and administrative expenses consisted primarily of personnel
and external consultant costs, indirect network costs, depreciation and
amortization expenses.
First quarter activities in 1999 were focused on the negotiation of
contracts and licenses throughout Europe. Over the first quarter of 2000, the
main charges are represented by salaries of $9.3 million, external services of
$8.3 million consisting primarily of consultancy services, depreciation expenses
of $3.4 million, amortization expenses of $2.5 million, indirect network costs
of $2.2 million and travel and accommodation expenses of $1.1 million.
Selling, general and administrative expenses in the first quarter of 2000
were impacted by increased headcount. The indirect network costs relate
primarily to our German fiber optic backbone network.
Depreciation expenses include charges relating to depreciation of property
and equipment, which consists principally of telecommunications equipment, such
as backbone network elements, feeder networks and switch equipment application
software.
Amortization expenses consisted of $1.8 million of goodwill amortization
relating to the acquisition of our interest in LambdaNet and $0.7 million
relating to amortization of licenses and other intangible assets. License fees
paid for the right to use a particular frequency that are amortized over the
lifetime of the licenses are also included in depreciation and amortization.
Depreciation and amortization for the first quarter of 1999 was immaterial.
We expect depreciation and amortization expense to increase significantly as
we continue to deploy our network and, in particular, increased costs of
licenses will increase amortization costs. We will need to depreciate or
amortize the license acquisition costs and our capital expenditures.
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We are building up a direct sales force in each country of operations to
serve the needs of our target customers and online service providers. During
2000, we expect to build a large sales force in Germany as well as to begin to
build a European sales force to handle large accounts. To attract and retain a
highly qualified sales force, we intend to offer our sales force, as part of
their overall compensation, incentive-based compensation. As our broadband
internet network is deployed and made operational, we expect to increase our
recruitment for our sales force and significantly increase our marketing
expenditures.
We expect selling, general and administrative expenses to increase
significantly over the next 12 months in parallel with the expansion of our
business.
LICENSE ACQUISITION COSTS
In the first quarter of 2000, we incurred approximately $0.3 million in
indirect license acquisition costs, which were not capitalized as part of the
Swiss license auction process. There were no indirect license acquisition costs
expensed in for the first quarter of 1999.
We may incur significant costs to acquire licenses in other countries in the
future as they become available. Recently, auctions of telecommunications
licenses in Europe have resulted in prices significantly in excess of original
expectations as competition for licenses has intensified.
INTEREST EXPENSE/INTEREST INCOME
Our network development has been primarily funded through capital
contributions, shareholders' loans and bank loans. In the first quarter of 2000,
interest expense was $3.3 million due to additional borrowings to fund our
business plan. There was no interest expense in the first quarter of 1999.
Interest income received during the first quarter of 2000 was not
significant. There was no interest income in the first quarter of 1999.
We expect interest expense to increase substantially as we anticipate
funding a large portion of our capital requirements for our business plan from
additional borrowings.
EXCHANGE GAINS/(LOSSES), NET
We realized a net exchange loss of $0.3 million in the first quarter of 2000
and no exchange result for the corresponding period in 1999. This loss is mainly
due to the impact of unfavorable U.S. dollar/ euro exchange rate movement on our
expenses which are primarily in euro.
EQUITY IN NET LOSSES OF AFFILIATES
Equity in net losses of affiliates amounted to $1.9 million for the first
quarter of 2000, corresponding to our share of the losses in our affiliates in
Spain, France, Belgium and Portugal. These losses relate to our license
acquisition efforts in these countries as well as the deployment of our network.
For the first quarter of 1999, there were no losses from investments in
affiliates.
We expect to conduct many of our operations through joint ventures and
associated companies. As these joint ventures develop their networks, including
the acquisition of wireless local loop licenses, we expect their losses and,
consequently, our share of their losses to increase.
INCOME TAXES
There was no material tax expense in the first quarter of 2000. There was no
tax expense in the first quarter of 1999.
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MINORITY INTEREST
Minority interest for the first quarter of 2000 amounted to a gain of
$0.6 million, representing the minority shareholders' interests in the losses of
LambdaNet. We had no minority interest gain or loss in 1999.
NET LOSS
We generated a net loss of $31.0 million for the first quarter of 2000 and
$1.2 million for the first quarter of 1999. The increase in net loss reflected
an increase in our activities throughout Europe. We expect to generate
significant operating and net losses for the next several years.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD FROM JULY 8, 1998 (DATE
OF INCEPTION) TO DECEMBER 31, 1998
REVENUES
In 1999, revenues were $0.1 million, which came from Direct Telecom, a
Luxembourg company in which we acquired a controlling interest in 1999. We had
no revenues in 1998.
COST OF SALES
Cost of sales, exclusive of depreciation and amortization, was
$0.07 million in 1999. We had no costs of sales in 1998. Cost of sales primarily
consisted of the cost of interconnection with the incumbent operator in
Luxembourg for transfer of our traffic to the final destination, mostly
international.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses were $24.5 million in 1999
and $1.4 million in 1998. Selling, general and administrative expenses consisted
primarily of personnel and travel costs, external consultants' fees,
professional fees and advertising.
Throughout 1999, our main activities were focused on developing and
deploying our network in Germany and Luxembourg, acquiring licenses in Europe,
establishing wireless local loop trials in France and Belgium, hiring management
and other key personnel, raising capital, negotiating supplier contracts,
developing operating systems and negotiating interconnection agreements.
In 1999, depreciation expense was $0.7 million and amortization expense was
$1.4 million. We did not record any depreciation or amortization in 1998.
LICENSE ACQUISITION COSTS
License acquisition costs were $0.1 million in 1999 compared to $0.06
million in 1998.
INTEREST EXPENSE/INTEREST INCOME
Since our incorporation on July 8, 1998, we have funded our operations
primarily through capital contributions, shareholder loans and bank loans.
Interest expense was $0.4 million in 1999. We had no interest expense in 1998.
We also had interest income of $0.3 million in 1999 with no such income in
1998. This interest income resulted from the temporary investment of funding
proceeds prior to their expenditure.
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EXCHANGE GAINS/(LOSSES), NET
In 1999, we had an exchange loss of $0.4 million and no amount for 1998.
This loss was mainly due to the impact of the unfavorable U.S. dollars/euro
exchange rate movement on our expenses.
EQUITY IN NET LOSSES OF AFFILIATES
Equity in net losses of affiliates of $5.9 million in 1999 was primarily due
to our share of losses in our Spanish joint venture, which was involved in the
wireless local loop license application process in Spain.
NET LOSS
We generated a net loss of $30.0 million in 1999 and $1.4 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations from shareholder loans and
contributions and bank loans. Through March 31, 2000 we have received $61.6
million in shareholder contributions, $2.6 million in shareholder loans and
$40.6 million in bank loans. As of March 31, 2000, we had $17.9 million of cash
on hand. On May 30, 2000, we entered into agreements for an additional $600
million in private equity. These commitments have been fully funded. We plan to
use these proceeds to fund our rollout and working capital. A portion of these
proceeds was used to repay an existing bank loan with an outstanding principal
balance of $50.0 million as of May 30, 2000 and to repurchase $62.4 million of
existing preferred stock.
As a start-up company, we have had very limited revenues to date and have
incurred significant expenditures to begin operations and build our broadband
internet network in Germany and elsewhere in Europe. Since inception through
March 31, 2000, we have had negative operating cash flow from operations of
$40.9 million.
On May 31, 2000 our subsidiary, FirstMark Communications Deutschland
Holdings GmbH, entered into a ten-year credit facility with Deutsche Bank AG,
consisting of four tranches, totaling $445 million ([EURO]480 million). The loan
will bear interest at EURIBOR plus 350 basis points with an interest margin step
down according to the ratio of senior debt to annualized EBITDA of FirstMark
Communications Deutschland GmbH. The loan will be used to finance the equipment
purchased from Siemens and other capital expenditures for our wireless local
loop network in Germany. Siemens has provided the lenders with a four-year
guarantee amounting to [EURO]75.0 million and we have agreed to contribute
sufficient equity into FirstMark Communications Deutschland to maintain a 3:2
debt-to-equity ratio.
On January 21, 2000, we entered into a seven-year finance loan with a
consortium of German banks. The loan is composed of a $10.1 million
([EURO]10 million) revolving credit line and a $46.2 million ([EURO]46 million)
term loan. The loan will bear interest at EURIBOR plus 375 basis points and an
interest margin step down according to the ratio of senior debt to annualized
EBITDA of LambdaNet. The loan will be used to finance the telecommunication
equipment purchased from Nortel DASA for our fiber optic backbone network in
Germany. Nortel DASA has provided the banks with a one-year guarantee amounting
to [EURO]23.8 million.
LambdaNet has a 10-year $21,025,641 (DM 41,000,000) loan facility with
GasLINE. The interest rate for the loan is fixed at 9% per annum, compounded
twice a year. The loan is disbursed in ten equal payments throughout the life of
the loan. GasLINE may convert the entire loan into shares of LambdaNet provided
that LambdaNet is converted into a German stock corporation or there is a change
in control on or after July 14, 2003. If LambdaNet is not converted into a
German stock corporation by December 31, 2001, the interest rate on the loan
will increase to 14% per annum.
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We have contracted with Nortel DASA Network Systems GmbH & Co.KG, Frankfurt
am Main as supplier of transmission equipment to LambdaNet. Under this contract,
we have committed to purchase transmission systems equipment and related
services for use in Germany amounting to $23,867,000 (DM 46,540,000) over a
total period of two years.
On April 26, 2000, we signed an agreement to lease two pairs of dark optical
fibers in France for a period of 20 years from the date of delivery or the life
of the dark fiber if less than 20 years. The total commitment is for an amount
of $36,778,766 (FFR 270,794,700). This contract automatically terminates if we
do not receive the applicable license or if the license is withdrawn or not
renewed.
In connection with receiving wireless local loop licences in Spain, our
Spanish joint venture made various commitments to the Spanish government
relating to the buildout of our planned wireless local loop rollout in Spain.
Through a bank, the Spanish joint venture issued a [EURO]184 million performance
guarantee to the Spanish government to support its commitments. Each of the
partners in the Spanish joint venture, including ourselves, provided back stop
guarantees to support this performance guarantee. As a result, we have arranged
for a bank to provide a guarantee of [EURO]64.8 million or approximately
$63 million. The guarantee is cash collateralized from proceeds received from
the issuance to ABN AMRO of our shares of preferred stock.
We are currently negotiating vendor financing arrangements to assist in
funding a portion of our rollout costs.
Commitments for capital expenditures were $37.3 million in 1999, of which
$35 million was primarily attributable to the deployment of our fiber optic
backbone network in Germany. Capital expenditures were insignificant in 1998.
Commitments for capital expenditures, including license fees in Switzerland,
were $118.1 million in the first quarter of 2000.
The development of our business and deployment and start up of our network
has required and is expected to continue to require significant capital to fund
capital expenditures, working capital and cash flow deficits. Our principal
equipment related needs include the purchase and installation of customer
premise equipment, base stations and network switches, leasing transmission
capacity, network operations center expenditures and information systems.
Additional capital will be required to pay for licenses, corporate overhead and
personnel. Actual requirements may vary based upon the timing and success of the
deployment of our broadband internet network.
We have entered into arrangements with a number of key industrial and
financial partners. Pursuant to these agreements, in the future we will be
required to make additional capital contributions. If we fail, or are unable, to
make such contributions our interest in any such joint venture may be diluted.
Moreover, if any of our partners fail to make their share of funding
requirements, we may need to make additional unanticipated investments
ourselves.
We currently anticipate that our cash requirements for capital expenditures,
working capital, equity contributions in minority interests and operating losses
from now through the end of 2001 will be approximately $1.1 billion, including
approximately $600 million in capital expenditures associated with the
deployment of our broadband internet network. These expenditures are expected to
cover completion of the fiber optic network in Germany and costs relating to
establishing wireless local loop and DSL services in Germany, completion of our
planned fiber optic backbone networks in France and Spain and establishing
wireless local loop services in Spain, France, Switzerland, Portugal and
Finland. We believe that the net proceeds of this offering, together with cash
on hand and anticipated future debt financings, will be sufficient to finance
the deployment of these parts of our broadband internet network, fund operating
losses and meet our capital needs until the end of 2001.
We are currently exploring numerous different financing sources to meet our
current capital requirements, including vendor debt financing, issuance of debt
instruments in the public and private markets and additional equity issuances.
We cannot be sure that we will be able to raise sufficient funds
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on acceptable terms to meet our business plan. Moreover, any debt financing
sources are likely to impose significant restrictions on our business activities
and could also require equity enhancements which could be dilutive to our
shareholders. Any equity issuances could also be dilutive to our shareholders.
Future financing sources may require us to provide them with pledges over all or
substantially all of our assets and may restrict our ability to receive cash
from our operating subsidiaries. If we are unable to raise sufficient capital,
we may need to alter our business plan significantly, which would adversely
effect our future operating results and impact our ability to reach positive
cash flow and profitability.
Our business plan is in a formulative state and is subject to change.
Significantly, we may accelerate our plan over the next 18 months to extend our
broadband internet network in more countries or to add new services to our
planned services. If we do expand or accelerate our business plan, we will
likely need significant additional capital prior to the end of 2001 beyond the
amounts described above. We will also need capital to fund our planned expansion
and operations after 2001 since we ultimately plan to be able to offer our
services in up to 18 European countries covering over 150 cities. The timing and
amount of these expenditures is currently uncertain. In the interim we may
utilize the funds then available to begin these expansion efforts. If we are
unable to raise needed capital, we may be unable to complete even our currently
targeted expansion and projects. Since the timing of application processes for
certain wireless local loop licenses, including some in the UK, has not been
finalized, we have not taken into account these potential licenses acquisition
costs in determining our expenditure through the end of 2001. These costs are
expected to be significant.
Moreover, if, among other things:
- our plans change,
- our operating losses increase beyond expectation,
- license acquisition costs are higher than expected,
- our assumptions regarding our funding needs associated with the deployment
of our network prove to be inaccurate,
- we experience unexpected costs overruns in the deployment of our network,
- we experience growth in our business or customer base greater than that
which is currently anticipated, or
- we experience unanticipated costs or competitive pressures,
any funds we raise may prove to be insufficient to meet our cash needs, and we
may be required to seek additional capital sooner than anticipated. In such
event, we would likely need to seek to raise such additional capital from public
or private equity or debt sources. Based on our current business plan, we will
need additional capital after 2001, since we do not anticipate generating
positive cash flow by the end of 2001. We cannot assure investors that we will
be able to raise such capital on terms that are satisfactory to us, if at all.
Because the cost of deploying our network and operating our business will
depend on a variety of factors, actual costs may vary from our estimates,
possibly to a material degree, and such variations are likely to affect how much
additional financing will be needed. In addition, the exact amount of our
financial needs will depend upon other factors, including the cost to develop
our network in each market, the extent of the competition and pricing of
telecommunications services, the acceptance of our services and the development
of new products. Accordingly, our actual financial needs may significantly
exceed the anticipated amounts described above.
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FOREIGN CURRENCY
Although our reporting currency is the U.S. dollar, interest and principal
payments on our existing debt primarily are denominated in euro. All of our
revenues and most of our operating costs are derived from sales and operations
outside the United States and are incurred in a number of different currencies,
principally the euro. Accordingly, our functional currency is the euro.
Therefore, fluctuations in currency exchange rates may have a significant effect
on our results of operation and balance sheet data. The euro has eliminated
exchange rate fluctuations among the 11 participating European Union member
states. We, however, anticipate that we will incur revenues and operating costs
in non-euro denominated currencies, such as the pound sterling and the Swiss
franc. Although we do not currently engage in exchange rate hedging strategies,
we may in the future attempt to limit foreign exchange exposure by purchasing
forward foreign exchange contracts or engaging in other similar hedging
strategies. Any reversion from the euro currency system to a system of
individual country floating currencies would subject us to increased currency
exchange risk.
INFLATION
We do not believe that inflation will have a material effect on our results
of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which has been subsequently amended by SFAS
No. 137 and SFAS No. 138. This statement establishes accounting and reporting
standards for derivatives and derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The adoption of this
standard is effective for the first quarter of our fiscal year ending
December 31, 2001. We have not yet completed our analysis of this new accounting
standard and, therefore, have not determined whether this standard will have a
material effect on our financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 outlines the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Specifically, the bulletin provides both general and specific guidance as to the
periods in which companies should recognize revenues. In addition, SAB 101 also
highlights factors to be considered when determining whether to recognize
revenues on a gross or net basis. The Group believes that its policies in
regards to the recognition of revenues are in compliance with SAB 101.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The main financial risks we face are interest rate risk and foreign exchange
risk. We do not currently use derivative instruments to manage our exposure to
interest rate changes and foreign exchange rate changes. As of December 31, 1998
we did not have any debt.
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INTEREST RATE SENSITIVITY
Other than the LambdaNet/GasLINE facility, all of our long-term debt bears
floating interest rates. Therefore, the fair market value of this debt is
sensitive to changes in prevailing interest rates. We run the risk that market
rates will increase and the required payments on our outstanding debt will
increase in line with the prevailing market rate. We do not currently use
interest rate derivative instruments to manage our exposure to interest rate
changes.
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BUSINESS
OVERVIEW
We aim to be a rapidly growing broadband internet service provider of
business-to-business network, voice, video and data communications and on-net
application/information technology services in Europe. Our strategy is to become
one of the first providers of pervasive broadband internet access and on-net
business solutions on a pan-European basis to small and medium size businesses.
We plan to build end-to-end broadband communications networks in all major
European countries, enabling our customers to transfer data at high speeds,
improve access to the internet, conduct a full range of telecommunications
activities and utilize broadband information technology solutions. We began
operations in Germany with our fiber optic backbone network in January 2000 and
are currently expanding our services in Germany and other countries.
We believe that small and medium size businesses in Europe, our target
customers, will be among the greatest drivers of demand for our services and are
presently under-served by incumbent and alternative telecommunications
providers. We expect to improve small and medium size businesses' access to and
use of information technology through our planned bundled services, which will
consist of access to our broadband internet network and related services and
applications from other selected service providers. We believe that our
broadband internet network will function as a platform to permit providers of
content, multimedia, e-commerce, applications and media to interact with our
customers. We refer to our broadband internet platform and the symbiotic
interactions among us, providers of content and applications and users of those
services as our EUROPEAN BROADBAND INTERNET ECOSYSTEM.
In addition to targeting small and medium size businesses, we plan to
provide a range of network and hosting services for internet service providers
(which provide access to the internet), content providers (which provide news,
entertainment, resource information and other data), application service
providers (which provide software and other computer applications on-line) and
alternative telecommunications carriers. These services will include
co-location, managed hosting and distribution of their content and applications
to our small and medium size business customers. Co-location services will
provide managed space for a provider's equipment near our telecommunications
switching facilities. Managed hosting will allow providers collaborative or
assisted access to our broadband internet network to improve contact with our
customers. We refer to this collection of products and services as our "Solution
Hotel". We intend to work with these providers to specify, customize and deliver
appropriate information technology and telecommunications applications for small
and medium size businesses.
The following diagram depicts the relationship between providers of services
and products and our customers using our proposed broadband internet network.
Broadband Internet Ecosystem
Diagramatic schematic showing the FirstMark concept of the European
Broadband Internet Ecosystem with graphic depictions of a solution hotel
building on the left side, end users on the right side and a double headed arrow
linking the two.
We plan to develop an end-to-end broadband communications network in up to
18 countries, including all major European countries, and over 150 cities. The
network in each of these countries will consist of hosting for applications and
content providers, a fiber optic backbone and broadband access which connects
our backbone directly to our customer's site. We plan to deploy a pan-European
fiber optic backbone by connecting our national fiber optic networks to each
other.
Traditionally, incumbent telecommunications providers have maintained
control of the "last mile" of telecommunications services through their
ownership of the copper telephone lines connecting each
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business to the telephone network. We plan to gain access to the last mile
through the use of multiple access technologies. Although the choice of the
appropriate access technology will depend on our customers' requirements, the
applicable regulatory regime and the costs of deploying such access technology,
in general, we intend to use:
- wireless local loop technology via microwave transmission primarily
targeted at small and medium size businesses,
- digital subscriber line technology, or DSL, over existing copper lines
primarily targeted at small office and home office users, and
- fiber optic connections primarily targeted at serving large multinational
enterprises.
In most of our major markets, we expect to have more than one access technology
available.
We believe that we will be able to minimize our operational costs because we
will control our broadband internet network from end-to-end. We also plan to use
our end-to-end network capability to offer the high quality of service supported
by superior service level agreements that we believe is required to provide
real-time application, content, and hosting services to our customers and to
provide a high level of functionality, including:
- always-on internet connections at affordable prices,
- secure and reliable data and communications services, and
- on-demand access to what we believe are the best information technology
products.
We are currently active in 10 European countries and have plans to expand
our services.
GERMANY
FIBER OPTIC NETWORK
- Began service on the 3,500 kilometer 21-city fiber optic network we have
leased in January 2000, providing one of the most extensive networks in
Germany
- Deployed this fiber optic backbone network over an eight-month period in
1999, by using leased dark fiber, which is existing, unused fiber optic
cable, and activating this fiber with DWDM technology which increases the
amount of information that may be transmitted in one strand of fiber
- Leased over 10,000 square meters of space for customer co-location and
hosting services in 21 cities
- Have over 30 telecommunication service providers as customers, including
major international carriers
- Selected Nortel as supplier of our backbone transmission equipment, voice
switches and routers
- Plan to add two cities to our fiber optic backbone network in the second
half of 2000
WIRELESS LOCAL LOOP
- Began providing services to end users in May 2000
- Received wireless local loop licenses providing a national footprint with
significant overlap with our fiber optic network
- Deployed an operational field trial of wireless local loop equipment in
Saarbrucken, Germany
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- Selected Siemens and their technology partner Floware Systems Ltd. as our
supplier of wireless local loop equipment
- Completed extensive market analysis of target customers
- Plan to begin commercial wireless local loop services for small and medium
size businesses in 10 cities in Germany including Berlin, Essen,
Frankfurt, Hamburg, Leipzig and Munich by September 2000
- Plan to be able to offer wireless local loop service under remaining
license areas during 2000 and 2001
- Applied for additional wireless local loop licenses
DSL SERVICES
- Signed unbundling contract with Deutsche Telekom to allow delivery of DSL
services
- Secured co-location space in over 596 central offices from Deutsche
Telekom and have requested co-location space in 237 additional central
offices
- Plan to launch DSL services by end of 2000 with at least 100 operational
co-location sites and expand DSL service during 2001
SPAIN
FIBER OPTIC NETWORK
- Plan to deploy fiber optic network covering major cities in Spain by
middle of 2001
WIRELESS LOCAL LOOP
- Formed a consortium with a number of strong Spanish companies whose
activities include internet, content and distribution operations
- Received a nationwide wireless local loop license through our consortium
- Plan to initiate wireless local loop service by end of 2000
FRANCE
FIBER OPTIC NETWORK
- Signed 4,800 kilometer dark fiber lease covering 16 cities in France
- Plan to sign a further 450 kilometer dark fiber lease in France and deploy
fiber optic backbone network covering a total of 18 cities by early 2001
- Plan to extend network to cities in neighboring countries and to connect
to our existing fiber optic backbone network in Germany
WIRELESS LOCAL LOOP
- Built a consortium of strong French companies whose activities include
utility, cable television, banking, internet content and distribution
operations
- Received a nationwide wireless local loop license through our consortium
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- Deployed an operational field trial of Alcatel wireless local loop
equipment in Lyon and conducted a pilot program offering internet, voice
and video conferencing services to small businesses and civic
organizations
- Selected Alcatel as our supplier of wireless local loop equipment
- Plan to initiate wireless local loop service by early 2001
DSL SERVICES
- Applied for a DSL trial license
LUXEMBOURG
WIRELESS LOCAL LOOP
- Received nationwide wireless local loop licenses
- Began broadband internet access services via wireless local loop on
May 1, 2000
PORTUGAL
WIRELESS LOCAL LOOP
- Purchased a 35% stake in Teleweb, the leading independent internet service
provider in Portugal
- Teleweb received a nationwide wireless local loop license
- Teleweb began providing wireless local loop services in July 2000
SWITZERLAND
WIRELESS LOCAL LOOP
- Received wireless local loop licenses to provide services nationwide
- Plan to begin wireless local loop service by March 2001
FINLAND
WIRELESS LOCAL LOOP
- Received regional wireless local loop licenses covering the largest 15
cities in Finland
- Plan to begin wireless local loop service by end of 2001
BELGIUM
WIRELESS LOCAL LOOP
- Deployed an operations field trial of Nortel wireless local loop equipment
in Brussels
- Formed a partnership with a leading alternative telecommunications
operator to apply for wireless local loop licenses and provide wireless
local loop service
- Waiting for details of license application process
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UNITED KINGDOM
WIRELESS LOCAL LOOP
- Formed partnerships with companies in the media and financial services
sectors to offer wireless local loop services when these services are
permitted under regulations and licenses are obtained
- Received details for the 28.8 gigahertz spectrum license application
process and are waiting for details for other licenses
NETHERLANDS
DSL SERVICES
- Applied for co-location space in over 200 central offices
BUSINESS STRATEGY
DEVELOPING A PAN-EUROPEAN NETWORK. While we are initially targeting Germany
in developing our broadband internet network, we plan to expand our network
across all major European countries as each national regulatory regime opens
access to wireless local loop and DSL services and as we secure long-term access
to dark fiber networks. We believe that we are gaining valuable experience in
building our network in Germany by developing relationships with key suppliers
and managing the build-out logistics and operations. We believe that the
experience we gain in Germany will help us roll out our planned network in other
European countries in a cost effective and timely manner. We also believe that
the network infrastructure and systems we are developing in Germany will enable
us to save time and costs in other countries as we:
- replicate our network operations in other European countries,
- install billing and customer relationship management systems which can be
implemented in each country,
- develop and introduce similar products in each country, and
- market our products and services on a local and pan-European basis.
ESTABLISHING LOCAL OPERATIONS. Although we plan to be a pan-European
service provider, we believe our success will depend on our ability to tailor
our strategy to the local markets. As a result, we have hired local management
teams in Germany, Spain, UK, Luxembourg, France and Italy with significant
telecommunications experience to build our business in each country. We have
also teamed with key local businesses as equity participants in many countries
to aid us in obtaining appropriate licenses, to assist us in marketing and to
provide us with other strategic assistance. As we prepare to develop our
broadband internet network in other countries, we intend to hire local
management and seek strategic relationships with local partners. We may further
expand our local and regional operations through joint ventures and acquisitions
when appropriate opportunities arise.
EXPANDING TARGET MARKET. We believe that the demand for broadband internet
services will grow in Europe. Our target retail customers, small and medium size
companies, currently have limited and expensive alternatives to meet their data
needs. We believe that by creating an end-to-end network across Europe we will
be able to address many of the needs of this customer base. We believe that we
can expand our addressable market in the following three ways:
- Using three access technologies--wireless local loop, DSL or local fiber
optic links--allows us to reach more potential customers on a cost
effective basis.
- Expanding our network geographically allows us to reach new potential
customers.
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- Expanding our range of services and strategic relationships allows us to
be able to capture a greater portion of each customer's total budget for
telecommunication and information technology services as well as reach new
potential customers.
BUILDING STRATEGIC RELATIONSHIPS. We are committed to forming strategic
relationships with companies with local knowledge and with key companies in the
access, content, application and distribution services and technology sectors.
We believe these relationships will assist in developing our business strategy
to broaden our scope and quicken the implementation of our business plan. In
many of our targeted European markets, we have sought wireless local loop
licenses in partnership with key local businesses that not only strengthen our
license applications but bring potential access to strategic customers. We have
also sought to leverage our supply and other contractual relationships to
enhance our business strategy beyond the traditional supply or contractual
arrangements. For example, we have begun to develop strategic relationships with
application providers, system providers and communications equipment providers,
such as Microsoft, Compaq, Nortel and Siemens, in which these companies also
agree to assist in developing and marketing our products and services. We
believe that our strategic relationships with internet service providers,
content providers, application service providers and alternative
telecommunications providers will create a platform to enable us to provide our
target customers with products and services. This interaction with our strategic
partners is a key element of the European broadband internet ecosystem we plan
to develop.
DEVELOPING FOCUSED AND DIFFERENTIATED PRODUCTS AND SERVICES. We are
designing our products and services to appeal to the needs of the small and
medium size businesses. We are committed to providing this customer base with a
broad range of services. We expect to offer categories of competitively priced
products and services, providing a selection of focused and innovative services
for our customers. Although some services may become available sooner, we plan
to introduce services in the following order as our network comes on line in
each country:
- Data services, including managed bandwidth services, leased wavelengths
and asynchronous transfer mode and internet protocol services,
- Local, long distance and enhanced voice services, which will enable us to
provide a full service communications bundle to our target customers,
- Internet services, including broadband internet access and bandwidth on
demand,
- Hosting services, including telehousing, web hosting and solution hosting
services, and
- Value added services, including video conferencing, e-fax, firewall,
unified messaging platform hosting, intelligent voice networking and
virtual private networks.
We believe that our broadband internet network will function as a platform
to permit providers of content, multimedia, e-commerce and applications to
interact with our customers. Using this platform, we plan to tailor our products
and services in response to customer demand and feedback. The development of
products in response to customer demand and feedback is a key element of the
European broadband internet ecosystem we plan to develop.
IMPLEMENTING TARGETED SALES AND MARKETING STRATEGY. In order to attract a
community of providers and users to our platform, we are building a two-tiered
distribution channel for our sales and marketing efforts. We are building a
direct sales force that is aimed at carriers, content providers, internet
service providers, application service providers and large corporations. In
addition, we are pursuing high-multiplicity channels such as real estate owners
with multiple tenants and banks with multiple branches that provide access to
multiple end users through a single initial contact. To complement our direct
sales efforts, we are planning indirect sales through a number of distribution
channels that have a large number of small and medium size business customers.
We plan to pursue opportunities in other countries among our local partners to
provide us with indirect sales opportunities.
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In addition, we plan to build two-tiered brands. We plan to build a strong
pan-European brand which we can use to attract providers and large corporations
and a local brand with tag lines, product descriptions and advertising campaigns
tailored to local markets.
EMPHASIZING TECHNOLOGY LEADERSHIP. We believe we are building a
comprehensive and reliable end-to-end broadband internet network in Europe
through a combination of innovative access, transport, hosting, systems and
switching technologies. We are flexible in the means by which we provide the end
user with access to our broadband internet network because we plan to offer
access by deploying wireless local loop, DSL or fiber optic technology depending
on economic attractiveness, regulatory restrictions and time-to-market. We were
the first to launch wireless local loop pilot services in France and one of the
first to sign a broadband wireless contract with a network vendor in Germany.
Our leased fiber optic backbone network in Germany connects 21 cities and uses
DWDM technology. We believe our fiber optic backbone network will enable us to
be among the first providers to offer optical wavelength services in Germany.
PROVIDING QUALITY SERVICE. We plan to provide our customers with access to
a reliable end-to-end network for their broadband internet communication needs.
We believe that our target customers, small and medium size businesses, need
access to a broadband internet network to transmit data on a time sensitive and
secure basis and have access to the internet to conduct key business
transactions. We also believe that software suppliers and other application
service providers, if given access to these target customers over a reliable
network, will seek to expand their services and products through this network.
As a result, we plan to service our customers from their doorsteps to the
final destinations for their data in Europe. We believe that by adopting this
end-to-end approach we will be better able to control service quality. We plan
to test extensively the equipment we plan to use on our network through customer
trials to minimize potential service quality problems and delays in the future.
We will continue to test our equipment in advance of its deployment as we
develop our network across Europe.
MARKET OVERVIEW
According to the European Information Technology Observatory 2000, a
European telecommunications and information technology research firm:
- the total market for information and communications technology software
and services in western Europe in 1999 in terms of end-user spending was
approximately [EURO]256 billion, excluding mobile telephony and cable
television services,
- Germany, where we currently have operations, was the largest information
and communications technology market in western Europe with a size of
approximately [EURO]58 billion in 1999, and
- in 1999, the size of the information and communications technology market
in France was approximately [EURO]46 billion and in Spain was
approximately [EURO]16 billion (in each case, excluding mobile telephony
and cable services).
The following charts illustrate the relative size of the information and
communications markets in western Europe and the United States and provide a
breakdown of the western European market by country. Note that for comparative
purposes mobile telephony and cable television services have been included in
the telecommunications carrier services numbers.
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Western European Information, Communication & Technology Market in 1999 On
the left side of the box is a bar chart showing the size of the US v Western
European markets in 1999 in (euro)billions. To the right of this is a pie chart
splitting the Western European market into major regions by percentage market
share.
In particular, we believe that western Europe is an attractive market for
the following reasons:
- SUBSTANTIAL AND GROWING TELECOMMUNICATIONS MARKETS. According to European
Information Technology Observatory 2000, the average growth rate of the
western European IT services and telecommunications carrier services
markets between 1999 and 2001 is forecast to be 12.0% and 7.3%,
respectively, compared with 10.3% and 6.5% in the U.S. For comparative
purposes, mobile telephony and cable television services have been
included in the telecommunications carrier services numbers.
- EXPANDING DATA AND INTERNET MARKETS. Growth in the internet and data
services will continue to drive the growth of the telecommunications
market. According to European Information Technology Observatory 2000, the
number of internet users in western Europe is expected to increase over
20% per year between 1998 and 2005. This growth rate represents more than
double the US expected growth rate in internet users over the same period.
Historical and Projected Numbers of Internet Users in the US and Western
Europe Line chart showing the accelerating Western European internet user
penetration and its convergence with the US in millions of users.
- CONVERGENCE OF THE TELECOMMUNICATIONS AND INFORMATION TECHNOLOGY MARKETS.
Digital technologies allow the development of higher capacity
infrastructures so that traditional and new communications services may
deliver voice, video and data content over the same networks to integrated
consumer devices. Telecommunications, media and information technology
companies can therefore leverage the flexibility of digital technology to
offer services that go beyond their traditional sectors. Together with the
gradual disappearance of other barriers to convergence, we believe this
will accelerate the development of new services, which in turn we believe
will generate demand for more communications and bandwidth required to
deliver them.
- GENERALLY FAVORABLE REGULATORY ENVIRONMENT. Over the last decade, the
European Commission and national governments have taken steps to create a
more liberal and competitive environment for telecommunication services in
Europe. Although the degree of liberalization is uneven across Europe,
every member state has made significant progress towards introducing
competition in local telecommunications markets and creating real
alternatives to the incumbent operators. In the latest round of
deregulation, European countries are allocating new radio spectrum
suitable for wireless local loop applications and unbundling the local
loop to facilitate DSL deployments. Both of these developments should
create competition for the incumbent operator in the last mile.
- OPPORTUNITIES IN THE SMALL AND MEDIUM SIZE BUSINESS SEGMENT. We believe
that the small and medium size business sector remains one of the largest
potential broadband internet communication and information technology
services market in western Europe. According to Eurostat, in 1998, small
and medium size businesses in western Europe (defined by Eurostat as
companies with 0-250 employees) accounted for 65% of the revenues
generated by western European companies and 66% of the persons employed by
western European companies. However, during the same time, they only
accounted for 47% of total spending for information and communications
technology products and services. An important factor in narrowing this
spending gap is the availability of new mechanisms of delivering
information, technology and software, and the falling cost in doing so.
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NETWORK DESIGN PRINCIPLES
In designing our network, we plan to abide by the following principles:
- END-TO-END CONTROL OF THE NETWORK. We believe that to provide a high
quality broadband service to the customer requires end-to-end control over
the network. A network is only as reliable as its weakest link. For
example, carriers in Germany who rely on Deutsche Telekom for their
backbone can only guarantee a service level to their customers at the
service level that Deutsche Telekom guarantees to them. The standard
Deutsche Telekom backbone capacity contract stipulates that the link that
they provide can be down as much as 131 hours per year. We intend that our
standard backbone capacity contract will provide that our network can be
down no more than 10 hours per year. By controlling the end-to-end
network, we believe that we can deliver high quality service and a broad
range of products to our customers. Over time as the use of online, real
time applications, such as video conferencing, become more prevalent, our
ability to maintain the quality of service of our network will become a
more important competitive advantage.
- FLEXIBLE ACCESS TECHNOLOGY. We believe that broadband local access
connections are the key to providing a complete end-to-end service.
Because the pace of deregulation of the telecommunications industry in
Europe is so uneven, we intend to pursue a flexible strategy of acquiring
and building out our broadband last mile network using either wireless
local loop or DSL. In some countries where unbundled access to the
incumbent's copper wire for DSL and spectrum to provide wireless local
loop service are both available, we intend to use a complementary
footprint of both technologies to serve small and medium size businesses
efficiently.
- NATIONWIDE COVERAGE. We are designing our network to be capable of
providing nationwide broadband access. Existing coverage by alternative
telecommunication carriers typically targets several large cities in each
country. We believe that a broad coverage is necessary to reach our
targeted customers, many of whom are geographically dispersed outside of
large urban centers. In addition, we believe that our network coverage
will be attractive to potential application service providers and internet
service providers.
- UPGRADABLE. We consider the ability to accommodate future expansion and
the ability to upgrade the technology to be key criteria when designing
our network and selecting equipment and software suppliers. It is
important to us that the equipment and software can be upgraded, that the
direction of future improvements is clear and that the vendor has a plan
for seamless transition from current technology to the next generation of
technology.
- RELIABILITY AND REDUNDANCY. We only commercially deploy each component of
our network after we have extensively tested the technology and equipment.
We have conducted a field trial for point to multipoint wireless local
loop technology in Lyon and Brussels. We are currently in the process of
conducting a field trial for our voice and data switching network in five
cities in Germany. We have designed our network so that there is
redundancy, including redundant power supplies, back-up components and
alternative pathways. Our backbone network was designed to be
self-healing, which means that traffic is automatically rerouted without a
service interruption if a fiber optic cable is severed or damaged.
THE BROADBAND INTERNET NETWORK
We have designed our broadband internet network to allow us to provide both
our small and medium size business customers and internet service provider,
content provider, application service provider and alternative
telecommunications provider customers with high-quality end-to-end broadband
services.
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The following graphic illustrates the architecture of our planned broadband
internet platform.
Planned Broadband Internet Platform
This graphic shows FirstMark's concept of the Broadband Internet Platform
with a graphic of a multi-office building on the left connected to a black box
denoting a FirstMark backbone POP (point of presence) -- a number of which are
linked by a treble ring fiber network so designed (and therefore depicted) for
the efficient re-direction of traffic in the event of an outage. The POP on the
right side of the ring is connected to the three access technologies; WLL (an
antenna graphic), DSL and fiber, which are connected to the FirstMark internet
site. This internet site is the Broadband Internet Portal and is the customer
interface that is accessible at the enabled businesses which is graphically
depicted on the far right of the schematic diagram. This entire network is the
Broadband Internet Platform.
THE FIRST MILE NETWORK
The first mile is any facility where content, applications and voice traffic
are transferred onto a backbone network. From these facilities, data is taken
across our fiber optic backbone to individual customers. We refer to these
facilities as points of presence. At this point of presence, there will be both
the first mile facilities and connections to the last mile network. Currently at
each of our 21 points of presence located in major cities in Germany, we have
approximately 500 square meters of raised floor space that we will provide to
other alternative telecommunication carriers, internet service providers,
content providers and application service providers to house their equipment and
link to our network. This is referred to as a co-location facility. Our
alternative telecommunication carrier customers are currently using this space
to co-locate their telecom equipment in our points of presence to facilitate
access to our network.
In order to enable our network to send and receive voice and internet
transmissions through other networks, we need to enter into agreements with the
incumbent telecommunications carrier and internet carriers in each country where
we establish services.
We plan to enter into arrangements with selected internet service providers,
content providers and application service providers to allow them to access our
small and medium size business customer base over our broadband internet
network, work with them to deliver targeted products and services to these
customers and, if appropriate, bundle their products and services with our own.
We refer to this collection of products and services as our "Solution Hotel."
Our customers will have access to our "Solution Hotel" through our broadband
internet portal.
THE BACKBONE NETWORK
The backbone network is a high capacity, optical fiber, long distance link
that carries communications data among local access points for third party
traffic and our customers. The backbone typically connects primarily
metropolitan areas because of the high cost associated with building a fiber
optic network connection to every potential end-user. Places along the network
where voice and data traffic can be added to the backbone are referred to as
points of presence. We believe that we have the third most dense backbone
network in Germany, based on the number of cities connected, due to an 18-year
(10 years with eight additional years at our option) commercial agreement with
GasLINE to lease dark fiber connecting 21 cities in Germany. GasLINE is a
leading consortium of 15 German gas supply companies that has installed dark
fiber along routes of long distance gas pipelines. We plan to assemble groups of
dark fiber leases in the countries where we intend to operate and install
optical electronic equipment on the dark fiber. When we activate this equipment,
information is transmitted through the fiber as light waves and the fiber is
said to be "lit". We believe that our strategy of leasing dark fiber and
deploying next generation optical electronics is more cost efficient and timely
than laying fiber ourselves.
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Our network in Germany consists of a connection of three rings allowing for
the re-direction of traffic in the event of an outage. Our German network, which
utilizes DWDM technology, has a current capacity of one terabit per second. DWDM
technology allows a provider to separate a beam of light on a single strand of
fiber into its component wavelengths so that each wavelength can be used to
carry additional information, thereby increasing the information that can be
transmitted on a single strand of fiber. At present, our network can support 112
wavelengths at the same time. We plan to replicate our German network in France
by the beginning of 2001 and have concluded a dark fiber agreement with Louis
Dreyfus Communications S.A. enabling us to deploy a similarly dense intra
country network covering 16 cities in France. We plan to sign a further 450
kilometer dark fiber lease and deploy a fiber optic network covering an
additional two cities in France. We are currently planning to deploy a fiber
optic backbone network in major Spanish cities by the middle of 2001. We plan to
create a pan-European fiber optic network by interconnecting our national fiber
optic networks and by establishing connections with cities in neighboring
countries.
THE LAST MILE NETWORK
The last mile represents the connection from the point of presence on the
backbone to an individual customer. Throughout Europe, most small and medium
size business customers receive telecommunication services across the last mile
through copper twisted pair wire. This copper connection is owned by the
incumbent telephone operator, which may provide access to alternative
telecommunications providers if required to under the regulatory regime of that
country. This copper network is called the local loop. We plan to build access
across the last mile in three ways.
- THE WIRELESS LOCAL LOOP. Wireless local loop utilizes radio spectrum to
provide broadband services to multiple customers from a single fixed
wireless point also referred to as "point to multipoint." When we refer to
wireless local loop technology, we mean point to multipoint transmission
in particular. Point to multipoint can be deployed and configured
efficiently without having to dig up roads to lay fiber or cable. A single
fixed wireless base station can service numerous customers providing each
customer up to four megabits per second of capacity, which makes the
technology relatively low cost to deploy. Typically, the 3.5 gigahertz and
26 gigahertz ranges of the spectrum are being allocated in Europe. The 3.5
gigahertz has a longer range than the 26 gigahertz but provides less
capacity. We plan to use a combination of the two technologies where
available to us to maximize customer coverage and to ensure sufficient
capacity to meet demand. We expect that in our initial deployment phase,
there will be no substantial difference between service availability at
the two bands. We will offer the same range of products across both bands.
We believe that our choice of systems technology will allow for the
dynamic allocation of bandwidth which enables greater spectral efficiency
and increases base station capacity limits.
We plan to deploy wireless local loop on a staged basis and offer broadband
internet services initially in 10 cities in Germany including Berlin, Frankfurt,
Hamburg, Munich and Stuttgart by September 2000. We will gradually increase our
service offerings and expand our customer base in Germany, Portugal and
Luxembourg and begin service in Spain, France, Switzerland and Finland through
the remainder of 2000 and 2001.
The following graphic illustrates the structure of our planned wireless
local loop architecture from the backbone point of presence to our customer's
premises.
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[GRAPH]
- DSL. Digital subscriber line or DSL is a range of access technology that
transforms basic copper infrastructure into "always on" high speed access
mechanisms. DSL technology provides broadband services over the existing
copper twisted pair wire network of the incumbent telephone service
providers. This provides transmission speeds of up to 70 times that of
analog dial-up modems. Continuing liberalization of telecommunications
regulations allows access to the local loop to connect end users directly
to our broadband network--a process commonly known as "unbundling of the
local loop". This enables new entrants to take on the customer's entire
telecommunications and data needs and facilitates the provision of
additional services. Further, by installing DSL technology over the local
loop, we can provide broadband services to customers without incurring the
considerable investment in infrastructure required by a fiber optic link.
We believe the European market is particularly well suited to DSL
technology due to the relatively high density of small and medium size
businesses in European cities and high gauge copper wire and associated
infrastructure used by many of the European incumbent telephone operators
in the local loop.
The following graphic illustrates the structure of our planned DSL network
from the point of presence to our customer's premises.
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[GRAPH]
- FIBER OPTIC CONNECTIONS. A basic fiber optic connection consists of
optical fiber deployed in rings with dual paths, which have the capability
of routing customer traffic simultaneously in both directions to eliminate
loss of service in the event of cable damage. These high capacity fiber
networks extend to large buildings, where they are cost efficient to
deploy due to the density of customers.
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The following graphic illustrates the structure of our planned in city fiber
network from the point of presence to our customer's premises.
[GRAPH]
We are in the process of evaluating opportunities to offer in-city fiber
optic connections where it is cost-effective to do so.
In determining which local access technology to deploy, we consider a number
of factors, some of which are presented in the chart below.
[GRAPH]
MANAGEMENT INFORMATION SYSTEMS
In designing our billing, operating, customer care, provisioning, network
management and other systems, we have placed significant emphasis on
reliability. We have chosen Logica and Ernst & Young as our systems integrators,
and one of them will act in this capacity in each country in which we plan to
operate. They are responsible for ensuring that each of the elements in our
end-to-end network functions smoothly and efficiently with each of the other
elements. These two systems integrators were chosen to ensure the availability
of sufficient resources at all times to assist us in deploying new networks in
Europe and in upgrading our existing network. Logica is currently deploying our
management information systems in Germany and Ernst & Young in Spain. We are
carefully coordinating these vendors to ensure that all systems are deployed
consistently and permit for
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scalability across the range of services, technologies and areas that we intend
to cover. To date, we have chosen Geneva as the software application for our
billing system. Geneva software has been deployed by several operators
throughout Europe.
We have also developed a detailed customer relationship management process.
The choice of our systems tools allows us to monitor any contact with the
customer closely--ranging from roof right acquisition to the point of sale to
maintenance and selling of services. We expect to launch our broadband portal by
the end of 2000. We expect that our portal will serve as the single interface
for our customers to access our network, our services and our service providers'
services. For the back-end of our systems, we are developing a broadband
internet toolkit. This toolkit is designed to enable internet service providers,
application service providers, content providers, alternative telecommunications
carriers and other providers to connect to our network and allow for the
seamless transfer of billing and customer record data as well as a set of
specifications that the providers will be able to set in order to optimize our
broadband internet platform for their specific needs.
KEY ASSETS AND OWNERSHIP POSITION
We have teamed with key local businesses in many countries to aid us in
obtaining appropriate licenses, to assist in marketing and to provide other
strategic assistance. As a result, we have in many countries entered into
agreements to manage jointly the acquisition of wireless local loop licenses
and, when the licenses are awarded, develop the wireless local loop business in
that country. In each country where we currently hold a wireless local loop
license, with the exception of Portugal, we hold the largest shareholding in our
consortium. In this prospectus, all discussion relating to the wireless local
loop business in a particular country refers to these jointly controlled
businesses. The following table summarizes our key assets and ownership position
in each country:
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<TABLE>
NUMBER OF
ADDRESSABLE
BUSINESS
CUSTOMERS(1)
COUNTRY KEY ASSETS (000'S) OWNERSHIP PARTNERS
<S> <C> <C> <C> <C>
Germany - 3,500 kilometer fiber optic lease NA 87% - LambdaNet Germany management
(fiber) network covering 21 cities in
Germany
Germany - Wireless local loop licenses 3,300 100% None
covering 36 million people
(wireless - Secured co-location space in 596
local loop central offices from Deutsche
and DSL) Telekom and have ordered co-
location space in 237 additional
central offices
- 10,000 square meters of space for
customer co-location and hosting
services
Spain - Nationwide wireless local loop 2,300 35% - Promotora de Informaciones, S.A.
(wireless local loop) license covering 39 million people or Prisa
- Informatica El Corte Ingles, S.A.
- Immobiliaria Aztlan, S.A. de C.V.
or Telmex
- Caja de Ahorros de Salamanca y
Soria
- Monte de Piedad y Caja de Ahorros
de Huelva y Sevilla
- Caja de Ahorros Provincial San
Fernando de Sevilla y Jerez
- Caja de Ahorros y Monte de Piedad
de Zaragoza, Aragon y Rioja or
Ibercaja
- Omega Capital, S.L.
- Diario de Burgos, S.A.
Portugal - Nationwide wireless local loop 660 35% - Finantel SGPS S.A.
(Teleweb) license covering 10 million people - Banco de Investimento Global S.A.
- Internet service provider with - IPE Capital-Sociedade de Capital
over 70,000 customers de Risco, S.A.
France (fiber) - 4,800 kilometer dark fiber lease NA 87% - LambdaNet Germany management
covering 18 cities in France
France - Nationwide wireless local loop 2,100 34% - Suez Lyonnaise des Eaux
(wireless license covering 58 million people - Groupe Arnault S.A.
local loop) - Trial license in Lyon - Rallye S.A.
- BNP-Paribas group
- Ponthieu Ventures
Switzerland - Nationwide wireless local loop 280 100% None
licenses covering 7 million people
Finland - Nationwide wireless local loop 180 100% None
licenses covering 2.5 million
people
Luxembourg - Nationwide wireless local loop 20 100% None
licenses covering 0.4 million
people
Belgium - Trial wireless local loop license NA 50% - Codenet
in Brussels covering 10 million
people
UK NA 79% - Shield Holdings (Guernsey)
Limited, a subsidiary of
Rothschilds Continuation Holdings
AG
- HTNM LLC (Hollinger-Telegraph New
Media)
- Providence Investment Company
Limited
Netherlands - Applied for co-location space in 490 100% None
(DSL) over 200 central offices
</TABLE>
(1) Source: extracted from Eurostat
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GERMANY. On January 2, 2000, we turned on our 21-city fiber optic backbone.
This network is based on an 18-year (10 years with eight additional years at our
option) dark-fiber lease from a consortium of gas companies known as GasLINE. We
currently lease 12 fibers and have installed DWDM equipment on four of the
fibers. As demand grows, we expect to light additional fibers with DWDM
equipment. We have built co-location space in every FirstMark point of presence
throughout Germany. We currently have over 10,000 square meters of space for
customer co-location and hosting services. As of May 31, 2000, we were carrying
traffic for 30 customers on our fiber optic backbone, including MCI WorldCom.
Nortel Networks provides our DWDM equipment. We have selected Nortel Networks as
our vendor for data routing equipment and voice switches. This equipment
functions as a gateway that automatically routes and terminates data and voice
traffic.
We intend to deploy broadband last mile access via both wireless local loop
and DSL in Germany. We currently have a national footprint of wireless local
loop spectrum in the 3.5 gigahertz and 26 gigahertz bands. Our wireless local
loop licenses in Germany permit coverage of most major metropolitan areas
including Munich, Berlin, Hamburg, Stuttgart and Frankfurt. We have selected
Siemens as our wireless local loop technology provider utilizing Floware
equipment. Floware, which currently has equipment deployed in 20 sites
worldwide, has an arrangement with Siemens under which Floware supplies the
software and hardware and Siemens installs and is responsible for it. Siemens
will provide us with a full turnkey solution on the wireless local loop
installation. We currently have deployed six wireless local loop base stations
in Germany.
Over the Summer of 2000, we are planning a staged deployment of our initial
service offering to small and medium size businesses in Germany. We expect to
offer broadband access to the internet through wireless local loop connections
in 10 cities in Germany by September of 2000. We intend to expand our geographic
coverage and our service offerings in the subsequent months.
We have an unbundling agreement with Deutsche Telekom to secure access to
its copper connections so that we can deploy DSL. We have selected Nortel as our
supplier for our DSL deployment and are currently requesting co-location space
in Deutsche Telekom central offices. The process of obtaining co-location space,
which Deutsche Telekom is required to provide where available, can take
approximately 16 weeks. The co-location space that we obtain will determine
where we can install DSL technology. We plan on deploying the first central
offices in the fourth quarter of 2000.
In March 2000, we completed an interconnection agreement for voice
termination with Deutsche Telekom, and in April 2000, we entered into an
agreement with UUnet to allow us to provide access to the internet.
FRANCE. In August 2000, we and our partners received a nationwide 3.5
gigahertz and 26 gigahertz wireless local license. Currently, we are operating a
pilot deployment of Alcatel wireless local loop equipment in Lyon. As part of
this pilot, we are providing service to eight end users including a hotel, a
school, a library and a UN research center. We entered into a 4,800 kilometer
dark fiber lease agreements with Louis Dreyfus Communications S.A. in France in
April 2000 covering 18 cities in France.
SPAIN. In March 2000, we and our partners received a nationwide 3.5
gigahertz wireless local loop license. We together with our partners are
currently planning to deploy a wireless local loop network in all major Spanish
cities, including 26 cities by the end of 2000.
We are currently planning to deploy a fiber optic backbone network in major
Spanish cities by the middle of 2001.
LUXEMBOURG. We received a permanent 26 gigahertz wireless local loop
license in March 1999 and a permanent 3.5 gigahertz wireless loop license in
July 1999. On November 10, 1999, we purchased the majority of Direct Telecom and
purchased the remaining interest in January 2000. Direct Telecom, is a
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least cost routing company with over 160 customers in Luxembourg. As we deploy
our wireless local loop network in Luxembourg, we intend to migrate Direct
Telecom's customer base to our network. In February 2000, we completed a voice
interconnection agreement with Enterprise des Postes et Telecommunications, the
incumbent operator in Luxembourg. We launched wireless local loop services on
May 1, 2000 and currently have two base stations deployed.
PORTUGAL. As part of the wireless local loop application process, we
purchased a minority stake in Teleweb, one of the leading independent internet
service providers in Portugal. Teleweb also runs one of the most popular portals
in Portugal.
In November 1999, Teleweb received a nationwide wireless local loop license
in the 26 gigahertz band. Teleweb began providing wireless local loop services
in July 2000.
SWITZERLAND. In March 2000, we were awarded a nationwide 3.5 gigahertz
license for wireless local loop services and regional 26 gigahertz licenses
covering Basel, Bern, Geneva and Zurich. We intend to begin building these
license areas out in early 2001, and we are currently reviewing opportunities to
build our backbone network into Switzerland.
FINLAND. In April 2000, we received regional 26 gigahertz wireless local
loop licenses covering the largest 15 cities. We intend to begin building out
our license areas by the end of 2001.
BELGIUM. We and our partner are currently operating a pilot deployment of
Nortel wireless local loop equipment in Brussels.
REGULATION. In each of the above countries, we are subject to various
regulatory conditions discussed in greater detail in the regulatory section of
this prospectus.
FUTURE OPPORTUNITIES. We are exploring opportunities in each of these
countries to extend our broadband network to encompass, to the extent described
above, wireless local loop service, DSL services and fiber optic connections and
the network backbone. Moreover, we are investigating the possibility of
providing all or part of these services in other European countries, including
the United Kingdom and Italy.
PRODUCTS AND SERVICES
We plan to offer a range of broadband internet communications services over
our network, including voice, video, internet, data, hosting and value-added
services.
We plan to offer broadband data services initially, followed by low cost
telephony services. Bundled solutions will include voice and data communications
software services, messaging and other value added services. We intend to work
with web based companies to provide affordable and innovative solution bundles
to our customers.
We have designed our services to be independent of the technology that we
use to deliver them to the end user, although there might be technological
limitations on a DSL or wireless local loop link compared with a fiber link. We
intend to provide the customer with the service package that they require using
the most efficient access technology available. We believe that this strategy
will allow us to:
- maintain and improve margins across our product lines,
- bundle services together to gain higher revenue per customer and reduce
customer turnover, and
- work with content and other web based companies to deliver the next
generation of telecommunications and information technology services.
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We will phase in the introduction of our portfolio of products and services
in Germany and other countries as our network is deployed, including data,
voice, video, internet, value added and hosting services.
DATA SERVICES
MANAGED BANDWIDTH SERVICES. We provide "clear" bandwidth leased lines for
local, national and international delivery of voice, data or video traffic. This
service will be provided to individual businesses at speeds ranging from 512
kilobits per second to eight megabits per second across either a wireless local
loop or a DSL connection. Other carriers, internet service providers and large
corporations will also be able to purchase capacity from us across our backbone
at speeds of 2.5 gigabits per second, 622 megabits per second, 155 megabits per
second, or other carrier speeds.
LEASED WAVELENGTHS. This product will allow us to provide other carriers
with a virtual network by leasing to them an entire optical wavelength on our
fiber network with a capacity of 2.5 gigabits per second to 10 gigabits per
second. Before the deployment of DWDM technology, these carriers would have had
to lease entire strands of fiber.
ASYNCHRONOUS TRANSFER MODE (ATM) AND INTERNET PROTOCOL SERVICES. We plan to
offer customers the ability to purchase connections, which utilize either ATM or
internet protocol technology. Businesses will be able to utilize these services
for a number of business specific applications, including connectivity between
local sites.
VOICE SERVICES
We view voice services as an integral part of a complete solution package
that we would offer to an individual business. Further, we intend to provide a
set of voice-enhanced services, including voicemail, call forwarding, conference
calling and messaging.
We are planning to offer a variety of fixed line voice services directly to
end-users over our broadband access networks. Our network voice switches will
support incoming and outgoing local, national and international calls. We will
provide both analog and digital voice connections depending on customer
requirements.
INTERNET SERVICES
BROADBAND INTERNET ACCESS. We will offer an "always on" high-speed internet
link at a flat rate using a variety of access technologies for end users, and
services such as e-mail and domain registration. This service will automatically
handle all internet addressing, authentication, authorization and accounting
functions. Additionally, we will offer both symmetrical and asymmetrical
connections to the internet. A symmetrical link runs at the same speed in both
directions while asymetrical connections run faster downstream than upstream.
Thus, sending e-mail runs at the same speed as receiving e-mail over a symmetric
link while receiving e-mail runs quicker than sending e-mail over an asymmetric
link. The following speeds will be available:
- Symmetrical connections from 256 kilobits per second to six megabits per
second.
- Asymmetrical connections from two megabits per second downstream and 192
kilobits per second upstream to six megabits per second downstream and 640
kilobits per second upstream.
We also intend to offer high speed symmetric optical connection packages
with access speeds from 155 megabits per second up to 2.5 gigabits per second.
This type of high speed internet service will be aimed at large multi-office
buildings and online service providers.
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BANDWIDTH ON-DEMAND. This feature will allow customers to request extra
committed capacity over an existing link for a specified period of time. For
example, a small business who would like to back-up data between two sites every
Friday night could request an appropriate increase in bandwidth for the bulk
data transfer at the specified time. Configuration will be done through the
customer's private web page on our broadband internet portal.
HOSTING SERVICES
TELEHOUSING. For customers who purchase transport services from us, we will
offer the opportunity to co-locate their networking and telecommunications
equipment in our telehouses. We will provide raised floor space in buildings
with appropriate security, power and temperature control to house computer
equipment that is owned and managed by our customers. In addition, we will
provide access to high bandwidth transport with various support services for
this equipment to ensure reliability.
WEB HOSTING. We intend to provide managed servers at our telehouses for the
purpose of hosting customer web pages and web sites. The servers will be managed
and maintained and will provide support for simple web pages, scripts and web
sites with back-end databases.
SOLUTION HOSTING. We intend to offer a hosting service with managed support
services specifically for a new range of online solution providers, including
e-commerce, information technology, messaging, video, and application service
providers. We intend to work closely with this new generation of online
providers by offering them network connectivity, managed servers and telehousing
facilities. In addition, we will bundle these online provider services with our
internet services and offer them to our small and medium size business
customers. We will also work closely with these online providers to develop new
products, drawing on their customer feedback and experience.
VALUE-ADDED SERVICES
We plan to offer the following value-added services through our broadband
internet portal.
VIDEO CONFERENCING. This service can be offered on demand.
E-FAX. This service will permit our customers to transmit facsimile
communications over our broadband internet network.
FIREWALL. As part of our internet access services, we intend to offer
software safeguards that regulate traffic between our customer's private network
and a public network, like the internet.
UNIFIED MESSAGING PLATFORM HOSTING. The platform would combine customer
exchange and e-mail systems, through which the customer will combine online fax,
messaging, video and audio conferencing.
INTELLIGENT VOICE NETWORKING. This system is a number-activated switch that
routes voice information dependent on predetermined criteria such as time of day
or connection delay.
VIRTUAL PRIVATE NETWORKS. This service will provide the customer with a
secure connection across the public network that simulates an actual dedicated
end-to-end leased line connection. For example, businesses could use this
service to create a cost effective extranet for online suppliers, remote offices
and home offices. Web based companies can use virtual private network services
to set up private networks for specific communities of interest among their
subscribers or to differentiate service levels. Service options include:
- Application or service specific virtual private network--permits the
customer to adjust the quality of service level for transmission according
to the type of traffic such as video or critical data,
- Encrypted virtual private network--provides encryption protection for
transfer of sensitive material,
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- On-demand virtual private network--permits sites to join the virtual
private network via our broadband portal. New additions to the virtual
private network are authenticated, authorized and accounted for
automatically by the network, and
- Virtual private network dial-up access--permits mobile workers or home
users to dial into a specific virtual private network from any phone line.
SALES AND MARKETING
CUSTOMERS
We are targeting two customer groups:
- SMALL AND MEDIUM SIZE BUSINESSES. These typically consist of businesses
with one or more locations and between 10 and 500 people. For these
customers, we focus on delivering easy-to-use, high quality broadband
internet and telecommunications service packages with a simplified rate
structure and providing a high level of customer service.
- SERVICE PROVIDERS. These are:
- local, national and international web-based businesses that provide
online services, such as unified messaging, internet procurement,
application rental, storage on-demand and e-commerce,
- alternative providers of telecommunications, and
- internet service providers. For these customers, we provide a range of
broadband internet services. We will focus on meeting the detailed and
demanding needs of these customers while working with them to sell and
market their products jointly.
We have conducted extensive surveys and market analysis in Europe in order
to understand better our potential customer base and their information
technology and telecommunication requirements. We have segmented our customer
base according to geographically coded data and our potential customers by:
- number of employees,
- industry classification,
- annual telecommunication and information technology spending,
- consumption by product and preference, and
- total revenues.
This strategy enables us to identify the small and medium size business
market opportunity in our planned coverage areas.
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The map below is a plan view of our technically addressable market in a
small part of Berlin. This footprint is generated by combining:
- geographical location data to locate potential small and medium size
customers,
- three-dimensional electronic images of the urban landscape and
- radio planning analysis to account for radio interference, line of sight
and wireless local loop link capacity issues.
[GRAPH]
The information that we gather from our surveys and research is further
dissected into industry and/or product specific vertical markets with high
demand for data services, and is combined with analyses of the competitive
environment. We use this analysis to develop our business strategy, including
when and where to deploy our network and how to most efficiently direct our
marketing efforts. The findings from our surveys and research have been tested
against published market reports and through a series of focus group discussions
with potential customers. The discussions:
- validate our hypotheses about customer expectations with respect to the
quality of service,
- confirm the likely variations in telecommunication and information
technology requirements across our targeted industries, and
- identify the customer decision making process and criteria for selection
of a telecommunication carrier with respect to price and product bundling.
SALES AND MARKETING
We are developing a multiple tiered marketing and sales approach, using both
a direct sales force and a set of indirect sales channels to target small and
medium size businesses. We have designed this approach to minimize the cost of
customer acquisition by emphasizing indirect sales channels which we believe are
cost effective for targeting small and medium size businesses. We believe that
indirect sales
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channels are more cost effective than direct sales channels for small
businesses. They will permit us to leverage off of the customer relationships of
existing sales forces with minimal investment. Additionally, we intend to expand
our direct sales force devoted to online service providers, application service
providers, alternative telecommunications carriers and key accounts. Currently,
our direct sales force consists of over 30 people. We intend to compensate both
our direct and our indirect sales force, in part, through a commission
structure.
DIRECT SALES. We are creating our own direct sales force in each country to
serve the needs of large businesses, application service providers and online
service providers. Key account managers within the direct sales team handle
"high-multiplicity" opportunities such as libraries, hotels, banks, retail
chains and real estate management companies where one customer may have several
sites or multiple end-users at one site. In Germany, we plan to have
approximately 60 people on the sales team by the end of 2000.
INDIRECT SALES. While we expect most of our revenue in the early stages of
our development to come from direct sales activities, we believe a greater
proportion of sales will come from indirect channels over the long term. To date
we have focused on one specific area, primarily in the equipment/ IT suppliers
and systems integrators. Currently, we have cooperative sales and marketing
arrangements to promote and resell our services through the direct or indirect
channels of leading equipment and information technology suppliers, such as
Compaq and Microsoft.
CUSTOMER SERVICE
We are building a customer relationship management system that will focus on
delivering high quality, responsive service to our customers and will emphasize
prompt attention to each customer. We believe that this level of service is
essential to achieving high satisfaction levels and winning our customers'
loyalty. We understand that we need to maximize customer satisfaction and
loyalty in order to lower our customer turnover rates, encourage stronger
customer referrals and achieve higher rates of completed sales. Our customer
relationship management system will include the following elements:
- We will make doing business with us easier through an integrated set of
tools such as web portals and contact centers that will provide customers
with direct access to us from any location, through any media and at any
time.
- We will tailor our product bundles based on our experience with similarly
situated customers and customer feedback.
- Each customer will have access to a real time account database and call
center available 24 hours a day, seven days a week.
- As part of our customer service, we intend to share customer feedback with
our application service provider partners to ensure that these application
service providers are able to offer appropriate applications to our
customers.
BUILDING BRANDS
We believe that in offering our broadband internet services and the services
of our partnered application service providers on a pan-European basis, the
reach and scope of our broadband internet platform will set us apart from most
of our competitors. We intend to capitalize on this strategy by creating a
pan-European brand. We believe that we will be one of the first broadband and
information service providers in Europe to do so.
We have retained the services of a professional consultant to develop our
brand and we are in the process of formulating together a branding campaign to
promote our vision for "A Broadband World-TM-". We believe that building a
pan-European brand will raise our profile with our target customer groups and
potential marketing partners.
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To complement our single pan-European brand, we are developing on a country
by country basis specific advertising campaigns for our services. We have done
this so that our local product and service offerings may be presented in a
manner that reflects local tastes and circumstances, while strengthening our
single company brand.
KEY STRATEGIC COMMERCIAL AND EQUITY RELATIONSHIPS
We have entered into commercial and strategic relationships that we believe
provide valuable technical, marketing and distribution expertise.
Some of our commercial and strategic relationships include:
ALCATEL CIT. We are currently conducting wireless local loop field trials
using Alcatel's point to multipoint broadband radio equipment in Lyon. Alcatel
builds next generation networks, delivering integrated voice and data
communications equipment.
AUDIOCOM S.A. Audicom is the parent company of a group that includes a
number of insurance companies and a financial and investment management company.
The group has a network of 600 agencies throughout Luxembourg.
COMPAQ COMPUTER. In March 2000, we announced a strategic relationship
through a letter of intent with Compaq in conjunction with Microsoft to jointly
market and develop broadband services in Europe. We intend to deploy Compaq's
mission critical "Non Stop-TM-" data center server platforms, integration
services and support services in our Solution Hotels. Compaq has a substantial
European distribution network.
ERNST & YOUNG. We have selected Ernst & Young to design and integrate our
billing, operating, customer care, provisioning, network management and other
integrated systems in Spain. Ernst & Young is a leading designer of customized
software products for system integration.
FIRSTMARK HOLDINGS L.L.C. FirstMark Holdings is one of our largest
shareholders and is controlled by the co-chairmen of our Board of Directors,
Lynn Forester and Michael J. Price. FirstMark Holdings has a distinguished
advisory board which provides strategic advice to FirstMark Holdings. Its
members are Vernon Jordan (Senior Managing Director, Lazard Freres); Dr. Henry
Kissinger (Chairman, Kissinger Associates); Dr. Nathan Myhrvold (Former Chief
Technology Officer, Microsoft Corporation); Bert Roberts (Chairman, WorldCom,
Inc.); Sir Evelyn de Rothschild (Chairman, NM Rothschild & Sons); and Bernard
Smedley (Chairman, CEO & President, Exigent International, Inc.).
FLOWARE WIRELESS SYSTEMS LTD. We have selected Floware, together with their
technology partner Siemens, as our wireless local loop vendor for our German
deployment. Floware Wireless Systems Ltd. develops point to multipoint wireless
access systems that enable alternative telecommunication operators to deliver
broadband data and voice services to their subscribers. Their WALKair technology
we have deployed is currently installed in more than 20 sites worldwide.
GASLINE GMBH & CO. KG. In July 1999, we concluded an 18-year (10 years with
eight additional years at our option) commercial agreement with GasLINE for
leased fiber optic lines over its 3,500 kilometer fiber optic networks linking
21 major German cities. GasLINE is a joint venture involving 15 German gas
supply companies, which operate over 30,000 kilometers of long distance gas
pipelines.
GENEVA TECHNOLOGY LTD. We have chosen Geneva as our preferred billing
application and are currently negotiating the terms of the application
agreement. Geneva specializes in the development and implementation of billing
applications.
HU-KOM. In March 2000, we announced the deployment of commercial wireless
services through our collaboration with HU-KOM, a city carrier in Hanau,
Germany. We are in the process of
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connecting wireless local loop base stations with HU-KOM's fiber optic network
to deploy broadband internet access in the city.
LOUIS DREYFUS COMMUNICATIONS. In April 2000, we signed a long-term lease
agreement with Louis Dreyfus Communications for 4,800 kilometers of dark fiber
covering 16 cities in France. Louis Dreyfus Communications was created in April
1998, as a 100% owned subsidiary of the Paris based Louis Dreyfus conglomerate
with activities in general trading, shipping, agricultural and energy
commodities and operations in over 40 countries worldwide.
LOGICA. We have selected Logica to design our billing, operating, customer
care, provisioning, network management and other integrated systems in Germany.
Logica is a leading designer of customized software products in the utilities,
telecommunications and banking sectors.
MICROSOFT. In March 2000, we announced a strategic partnership through a
letter of intent with Microsoft in conjunction with Compaq to further develop
our Solution Hotel architecture. We intend to offer Microsoft's latest Windows
DNA 2000 platform, which supports a wide range of web enabled applications with
support services and other back office applications. This will enable online
service providers to distribute and cross sell their e-solutions via this
internet platform at the Solution Hotel. Microsoft has a substantial European
distribution network.
NORTEL. In September 1999 we entered into an agreement with Nortel DASA, a
joint venture between Nortel Networks and DASA GmbH, as our preferred supplier
of transmission DWDM and SDH fiber technology. As part of this transaction,
Nortel DASA guaranteed a vendor facility in March 2000. In addition, we entered
into a memorandum of understanding to develop next generation optic equipment.
In March 2000, we selected Nortel Networks as our vendor to provide data routing
equipment and voice switches for our core network in Germany and are currently
negotiating the terms of this relationship.
SIEMENS AG. In November 1999 we selected Siemens as our preferred wireless
access equipment supplier in Germany for which Siemens guaranteed a vendor
facility in March 2000. As part of the agreement, Siemens will provide access to
their public broadcast exchanges, roof space at their 400 offices in Germany for
the deployment of wireless communication equipment base stations. Siemens is a
leading engineering and electronic equipment manufacturing conglomerate and is
one of Germany's largest companies.
VSE NET. In January 2000 we announced the deployment of commercial wireless
local loop services through collaboration with VSE Net, the Saarland-based city
carrier in Germany. We interconnect wireless local loop base stations with VSE's
dense fiber network and have deployed broadband access in the city.
In addition, we have entered into joint venture arrangements with a number
of key industrial and financial partners in many of the countries in which we
operate. Some of these local equity partners include:
BELGIUM
CODENET. The company is the internet service provider subsidiary of
Tractebel. Tractebel, owned by Suez Lyonnaise des Eaux, has a cable business,
Coditel, voice and data operations through Codenet and satellite operations
through Societe Europeenne des Satellites.
UK
PROVIDENCE INVESTMENT COMPANY LIMITED. Providence is an investment holding
company based in Jersey, Channel Islands. It holds a wide range of investments
including those with a specific interest in the technology, communications and
electronic sectors.
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HTNM LLC (HOLLINGER-TELEGRAPH NEW MEDIA). HTNM LLC is a wholly owned
subsidiary of Hollinger International Inc. Hollinger International Inc. is a
global newspaper publisher with newspapers in the United States, United Kingdom,
Canada and Israel. Included among the 77 paid daily newspapers that Hollinger
International currently owns are The Daily Telegraph, Chicago Sun-Times, The
Jerusalem Post, Ottawa Citizen and National Post. In addition, Hollinger
International currently owns 302 non-daily newspapers, as well as magazines and
other publications. Hollinger International, through its subsidiaries, has also
taken investment positions in various internet-based companies.
SHIELD HOLDINGS (GUERNSEY) LIMITED. Shield is a wholly-owned subsidiary of
Rothschilds Continuation Holdings AG.
FRANCE
BNP-PARIBAS GROUP. The BNP-Paribas group is a prominent banking group in
western Europe and in France. It has a particularly strong position in the
French small and medium size business market and in the French internet banking
market with its three operations, BNP.Net, E-Cortal and Banque Directe. In
addition, BNP-Paribas has a strong real estate footprint with its banking
network throughout France.
The BNP-Paribas group has invested primarily through BNP Europe Telecom and
Media Fund II, a leading private equity fund, and through two other
co-investment vehicles (Natio Vie Developpement 3 and Banexi).
PONTHIEU VENTURES. Ponthieu Ventures is a subsidiary of Francarep SA, a
financial holding company with investments in the telecommunication, financial,
real estate, light industrial, and energy sectors. Francarep SA is majority
owned by Paris Orleans, a French public company.
GROUPE ARNAULT S.A. The group is the family holding company of Bernard
Arnault, which controls Christian Dior and the French luxury and fashion group
LVMH. As an active investor in information technology and internet, Mr. Bernard
Arnault created in June 1999 Europ@Web, which has a major stake in LibertySurf,
a leading ISP.
RALLYE S.A. Rallye is a holding company with subsidiaries operating in the
retail sectors. Casino, a subsidiary of the group, is one of the largest
retailers in France operating nearly 5,000 outlets of which 1,000 are
hypermarkets and supermarkets.
SUEZ LYONNAISE DES EAUX. Suez Lyonnaise is a major international industrial
and utility company with over 200,000 employees operating in the energy, water,
waste services and communications sectors. The communications division has three
main businesses, M6, a listed commercial television channel, Television Par
Satellite and NOOS (formerly Lyonnaise Cable).
PORTUGAL
BANCO DE INVESTIMENTO GLOBAL S.A. Banco de Investimento Global's core
activity is on-line banking including brokerage and asset management services.
FINANTEL SGPS S.A. Finantel is a Portuguese holding company with
subsidiaries operating in telecommunication services and equipment distribution
businesses. The group has a majority shareholding in Teleweb, which is the
largest independent internet service provider in Portugal.
IPE CAPITAL-SOCIEDADE DE CAPITAL DE RISCO, S.A. IPE is a holding company in
which the Portuguese State owns a 49% stake, with interests in
telecommunications, information technology, water, recycling and healthcare.
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SPAIN
DIARIO DE BURGOS, S.A. This is a Spanish newspaper group, which has
recently diversified into other communications markets through holdings in
Burgos Cable Television, TV de Valencia, Vallodolid and Union Iberica Radio.
INFORMATICA EL CORTE INGLES, S.A. The group is the largest Spanish retail
conglomerate operating over 50 retail outlets throughout Spain. Through its
Informatica El Corte Ingles subsidiary the group provides information technology
solutions and computer hardware to business and retail consumers. Other
substantial operations include activities in the travel, insurance and financial
services sectors amongst others.
OMEGA CAPITAL, S.L. One of the biggest Spanish investor groups, Omega
Capital invests mainly in the technology and telecommunications sectors. Other
operations include asset management in the financial securities and property
sectors. Currently, the group manages assets of over 180,000 million pesetas.
PROMOTORA DE INFORMACIONES, S.A. OR PRISA. Prisa is the leading Spanish
media group with interests in El Pais, the largest national Spanish newspaper
with a daily circulation of over 435,000 units and Cinco Dias, a business
publication with a daily circulation of over 28,000 units. Through Canal + TV
channel with over 1.8 million subscribers and Canal Satelite Digital with nearly
900,000 subscribers, the group has a distribution network of 5,559 sales points,
access to 500 radio locations throughout Spain, installation teams and
operational call centers. Through Proel, a subsidiary dedicated to new
information technologies, the Prisa group has just launched an internet portal
called INICIA with over 50,000 users.
IMMOBILIORIA AZTLAN, S.A. DE S.V. The company is a subsidiary of Telefonos
de Mexico, the Mexican incumbent telecommunications operator, which has expanded
internationally and is present in Spain.
CAJAS. The Cajas are a series of regional Spanish financial services
institutions.
Caja de Ahorros de Salamanca y Soria, also known as Caja Duero. This savings
bank maintains an innovative distribution network throughout its 443 offices
with Caja Electronica its internet banking facility and Linea Duero its
telephone banking service. The institution operates in the financial services
sector with approximately 2,500 employees and approximately 2 million clients.
Monte de Piedad y Caja de Ahorros de Huelva y Sevilla. This savings bank
launched Telemonte Videotex, a broadcast banking information service in 1990,
set up Oficina Telefonica, a telephony banking service in 1994, and more
recently offered internet banking facilities to its approximately 700,000
clients. The company has approximately 1,300 employees in 286 offices.
Caja de Ahorros Provincial San Fernando de Sevilla y Jerez. This savings
bank has approximately 2,000 employees throughout a network of 345 offices and
offers telephone and internet banking facilities.
Caja de Ahorros y Monte de Piedad de Zaragoza, Aragon y Rioja ("Ibercaja").
Ibercaja has approximately 3,800 employees throughout its 880 offices. The
company offers telephone and interactive banking to its approximately
1.7 million clients.
COMPETITION
The telecommunications industry is highly competitive. Competition in the
telecommunications industry is based upon price, customer service, network
quality, value-added services and customer relationships. We compete or will
compete primarily with the dominant incumbent telecommunications carriers, which
generally offer the full range of voice, data and other value-added services and
benefit
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from their history as incumbent providers. The dominant incumbent in each
country generally has certain competitive advantages over other operators
(including us) due to its established market presence, fully deployed networks,
greater resources, and control over its end to end network.
We compete or expect to compete with all incumbents in the countries in
which we operate, including Deutsche Telekom, France Telecom, Telefonica,
Portugal Telecom and SwissCom.
We also will compete with all providers who will provide local loop access
through wireless local loop and DSL. Access to wireless local loop spectrum and
to copper twisted pair wire is a scarce resource and we may not be able to
obtain access to either in the markets we wish to enter. In addition, some
providers have extensive fiber optic networks in Europe and are expanding their
fiber optic networks. We will also compete against other alternative
telecommunication providers, including other providers of fiber optic networks
and cable companies. In addition to competition from existing incumbent
telecommunications providers and alternative telecommunications carriers,
including competing services for wireless local loop and DSL, we expect to face
competition from European cable television systems, satellite service providers
and other wireless technology operators that are beginning to offer broadband
telecommunications services to business customers.
EMPLOYEES
As of June 30, 2000, we had full time employees in the following countries:
<TABLE>
<CAPTION>
COUNTRY EMPLOYEES
------- ---------------------
<S> <C>
France...................................................... 27
Germany..................................................... 169
Luxembourg.................................................. 24
United Kingdom.............................................. 120
</TABLE>
We believe our relationship with our employees is satisfactory. Our
employees are required to sign confidentiality agreements. We plan to expand
significantly the number of persons under employment.
As of June 30, 2000, our Spanish wireless local loop affiliate had 25
employees and our French wireless local loop affiliate had 15 employees. During
1999, we had an average of one, 46, four and nine full time employees in France,
Germany, Luxembourg and the UK, respectively. During 1999, our Spanish wireless
local loop affiliate had an average of four full time employees. During 1998, we
had an average of three full time employees.
PROPERTY
Our headquarters in Luxembourg consists of approximately 960 square meters
of leased space. Our principal office in London, England consists of
approximately 9,700 square feet of leased space. We lease additional space in
Maidenhead in England, Hannover, Dresden and Saarbrucken in Germany, Paris and
Lyon in France, Luxembourg and Madrid in Spain. In Germany, we have leased over
10,000 square meters of space for customer co-location and hosting services. We
do not own any real estate. We believe that our facilities are adequate for our
current operations. We expect that we will need additional space as we expand
our business and believe that we will be able to obtain space as needed.
INTELLECTUAL PROPERTY
We hold the register and the trademark "FirstMark-TM-" in the European Union
and in Germany. In addition, we have applied to register the trademark
"FirstMark-TM-" in Switzerland and the UK. In addition, we have applied to
register the trademark "A BROADBAND WORLD-TM-" in Europe with the European Union
and in Switzerland. Furthermore, we have applied to register other trademarks in
various European countries and with the European Union. Although in the
aggregate these trademarks are of importance to us, we do not consider any
single trademark or other intellectual property right to
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be essential to our business. In general, we rely upon our network, quality of
service and products and application of our expertise rather than trademarks or
proprietary technology in the conduct of our business.
We have applied for or secured the right to use numerous broadband and
telecommunication web domain names, which we plan to use for marketing or
product launch purposes.
LEGAL PROCEEDINGS
We may be subject to legal or governmental proceedings from time to time in
the ordinary course of our business. We are not currently a party to any pending
or threatened material legal or governmental proceedings.
We are not aware of any legal or arbitration proceedings, pending or
threatened, which could have a material adverse effect on our financial
position, nor have any such proceedings been initiated in the previous two
years.
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REGULATION
The establishment of a broadband internet platform and the provision of
broadband internet communications and services in the countries in which we
operate and plan to operate is regulated. The scope of regulation varies from
country to country, although in some significant respects regulation is
harmonized under the regulatory structure of the European Union or EU. All of
the countries that are referred to in the regulation section, except
Switzerland, are members of the EU. Set forth below is a summary of the
regulatory environment in the EU and the principal countries in which we operate
or intend to operate in the near future.
OVERVIEW
National, regional and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which we
currently operate and plan to operate. The interpretation and enforcement of
such laws and regulations vary and could limit our ability to provide certain
telecommunications services and to establish and operate telecommunications
networks in certain markets. It is unclear whether future regulatory, judicial
and legislative changes will have a material adverse effect on us, whether
regulators or third parties will raise material issues with regard to our
compliance with applicable laws and regulations, or whether other regulatory
activities will have a material adverse effect on our business, financial
condition and results of operations.
Under the World Trade Organization Basic Telecommunications Services
Agreement, effective as of February 9, 1998, which we refer to as the WTO
Agreement, 77 countries have agreed to permit varying degrees of competition
from foreign carriers over different time frames. Although many European
countries have agreed to make certain changes to open and ensure fair
competition in their respective markets, there can be no assurance that
countries will honor their commitments in a timely manner, if at all. In
addition, since the regulatory frameworks are currently not well established in
all countries, it is difficult to anticipate what regulatory requirements we
will encounter in carrying out our business plan.
Many European countries are currently examining whether and to what extent
broadband internet networks, communications and services should be regulated. We
cannot predict whether or to what extent broadband internet networks,
communications and services may be regulated in the future in Europe. In
particular, we cannot predict the way in which the EU or individual member
states will regulate these areas, including whether particular broadband
internet communications and services will be prohibited or whether a license
will be required to provide these services or establish the required networks.
EUROPEAN UNION
The EU has taken a dual approach to the opening up of telecommunications by
requiring the removal of monopoly rights and by harmonizing regulatory rules.
The EU Commission liberalization directives required EU member states to
open their telecommunications market progressively sector by sector: services
(Directive 90/388), satellite equipment and services (Directive 94/46), cable
television (Directive 95/51 and 99/64), mobile networks and services
(Directive 96/2) and the remaining restrictions to competition
(Directive 96/9).
The EU Commission began to establish the regulatory framework in 1990
through the adoption of the Open Network Provision Framework Directive
(Directive 90/387) requiring each EU member state to establish an independent
national regulatory authority. The EU Commission established a framework for
market entry rules (EU Licensing Directive 97/13), as well as a framework for
inter-operator relations (EU Leased Lines Directive 92/44, as amended by the
Amending Leased Lines Directive 97/51, and the EU Interconnection
Directive 97/33, as amended by the EU Numbering Directive 98/61). Customer
issues, including billing and data protection, were also addressed (EU Amended
Voice Telephony Directive 98/10 and the EU Telecommunications Data Protection
Directive 97/66).
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National regulatory authorities focus on operators with significant market
power. In particular, in relation to the origination and termination of
communications within national networks, operators with significant market power
must offer cost oriented rates and standard terms and conditions for those
services. In considering whether an operator enjoys significant market power, a
national regulatory authority may conclude that a market share of 25% or more is
indicative of significant market power, although the national regulatory
authority may take into account other factors in reaching its conclusion.
Unbundling of the local loop through wireless local loops, DSL or in-city
fiber optic connections is not expressly required under EU law. The EU
Commission's e-Europe initiative set out its support for unbundling of the "last
mile" and indicated a deadline of December 2000 for EU member states to enable
the unbundling of the "last mile." In February 2000, the EU Commission published
a working document that analyzed the unbundling of the "last mile" and included
a proposal for a Commission recommendation. The Commission specifically called
upon EU member states to enable full access by alternative operators under
costoriented, transparent and non-discriminatory terms and conditions by the end
of 2000 to wireless local loop, DSL and fiber optic connections owned or
obtained by operators with significant market power. On July 12, 2000, the
Commission published a proposed regulation which would give legal effect to the
Commission's recommendation for unbundled access in member states by
December 31, 2000. If passed, the regulation would be directly enforceable in
each member state as if it were part of national law. It also asserts that the
EU Amended Voice Telephony Directive requires EU member states to ensure that
operators with significant market power meet all reasonable requests for shared
access to high frequency spectrum within the "last mile", for example, to
provide DSL services.
In addition, the EU Commission is currently reviewing existing EU
communications law with a view to developing a regulatory framework for the
converging communications markets. The EU Commission issued a package of draft
proposals relating to the future regulatory framework for electronic
communications services in the EU on July 12, 2000 dealing with harmonization,
interconnection, licensing, universal service obligations and data processing
issues. Although sector-specific regulation will remain in a consolidated and
reduced form, the EU Commission would like to use competition law to control the
sector, once effective competition has been achieved.
While EU directives remain binding on EU member states, the means of
implementing directives into national law are at EU member states' discretion.
This dual regulatory structure has meant in practice that the implementation,
interpretation and enforcement of these EU Commission directives differ
significantly among the EU member states. While some EU member states have
embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintain
several levels of restrictions on full competition.
FINLAND
The Telecommunications Market Act, enacted on June 1, 1997, repealed the
1987 Telecommunications Act and opened the entire telecommunications market to
competition. The new statute eliminated the requirement to obtain a license to
provide services except public mobile network operations. As a result, and
consistent with the European Union Licensing Directive, the provision of public
telecommunications services and operation of fixed public networks now require
only prior notification to Finland's Ministry of Transport and Communications.
Other types of services, including resale, switched data transmission and
incidental voice and video transmission over data networks, do not require any
license or notification and are generally exempt from regulation except for
applicable interconnection and technical requirements. In January 1998, a new
regulation became effective exempting World Trade Organisation member country
operators from the notification requirements for arranging transmission
connections to route international telecommunications into Finland.
We received a license on April 7, 2000 to provide customers in 12 cities
with broadband local access services through wireless local loop technology in
the 26 gigahertz bandwidth. We have
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submitted a license application for further frequencies, as well as the
possession and use of radio equipment, and expect to receive a response from
Finland's regulatory authority soon.
There are no specific regulations relating to unbundling the local loop or
DSL in Finland. The use of DSL is not subject to any license. ADSL is the only
type of DSL service currently available in Finland.
FRANCE
REGULATORY FRAMEWORK. The Telecommunications Act of July 26, 1996 requires
operators to obtain a L.33-1 infrastructure license for the establishment and
operation of public networks and a L.34-1 service license for the provision of
public telephone services. Operators establishing and operating a public network
and providing public telephone services must obtain a L.33-1/L license, which
covers both infrastructure and services. The Telecommunications Regulatory
Authority, the French regulatory authority, is responsible for examining
applications for these licenses. The minister in charge of telecommunications
grants the licenses.
WIRELESS LOCAL LOOP. The establishment and operation of wireless local loop
services in France requires granting of a L.33-1 infrastructure license and, if
necessary, a L.34-1 service license and the allocation of frequencies. Due to
the scarcity of frequencies, the allocation of wireless local loop licenses and
of the corresponding frequencies is conducted by the French regulatory authority
on a competitive basis.
On October 19, 1998, we were granted a temporary experimental license and an
allocation of frequencies for the city of Lyon. The experimental license expires
on the date of allocation of the licenses described in the following paragraph.
However, this temporary frequency allocation and experimental license do not
grant us any right or priority to obtain any of the licenses described below.
The French regulatory authority has launched three calls for tenders to
grant the following licenses on a competitive basis: two nationwide licenses,
two licenses in each of the 22 metropolitan regions and two licenses in each of
the overseas territories. The deadline for submitting applications for these
licenses was January 31, 2000. We applied for a nationwide license and 22
regional licenses. The French regulatory authority announced the results of its
selection process on July 11, 2000. We have been selected for a nationwide
license. The minister in charge of telecommunications signed the license on
August 4, 2000.
OTHER LICENSES. A license to establish and operate a network open to the
public and/or to provide public telephone services may be refused only for one
of the following reasons:
- on the grounds of law and order or in the interests of national defense
and public security,
- as a result of technical constraints due to the availability of
frequencies,
- when the applicant does not have the technical or financial capacity to
meet its obligations, or
- if the applicant has been sanctioned because of its activities in the
telecommunications sectors.
On March 21, 2000, we submitted an application for an L.33-1 and L.34-1
license to establish and operate a national fiber network and to provide public
telephone services on such network. Our license was granted on June 9, 2000 and
published on July 6, 2000.
An amendment to the current telecommunications law may be introduced in
order to expressly require significant market power operators to give access to
the local loop for DSL services for it in the near future. Local loop trials of
DSL services were launched in July and we have been granted an experimental DSL
license on July 7, 2000 to participate in the experimental phase.
INTERCONNECTION. France Telecom, the incumbent dominant operator, is
obligated to interconnect with other providers of telecommunications services at
cost oriented rates and on nondiscriminatory terms. The interconnection rates
charged by France Telecom are subject to the approval of the French regulatory
authority. We will be entitled to obtain more favorable interconnection rates
from France
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Telecom because we have been granted the L.33-1 license. We have commenced
negotiations on an interconnection agreement with France Telecom.
GERMANY
REGULATORY FRAMEWORK. The German Telecommunications Act of July 25, 1996
provided for the liberalization of all telecommunications activities by
January 1, 1998. Several related ordinances concerning, among other things,
license fees, tariff regulations, interconnection, universal service and
consumer protection have been passed to complement the German Telecommunication
Act. In addition, companies providing telecommunications services may be subject
to data protection laws and related regulations. The German telecommunications
sector is currently overseen by the Regulatory Authority for Telecommunications
and Post, the German regulatory authority.
WIRELESS LOCAL LOOP. In 1998 and 1999, we applied for the allocation of
wireless local loop frequencies in the 3.5 as well as the 26 gigahertz
bandwidth. According to the allocation rules, Germany was divided into
approximately 440 regional areas, each of which required a separate application.
The frequencies were allocated in two rounds and one supplemental allocation,
which differed with respect to the applicable allocation rules. We received 30
licenses in the first round, in which licenses were allocated for those areas in
which demand did not exceed the available frequencies. We received 111 licenses
in the second round, in which an application for each area was required and
licenses for frequencies were allocated competitively. We received six licenses
in the third round which has only recently been closed. This third allocation
became necessary as a reorganization of the frequency allocation plan had made
additional frequencies available in specific areas. Licenses for frequencies in
the third round apparently were granted to those applicants that were in a
position to operate the allocated spectrum without causing interference with the
licenses allocated to competitors. In May 2000, the German regulatory authority
announced a fourth round. We are participating in this round.
At least one applicant filed a lawsuit against the German regulatory
authority's license allocation process in the second round. That lawsuit,
however, was withdrawn. While we are not aware of and do not expect additional
lawsuits to be filed with respect to the allocation process, we cannot be
certain that there will not be additional lawsuits filed in the future,
particularly with respect to round three which was not announced publicly by the
German regulatory authority.
Our licenses are subject to various conditions, including that we:
- start commercial services within one year,
- cover typically between 90% and 100% of the population within a license
coverage area depending on the specific area within a period of three to
six years from frequency allocation, and
- provide universal services, including voice telephony with ISDN quality,
to our customers.
In addition, our licenses may be revoked:
- if an increase in efficiency is possible due to technical developments,
- if we fail to use the frequencies for more than one year after we have
received them,
- if our operation of the frequencies causes damage,
- if the regulatory authority reorganizes the frequency allocation plan, or
- if revocation is the only way to prevent substantial damage to the public.
OTHER LICENSES. Under the German Telecommunications Act, licenses can be
issued for constructing and operating different types of networks, as well as
for the provision of services using networks owned or maintained by other
operators. We have received a nationwide Class 4 license for the provision of
voice telephony services on the basis of self-operated networks and the
operation of networks using the wireless local loop frequencies described above.
We have also received a national
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Class 3 license to construct and operate telecommunications lines and facilities
for the provision of telecommunications services to the public. Both a Class 4
and a Class 3 license are required for access to the copper local loop
maintained by Deutsche Telekom, the incumbent dominant operator.
Between 1997 and 2000, the German Ministry and the German regulatory
authority issued several decisions on Deutsche Telekom's obligations relating to
the interconnection of networks and other forms of network access. Two of these
decisions stated that Deutsche Telekom must grant unbundled access to the local
loop to its competitors.
Deutsche Telekom is required to:
- offer the relevant services that it uses internally, including
transmission, switching and operational interfaces, where the connection
to the copper wire is permitted; and
- unbundle its services for special network access, for example, access to
the local loop under certain circumstances in such a way that other
competitors need not purchase services they do not want.
As a result, Deutsche Telekom has been required since December 1997 to grant
its competitors unbundled access to the local loop. In connection with the
unbundled local loop agreements, Deutsche Telekom submitted proposed tariffs to
the German regulatory authority for approval. The regulatory authority rejected
these tariffs in March 1998. Deutsche Telekom was asked to submit a new
application, taking into account the results of a review of the German
regulatory authority. On February 8, 1999, the German regulatory authority ruled
on the application and set fees, effective until March 31, 2001, for copper
local loop at a price of DM 25.40 per month, excluding value-added tax, one-time
installation fees from DM 196.55 to DM 337.17 including installation and a fee
for terminating access to two-wire copper line of DM 107.70. Each of these new
fees was lower than the fees requested by Deutsche Telekom but higher than the
current monthly subscription fee for a basic analog voice service. Some
companies affected by this decision, including Deutsche Telekom, have appealed
the decision. The orders of the German regulatory authority are enforceable
while the case is pending.
In March 2000 we entered into an unbundling agreement with Deutsche Telekom
in which Deutsche Telekom agreed to offer us unbundled access to their local
networks of copper twisted pair wire and access to space in their central
offices. We need unbundled access to this copper wire to install our equipment
so that we can provide DSL services. We will use the co-location space we have
been allocated in Deutsche Telekom's central offices to install, operate and
maintain our interconnection equipment.
INTERCONNECTION. We entered into an interconnection agreement with Deutsche
Telekom in March 2000. We expect to begin providing services in ten cities
pursuant to this interconnection agreement in August 2000.
As a public network operator, we are entitled to obtain preferential tariffs
and conditions from Deutsche Telekom for the origination and termination of
communications. If the operator has significant market power, tariffs and
tariff-related components are subject to regulation by the German regulatory
authority. With respect to international calls, Deutsche Telekom no longer has
significant market power. Deutsche Telekom remains a market dominant provider
for other fixed public voice telephony services.
As an operator of a public telecommunications network, we have an obligation
to interconnect with other operators of public telecommunications networks upon
request. If we do not reach an agreement on interconnection with the requesting
operator, the German regulatory authority may order the parties to reach such an
agreement. The German regulatory authority has six weeks, extendable for an
additional four weeks, to issue such an order. If the parties come to an
agreement within this period, they can abandon the request for an order and the
German regulatory authority does not have the power to require another
interconnection agreement. If the German regulatory authority orders an
interconnection, it must be implemented within three months, unless
implementation proves to be
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impossible on grounds of objective technical reasons. Interconnection agreements
to which an operator with significant market power is a party, such as Deutsche
Telekom, must be presented to the German regulatory authority.
ACCESS CODE. We were granted the access code 010085 by the German
regulatory authority in February 1999. Generally, a licensee of an access code
must start operations utilizing the access code within six months. Due to the
protracted nature of the frequency allocation process and the resulting delay to
the start of our operations, our use of the access code has been delayed.
Although we have not met the condition for use, we are not aware of any action
to revoke the access code.
ITALY
REGULATORY FRAMEWORK. The telecommunication sector in Italy is regulated by
laws and regulations substantially in line with the EU directives in this
sector. Many matters have been delegated to the Supervisory Authority, the
Italian regulatory authority, which has significant powers of regulating the
sector and imposing sanctions.
The provision of telecommunication services and the construction of networks
require a license from the Italian regulatory authority. However, the provision
of telecommunication services other than voice telephony and construction of
networks require a simple authorization granted by the same authority. Licenses
may be granted for voice telephony or other telephony services. An applicant for
a license must provide details of its shareholders, its financial statements,
the network, geographic coverage, installation program, market objectives,
market forecasts and its technical expertise among other things. An applicant
must be a corporation with a fully paid up capital, when the application is
filed, equal to at least 10% of the value of the planned investment. The
installation of telecommunications networks which pass over or under public land
is subject to the granting of a permit for the use of the public land by the
municipality concerned. Each municipality has different rules regarding how such
permission must be obtained, and negotiations with these municipalities could
delay operations in Italy.
WIRELESS LOCAL LOOP. The Supervisory Authority is preparing the procedures
for the allocation of wireless local loop licenses. The Supervisory Authority
has recently completed a consultative process for wireless local loop services.
We expect that the procedures will be published by the end of 2000. We plan to
apply for wireless local loop licenses when they become available.
OTHER LICENSES. ADSL is the only type of DSL service currently available in
Italy. Prior to December 1999, there were no specific regulations for DSL. The
only provisions applicable to telecommunications services provided by using ADSL
technology were the rules in force for any telecommunication service in Italy.
On December 21, 1999, the Supervisory Authority granted Telecom Italia, the
incumbent dominant operator, a provisional authorization to provide ADSL
wholesale services in Italy. The Supervisory Authority imposed certain
provisional obligations on Telecom Italia in connection with the supply of ADSL
services, which are in addition to the existing obligations imposed on
telecommunication service providers. For example:
- Telecom Italia must offer ADSL services only to those telecommunication
operators to which the Supervisory Authority has granted a license or a
general authorization for the provision of telecommunication services in
Italy. Such operators may immediately start to provide ADSL services to
final users by communicating to the Supervisory Authority the commencement
of such activity;
- Telecom Italia must supply ADSL services to any operator that makes a
request taking into account (i) the economic conditions that it applies to
its affiliates and (ii) the economic conditions that Telecom Italia and
its affiliates apply to the final users;
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- the conditions of the offer must allow the operators to supply ADSL
services to final users on competitive conditions; and
- the Supervisory Authority has also established the main technical
requirements which must characterize Telecom Italia's offers.
INTERCONNECTION. Generally, each operator of a public telecommunications
network is entitled and, if requested by the other operators belonging to the
same category, obliged, to negotiate interconnection agreements, subject to
certain circumstances. No request for interconnection may be refused without the
Italian regulatory authority's consent.
Operators with significant market power are subject to more restrictive
obligations in negotiating interconnection agreements, for example:
- they must observe the principle of non-discrimination with respect to
interconnection offered to others,
- they must guarantee, in providing the necessary infrastructure, the same
quality which characterizes their own services,
- they must provide other operators, upon request, all information and
technical specifications necessary for the entry into of the
interconnection agreement,
- they must send the Supervisory Authority copies of any interconnection
agreements that they enter into, and
- the economic terms of the interconnection agreements must be
cost-oriented.
The Italian regulatory authority may require amendments to the
interconnection agreements entered into by operators.
LUXEMBOURG
REGULATORY FRAMEWORK. Telecommunications are regulated in Luxembourg by the
Law of March 21, 1997 on Telecommunications and various related decrees and
decisions. The relevant authority responsible for the telecommunications sector
is the "Institut Luxembourgeois des Telecommunications," the Luxembourg
regulatory authority.
WIRELESS LOCAL LOOP. On February 9, 2000, the Luxembourg regulatory
authority announced that it reserved the 3.4-3.6 gigahertz and 24.5-26.5
gigahertz frequency bands for wireless local loop services. Based on this
decision, the Institut Luxembougeois des Telecommunications has assigned four
channels of 28 megahertz within the 26 gigahertz frequency band for wireless
local loop to us. Moreover, we have been granted a 14 megahertz channel in the
3.5 gigahertz frequency band in order to provide national coverage. We were
authorized to operate a national wireless local loop network in March 1999.
OTHER LICENSES. In general, the provision of telecommunications services,
except for voice telephony, only requires prior notice to the Luxembourg
regulatory authority. If the Luxembourg regulatory authority does not object to
the offering of the telecommunication services within four weeks after receipt
of the notification, the operator is authorized to commence services.
The operation of fixed and mobile telecommunications networks and the
provision of voice telephony services require licenses from the Minister of
Communications. Three different types of licenses can be obtained.
- A License--a license which allows an operator to operate a network and to
provide voice telephony services,
- B License--a license which allows an operator to operate a network, which
does not include providing voice telephony services, and
- C License--a license which allows an operator to provide voice telephony
services.
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We received an A license in April 1999. Licenses are valid for a period of
30 years and may be renewed for successive periods of 10 years. Licenses cannot
be transferred from one company to another. In the event of a major change in
ownership or control of the license holder, the Minister of Communications must
be notified. If the Minister of Communications does not object to the change in
ownership or control within two months after the notification, the change in
ownership or control will not affect the existing licenses.
No regulations relating specifically to unbundling the local loop have been
enacted. However, the telecommunications law provides that all operators with
significant market power should provide access to their networks based on
conditions which are objective, transparent and non-discriminatory and guarantee
equal access, which includes the local loop.
INTERCONNECTION. According to the telecommunications law, each operator
with significant market power is obliged to allow and facilitate interconnection
to its network and is obliged to respond to each reasonable request for
interconnection. Although the interconnection agreements are subject to
negotiations between the relevant parties, the Luxembourg regulatory authority
may specify certain terms of the interconnection agreements. Currently, the only
operator with significant market power is the "Entreprise des Postes et
Telecommunications." We signed an interconnection agreement with the Entreprise
des Postes & Telecommunications on June 22, 2000.
PORTUGAL
REGULATORY FRAMEWORK. The Institute of Communications is the Portuguese
regulatory authority. It monitors compliance with authorizations, licenses and
permits granted to telecommunications providers in Portugal. The
telecommunications sector in Portugal complies with the principal EU directives
for this sector.
The Basic Law of Telecommunications, enacted on August 1, 1997, provides the
legislative framework and the basis for telecommunications regulation in
Portugal. This law requires that a basic telecommunications network exists and
basic telecommunications services are provided on a universal basis in Portugal.
It also requires that operators of public telecommunications networks have an
obligation to permit non-discriminatory use of their networks by other operators
and service providers. It also prohibits unfair competitive acts and abuse by a
network operator or service provider with significant market power.
Separate licenses are required to:
- provide public fixed telephone services,
- establish and/or provide public telecommunications networks,
- establish networks or provide services which require the granting of
frequencies, and
- conduct operations where the operator is subject to universal service
obligations, interconnection obligations or duties that derive from having
significant market power.
No regulations relating to unbundling the local loop have been enacted.
LICENSES OF OPERATING COMPANY. On August 17, 1999, we entered into a
Partnership Agreement with Finantel SGPS, S.A., Banco de Investimentos Global,
S.A. and IPE Capital--Sociedade de Capital de Risco, S.A., through which we
acquired 35% of the share capital of Teleweb Comunicacoes Interactivas, S.A., a
global telecom operator specialized in internet services, fixed
telecommunications services and wireless local loop services, duly licensed in
accordance with Portuguese law.
In November 1999, Teleweb was awarded a national wireless local loop license
in the 24.5-26.5 gigahertz frequency bands. This license was granted for
15 years from the date the license was formalized. The license may be terminated
upon the occurrence of certain events, including non-compliance with any of its
conditions, suspension of payments and expiration of the term of the license.
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Teleweb has been authorized to provide public fixed telephone services since
1998. In 1999, Teleweb received a license to provide fixed voice telephone
services and Teleweb began to provide services pursuant to this license on
January 1, 2000. Teleweb obtained a license to provide public telecommunications
networks earlier this year. This license requires that Teleweb negotiate
interconnection agreements with other operators, subject to certain
circumstances. Teleweb may not refuse interconnection. Each of these three
licenses is valid for a period of 15 years.
INTERCONNECTION. The Portuguese regulatory authority is establishing the
basic framework for interconnection with Portugal Telecom, the incumbent
dominant operator, and between other network operators. Portuguese law provides
that:
- Portugal Telecom is required to establish a form of interconnection
agreement and to negotiate interconnection agreements with other network
operators,
- the Portuguese regulatory authority will determine the main elements of
the form of interconnection agreements,
- Teleweb must permit non-discriminatory access to its network by other
network operators and service providers, and
- Teleweb is required to have interconnection rates that are transparent,
non-discriminatory and cost-oriented.
SPAIN
REGULATORY FRAMEWORK. The General Law on Telecommunications, effective as
of April 26, 1998, is the primary legislation regulating the Spanish
telecommunications market and the provision of telecommunications services in
Spain. The Spanish government has enacted decrees and orders relating to, among
other issues, licensing, interconnection and numbering and public service
obligations (including universal service). The MINISTERIO DE CIENCIA Y
TECNOLOGIA shares responsibility for overseeing the telecommunications industry
in Spain with the Spanish Telecommunications Commission. The principal role of
the MINISTERIO DE CIENCIA Y TECHNOLOGIA in the telecommunications field is to
propose or decide policy, to issue the necessary regulations and to sanction
operators when necessary. The Spanish Telecommunications Commission is an
independent telecommunications regulatory body that supervises the activities of
the telecommunications market.
The Spanish fixed-line telecommunications market was fully liberalized on
December 1, 1998. Pursuant to the General Law on Telecommunications and its
implementing legislation, different types of individual licenses are required to
construct or operate different networks and to provide different services. This
legislation established three categories of individual licenses that permit
operators to provide telecommunications services to third parties or to
establish or operate a public telecommunications network:
- Type A individual licenses provide operators the right to offer fixed-line
telephony services to the public, through the use of switch and
transmission means, but without having the rights and obligations of
holders of Type B and Type C individual licenses with respect to the
construction or operation of the network.
- Type B individual licenses provide operators the right to offer telephony
services to the public by constructing or operating a public
telecommunications network. Type B individual licenses include "B1"
licenses, for fixed-line telephony services through a fixed-line public
network, and "B2" licenses, for mobile telephony services through a ground
or satellite mobile public network.
- Type C individual licenses permit an operator to construct or operate a
public telecommunications network without the license holder providing
telephony services to the public. Type C individual licenses include "C1"
licenses, when the network does not necessarily require the use of the
radio-electric public domain, and "C2" licenses, when the network requires
the use of the radio-electric public domain.
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WIRELESS LOCAL LOOP. On March 8, 2000, we received a Type C2 individual
license to construct and operate a nationwide wireless local loop network in the
3.4 to 3.6 gigahertz bandwidth. The C2 license was formalized on April 18, 2000.
In June 2000, we applied for a Type C general authorization to provide data
transmission services to the public, including internet access, but it has not
been granted yet.
Under the Type C2 individual license, we enjoy certain rights, including
being able to obtain numbering resources, interconnect with public networks,
provide leased lines services and occupy private or public property for the
construction or operation of our network. As a user of wireless local loop
frequencies, generally we have the right to be protected against harmful
interferences in the frequencies awarded.
The Type C2 individual license is valid for 20 years running from the date
the license was formalized and may be extended by prior request to the
MINISTERIO DE CIENCIA Y TECNOLOGIA for one 10 year period. The license may not
be transferred unless certain statutory requirements are met, including the
expiration of the first four years of the license term. The performance of the
obligations of our Spanish joint venture is guaranteed by a [EURO]185 million
bank guarantee. Our pro-rata share of this guarantee amounts to approximately
[EURO]63 million.
Under the Type C2 individual license, we must, among other things:
- deploy the network covering certain zones of those cities in Spain with
more than 200,000 inhabitants within one year from the date the individual
license is formalized,
- maintain the operation of the network for at least four years from the
date when the individual license was granted,
- submit the technical specifications to the MINISTERIO DE CIENCIA Y
TECNOLOGIA for its approval, prior to starting operation of the network,
- offer interconnection and access to our network as well as guarantee, when
necessary, interoperability of services,
- share infrastructure with other operators when there is a public interest
or an environmental reason. If an agreement is not reached by the relevant
parties, the Spanish Telecommunications Commission may specify the terms
of such agreement,
- comply with certain public service obligations, and
- fulfill the operator's commitments set forth in our Type C2 individual
license application including, among others:
- radio coverage and installed access capacity,
- frequency planning and co-ordination,
- number of covered cities and installed base stations,
- service quality and availability (including local and national
interconnection availability), billing accuracy and repair time,
- nature and availability of service offerings,
- maintenance of existing corporate structure, minimum equity
contributions and minimum capital expenditures,
- pricing structure and volume discounts, and
- employment, training and contributions to communities and the national
economy.
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If we do not comply with our license obligations and conditions or commit
very serious infringements as defined in the General Law on Telecommunications
conditions, the Telecommunications Commission or the relevant administrative
body may impose sanctions on us, including fines and termination of the license.
If we commit other infringements, we may also be sanctioned.
The license may be terminated under certain circumstances, including:
- the term has expired,
- the technical conditions of our network under our Type C2 individual
license are not adjusted to the National Assignment of Frequencies Plan
and additional bandwidths cannot be awarded,
- the license is revoked due to non-compliance with any of its conditions,
and
- the occurrence of certain events specified by the Spanish Public
Procurement Law, including formal bankruptcy, suspension of payments,
expropriation, breach of any key obligations or lack of capacity.
OTHER LICENSES. On May 11, 2000, the Spanish Telecommunications Commission
granted us a Type A individual license to provide fixed telephony services,
available to the public, through the use of switch and transmission means, but
without having the rights and obligations of holders of Type B and Type C
individual licenses with respect to the construction or operation of the
network. We have recently applied for the conversion of our Type A license into
a Type B1 license for fixed line telephony services through fixed line public
networks.
Under the Type A individual license, we are allowed to provide fixed
telephony services anywhere within the territory of Spain, as long as we have
one point of interconnection in each of the provinces where we intend to provide
service.
The license is valid for 20 years, and may be extended by prior request to
the Spanish Telecommunications Commission for 10 year periods up to a total term
of 50 years.
Under the Type A individual license, we will have the right, among other
things, to:
- obtain numbering resources,
- offer call by call selection and, as of December 1, 2000, pre-selection,
- interconnect with public networks, and
- provide an access network to our customers by means of leased lines from
public telecommunications network operations.
Our obligations under our Type A individual license include, among others,
the following:
- to commence service within one year from the date the license was granted
and to continue such service for at least four years from the grant date,
- if we are the customer's selected operator, to transport calls effectively
and efficiently, and
- to pay an annual fee for assignment of numbering resources.
Termination of the Type A license and sanctioning in the event of
non-compliance with our obligations and conditions under the Type A license are
generally triggered by the same events and have the same consequences as
described above for termination and sanctioning under the Type C2 individual
license.
INDIRECT ACCESS TO LOCAL LOOP THROUGH ADSL TECHNOLOGY. An order approved by
the MINISTERIO DE FOMENTO on March 26, 1999 regulates the conditions in which
operators of public fixed telephony
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networks with significant market power will provide indirect access to the local
loop through ADSL technology. This order and the relevant standard contract may
allow Telefonica, the incumbent dominant operator, to withhold ADSL internet
connection services from customers who switch from Telefonica to a different
telephony provider.
According to the ADSL order, the relationship between dominant operators and
authorized operators is governed by a standard contract for the provision of
indirect access to the local loop which was approved by the General Secretary
for Communications on July 9, 1999.
The Government Commission for Economic Affairs is entitled to prescribe
temporary fixed, maximum and minimum prices to be charged by Telefonica to
authorized operators for the provision of indirect access to the local loop. The
Government Commission for Economic Affairs approved the applicable tariffs for
the provision of indirect access to the local loop which will be in force until
December 31, 2000, unless reviewed before that date.
Telefonica is obliged to make available indirect access to the local loop
through ADSL technology in its fixed telephony network in a progressive way. The
first phase of Telefonica's coverage plan ends on December 31, 2000.
INTERCONNECTION. Spanish law requires, as a general rule, the owners of
public telecommunications networks to provide interconnection to other public
telecommunications networks established in Spain and telephone services
available to the public, the terms of which must be specified in an
interconnection agreement. Interconnection agreements are subject to Spanish
government regulations, including the Interconnection Decree dated July 30,
1998, and to the supervision of the Telecommunications Commission.
The Interconnection Decree requires that Telefonica, as the dominant
operator in the fixed line telephony market, present a reference interconnection
offer to the Spanish Telecommunications Commission containing its proposed price
terms. The purpose of the reference interconnection offer is to set out the
general conditions and financial terms upon which Telefonica will interconnect
with other operators. Interconnection services will be provided through points
of interconnection, which are described in an interconnection agreement with
Telefonica. The applicable legislation requires that the interconnection prices
charged by Telefonica be cost-oriented.
In October 1998, the MINISTERIO DE FOMENTO approved Telefonica's reference
interconnection offer, with the revisions recommended by the Spanish
Telecommunications Commission which included a decrease in the prices proposed
by Telefonica. Telefonica has appealed the MINISTERIO DE FOMENTO'S decision to
the AUDIENCIA NACIONAL, a Spanish national court. The appeal is still pending.
The AUDIENCIA NACIONAL could take more than a year to decide on the merits of
the case, but it has refused to suspend the new interconnection rates while the
appeal is pending. Telefonica does have the right, however, to appeal the
decision of the AUDIENCIA NACIONAL to not suspend the new interconnection rates
while the appeal is pending.
Telefonica may vary the conditions included in the reference interconnection
offer in accordance with applicable law. It is required to provide amendments to
the reference interconnection offer annually. The first amendment has already
been approved by the Spanish Telecommunications Commission.
The interconnection regulations prescribe a maximum four month negotiation
period, starting on the date a request for negotiation for an interconnection
agreement with Telefonica is made. We intend in the near future to begin
negotiating an interconnection agreement with Telefonica.
NUMBERING AND OPERATOR SELECTION. In order to provide telecommunications
services, operators need to be allocated public numbering resources by the
Spanish Telecommunications Commission. The Interconnection Decree addresses
operator selection, which refers to the ability of the subscriber to
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select a given operator for all or certain calls. The operator to be used can be
chosen ahead of time or on a call-by-call basis. The operator selected must
transport the calls effectively and efficiently. The operator with significant
market power (currently Telefonica) is required to set out procedures for the
selection of operators before December 1, 2000. Call-by-call selection is
already available on long-distance and certain mobile calls. On February 1,
2000, Telefonica was required to allow customer preselection of alternative
telecommunication carriers for long-distance and certain mobile calls on all of
its digital lines. Telefonica is required to set out procedures, prior to
November 15, 2000, for call-by-call selection and preselection in lines
connected to digital telephony stations for metropolitan calls.
NUMBER PORTABILITY. Under the Interconnection Decree, subscribers will have
the right to keep their existing telephone numbers when contracting for the same
telecommunications services of a new provider. The General Law on
Telecommunications further requires that fixed telecommunications network
providers guarantee that existing telephone numbers be maintained and share the
costs associated with this service. Number portability is available to fixed
telephony service subscribers in certain cases.
LICENSE PAYMENTS. Under applicable Spanish regulations, holders of
individual licenses and general authorizations are required to make certain
payments. Most importantly, they are required to pay an annual fee of 0.15% of
gross revenue and, in the event of using the radio-electrical public domain,
they have to pay an additional annual fee.
TELEPHONY CUSTOMER CHARGES. Telephone operators (other than operators with
significant market power) are generally free to fix customer charges. However,
the Government Commission for Economic Affairs is entitled to prescribe, on a
temporary basis, fixed maximum and/or minimum customer charges, or criteria for
their establishment, taking into account the actual costs of the services
rendered and the degree of competition existing in the markets. This Commission
will also establish the customer charges for the services included in universal
service and may also impose temporary surcharges above the interconnection rates
in order to contribute to the financing of universal service until a national
fund for universal service is established. We could be required to contribute to
the financing of universal service.
A Royal Decree-Law of October 1999 requires the establishment, with effect
from August 1, 2000, of a new regulatory framework of maximum prices for the
fixed telephony and leased lines services provided by Telefonica based on a
model of maximum limits of annual prices (to be established using as a reference
the annual changes in the consumer price index). The MINISTERIO DE ECONOMIA will
approve the regulations necessary to implement this framework.
ACCESS DEFICIT FUNDING. Telefonica has claimed compensation for the amount
of its access network investment that it will now be unable to fully amortize,
its "access deficit", under the new price structure, and the relevant authority
has specifically indicated that it may recognize this claim. Under such
circumstances the Government Commission for Economic Affairs may impose
temporary surcharges above the interconnection rates to help fund Telefonica's
"access deficit". Should it do so, we could be required to help fund this
"access deficit".
UNIVERSAL AND COMPULSORY SERVICES, AND PUBLIC SERVICE OBLIGATIONS. The
General Law on Telecommunications, coupled with the Universal Service Decree,
provides that operators with significant market power (and in certain cases,
operators without it) may be requested to provide certain universal services and
that all operators may be requested to provide compulsory services and to comply
with other public service obligations according to the procedures established in
the legislation.
The Telecommunications Commission may determine that providing universal
service imposes a competitive disadvantage on the telephony operators that
provide these services, and that the net cost of these services should be
allocated among certain operators. The Decree on Universal Service
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indicates that a national fund for universal service will be created and that
the costs will eventually be allocated among certain operators on the basis of
gross revenue.
FOREIGN INVESTMENT RESTRICTIONS. Under the General Law on
Telecommunications, legal entities or natural persons from an EU member state,
or from other countries which have signed a relevant international agreement
with Spain, may be granted a telecommunications individual license.
Participation by non-EU individuals, legal entities domiciled out of the EU or
legal entities having an EU domicile which are directly or indirectly controlled
by non-EU individuals or by legal entities domiciled out of the EU in the share
capital or assets of companies or other legal entities that hold
telecommunications individual licenses may not exceed in the aggregate 25%,
unless either such investment is permitted by international agreements executed
with Spain or by specific authorization in cases where the non-EU state permits
Spanish investments exceeding 25% in similar entities domiciled in such non-EU
state. Upon request, the Spanish Government may authorize percentages of
participation exceeding 25%.
Special provisions may apply to foreign investments in entities carrying out
telecommunications activities which entail the use of radio-electric public
domain.
Because Spain ratified the Fourth Protocol of the WTO General Agreement on
Trade of Services (the "Telecoms Annex to GATS"), the approval of the Spanish
Government is not required for non-Spanish persons or entities domiciled in a
country which is a party to the Telecoms Annex to GATS to directly or indirectly
control more than 25% of a licensed operator provided that said operator does
not undertake telecommunications activities which are outside of the scope of
the Telecoms Annex to GATS. Our current shareholders are exempt from the
prohibition in the General Law on Telecommunications on foreign participation in
licensed companies because the direct and indirect shareholders of FirstMark
Comunicaciones Espana, S.L. are domiciled in countries that are parties to the
Telecoms Annex to GATS.
SWITZERLAND
REGULATORY FRAMEWORK. The Telecommunications Act went into effect on
January 1, 1998, together with ordinances containing more detailed regulations
pertaining to telecommunications services, frequency management, allocation of
numbering resources, terminal equipment and license fees. The Telecommunications
Act provides for full liberalization of the Swiss telecommunications market as
of January 1, 1998, in a manner broadly similar to that adopted by neighboring
EU states, although Switzerland is not a member of the EU.
WIRELESS LOCAL LOOP. We successfully bid for a national license to provide
wireless local loop services and, for this purpose, to use a frequency block of
28 MHz in the 3.5 gigahertz band. We paid the full bidding price, which was
$109.7 million, and the license was issued on June 5, 2000. We also successfully
bid for four regional wireless local loop licenses, namely for Geneva, Zurich,
Basel and Berne, and final licenses are also scheduled to be issued in
summer 2000. We have also registered our interest in an additional four regions.
At least one applicant has filed two lawsuits challenging certain procedural
aspects of the licensing procedures. While the regulator recently stated that
these lawsuits have been withdrawn, there can be no assurance that other
lawsuits will not be filed in the future, particularly challenging the orders of
the regulator granting the licenses to the successful applicants.
According to the invitation to tender, the licenses will contain an
obligation to commence commercial services with at least one hub within one year
of the granting of the license. Failure to meet this or other obligations under
the license or the relevant Swiss legislation could result in various
administrative sanctions, including the revocation of the license. In addition,
Article 10 of the Swiss
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Federal Statute on Telecommunications provides that any telecommunications
license may be amended if prevailing public interest so requires.
OTHER LICENSES. As with any fixed network telecommunications service, a
license for the provision of DSL services is only required if the provider
operates its own installations to a substantial degree. Otherwise (i.e., if the
services are substantially provided over a third party network), a mere
notification to the Federal Office of Communications, or "OFCOM", is sufficient.
A telecommunications provider offering services which do not involve the use
of frequency spectrum such as DSL is entitled to obtain a license for such
services. If the provider at issue already holds a Swiss telecommunications
license, usually no new license will be issued; rather, the existing license
will be amended by adding DSL to the list of services contained in the annex to
such license. The time required for the granting of a new fixed net service
license is usually two to three months; the mere amendment of an existing
license may be accomplished within a shorter period of time. A notification of
services by a provider without its own substantial network installations is
usually registered and confirmed by OFCOM within three to four weeks.
It is currently unclear whether network owners are required to offer
unbundled access to their copper wires, in particular on the "last mile", which
would be necessary for the offering of DSL services by providers other than the
network owner. An interconnection complaint against Swisscom AG, the former
incumbent dominant operator which still holds a DE FACTO monopoly in the area of
last mile connections, regarding this question is currently pending before the
Swiss Communications Commission, or ComCom, the principal regulator of the Swiss
telecommunications market. ComCom, which already indicated that it favors
unbundled access, is expected to issue a decision sometime in 2000; however,
such decision will still be subject to appeal to the Federal Court.
INTERCONNECTION. The relevant regulatory rules require each
telecommunications service provider offering services which are included in the
universal service definition, such as the transmission of speech in real time
and data transmission at low transfer rates, to offer interconnection to all
other providers of telecommunications services. If a provider is considered to
be market-dominant, as is still the case with Swisscom, the incumbent dominant
operator, that provider has to offer interconnection at cost-based prices.
UNITED KINGDOM
REGULATORY FRAMEWORK. The Telecommunications Act of 1984, as amended,
provides a licensing and regulatory framework for telecommunications activities
in the United Kingdom. The Wireless Telegraphy Act of 1949, as amended by the
Wireless Telegraphy Act of 1998, provides a licensing and regulatory framework
for the installation and operation of radio equipment in the U.K.
The Secretary of State for Trade and Industry at the Department of Trade and
Industry, or DTI, is responsible for granting licenses under the
Telecommunications Act and the Wireless Telegraphy Act. The Director General of
the Office of Telecommunications, or OFTEL, is responsible for enforcing the
terms of such Telecommunications Act licenses and the Radiocommunications
Agency, an executive agency of DTI, is responsible for administration,
allocation, and enforcement of the terms of such Wireless Telegraphy Act
licenses.
The grant of an individual license to operate a telecommunications network
to any applicant will be considered by the DTI and OFTEL who will assess whether
the applicant has a reasonable business plan and the necessary financial
resources and whether there are no other overriding considerations against the
grant of a license. Many telecommunications systems are authorized by class
licenses, which give general authority to provide such services, subject to
meeting the conditions of the license.
The operation of a telecommunication system in the United Kingdom requires a
license granted under the Telecommunications Act. Under English law, there are
two principal types of licenses,
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individual licenses and class licenses. In order to provide all of our products
and services, we must obtain an individual license authorizing the connection of
the systems run under the license to systems outside of the U.K. We will apply
for the appropriate individual license prior to the launch of our service in the
U.K.
WIRELESS LOCAL LOOP. The provision of a wireless local loop network in the
U.K. requires a license to run a telecommunication system as well as an
individual license to install and operate radio equipment. We plan to apply for
frequency licenses in the U.K. when the opportunity arises.
In July 1999, the United Kingdom government issued a consultation document
entitled "Wireless In the Information Age" dealing with the provision of
spectrum for broadband fixed wireless access. The document dealt with the two
frequencies that appeared to them to offer the greatest opportunities for new
services, i.e. 40.5-43.5 gigahertz and 27.5-29.5 gigahertz. As a result of this
consultation document, the government announced in January 2000 that it will be
making radio spectrum licenses available for broadband fixed wireless services
in two releases. We have been informed that the 28 gigahertz license will be
released, by auction, in September 2000. This license, because of the limited
bandwidth, may be more suitable for small business use. Details of the license
package and format are due to be announced shortly.
The Radiocommunications Agency has stated that the 40 gigahertz license is
likely to be released, at the earliest, in late October or early November 2000.
The government will undergo a consultation to decide whether an auction or
competitive process is more appropriate to award the license, and indeed when
the license should be awarded. They are not certain, due to technical and
planning issues involved, whether it is sensible to award this license at this
time, and question whether the industry is ready for this frequency to be
awarded. Due to the large amount of bandwidth, this license will probably be for
residential use.
In November 1999, the United Kingdom government issued a consultation
document on 3.4 gigahertz fixed wireless access spectrum. The consultation
document was issued as a result of the existing holder of the spectrum going
into receivership. Since such holder owned both the 3.4 and some 10 gigahertz
spectrum, these licenses were returned to the government. A consultation is due
on the 10 gigahertz spectrum and this is expected later this summer. The 3.4
gigahertz spectrum is a Ministry of Defense spectrum to which the
Radiocommunications Agency (a government body) has negotiated civil access. This
spectrum will most likely be awarded by way of a competitive process. It is
uncertain when the 10 gigahertz spectrum will be awarded. The
Radiocommunications Agency states that the government intends to award both of
these licenses by the end of December 2000. The 3.4 gigahertz license is
intended to be awarded on a national basis (covering England, Wales and
Scotland). The 10 gigahertz license is not envisaged to cover Scotland, although
the position may change. Notwithstanding the bandwidth constraints, the
government does not intend to restrict the type of service provided within the
3.4 gigahertz spectrum. This will be made more clear when the "explanatory
memorandum" is issued, which is expected later this summer.
OTHER LICENSES. The type of license required for the use of a fiber network
will depend on the nature of the services to be provided and how they are
provided. A company which uses fiber capacity leased from a licensed third party
to provide telecommunications services may do so under a telecommunications
services class license provided that the services are not provided to more than
20 premises.
The provision of DSL as a technology would not, in itself, impose any
licensing requirements in addition to those that would otherwise apply in
relation to the service providers system.
Following an industry consultation last year, OFTEL has directed British
Telecommunications plc, the incumbent dominant operator, referred to as BT, to
permit other operators access to its copper
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local network for the purpose of providing higher bandwidth services. OFTEL has
determined that this access is to be provided by requiring BT to:
- introduce DSL technology in the United Kingdom on a phased basis
determined at its own discretion and provide other operators with access
to DSL services on terms which do not unfairly discriminate between
operators; and
- make its copper local network available to other operators (at a
cost-based price) and allow them to install their own DSL equipment in
BT's exchanges so as to provide DSL services to their customers.
The first option involves lower investment costs for the operator. Pursuant
to the second option, operators need to build out their networks to all the
exchanges from which they intend to provide services. This option allows
operators to introduce new technologies without having to wait for BT to
introduce them; however, it would involve higher investment costs for the
operator.
BT has already launched a range of wholesale DSL services available to
service providers to re-sell (aimed at residential customers and small
businesses). As of the end of June 2000, these services are available in
Belfast, Edinburgh, Glasgow, Newcastle, Leeds, Manchester, Birmingham, Coventry,
Cambridge, Milton Keynes, Cardiff and London.
OFTEL has determined that BT must make its copper local network available to
other operators and allow them to install their own DSL equipment as soon as is
reasonably practicable, but no later than the end of July 2001. OFTEL and the
United Kingdom government are encouraging BT to implement unbundling by the end
of 2000. The implementation of this involves a number of key stages against
which a timetable has evolved as follows:
- BT began trials of DSL services with 14 operators in January 2000
- With effect from August 8, 2000, BT's licence was amended to require it to
provide access to its local loop and related services
- On August 2, 2000, BT released information on the availability of
co-location space in its exchanges together with the terms and conditions
applicable to co-location, external tie-circuits and other relevant
services
- Applicants for co-location, external tie-circuits and other relevant
services can be submitted to BT from September 1, 2000
- Applications made to BT up to December 2000 are expected to be met by BT
by June 2001 at the latest with unbundled loops to be made available by
July 2001
INTERCONNECTION. The EU Interconnection Directive (1997) required member
states to implement a regulatory regime which requires certain operators to
provide interconnection services to other qualifying operators.
In the U.K., operators who are deemed by OFTEL to have interconnection
status have the right to interconnect to the extent reasonably necessary for the
provision of its services with other operators with the same status.
Operators with market influence (being a position of strength in a relevant
market), including in respect of some services BT, are prohibited from
exercising undue discrimination between operators in the provision of
interconnection services. As a result, BT generally provides interconnection
services under standard terms and conditions. If qualifying operators are unable
to reach agreement on the terms of interconnection, the matter may be referred
by either party to OFTEL which has the power to determine and impose
interconnection conditions, such as interconnection rates.
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OTHER COUNTRIES
We may operate in a number of countries, including Austria, Denmark, Ireland
and the Netherlands.
WIRELESS LOCAL LOOP.
- In Austria, we plan to submit an application for licenses for frequencies
and frequency blocks for the operation of wireless local loop networks.
The allocation of frequencies and frequency blocks will be determined by
auction.
- We plan to apply for wireless local loop frequencies in Denmark.
Applications for wireless local loop frequencies in Denmark must be
submitted before September 2000 and it is expected that licenses will be
issued in December 2000.
- We intend to apply for a license to operate wireless local loop networks
in Ireland when frequencies become available.
- A license is required for the acquisition of wireless local loop
frequencies in the Netherlands. We expect that an auction for Dutch
frequencies will take place in the autumn of 2000.
DSL.
- In Austria, we received a license for the public offer of leased lines by
means of an owner-operated fixed network on December 20, 1999. On July 2,
1999, the Austrian regulatory authority set forth the general terms and
conditions for interconnection with Telekom Austria AG, the incumbent
dominant operator in Austria.
- In Denmark, the provision of public telecommunications services and the
operation of fixed public networks does not require a license.
- We may apply for a general telecommunications license (to provide
telecommunications networks and services, including voice telephony, to
the general public) in Ireland.
- In the Netherlands, all public services that do not require the use of
frequencies, including the installation and provision of public
telecommunications networks, may be provided pursuant to registration. We
are preparing our registration for DSL, which will be sent to the Dutch
regulatory authority.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and other significant employees are set
forth below. Officers are appointed by our board of directors and serve at its
discretion.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ------------------------------------------
<S> <C> <C>
Lynn Forester............................. 46 Co-Chairman of the Board of Directors
(non-executive)
Michael J. Price.......................... 43 Co-Chairman of the Board of Directors
(non-executive)
Timothy Samples........................... 42 Chief Executive Officer and Director
Donal Byrne............................... 34 Chief Marketing Officer
Keith Cornell............................. 43 Senior Vice President of Business
Development
Raj K. De Datta........................... 25 Senior Vice President of Strategic
Development
Dieter Finke.............................. 46 Executive Vice President; Executive Vice
President of LambdaNet and Chief Executive
Officer and President of FirstMark Germany
Robert Koenig............................. 51 Senior Vice President and Chief Financial
Officer
Michael Taylor............................ 44 Senior Vice President and General Counsel
Victor Bischoff........................... 53 Director
Juan Luis Cebrian......................... 55 Director
Edward A. Gilhuly......................... 40 Director
Alan E. Goldberg.......................... 45 Director
Francois Jaclot........................... 50 Director
David C. Lee.............................. 34 Director
Sir Evelyn de Rothschild.................. 68 Director
Lawrence B. Sorrel........................ 41 Director
Barry S. Volpert.......................... 40 Director
Helmut Werner............................. 63 Director
</TABLE>
LYNN FORESTER. Ms. Forester has served as a director of the company or its
predecessor since July 1998. She also served as Co-Chief Executive Officer of
the company since 1998 until the appointment of Tim Samples as Chief Executive
Officer in February 2000. She now acts as Co-Chairman of the board of directors.
She has also served as Co-Chief Executive Officer of FirstMark Communications
International L.L.C. since June 1998 and as Chief Executive Officer of FirstMark
Holdings, Inc. since 1984. Ms. Forester served as Chairman and Chief Executive
Officer of TPI Communications International, Inc. from 1989 to December 1994.
Ms. Forester served as an Executive Vice President for Development for
Metromedia Telecommunications Inc. from 1985 to 1989. Ms. Forester served as an
Associate with Simpson, Thacher & Bartlett from 1980 to 1984. In 1993,
Ms. Forester was appointed
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by President Clinton to the U.S. National Information Infrastructure Advisory
Council, and in 1994 was elected a Global Leader of Tomorrow by the Davos World
Economic Forum. She currently serves as a director of Next Level Communications,
Inc. From February 1995 to January 2000, Ms. Forester was a director of General
Instrument Corporation and its predecessors, and from March 1997 to July 1999
she was a director of Gulfstream Aerospace Corporation.
MICHAEL J. PRICE. Mr. Price has served as a director of the company or its
predecessor since July 1998. He also served as Co-Chief Executive Officer of the
company until the appointment of Tim Samples as Chief Executive Officer in
February 2000. He now acts as Co-Chairman of the board of directors. He has also
served as Co-Chief Executive Officer of FirstMark Communications International
L.L.C. since June 1998. Mr. Price founded and served as head of the
Telecommunication and Technology Group of Lazard Freres from 1987 to 1998.
Mr. Price also served on the Banking Committee, the Principal Oversight
Committee and the Venture Capital Committee at Lazard. Mr. Price served as an
Associate at Morgan Stanley from 1984 to 1987 and as an analyst at Morgan
Stanley from 1979 to 1981. Mr. Price was a founding investor in Firefly, Inc.
and Avidia Systems, personalization software and ADSL solutions providers. He
currently sits on the boards of Amdocs Limited, SpectraSite Communications,
Inc., and People PC, Inc.
TIMOTHY SAMPLES. Mr. Samples has served as our Chief Executive Officer,
President since February 2000 and a director since April 2000. Mr. Samples
served as Managing Director of One2One from September 1997 to February 2000.
Mr. Samples held the position of Vice President of Domestic Wireless Operations
and Investments for US West Media Group (MediaOne) from June 1996. Prior to
this, Mr. Samples was Vice President and General Manager of the southwest region
of US West NewVector.
DONAL BYRNE. Mr. Byrne has served as Chief Marketing Officer since
September 1999. Prior to joining FirstMark Communications Europe, Mr. Byrne was
Senior Vice President of Corporate Marketing for Fore Systems. Mr. Byrne was the
Co-Founder and Vice President of Marketing and Production Management for
Berkeley Networks, a start-up company specializing in high speed IP switching
from 1996 to 1998. Prior to this, Mr. Bryne worked for Bay Networks as the Chief
Architect for the Enterprise Business Unit.
KEITH CORNELL. Mr. Cornell has served as Senior Vice President of Business
Development since September 1999. Prior to joining FirstMark Communications
Europe, Mr. Cornell was Vice President of International Operations for AirTouch
Europe. Mr. Cornell served on the board of Europolitan from 1997 to 1998.
Mr. Cornell held the position of Managing Director, Corporate Development for
AirTouch Communications, where he was responsible for corporate development
activities in Europe, India, and in 1997, the AirTouch Band B License
Applications in Brazil.
RAJ K. DE DATTA. Mr. De Datta has served as Senior Vice President of
Strategic Development since April 1998. Prior to joining our company, Mr. De
Datta served as an investment banker at Lazard Freres & Co. in the Global
Telecommunications and Technology Group. During 1995, Mr. De Datta served as a
hardware systems design engineer with AT&T Bell Labs designing mid-sized PBXs.
DR. DIETER FINKE. Dr. Finke has served as Executive Vice President of
FirstMark, Executive Vice President of LambdaNet and Chief Executive Officer and
President of FirstMark Germany. Dr. Finke held the position of Chief Executive
Officer of LambdaNet Communications GmbH from its formation in April 1999 to
November 1999. Dr. Finke held the position of Managing Director at HanseNet
Transportnetz Gesellschaft (HTG), Hamburg from 1998 to 1999. Dr. Finke served as
Director of Network Build at o.tel.o Communications from 1997 to 1998. Between
1995 and 1997 Dr. Finke served as Director of Transport Network at o.tel.o. From
1986 to 1995 Dr. Finke served as a Collaborator at Philips Kommunikations
Industrie (PKI) from 1986 to 1995. In his last few years at PKI, Dr. Finke
served as Director of Product Management where he was responsible for the
specification, launching and supply of all PDH and SDH equipment.
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ROBERT KOENIG. Mr. Koenig has served as Senior Vice President and Chief
Financial Officer since April 2000. Prior to joining FirstMark Communications
Europe, Mr. Koenig served as Chief Financial Officer of One2One from May 1997 to
March 2000 during which time he served on the boards of One2One and Virgin
Mobile. Prior to this, Mr. Koenig served as Chief Financial Officer of US WEST
NewVector and as Executive Director of US WEST Communications.
MICHAEL TAYLOR. Mr. Taylor has served as Senior Vice President and General
Counsel since April 1999. Prior to joining FirstMark Communications Europe,
Mr. Taylor was Deputy General Counsel for ICO Global Communications, a global
satellite mobile service provider. Mr. Taylor had been Director of Legal Affairs
in ACC Long Distance Ltd., the first operator to receive an International Simple
Resale license in the UK, and he held a high-level post in Mercury
Communications, BT's main competitor in Britain.
VICTOR BISCHOFF. Mr. Bischoff has served as a director of the company since
May 2000. He has served as a member of and the chairman of the World Online
supervisory board since September 1999. Mr. Bischoff is a member of the board of
directors of the Citco Group and vice-chairman of the board of directors of
BB Biotech AG in Schaffhausen. Mr. Bischoff served as vice-president of
Citibank N.A. from 1980 to 1986. He was Chief Financial Officer of Sandoz AG in
Basel from 1987 to 1993. He is part of the executive board of Sandoz Fondation
de Famille.
JUAN LUIS CEBRIAN. Mr. Cebrian has served as a director of the company
since June 2000. He serves as Chief Executive Officer of Grupo PRISA, Spain's
extensive media organization and owner of the country's largest newspaper,
El Pais, and largest radio network, SER. In 1996, he received the Medal for
Freedom of Speech from the Franklin Delano Roosevelt Four Freedoms Foundation of
New York and a Medal of Honor from the University of Missouri. Mr. Cebrian was
Chairman of the International Press Institute from May 1986 to May 1988.
EDWARD A. GILHULY. Mr. Gilhuly has served as a director of the company
since June 2000. He has been an executive of KKR since 1986 and is Managing
Director of Kohlberg Kravis Roberts & Co Ltd., KKR's London based affiliate.
Mr. Gilhuly is a member of the board of directors of Owens-Illinois, Inc., Layne
Christensen Company, Medcath Inc., Wincor Nixdorf GmbH & Co., Tenovis Holding
GmbH and Wengen Acquisition PLC.
ALAN E. GOLDBERG. Mr. Goldberg has served as a director of the company
since June 2000. He serves as Chairman and Chief Executive Officer of Morgan
Stanley Dean Witter Private Equity, the private equity business of Morgan
Stanley Dean Witter & Co., and its affiliate Morgan Stanley Dean Witter Capital
Partners. He has been a Managing Director of Morgan Stanley & Co. Incorporated
since January 1988. Mr. Goldberg also serves as a director of Allegiance Telecom
Inc., Catalytica, Inc., Equant N.V., Smurfit-Stone Container Corporation and
several privately held companies. He was elected vice president in 1984 and in
July 1984 participated in the formation of Morgan Stanley's private equity
business. Mr. Goldberg joined Morgan Stanley Dean Witter in 1979.
FRANCOIS JACLOT. Mr. Jaclot has served as a director of the company since
May 2000. He serves as Vice Chairman of the Executive Board of Suez Lyonnaise
des Eaux. He has been a member of the Executive Board since 1997. He is Director
of Societe Generale de Belgique, GTM, Sita, TPS, M6, Paris Premiere, Coflcem and
Suez Industrie. He is chairman of FirstMark Communications France and of
Lyonnaise Communications. In 1996, he was Executive Vice President of Compagnie
de Suez. From 1994 to 1996, he served as managing partner of Demachy Worms &
Compagnie. He was as Executive Vice President of Lafarge Coppee Group from 1987
to 1994, Chief Executive Officer of Lafarge Corporation (North America) from
1988 to 1991 and Executive Vice President and Chief Financial Officer of Lafarge
Coppee from 1990 to 1994. During 1982 to 1987, Mr. Jaclot held several positions
with Credit National including advisor to senior management and Senior Vice
President in charge of the Equity department. Before joining Credit National,
Mr. Jaclot served in the French Ministry of Finance acting as an inspector of
Finances from 1978 to 1982.
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DAVID C. LEE. Mr. Lee has served as a director of the company since January
2000. He has been a Managing Director of Sandler Capital Management since 1999.
Prior to joining Sandler Capital, he was a Managing Director at Lazard Freres &
Co. LLC, where he worked on a range of advisory and financial assignments with a
special emphasis in the communications sector. Mr. Lee is a director of Young
Broadcasting Inc., Telscape International Inc., Infocrossing, Inc. and Jobline
International AB, and several privately held companies.
SIR EVELYN DE ROTHSCHILD. Sir Evelyn de Rothschild has served as a director
of the company since January 2000. He is a director of NM Rothschild & Sons
Limited, of which he has been chairman since July 1976. He is also a director of
The Telegraph plc.
LAWRENCE B. SORREL. Mr. Sorrel has served as a director of the company
since June 2000. He is a General Partner of Welsh, Carson, Anderson & Stowe
(WCAS), having joined WCAS in 1998, and is a managing member or general partner
of the respective sole general partners of Welsh, Carson, Anderson & Stowe VIII
and IX, L.P.s and other associated investment partnerships. Prior to joining
WCAS, Mr. Sorrel spent 12 years at Morgan Stanley Dean Witter & Co. where he was
a Managing Director and senior executive in its private equity investment
business. Mr. Sorrel is Chairman of the board of directors of SpectraSite
Holdings, and is a director of Select Medical Corp., Emmis Communications,
Westminster Healthcare Ltd., Valor Telecommunications, LLC, Winstar
Communications and CFW Communications.
BARRY S. VOLPERT. Mr. Volpert has served as a director of the company since
June 2000. He is a Managing Director of Goldman Sachs International and is head
of the Merchant Banking Division in Europe and head of Principal Investment Area
in Asia. The Merchant Banking Division is the firm's exclusive investment
vehicle for long-term private equity investments in companies and real estate
worldwide. Mr. Volpert is a member of the Investment Committee and Whitehall
Real Estate Investment Committee, which oversees all of the firm's corporate and
real estate funds. He joined Goldman, Sachs & Co. in 1986 in New York, became a
Vice President in 1990 and was elected a General Partner in 1994 and a Managing
Director in 1996. He has spent his entire career at Goldman Sachs in the private
equity business. In addition to his current responsibilities, he has been
responsible for the firm's investments in distressed securities, distressed real
estate and mezzanine investments over the past 11 years. He transferred to
London in November 1997. Mr. Volpert serves as a director of Elifin S.A., IDB
Holdings Corp., Rockefeller Center Properties, Inc., Trillium Investments
G.P. Ltd., Westminster Healthcare Ltd. and Wincor-Nixdorf.
HELMUT WERNER. Mr. Werner has served as a director of the company since May
2000. He is Chairman of the Supervisory Board of the EXPO 2000 Hannover GmbH. He
is also Chairman of the Supervisory Board of mg technologies ag as well as
member of the Supervisory Boards of Alcatel (Paris), BASF AG, Ernst & Young
Deutsche Allgemeine Treuhand AG WPGes, Gerling-Konzern Versicherungs-Betellungs
AG and Aktiebolaget SKF in Sweden. Mr. Werner was appointed Deputy President of
Mercedez-Benz AG in 1989 and served as Chairman of the Board of Management from
May 1993 to February 1997. He was a member of the Board of Management of
Continental Gummi-Werke AG, Hanover from 1979 to 1981 and Chairman of the
company from 1982 to 1987. Mr. Werner served on the Board of Management of
Daimler-Benz AG from November 1987 to February 1997 and was the European General
Product Manager of Uniroyal GmbH from 1970 to 1979.
The directors will be grouped into three separate classes. The first group
of directors will serve for three years, the second group will serve for four
years and the third group will serve for five years. After the initial term, the
directors will have terms of three years. The directors set forth above have not
yet been allocated to any group. The procedure for nomination and agreements
between the existing stockholders on the nominations is described in "Summary of
Material Agreements--Stockholders Agreement" and "Description of Share Capital."
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KEY EMPLOYEES
The following are additional key employees of our company:
GERMANY:
See biography of Dr. Dieter Finke above.
FRANCE:
THIERRY MILEO. Mr. Mileo has held the position of Chief Executive Officer of
FirstMark Communications France since November 1999. Prior to joining FirstMark,
Mr. Mileo was Telecommunications Market Manager of ATOS. Previously he joined
the Bouygues Group in 1995 where he served as Director of Strategy and External
Affairs at Bouygues Telecom. Between 1993 and 1994 he was Adviser to the French
Minister of Communications, and from 1992 to 1993 he served as Deputy Director
in charge of International and Industrial Affairs in the Post and
Telecommunications Ministry. Between 1994 and 1996, Mr. Mileo also chaired the
Information Society Committee at the French Prime Minister's Economic Planning
Commission.
VINCENT TEISSIER. Mr. Teissier has served as Managing Director of LambdaNet
Communications France since January 2000. Mr. Teissier held the position of
Product Manager and Interconnection Manager at 9 Telecom between 1997 and 1999.
From 1995 to 1997, Mr. Teissier held the position of Technical Manager for the
Transport Network at o.tel.o. Between 1992 and 1995, Mr. Teissier served as
Product Manager for transport networks at Philips Kommunikations Industrie
(PKI).
SPAIN:
JOSE FERNANDEZ LIZARAN. Mr. Fernandez Lizaran has held the position of
Managing Director General of FirstMark Communications Spain since July 16, 1999.
Between 1996 and 1999, Mr. Fernandez Lizaran served as General Manager of
Ericsson Radio in Spain. In 1995, Mr. Fernandez Lizaran founded Informatica y
Telecomunicaciones, developing various projects for operators, distributors and
manufacturers. Between 1991 and 1995, Mr. Fernandez Lizaran served as General
Manager of the Cometa Project. From 1985 Mr. Fernandez Lizaran held the position
of Commercial Director of IBM Spain and prior to this he held various positions
within IBM Europe.
LUIS RODRIGUEZ LESCURE. Mr. Rodriguez Lescure has held the position of
Chief Operations Officer of FirstMark Communications Spain since July 16, 1999.
Prior to joining FirstMark, Mr. Rodriguez Lescure served as Director of Planning
for Retevision Voice and Data Services, responsible for designing and developing
Retevision's network, systems, international link up and marketing projects.
Between 1998 and 1999, Mr. Rodriguez Lescure took part in a number of
telecommunication projects as an independent consultant.
LUXEMBOURG:
PETER SODERMANS. Mr. Sodermans has served as Managing Director of FirstMark
Communications Luxembourg since November 1999. In 1998, Mr. Sodermans founded
Direct Telecom, a Luxembourg-based independent voice-traffic telecoms operator.
In November 1999, we purchased a controlling interest in Direct Telecom. Between
1995 and 1998, Mr. Sodermans held the position of regional Sales Manager of
Swatch Telecom for the Benelux countries.
UNITED KINGDOM AND SWITZERLAND:
WILLIAM JONES. Mr. Jones has served as Chief Executive Officer of FirstMark
UK and interim Chief Executive Officer for FirstMark Switzerland since
April 2000. Prior to joining FirstMark, he was Managing Director of MCI
International (UK), Director of Western European Operations of Motorola
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Cellular Infrastructure Group, and had a series of senior management positions
with Cable and Wireless plc globally and Plessey plc. Mr. Jones has been a
director of telecommunications businesses in 14 countries, and has managed
businesses in over 10 countries and on a pan-European basis.
ITALY:
DARIO CASSINELLI. Mr. Cassinelli has held the position of Managing Director
for FirstMark Communications Italia since August 2000. Prior to joining
FirstMark Italy, Mr. Cassinelli was a private consultant with various
telecommunications and internet technology companies since the second half of
1999. He was Managing Director and General Manager of Compaq Computer, Milan
from 1997 until the second half of 1999. Between 1995 and 1997, Mr. Cassinelli
served as Regional Managing Director of Cabletion Systems, Milan.
COMMITTEES OF THE BOARD
Prior to this offering, we will establish an Audit and Risk Management
Committee, all of the members of which will be non-employee directors. The
committee members will be independent as required under the Nasdaq listing
rules. The Audit and Risk Management Committee will be responsible for
recommending to our board of directors the engagement of our independent
auditors and reviewing with our independent auditors the conduct and results of
the audits, our internal accounting controls, audit practices and the
professional services furnished by our independent auditors.
In addition, we will establish an Executive Committee which will exercise
all authority of the board of directors in the day-to-day management of the
company between meetings of the board of directors. The board of directors will
also delegate to the Executive Committee authority to approve other matters
within prescribed limits.
We also plan to establish a Compensation Committee. Among other
responsibilities, our Compensation Committee will be responsible for the general
compensation plans and policies of the company and will review and approve all
compensation agreements for senior officers.
EXECUTIVE COMPENSATION
The table below summarizes information concerning the compensation we paid
during the year ended December 31, 1999 to our former Co-Chief Executive
Officers, Chief Executive Officer and the four other most highly paid executive
officers who earned more than $100,000 during such period.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- AWARDS ALL OTHER
OTHER ANNUAL SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION OPTIONS/SARS (#) ($)
--------------------------- ---------- --------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Lynn Forester--former Co-
Chief Executive
Officer(1)............... -- -- -- --
Michael J. Price--former
Co-Chief Executive
Officer(1)............... -- -- -- --
Timothy Samples--Chief
Executive Officer........ -- -- -- --
Raj K. De Datta--Senior
Vice President of
Strategic
Development(2)........... -- -- -- --
Dieter Finke--Executive
Vice President(3)........ 215,578 -- -- --
Michael Taylor--Senior Vice
President and General
Counsel.................. 124,000 28,170 -- --
</TABLE>
------------------------
(1) Lynn Forester and Michael J. Price acted as Co-Chief Executive Officers
prior to the appointment of Timothy Samples in February 2000. Upon
Mr. Samples' appointment, Ms. Forester and Mr. Price remained as co-chairmen
of the board of directors but are no longer acting after that date as
executive officers of the company. Neither Ms. Forester nor Mr. Price
received a salary from the company or any of its subsidiaries. Pursuant to
an arrangement between the company and FirstMark Communications
International LLC, which is indirectly controlled jointly by Ms. Forester
and Mr. Price, FirstMark Communications International provided certain
corporate advisory services to the company on a cost plus basis. For 1999,
these payments aggregated to $1.86 million.
(2) Raj K. De Datta receives a salary from FirstMark Holdings LLC, an indirect
stockholder of the company. Mr. De Datta provides services to the company
pursuant to the services agreement discussed above in Note 1. In 1999, the
company indirectly reimbursed FirstMark Holdings for $163,770, reflecting an
allocation of his salary and benefits.
(3) $114,130 of the compensation earned by Dieter Finke for 1999 was deferred
until 2000.
OPTION GRANTS IN FISCAL 1999
The following table sets forth information regarding options to purchase
shares granted during the year ended December 31, 1999 to each of the named
executive officers, including the potential realizable value over the term of
the options, based on assumed, annually compounded rates of share value
appreciation. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
share prices. Actual gains, if any, on share option exercises will depend on the
future performance of our shares. The 1999 plan authorizes our board of
directors to grant options at an exercise price equal to or below the fair
market value of
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our shares on the date of grant. No share appreciation rights were granted to
these individuals during the year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT
NUMBER PERCENT OF ASSUMED ANNUAL RATES OF
OF SECURITIES TOTAL OPTIONS SHARE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------------
NAME GRANTED IN 1999 ($/SHARE) DATE 5% 10%
---- ------------- ------------- --------- ---------- ------------- -------------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Lynn Forester.................... -- -- -- -- -- --
Michael J. Price................. -- -- -- -- -- --
Timothy Samples.................. -- -- -- -- -- --
Raj K. De Datta.................. -- -- -- -- -- --
Dieter Finke..................... -- -- -- -- -- --
Michael Taylor................... 1.8% 4/19/09 6 11
6.7% 4/19/09 30,250 60,500
</TABLE>
AGGREGATE OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
The table below sets forth information concerning the number and
hypothetical value of unexercised in-the-money options held by the named
executive officers as of , 2000. This table is presented solely for
purposes of complying with the SEC rules and does not necessarily reflect the
amounts the optionees will actually receive upon any sale of the shares acquired
upon exercise of the options.
There was no public market for the shares as of , 2000. The values of
the unexercised in-the-money options at , 2000 have been calculated using
a price of $ per share, the fair market value of the shares as of
, 2000, as determined by the board of directors on the basis of its
assessment of our prospects, financial condition and results of operations as of
that date, less the aggregate exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
$ $
<S> <C> <C> <C> <C>
Lynn Forester.................................. -- -- -- --
Michael J. Price............................... -- -- -- --
Timothy Samples................................ -- -- -- --
Raj K. De Datta................................ -- -- -- --
Dieter Finke................................... -- -- -- --
Michael Taylor................................. 429,333 715,555
</TABLE>
THE 1999 STOCK OPTION PLAN
The following is a summary description of the 1999 Stock Option Plan. This
summary description is qualified in its entirety by the plan.
On December 1, 1999, we adopted the 1999 Stock Option Plan. Since this plan
was adopted, options over shares of our common stock with a par value of
$1.50 have been granted to eligible employees. No new options will be granted
under this plan, and any future option grants will be made under a new stock
option plan as described below.
All of our subsidiaries' directors and employees have been eligible to be
granted options at the discretion of the board of directors. In the majority of
cases, the vesting terms have provided for options to vest cumulatively over a
four year period, with 1/16 of the grant vesting at the end of each
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three month period over the three year period following the first anniversary of
the date the option holder commenced employment with us or one of our
subsidiaries.
Options will not normally be exercisable until the first to occur of a sale
or a public offering. On a sale, accelerated vesting will apply so that options
may be exercised in full. Alternatively, option holders may be required to
surrender their existing options in consideration of the grant to them of new
and equivalent rights over shares in the acquiring company.
On a public offering, vesting will continue to be determined according to
the original vesting terms. In connection with a public offering, the board of
directors may require option holders to enter into lock-up provisions under
which, during a defined period, they will be bound not to sell, lend, charge,
grant any options for the purchase of or otherwise dispose of the shares
acquired on exercise of their options.
Exercise in circumstances other than on a sale or a public offering is only
permitted at the discretion of the board of directors. The board of directors
may require the option holder to enter into repurchase rights in favor of the
company if such early exercise is sanctioned. No occasions of early exercise
have arisen to date.
Options will lapse on the first to occur of the following main events:
(a) the tenth anniversary of the date of grant,
(b) the interruption or termination of an option holder's period of service,
(c) any breach by an option holder of confidentiality and post termination
covenants under his/her employment agreement,
(d) 30 days after the occurrence of a sale,
(e) the bankruptcy of the option holder,
(f) death of the option holder, and
(g) the date specified by the company in the event of early exercise due to
a sale or a public offering.
In compliance with the stockholders' agreement, no option may be granted on
any date if the aggregate number of shares to be issued upon its exercised, when
aggregated with the number of shares then issued and the number of shares
capable of being issued, would exceed 23,188 (subject to adjustment for changes
in capitalization).
On the occurrence of any relevant capital event, including a capitalisation
issue, or any sub-division, reduction or consolidation of our issued share
capital, options may be adjusted by the board of directors to ensure they retain
their original value to the option holder.
The board of directors shall administer this plan acting on our behalf, and
the board of director's decisions on all disputes shall be final. The board of
directors may amend the terms of this plan at any time, provided that except
with the approval of the members of the company in general meeting, no amendment
to the material advantage of option holders may be made. Also, no amendment may
be made which would adversely affect the subsisting rights or option holders
unless approved by a 75% majority of them as a class.
Option holders will be required to indemnify any group company in respect of
any tax or social security liability arising on the exercise of their options,
and shall enter into appropriate arrangements for the making of tax withholdings
according to the applicable tax laws.
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THE 2000 STOCK OPTION PLAN
On 2000, we adopted the 2000 Stock Option Plan. The 2000 Stock Option
Plan provides for the granting of stock options to our or our subsidiaries'
employees, officers, consultants and directors.
The following is a summary description of the 2000 Stock Option Plan. This
summary description is qualified in its entirety by the plan which is filed as
an exhibit to this registration statement, of which this prospectus is a part.
OVERVIEW
The 2000 Stock Option Plan provides eligible individuals with an opportunity
to purchase shares of our common stock. The purpose of the plan is to attract
and retain the best available personnel and to incentivize them to promote the
success of our business.
ADMINISTRATION
The 2000 Stock Option Plan will be administered by the board of directors of
the company or a committee of independent directors appointed by the board.
Generally, the board of directors or the committee will:
- select those persons to whom options will be granted, and
- determine the terms and conditions of options, including the purchase
price per share and the vesting provisions.
SHARES SUBJECT TO THE 2000 STOCK OPTION PLAN
The maximum number of shares available for the granting of options under the
2000 Stock Option Plan is , as adjusted for stock splits and other
changes in capitalization (as that term is defined in the 2000 Stock Option
Plan). The maximum number of shares that may be granted to each eligible
individual in any calendar year is , as adjusted for stock splits and other
changes in capitalization. If an option expires, is surrendered pursuant to an
option exchange program, or is otherwise terminated without having been
exercised in full, the shares allocated to the expired, surrendered or otherwise
terminated option may again become available for grant or sale under the 2000
Stock Option Plan.
The per share exercise price of any option will be fixed by the board of
directors or committee at the time the option is granted. The per share exercise
price of any stock option may be less than 100% of the fair market value on the
date the option is granted. Each option is exercisable at such dates and in such
installments as determined by the board of directors or committee. Each option
will be for a term determined by the board of directors or committee, but no
longer than 10 years.
Options will not be transferable except by will, the laws of descent or
distribution, pursuant to a domestic relations order or if the stock option
agreement between the company and the relevant option holder provides, to
members of the option holder's immediate family, to trusts solely for the
benefit of such immediate family member and to partnerships in which such family
members and/or trusts are the only partners.
The purchase price for shares acquired pursuant to the exercise of an option
must be paid in full at the same time as the option is exercised. The purchase
price may be paid in cash, or as otherwise specified in the terms of the grant.
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TERMINATION OF EMPLOYMENT
Each stock option agreement will set forth the terms and conditions
applicable to the option upon termination of the option holder's employment. In
the absence of a specified time in the stock option agreement, all vested
options shall remain exercisable for three months following the option holder's
termination. If the option holder does not exercise his or her option in the
specified time, the option shall terminate.
INCOME TAX WITHHOLDING
When an option holder recognizes taxable income in connection with the
receipt of shares under the 2000 Stock Option Plan, the option holder must pay
us an amount equal to any taxes and other amounts as may be required by law to
be withheld by us prior to the issuance of shares. If permitted by the terms of
the stock option grant in satisfaction of the obligation to pay withholding
taxes, the option holder may elect to have withheld a portion of the shares then
issuable to him or her having an aggregate fair market value equal to the
withholding taxes.
ADJUSTMENT UPON CHANGE IN CAPITALIZATION
In the event of a change in capitalization, there will be an adjustment to
the maximum number and class of shares or other stock or securities with respect
to which options may be granted under the 2000 Stock Option Plan to any eligible
individual in any calendar year and the number and class of shares or other
stock or securities which are subject to outstanding options and the purchase
price covered by each outstanding option.
MULTIPLE AGREEMENTS
The terms of each option may differ from other options granted under the
2000 Stock Option Plan at the same time, or at some other time. The terms of
each option granted under the 2000 Stock Option Plan will be set forth in an
agreement between the company and the option holder.
AMENDMENT AND TERMINATION
The 2000 Stock Option Plan terminates on the day preceding the tenth
anniversary of its adoption. The board may at any time and from time to time
amend, alter, suspend or terminate the plan. However, no such amendment,
alteration, suspension or termination may adversely alter any outstanding
options without the consent of the option holder. In addition, amendments may
require shareholder approval to the extent necessary under applicable law.
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EMPLOYMENT AGREEMENTS
Some of our executive officers have employment contracts with FirstMark
Communications Services Europe Limited, our wholly owned subsidiary which is
referred to as Services Ltd. in this prospectus. Services Ltd. will assign these
executive officers to act in their various capacities with FirstMark as part of
the service arrangements between Services Ltd. and FirstMark.
TIMOTHY SAMPLES
On May 11, 2000, Services Ltd., our wholly owned subsidiary, entered into an
employment agreement with Timothy Samples to serve as President and Chief
Executive Officer of Services Ltd., which commenced on February 2, 2000.
Mr. Samples' agreement continues year to year, provided that Services Ltd. or
Mr. Samples may terminate at any time by giving the other party six months'
written notice.
Pursuant to the agreement, Mr. Samples will receive an annual base salary of
L200,000 and an annual bonus targeted to be 100% of Mr. Samples' base salary.
The agreement provides that if Services Ltd. terminates Mr. Samples without
"cause," or Mr. Samples terminates for "good reason" within three years from
May 11, 2000, Services Ltd. will pay Mr. Samples one year's base pay and a bonus
equal to the prior year's bonus, or if there is no prior year bonus, an amount
equal to 100% of Mr. Samples' base salary. If within two years after a "change
in control" Mr. Samples is terminated without "cause" or he terminates for "good
reason" Services Ltd. will pay Mr. Samples two years base pay and two years
bonus. The bonus component of the severance payment after a change in control
will be equal to the greater of the prior year's bonus or Mr. Samples' greatest
bonus paid in any of the last three years prior to the year in which the change
in control occurs. For purposes of Mr. Samples' employment agreement and stock
option agreement, a change in control generally occurs where any person or
entity becomes the beneficial owner of equity interests representing more than
50% of the voting power of all outstanding equity securities of FirstMark,
FirstMark consummates a merger which results in the stockholders of FirstMark
immediately prior to the merger ceasing to own equity interests representing
more than 50% of the voting power of all outstanding equity securities of the
resulting or surviving entity or its parent entity, or FirstMark sells all or
substantially all of its consolidated assets.
Pursuant to the agreement, Mr. Samples agreed that for a period of
12 months after termination he would not:
- be engaged as a director, officer, employee or consultant in any concern
which directly or indirectly, is in competition with any aspects of
Services Ltd.'s business in any jurisdiction in which Services Ltd.
operates, or intends to operate or apply for a wireless local loop or DSL
license,
- solicit or entice away any person who is or was, at the date of
Mr. Samples' termination, employed by Services Ltd. who is in a senior
managerial, technical, supervisory sales or marketing capacity, or
- solicit any customer of Services Ltd. to terminate or modify adversely its
business relationship with Services Ltd.
If Mr. Samples should become ill or incapacitated, subject to providing
satisfactory medical evidence, Services Ltd. will continue to pay his salary. If
Mr. Samples' absences aggregate to 16 weeks in any 52 consecutive weeks,
Services Ltd. may terminate his employment by written notice within 28 days of
the end of the 16 weeks and will pay Mr. Samples a sum equal to one year's
salary from the date of termination reduced by the amount of any statutory sick
pay payable to him.
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On May 11, 2000, FirstMark entered into a stock option agreement with
Mr. Samples for services rendered to us granting Mr. Samples:
- options to purchase 1,136 shares of common stock at an exercise price of
$4,401 per share,
- options to purchase 1,136 shares of common stock at an exercise price of
$8,803 per share,
- options to purchase 1,136 shares of common stock at an exercise price of
$26,408 per share, and
- options to purchase 1,136 shares of common stock at an exercise price of
$44,014 per share.
20% of these stock options vest on February 2, 2001, and a further 20% vest
on that date in each subsequent year until 2005, provided Mr. Samples remains
employed by Services Ltd. In the event Services Ltd. terminates Mr. Samples
without "cause" or Mr. Samples terminates for good reason:
- on or before two years from February 2, 2000, an additional 40% of the
aggregate number of options originally granted will become vested,
- after two years, but prior to four years from February 2, 2000, 80% of the
aggregate number of options originally granted will be vested, or
- on or after four years from February 2, 2000, 100% of the aggregate number
of options originally granted will be vested.
An option is only exercisable on:
- the occurrence of, or with our consent, immediately prior to the
occurrence of a change in control, in which event vesting of the right to
exercise the option will be accelerated so it can be exercised in full,
and
- the occurrence of an initial public offering, in which event vesting of
the right to exercise the option will continue according to the original
vesting schedule.
If an acquiring company obtains effective majority voting control of
FirstMark, all or a portion of the options will be surrendered by Mr. Samples in
consideration of the grant to him of new options. The terms of the new options
issued will reflect the terms set forth in the agreement. A change in control
will not affect the rights of Mr. Samples to exercise options, and any new
options obtained will immediately and fully vest.
The options lapse and cease to be exercisable on the first of the following
events to occur:
- the 10th anniversary of the date of the grant,
- 90 days after the termination of Mr. Samples' employment with
Services Ltd. other than for "cause" or good reason, or by reason of his
death or disability, or two years after termination in the case of a
termination for "good reason" following a change in control or termination
other than for "cause" after a change in control,
- the termination of Mr. Samples' employment with Services Ltd., by
Services Ltd. for "cause" or by Mr. Samples without "good reason",
- the date specified by FirstMark in the event of the early exercise of the
option, or
- one year after the termination of employment with Services Ltd. by reason
of the death or disability of Mr. Samples.
On May 11, 2000, we loaned Mr. Samples $1,000,000 with the principal balance
to be paid in five annual payments in the amount of $200,000, with the first
installment payment due and payable on February 2, 2001, and each of the next
four installment payments due and payable on each succeeding February 2. The
promissory note does not bear interest. All amounts are due and payable
immediately
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in the event that Mr. Samples is terminated by Services Ltd. for cause or
terminates his employment other than for "good reason," or, subject to
"forgiveness," one year after termination of employment for any other reason. If
Mr. Samples continues to be President and Chief Executive Officer of
Services Ltd., we will forgive the installment payment due and payable and treat
the forgiveness as compensation to Mr. Samples. Upon a change in control, we
will forgive any remaining installment payments and treat the forgiveness as
compensation to Mr. Samples.
ROBERT KOENIG
On April 1, 2000, Services Ltd. entered into an employment agreement with
Mr. Koenig to serve as Chief Financial Officer of Services Ltd. The agreement
continues year to year, or until Mr. Koenig reaches 60 years of age, provided,
that Services Ltd. or Mr. Koenig may terminate at any time by giving the other
party twelve months' written notice.
Pursuant to the agreement, Mr. Koenig will receive an annual base salary of
L150,000, and is eligible for a bonus of up to 50% of his salary.
On April 1, 2000, Mr. Koenig received options to purchase 615 shares of
common stock at a subscription price of $5,000 per share. The grant and exercise
of the stock options is subject to, and governed by, the 1999 stock option plan.
The stock options will vest in equal 1/16 amounts every three months over a
period of four years from the date of the agreement.
Mr. Koenig has also agreed to a 12 month non-compete and non-solicitation
with Services Ltd. and associated companies. He has also agreed to a
confidentiality clause which prohibits him from disclosing confidential business
information without our permission. This restriction lasts for an indefinite
period after termination of employment.
On April 1, 2000, we loaned $500,000 to Mr. Koenig with the principal
balance to be paid in five annual payments in the amount of $100,000, with the
first installment payment due and payable on April 1, 2001, and each of the next
four installment payments due and payable on each succeeding April 1. All
amounts are due and payable immediately in the event that Mr. Koenig is
terminated by Services Ltd. for "cause" or terminates his employment other than
for "good reason", or, subject to "forgiveness," one year after termination of
employment for any other reason. If Mr. Koenig continues to be Chief Financial
Officer of Services Ltd., we will forgive the installment payment due and
payable and treat the forgiveness as compensation to Mr. Koenig. The promissory
note will bear interest at a rate per annum equal to 6% compounded annually.
MICHAEL TAYLOR
On April 19, 1999, FirstMark entered into an employment agreement with
Michael Taylor to serve as Vice President and General Counsel. This agreement
was assigned to Services Ltd. The agreement continues year to year, provided
that Services Ltd. or Mr. Taylor may terminate at any time by giving the other
party three months' written notice.
Pursuant to the agreement, Mr. Taylor received an annual base salary of
L110,000 and annualized bonus of L25,000 for 1999 pro rated from April 19, 1999
to December 31, 1999. After December 31, 1999 he will receive an annual salary
of L131,000 and no bonus.
Mr. Taylor received an option to subscribe for 75 shares of our common stock
at a subscription price per share of $1.50, and 275 shares of Class A common
stock at a subscription price per share of $2,200. The option is exercisable in
accordance with the terms of the stock option plan. The stock options will vest
in equal 1/16 amounts every three months over a period of four years from
April 19, 2000.
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Mr. Taylor is subject to a 12 month non-compete provision which prohibits
him from working for a competitor company and a non-solicitation provision which
prohibits him from hiring any of our customers or our employees for a period of
12 months. He has also agreed to a confidentiality clause which prohibits him
from disclosing confidential business information without our permission. This
restriction lasts for an indefinite period after termination of employment.
KEITH CORNELL
On September 27, 1999, Services Ltd. entered into an employment agreement
with Mr. Cornell to serve as Senior Vice President of Business Development of
Services Ltd. Mr. Cornell's employment will continue for a fixed period of
24 months from September 27, 1999 and, thereafter may terminate at any time by
giving the other party 12 months' written notice. Mr. Cornell's employment may
be terminated by the company for gross misconduct or upon payment in full of all
amounts payable to Mr. Cornell for the lifetime of the agreement.
Pursuant to the agreement, Mr. Cornell will receive an annual base salary of
[EURO]200,000. Mr. Cornell is entitled to receive a reimbursement of relocation
cost of up to L20,000.
Mr. Cornell received an option to subscribe for 150 shares of our Class A
common stock at a subscription price of $1.50 per share, and options to
subscribe for 650 shares of Class A common stock at $2,200 per share. The option
is exercisable in accordance with the terms of the 1999 stock option plan. The
first stock options will vest in equal 1/8 amounts every three months over a
two-year period from September 27, 1999, and the grant of second set of stock
options will vest in equal 1/16 amounts every three months over a period of four
years from September 27, 1999.
Mr. Cornell is subject to a 12 month non-compete provision which prohibits
him from working for a competitor company and a non-solicitation provision which
prohibits him from hiring any of our suppliers, customers or our employees for a
period of 12 months. He has also agreed to a confidentiality clause which
prohibits him from disclosing confidential business information without our
permission. This restriction lasts for an indefinite period after termination of
employment.
The agreement terminates upon Mr. Cornell reaching 60 years of age.
DONAL BYRNE
On September 13, 1999, FirstMark entered into an employment agreement with
Mr. Byrne to serve as Senior Vice President of Marketing and Strategy.
Mr. Byrne will receive an annual base salary of [EURO]200,000.
Mr. Byrne received an option to subscribe for 400 shares of our Class A
common stock at a subscription price of $1.50 per share, and options to
subscribe for 650 shares of Class A common stock at a subscription price of
$2,200 per share. The grant of stock options are subject to, and governed by the
stock option plan. The first set of stock options will vest in equal 1/8 amounts
every three months over a period of two years from September 13, 1999, and the
second set of stock options will vest in equal 1/16 amounts every three months
over a period of four years from September 13, 1999.
Within one year from September 13, 1999, at our discretion, Mr. Byrne will
be considered for a further grant to purchase 500 shares of common stock at the
then current market value.
Mr. Byrne is subject to a non-compete provision which restricts his ability
to work for a competitor company in a senior position for a specified time.
During the first year of Mr. Byrne's employment, the non-compete lasts for 12
months following termination and decreases as he is employed with us for longer
periods. This non-compete clause does not apply if there has been a change in
control or if Mr. Byrne's employment was terminated without cause. Mr. Byrne is
also subject to a non-solicitation provision which prohibits him from hiring any
of our suppliers, customers or our employees. This
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restriction lasts for the same period as the non-compete provision. Mr. Byrne
has also agreed to a confidentiality clause which prohibits him from disclosing
confidential business information without our permission. This restriction lasts
for an indefinite period after termination of employment.
RAJ K. DE DATTA
On June 29, 1999 and effective as of June 29, 1998, FirstMark Holdings
L.L.C. entered into an employment agreement with Mr. De Datta to serve as Senior
Vice President of Strategic Development for the period commencing on June 29,
1998 and ending on April 1, 2002. Pursuant to the agreement, Mr. De Datta will
receive an annual base salary of $200,000.
Mr. De Datta is subject to a non-compete agreement which prohibits him from
working for a competitor company, either as an employee or consultant, or
engaging in any business which competes in our field for a period of two years
after he is no longer employed with us. Mr. De Datta is also subject to a
non-solicitation provision which prohibits him from hiring or otherwise
interfering with any of our employees for the same period as the non-compete
provision. Mr. De Datta has also agreed to a confidentiality clause which
prohibits him from disclosing confidential business information without our
permission. This restriction lasts for an indefinite period after termination of
employment.
Under the services agreement, FirstMark Communications International also
agreed that for so long as he is employed by FirstMark Communications
International or any of its affiliates, FirstMark Communications International
will make Mr. De Datta available to serve as an executive of the company. Mr. De
Datta's annual salary and bonus is included in the expenses taken into account
for purposes of payments to FirstMark Communications International under the
services agreement.
DR. DIETER FINKE
On April 30, 1999, FirstMark entered into a Managing Director Agreement with
Dr. Dieter Finke to provide services to LambdaNet, formerly known as CCG
Carriers' Carrier Gesellschaft mbH. Dr. Finke's employment term is for five
years and may be terminated by either party earlier with the notice period
provided by law.
Pursuant to the agreement, Dr. Finke serves as chief managing director and
will receive an annual fixed gross income of [EURO]200,000, with a minimum
annual increase of 5% per year, and an annual variable bonus of up to DM 60,000
pro rata payable by March 1 of the year after the end of the year to which it
relates.
In addition, Dr. Finke will be provided with a car. Dr. Finke is entitled to
participate in any other employee benefit programs maintained for similarly
situated employees.
Dr. Finke is obligated to comply with the confidentiality agreement and to
keep confidential all business matters and business secrets.
The agreement terminates upon Dr. Finke reaching 65 years of age.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the establishment of the Compensation Committee, compensation
decisions were made by the board of directors, including Ms. Forester and
Mr. Price, executive officers of FirstMark. After its establishment, the
Compensation Committee will generally be responsible for executive compensation
decisions. No executive officer of FirstMark will serve as a director or member
of the Compensation Committee of any other entity whose executive officers serve
as a director or member of our Compensation Committee.
COMPENSATION OF DIRECTORS
We will reimburse members of the board for their reasonable out-of-pocket
expenses incurred in connection with attending board meetings. In addition, we
maintain directors' and officers' liability insurance. Members of the board of
directors may receive grants of stock options, but do not receive any cash
compensation for serving as directors.
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CERTAIN RELATIONSHIPS
From time to time, our employees provide services to companies that are
affiliated companies and employees of affiliated companies provide services to
us. We receive compensation from and pay compensation to these companies, as
applicable, based on an allocation of that employee's costs. For 1998 and 1999
these amounts were de minimus.
Prior to April 1, 2000, we reimbursed FirstMark Communications
International, one of our largest shareholders, for services provided to us on a
cost plus basis. For 1999, these payments aggregated $1.86 million.
On June 15, 2000, we entered into a services agreement with FirstMark
Communications International LLC, an indirect stockholder of the company, that
governs services provided by Lynn Forester and Michael J. Price, our co-chairmen
of the board of directors, Raj K. De Datta, one of our executive officers, and
other individuals to us from April 1, 2000. Ms. Forester and Mr. Price control
FirstMark Communications International. FirstMark Communications International
provides certain corporate advisory services to the company and receives a
monthly fee of $750,000, which is intended to compensate FirstMark
Communications International for expenses fairly and reasonably incurred on
behalf of us and our subsidiaries plus a profit margin consistent with margins
charged within the FirstMark group for intercompany services (expected to be
approximately 7.5%). On or prior to April 1 of each year, there will be an
annual review of the actual expenses of FirstMark Communications International
and an adjustment will be made to determine whether the payments received by
FirstMark Communications International for the preceding 12-month period were
greater or less than the actual costs incurred by FirstMark Communications
International that are allocable to services to us and our subsidiaries, plus
the appropriate margin. The agreement terminates on March 31, 2003 but will be
automatically extended each year for an additional year if written notice is not
given by either party 90 days before the end of the term. FirstMark
Communications International currently pays each of Ms. Forester and Mr. Price
an annual salary of $500,000, which is included in the expenses taken into
account for purposes of payments to FirstMark Communications International under
the services agreement. Under the services agreement, we indemnify FirstMark
Communications International and its officers, directors, employees and agents
in connection with actions or proceedings arising out of the agreement. Ms.
Forester and Mr. Price receive no other salary or remuneration from us.
Ms. Forester and Mr. Price have each entered into non-competition agreements
with us. Under the agreements, until the second anniversary of either of them no
longer being an affiliate or an executive officer of an affiliate to the
company, each of them has agreed directly or indirectly, not to engage in any
business that competes with any business or line of business of any member of
our affiliated group in Europe or interfere with or otherwise disrupt the
relationship between us and any vendor, supplier or client; provided, however,
that this shall not prohibit either of them from merely owning (x) up to 5% of
the equity securities of one or more publicly traded companies, (y) up to 10% of
the equity securities of one or more privately-held companies, or (z) any equity
securities received upon the merger, consolidation or sale of the company (or
our successor) or any entity through which either of them directly or indirectly
holds an equity interest in the company (or our successor) or any disposition of
equity securities of any of the foregoing entities, in each case to the extent
that such merger, consolidation, sale or other disposition is permitted under
the stockholders agreement.
Moreover, during this period, neither of Ms. Forester or Mr. Price may hire
directly or indirectly any person who, to their knowledge, was an officer of the
company or our subsidiaries (or of FirstMark Holdings if such officer has
performed substantial services for us) within 180 days prior to the time such
officer was hired by either Ms. Forester or Mr. Price.
On March 31, 2000, we entered into an agreement with FirstMark
Communications Latin America L.L.C. for the provision of certain advisory
services in connection with the development of our respective telecommunications
businesses in Europe and Latin America. FirstMark Holdings LLC, an
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indirect shareholder of ours, holds a controlling interest in FirstMark Latin
America. Under the agreement, each of us has agreed to provide:
- services related to the implementation of technical, scientific and
engineering systems,
- financial, legal, administrative, marketing and regulatory support
services, and
- advisory services based on our respective relationships with customers,
suppliers, consultants and regulatory bodies.
All requests for services are subject to the prior approval of a committee
of the board of directors of the company requested to provide such services.
Neither of us is required to provide any services where this committee
determines it is contrary to the best interests of the relevant company. We and
FirstMark Latin America will invoice each other for the fair market value of
these services.
The agreement will terminate after five years unless terminated by for cause
or in the event of a change in control of either company.
From time to time we have borrowed from our stockholders to finance our
operations. As of March 31, 2000, the outstanding amount under these loans
totaled $2,581,587. In May 2000, we issued 466 shares of Series F convertible
preferred stock to FirstMark Communications International L.L.C., one of our
largest stockholders, in cancellation of $2,330,000 in loans held by FirstMark
Communications International.
We and FirstMark Communications International anticipate entering into an
agreement under which FirstMark Communications International will acknowledge
our right to the trademark "FirstMark" and other related trademarks in Europe
and we will acknowledge their right to these trademarks outside of Europe.
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SUMMARY OF MATERIAL AGREEMENTS
STOCKHOLDERS AGREEMENT
The following summarizes the stockholders agreement among most of our
existing stockholders which is being amended prior to this offering.
VETO RIGHTS. Under the stockholders agreement, the stockholders that are
party to the stockholders agreement have agreed that a majority of the shares
held among the group of investors referred to in this section as lead investors
and consisting of Welsh, Carson, Anderson & Stowe, Kohlberg Kravis Roberts &
Co., Morgan Stanley Dean Witter Capital Partners, Goldman Sachs, ABN AMRO, and a
group of French investors, including Suez Lyonnaise Des Eaux, S.A., Montaigne
Participations et Gestion, S.A., Francarep, S.A., BNP Europe Telecom and Media
Fund II L.P. and Natio Vie Developpement 3, FCPR must provide their written
consent before the following actions may take place
(1) the consolidation, merger or acquisition of control of FirstMark, any sale
of all or substantially all of our assets and any liquidation or dissolution
of FirstMark, and
(2) any submission or application by us to obtain or acquire a material license,
other than the existing application in France, involving more than
$20 million in build out requirements, license fees or performance bond
obligations in any individual case, or more than $100 million in the
aggregate.
The right to approve transactions in paragraph (1) above expires on the
earlier of May 30, 2004 or the first date the lead investors have realized
aggregate net cash proceeds in respect of their shares equal to the price paid
for such shares. The right to approve transactions in paragraph (2) above
expires on the earlier of the second anniversary of the consummation of this
offering or the date on which we have raised an aggregate of $500 million in net
aggregate proceeds of long term high yield debt and/or equity capital, including
the proceeds of this offering.
TAG ALONG RIGHTS. If FirstMark Communications International L.L.C.,
FirstMark Communications International II L.L.C. and FirstMark Holdings L.L.C.
or any of their permitted transferees (the "FirstMark Stockholders") proposes to
sell, transfer or otherwise dispose any of our shares in a private, off-market
transaction to a nonaffiliate, then the other stockholders who are parties to
the stockholders' agreement have a right to participate in this transaction on a
proportional basis. If any of the lead investors or their permitted transferees
propose to sell, transfer or dispose any of our securities held by it in a
private, off-market transaction to a nonaffiliate, the other lead investors will
have the right to participate in this transaction on a proportional basis. After
the lead investors have realized net cash (or equivalent) proceeds from the
transfer of equity securities, other than to permitted transferees, equal to at
least 50 percent of the purchase price of equity securities purchased from us
(approximately $207.9 million), if any of the lead investors proposes to sell,
transfer or otherwise dispose of any of our securities in a private, off-market
transaction to a nonaffiliate, then FirstMark Communications International and
its affiliates will have the right to participate in this transaction on a
proportional basis.
RESTRICTIONS ON TRANSFER. Subject to certain exceptions, until the second
anniversary of the date of the consummation of this offering, none of FirstMark,
FirstMark Holdings, the FirstMark Stockholders, Lynn Forester, Michael J. Price
or any of their permitted transferees may
- sell, transfer or otherwise dispose, directly or indirectly, any of our
shares,
- directly or indirectly effect the sale of FirstMark Holdings, FirstMark
Communications International or any other entity through which
Ms. Forester, Mr. Price or their permitted transferees indirectly or
directly own an equity interest of FirstMark,
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- directly or indirectly authorize or effect a disposal of all or
substantially all of the assets of FirstMark Holdings, FirstMark
Communications International or any other entity through which
Ms. Forester, Mr. Price or their permitted transferees indirectly or
directly own an equity interest of FirstMark,
- voluntarily liquidate, dissolve or wind up its affairs, or
- effect a public offering of securities of FirstMark Holdings, FirstMark
Communications International or any other entity through which
Ms. Forester, Mr. Price or their permitted transferees indirectly or
directly own an equity interest of FirstMark.
If Lynn Forester, Michael J. Price, their permitted transferees or any
entity through which Ms. Forester or Mr. Price beneficially own any of our
equity securities receives a cash or noncash dividend with respect to direct or
indirect equity interests of FirstMark held by such individuals or entities as a
result of a merger, consolidation, recapitalization, sale of equity interests
other than in connection with certain financings, sale of assets, extraordinary
dividend, redemption, repurchase of equity interests or similar transaction,
then Ms. Forester and Mr. Price will offer to the lead investors the opportunity
to participate in this transaction on the same economic terms as Ms. Forester,
Mr. Price or their relevant affiliate in proportion to their equity interest in
FirstMark.
BOARD NOMINEES. The stockholders who are party to the stockholders
agreement have agreed with the company that the company will nominate persons
designated by the stockholders for election as directors. These nominees would
then be up for election at the general stockholders' meeting together with any
other nominees. These stockholders have agreed that the FirstMark Shareholders
will designate six nominees. Each of Welsh, Carson, Anderson & Stowe, Kohlberg
Kravis Roberts, Morgan Stanley Dean Witter Capital Partners, Goldman Sachs,
Sandler Capital Partners, World Online and the French investors will designate
one nominee to the board of directors. This agreement is subject to specific
ownership thresholds being maintained by these stockholders.
ADDITIONAL INVESTMENTS. We have agreed to provide the lead investors with
the opportunity to purchase shares of our common stock in a private placement at
the time of this offering at this offering price. Lead investors that
participate will be entitled to purchase in aggregate an amount not to exceed 20
percent of the number of shares offered in this offering plus the number of
shares in the private placement.
REGISTRATION RIGHTS AGREEMENT
We have agreed to register the shares of the stockholders who are a party to
the stockholders agreement with the Securities and Exchange Commission upon
written request, subject to certain restrictions and limitations. In addition,
upon the written request of any of these shareholders, we have agreed to include
their shares in future registration statements with respect to offerings of our
securities unless the inclusion of such shares would affect the marketability of
the offering in the opinion of the managing underwriter. In connection with
these registration statements, we have agreed to indemnify the selling
stockholders for certain losses other than those losses arising out of
information provided by such stockholders.
JOINT VENTURE AGREEMENTS
PARTNERS AGREEMENT DATED NOVEMBER 18, 1999 BETWEEN THE PARTNERS OF FIRSTMARK
COMUNICACIONES ESPANA, S.L. ("FIRSTMARK SPAIN")
We formed a joint venture, FirstMark Spain, to construct, deploy, market and
operate a telecommunications local-loop access system in Spain. FirstMark Spain
was awarded licenses to conduct wireless local loop services on April 18, 2000.
We currently hold a 35% ownership interest in FirstMark Spain. The other
partners hold the following ownership interests:
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- Promotora de Informaciones ("Prisa") owns 17.5%,
- Inmobiliaria Aztlan ("Telmex") owns 17.5%,
- Informatica El Corte Ingles ("Corte Ingles") owns 12.02%,
- Omega Capital owns 5%,
- Diario de Burgos owns 1.49%,
- Caja de Ahorros de Salamanca y Soria (Grupo Duero) owns 3.99%,
- Caja de Ahorros y Monte de Piedad de Zaragoza, Aragon y Rioja (Ibercaja)
owns 2.5%,
- Caja de Ahorros Provincial San Fernando de Sevilla y Jerez owns 2.5%, and
- Monte de Piedad y Caja de Ahorros de Huelva y Sevilla owns 2.5%.
The partners agreement sets forth the following principal provisions which
govern the relationship among the parties.
CAPITAL CONTRIBUTIONS. To the extent the joint venture is financed through
capital contributions, the partners have agreed to contribute such capital pro
rata to their respective ownership interest in FirstMark Spain. Failure of any
partner to contribute any required additional capital shall result in the pro
rata dilution of the shares held by such partner.
PREEMPTIVE RIGHTS. Each of the partners has a preferential subscription
right to purchase new shares issued by FirstMark Spain to maintain its
proportionate interest. This right may be waived for certain issuances,
including in connection with a public offering of FirstMark or FirstMark Spain.
GOVERNANCE. There are twelve members on the board of directors. FirstMark
has the right to elect four directors so long as we hold at least 5% of the
shares. A majority of the directors present or represented shall constitute a
quorum at all meetings of the board of directors.
Resolutions affecting FirstMark Spain are adopted by a majority vote of the
partners present or represented and/or by approval of a majority of the board of
directors. Some resolutions, however, require the approval of FirstMark, Prisa,
Telmex and Corte Ingles, and the directors elected by each of them, so long as
each of these partners hold at least 5% of the share capital of FirstMark Spain.
In addition, some resolutions, such as a waiver of the preferential subscription
right, an increase in capital stock of FirstMark Spain, the transfer of stock to
an affiliate or a distribution of dividends, require the vote of at least 70% of
the voting capital and/or the approval of 66% of the directors. These
resolutions include the waiver of preferential subscription rights, increase of
FirstMark Spain's share capital or distribution of dividends.
EXCHANGE RIGHTS. The partners have a right to exchange their interests in
FirstMark Spain for shares of our common stock in connection with this offering,
in connection with a sale of 50% of our outstanding common stock or after
November 18, 2004. The number of shares of our common stock issuable upon the
exchange is set forth in a formula based on the progress of FirstMark Spain
relative to our overall progress. Based on discussions with these partners, we
do not expect that our partners will elect to exchange their interests in
connection with an initial public offering completed in 2000.
TRANSFER RESTRICTIONS. Transfers of interests in FirstMark Spain are
subject to restrictions, including:
- no transfers within one year from the date of awarding our licenses;
- no transfers within two to four years from the date of awarding our
licenses without consent of the relevant Spanish authorities, except for
transfers to other partners which do not exceed 15% of FirstMark Spain's
capital; and
- transfers to third parties are subject to the prior offer of such shares
to FirstMark and to the other partners upon FirstMark's refusal.
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SHAREHOLDERS AGREEMENT DATED JANUARY 21, 2000 BETWEEN THE SHAREHOLDERS OF
FIRSTMARK
COMMUNICATIONS FRANCE SAS ("FIRSTMARK FRANCE")
We have formed a subsidiary, FirstMark France, which was thereafter
converted into a joint venture, to construct, deploy, market and operate a
telecommunications local-loop access system in France. We hold a 34% ownership
interest in FirstMark France. The other shareholders hold the following
ownership interests:
- Suez Lyonnaise des Eaux owns 18%,
- Groupe Arnault owns 18%,
- Rallye owns 10%,
- Ponthieu Ventures owns 10%, and
- Banque Pour L'Expansion Industrielle, BNP Europe Telecom and Media Fund II
L.P., and Natio Vie Developpement, FCPR collectively own 10%.
The shareholders agreement sets forth the following principal provisions
which govern the relationship among shareholders.
CAPITAL CONTRIBUTIONS. To the extent the joint venture is financed through
capital contributions, the shareholders have agreed to contribute such capital
pro rata to their respective ownership interest in FirstMark France, not to
exceed [EURO] 250 million on an aggregate basis. If a shareholder fails to
contribute its share of required capital contributions, the other shareholders
may acquire all or any portion of the shares of such shareholder. The
shareholders may decide to increase the capital contributions required to an
amount over and above [EURO] 250 million with the objection or abstention of no
more than one member of the board of directors. Failure of any shareholder to
contribute additional capital contributions over [EURO] 250 million shall result
in the pro rata dilution of the shares held by this shareholder.
PREEMPTIVE RIGHTS. Each of the shareholders has a preferential subscription
right to purchase new shares issued by FirstMark France to maintain its
proportionate interest. This right is waivable for issuances such as for new
shareholders.
GOVERNANCE. There are eleven members on the board of directors. FirstMark
has the right to elect four directors so long as it owns more than 20% but no
greater than 34% of the shares. The number of directors FirstMark may elect will
decrease if our ownership interest falls below 20% and increase if our ownership
interest rises above 34%. Two-thirds of the directors present or represented
shall constitute a quorum at all board meetings.
Resolutions affecting FirstMark France are adopted by a majority vote of the
directors present or represented. Resolutions of the meeting of shareholders
which by law require a qualified majority, however, shall be adopted by a
proposal of the directors with the objection or abstention of a maximum of two
members of the board of directors. In addition, some resolutions may not be
approved unless passed by the objection or abstention of a maximum of two, or
one, director(s), as specified in the shareholders agreement, including the
incurrence of debt by FirstMark France greater than [EURO]10 million or the
termination or modification of any license or technical agreement where
FirstMark France is a party.
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TRANSFER RESTRICTIONS. The shareholders may not transfer any of their
shares or interests in FirstMark France prior to FirstMark France's obtaining a
license. Transfers after receiving a license are subject to restrictions,
including:
- no transfers within thirty months from the date of awarding of the
earliest license;
- no transfers within five years from the date of awarding of the earliest
licenses, except for transfers to other shareholders that do not exceed
50% of the transferring shareholder's initial participation in the share
capital of FirstMark France and which do not exceed 5% of FirstMark
France's capital;
- transfers to third parties are subject to the prior offer of such shares
to FirstMark and to the other shareholders upon FirstMark's refusal; and
- transfers by FirstMark to any third parties are subject to a tag-along
provision giving other shareholders the right to offer a proportionate
amount of their shares in such transfer.
VOLUNTARY CONVERSION. Upon notice by FirstMark to the shareholders of the
execution of an agreement for the sale of any shares of FirstMark which would
result in the failure of the current shareholders of FirstMark to continue
directly or indirectly to control FirstMark, the shareholders have the option to
exchange all of their shares in FirstMark France for a number of shares of
common equity securities of FirstMark, based on the fair market value of
FirstMark and FirstMark France at the date of the exercise of the option to
exchange the shares. In a sale pursuant to the foregoing provision, a
shareholder who exchanged their shares in FirstMark France for shares of
FirstMark shall have a tag-along right on the same financial terms as us in
respect of all their FirstMark shares.
If FirstMark does give notice of the execution of an agreement for the sale
of its shares (including in connection with this offering), within five years of
the granting of the earliest award of any of the licenses, each shareholder
shall have the option to exchange all of their shares in FirstMark France for
shares of FirstMark or require that FirstMark purchase all of their shares of
FirstMark France. The shareholders must give FirstMark thirty days written
notice of its election to either convert its shares or require repurchase of the
shares by FirstMark. The FirstMark France shares may be exchanged or repurchased
based on the fair market value of FirstMark and FirstMark France at the date of
the exercise of the option to either exchange or require repurchase of the
shares.
ADDITIONAL AGREEMENT. The FirstMark France shareholders have entered into
an agreement with Lynn Forester and Michael J. Price, the controlling
shareholders of FirstMark, whereby Ms. Forester and Mr. Price agreed to refrain
from taking certain actions with respect to FirstMark prior to FirstMark
commencing, or making provisions for, the exchange, or repurchase by FirstMark,
of the shares held by the FirstMark France shareholders. These restrictions
include:
- the sale of FirstMark;
- distributions to the common shareholders of FirstMark;
- transfer of Ms. Forester's or Mr. Price's interests in FirstMark; and
- restrictions on the ability of Ms. Forester or Mr. Price to engage in, or
associate with, businesses providing services similar to the services
provided by FirstMark.
SHAREHOLDERS AGREEMENT DATED MARCH 9, 2000 BETWEEN THE SHAREHOLDERS OF TELEWEB,
COMUNICACOES INTERACTIVAS ("TELEWEB")
We have entered into a shareholders agreement with Finantel. In connection
with this agreement we, together with the other shareholders, plan to construct,
deploy, market and operate a telecommunications local loop access system in
Portugal. We hold a 35% ownership interest in Teleweb, the company formed to own
and operate this business. The other shareholders hold the following ownership
interests: Finantel owns 55%, Banco de Investimento Global ("BIG") owns 5% and
IPE
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Capital owns 5%. As of March 9, 2000 the shareholders owe Finantel an aggregate
amount of PTE 868,938,837 for their respective shares of Teleweb. Each
shareholder owes the following individual amounts: FirstMark owes PTE
675,841,317; BIG owes PTE 96,548,760 and IPE Capital owes PTE 96,548,760. These
amounts are due on the earlier of (1) December 31, 2001, (2) the date of
conversion of the shares of Teleweb into shares of FirstMark or shares of
Finantel or (3) an initial public offering of FirstMark, in accordance with the
shareholders agreement.
The shareholders agreement sets forth the following principal provisions
which govern the relationship among shareholders.
CAPITAL CONTRIBUTIONS. Finantel and FirstMark have agreed to contribute
their proportionate share of any capital contributions required for the business
of Teleweb up to the aggregate amount of [EURO] 5 million. Failure of Finantel
or FirstMark to contribute any required additional capital will result in the
pro rata dilution of their shares.
GOVERNANCE. There are seven members on the board of directors. Finantel has
the right to elect four directors, FirstMark has the right to elect two
directors and BIG and IPE Capital together have the right to elect one director.
A majority of the directors present or represented shall constitute a quorum at
all meetings of the board of directors.
Resolutions affecting Teleweb are adopted by a majority vote of the
directors present or represented. However, some resolutions relating to the
business of Teleweb require the approval of four-fifths of the directors present
or represented. Certain decisions of the shareholders taken at a general meeting
shall be subject to a vote of three-fourths of the shareholders, including the
annual approval of Teleweb's business plan and the incurrence of any debt not
provided for in the business plan greater than [EURO]4 million or 20% of the
costs of Teleweb. In addition, decisions regarding the merger, spin-off,
transformation or dissolution of Teleweb, or certain amendments to Teleweb's
bylaws, require the vote of all the shareholders.
TRANSFER RESTRICTIONS. The Teleweb shares are subject to transfer
restrictions, including:
- no transfers shall be made until the amounts due to Finantel have been
fully paid;
- transfers to third parties are subject to the prior offer of such shares
to the other shareholders; and
- any transfer by FirstMark or Finantel representing 5% or more of the share
capital of Teleweb shall be subject to the right of BIG and IPE Capital to
offer a proportionate number of their respective shares in such transfer.
SHAREHOLDERS AGREEMENT DATED MARCH 25, 1999 BETWEEN THE SHAREHOLDERS OF
FIRSTMARK
COMMUNICATIONS BELGIUM SPRL ("FIRSTMARK BELGIUM")
We have formed a joint venture to deploy, market and operate a
telecommunications local loop access system in Belgium. We hold a 50% ownership
interest in FirstMark Belgium. We share control of FirstMark Belgium with
Codenet.
The shareholders agreement sets forth the following provisions which govern
the relationship between FirstMark and Codenet.
CAPITAL CONTRIBUTIONS. FirstMark Belgium's capital is expected to be
increased to the following levels: (1) BEF 562,300,000 by December 31, 2000;
(2) BEF 955,700,000 by December 31, 2001; (3) BEF 1,157,400,000 by
December 2002; and (4) BEF 1,242,000,000 by December 31, 2003. To the extent the
joint venture is financed through capital contributions, FirstMark and Codenet
agree to contribute such capital in proportion to their respective ownership
percentage in FirstMark Belgium. Failure of FirstMark or Codenet to contribute
any required additional capital shall result in the pro rata dilution of their
shares accordingly.
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CORPORATE GOVERNANCE. There are six members on the board of directors.
FirstMark and Codenet each have the right to elect three directors. Four
directors shall constitute a quorum at all meetings of the board of directors.
Resolutions affecting FirstMark Belgium are adopted by a majority vote of
the directors present or represented. All major decisions require the approval
of the directors and the joint signature of at least one director elected by
each of the shareholders. Major decisions include equity investments in other
entities, disposition of the assets of FirstMark Belgium, and the incurrence of
indebtedness in excess of amounts approved by the board of directors.
TRANSFER RESTRICTIONS. The FirstMark Belgium shares are subject to transfer
restrictions, including:
- no transfers within one year of the shareholders agreement, except with
the prior consent of the other shareholder;
- transfers to third parties are subject to the prior offer of such shares
to the other shareholder; and
- transfers by a shareholder to any third parties are subject to the right
of the other shareholder to offer a proportionate amount of their shares
in such transfer.
SHAREHOLDERS AGREEMENT DATED NOVEMBER 19, 1998 BETWEEN THE SHAREHOLDERS OF
FIRSTMARK
COMMUNICATIONS LUXEMBOURG SARL ("FIRSTMARK LUXEMBOURG")
Pursuant to the shareholder's agreement entered into on November 19, 1998
with Audiocom, we granted Audiocom the option to exchange its shares of
FirstMark Luxembourg for shares of FirstMark, prior to an initial public
offering of common equity securities of FirstMark. Audiocom has elected to
exercise the option to exchange its shares.
Pursuant to a letter agreement dated June 26, 2000, we agreed to issue 541
shares of FirstMark to Audiocom in exchange for its shares in FirstMark
Luxembourg. The number of FirstMark shares issued to Audiocom shall be adjusted
for any stock split, stock combination, stock dividend or other
recapitalization. In addition, the number of FirstMark shares issued to Audiocom
shall also be adjusted in the event the actual revenues of FirstMark Luxembourg
for the year ended December 31, 2001 exceeds, or is less than, the forecasted
revenues for the year ended December 21, 2001 in the business plan for FirstMark
Luxembourg.
SHAREHOLDERS AGREEMENTS BETWEEN THE SHAREHOLDERS OF FIRSTMARK COMMUNICATIONS
LIMITED ("FIRSTMARK UK")
We formed a majority owned subsidiary, FirstMark UK, to design, deploy,
market and operate a telecommunications local-loop access system in the United
Kingdom. We entered into shareholder agreements with each of Shield Holdings
(Guernsey) Limited ("Shield"), Hollinger-Telegraph New Media Limited
("Telegraph") and Providence Investment Company Limited ("Providence"). We hold
a 79% ownership interest in FirstMark UK. The other shareholders hold the
following ownership interests:
- Shield owns 10%,
- Telegraph owns 10%, and
- Providence owns 1%.
The shareholders agreements set forth the following principal provisions
which govern the relationship among shareholders.
CAPITAL CONTRIBUTIONS. To the extent FirstMark UK is financed through
capital contributions, the shareholders have agreed to contribute such capital,
through the subscription of additional shares of
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the same class of shares held by them, proportionate to their respective
ownership percentage in FirstMark UK. Failure of any shareholder to contribute
any required additional capital shall result in the pro rata dilution of the
number of shares held by such shareholder.
PREEMPTIVE RIGHTS. Each of the shareholders has a preferential subscription
right to purchase new shares issued by FirstMark UK to maintain its
proportionate interest. This right may be waived for certain types of issuance.
GOVERNANCE. There are six members on the board of directors. FirstMark has
the right to elect four of the six directors. Three directors shall constitute a
quorum at all meetings of the board of directors which shall include at least
one director elected by FirstMark and two directors elected by any shareholder
who either holds at least 5% of the issued equity shares or has invested
$5 million in FirstMark UK or FirstMark.
Resolutions affecting FirstMark UK are adopted by a majority vote of the
directors present or represented. However, whenever a shareholder owns 5% or
more of the share capital in FirstMark UK, or has invested $5 million in
FirstMark UK or FirstMark, the consent of the director appointed by such
shareholder is required on some matters relating to the business of FirstMark
UK, including any material change in FirstMark UK's business plan or any
issuance of stock, except for an employee compensation plan. In addition, the
shareholders may adopt resolutions by a majority vote of the shares entitled to
vote at the meeting of the shareholders.
TRANSFER RESTRICTIONS. The shares held by FirstMark may be sold and
transferred to any party without restrictions. However, once FirstMark UK has
been issued a license, if FirstMark transfers up to 50% of its shares, FirstMark
shall offer the other shareholders the right to sell a proportionate number of
their shares in connection with such transfer. If after FirstMark UK has been
issued a license, FirstMark transfers 51% or more of its shares, the other
shareholders shall have the right to transfer all of their shares as part of
such transfer. The shares held by the other shareholders are subject to
restrictions, including:
- transfers to third parties are subject to the prior offer of such shares
to FirstMark; and
- if FirstMark transfers all of its shares to a third party, the other
shareholders may be required to sell all of their shares to the third
party.
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OTHER MATERIAL AGREEMENTS
THE [EURO]480 MILLION SYNDICATED CREDIT FACILITY
Principal terms of the senior secured credit facility dated May 31, 2000
between FirstMark Communications Deutschland Holdings GmbH ("FirstMark Germany
Holdings") as borrower, FirstMark Communications Deutschland GmbH ("FirstMark
Germany") as guarantor, Deutsche Bank AG as arranger and fronting bank, Deutsche
Bank Luxembourg S.A. as facility agent and security agent and the banks named
therein as lenders are described below. The funding under this credit facility
is subject to a number of conditions, and we cannot assure you that these
conditions will be satisfied.
THE CREDIT FACILITY
The credit facility is a senior secured credit facility that will provide
loans in an aggregate principal amount of up to [EURO]480,000,000. The facility
is structured in four tranches.
Tranche A is sub-divided into three sub-tranches: Tranche A1 is a
[EURO]75,000,000 term loan, Tranche A2 is a [EURO]25,000,000 term loan and
Tranche A3 is a [EURO]35,000,000 term loan. Each sub-tranche under Tranche A is
available from the date on which the conditions precedent in the agreement have
been satisfied or waived until May 31, 2002.
Tranche B is a [EURO]85,000,000 term loan which, subject to the Tranche A
facility having become available, is available from the date on which the
annualized revenue of the relevant companies is equal to at least
[EURO]40,000,000 until the earlier of the date falling two years after such date
and May 31, 2004.
Tranche C is a [EURO]195,000,000 term loan which, subject to the Tranche A
facility having become available, is available until the earlier of the date
falling 18 months after the date on which Tranche A becomes available and
May 31, 2005.
Tranche D is a [EURO]65,000,000 revolving working capital facility which
includes a [EURO]25,000,000 guarantee facility. Both advances and guarantees
under Tranche D are issued by Deutsche Bank as fronting bank. Tranche D is
available until the day on which the last repayment of Tranche B and the last
repayment of Tranche C is required to be made under the credit facility.
USE OF CREDIT FACILITY PROCEEDS
Each of Tranche A1 and Tranche A2 are to be used to finance the payment of
invoices under a contract between Siemens AG and FirstMark Germany for the
supply of equipment, software and services in Germany by Siemens. Tranche A3 is
to be used to finance the payments under a core network contract to be entered
into between FirstMark Germany and Nortel Networks plc.
Tranche B is to be used for funding capital expenditures of FirstMark
Germany in Germany.
Tranche C is to be used for the prepayment of Tranche A and (up to a
specified maximum amount) for funding capital expenditures of FirstMark Germany
in Germany.
Tranche D is to be used to meet the working capital and guarantee
requirements of FirstMark Germany Holdings.
AVAILABILITY TESTS
The Tranche A facility will only become available once certain specified
conditions precedent have been satisfied. Tranches B, C and D of the credit
facility will only become available once Tranche A has become available.
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In addition, the availability of Tranches B, C and D is limited as follows:
Amounts under the Tranche B facility will become available by reference to
an annualized revenue test. At the time of advance of any amount under
Tranche B, in relation to the three month period to which the most recently
delivered financial statements relate, the maximum amount of the Tranche B
facility available for drawing is equal to 75% of the annualised revenue for
that period.
The maximum amount of the Tranche C facility and the Tranche D facility
available for drawing at any time is equal to the amount by which the
annualized EBITDA of FirstMark Germany Holdings and its subsidiaries on that
date multiplied by five exceeds total indebtedness of FirstMark Germany
Holdings and its subsidiaries after deducting the amount outstanding under
Tranche A.
Until the Tranche A loan has been prepaid in full using the proceeds of
Tranche C, no more than [EURO]5,000,000 may be drawn under the Tranche C
facility during any calendar month in order to fund capital expenditures.
INTEREST RATES
Borrowings under the credit facility will bear interest at a rate per annum
equal to EURIBOR plus the applicable margin and mandatory costs. The applicable
margin will initially be:
(a) 2.87% for Tranche A1;
(b) 5.4% for Tranche A2; and
(c) 3.5% for Tranche A3.
In respect of Tranches B, C and D, the margin will depend on the ratio of
senior debt to annualized EBITDA of FirstMark Germany Holdings and its
subsidiaries but will range between 3.5% (when the ratio is greater than 5:1)
and 1.25% (when the ratio is less than 2:1). The default rate under the credit
facility is 2% above the otherwise applicable rate.
PREPAYMENTS, REPAYMENT, CANCELLATION
Borrowings and commitments under the credit facility will be subject to a
mandatory prepayment every six months (commencing after the first repayment date
in respect of Tranche B and Tranche C) comprising:
(a) an amount equal to 50% of excess cash flow for the previous two
quarters;
(b) certain insurance proceeds; and
(c) 100% of the net proceeds of the disposal of material assets but only to
the extent such proceeds are not reinvested within six months.
These mandatory prepayments are applied pro rata across the facilities and
reduce each loan and the relevant commitments in reverse chronological order.
In addition, one month after each financial quarter the borrower is required
to prepay any amounts which were drawn down under Tranche A and used to fund VAT
on any invoices under the Siemens contract and the Nortel contract. The amount
prepaid in this case is used to reduce the relevant Tranche A facility.
Voluntary prepayment of the loans is permitted in whole or in part (subject
to minimum amounts) pro rata across the facilities and will reduce each loan and
the relevant commitments in reverse chronological order, save that FirstMark
Germany Holdings may request that any prepayment be applied first to prepay all
or part of an advance under Tranche D.
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If it has not been repaid earlier from the proceeds of Tranche C, the
Tranche A loan is to be repaid in a bullet payment on May 31, 2004.
The amortization schedule for Tranche B and Tranche C commences on the last
day of the third quarter after the end of the Tranche C availability period and
ends five years later. Each of Tranche B and Tranche C is to be repaid in ten
equal semi-annual instalments.
The working capital facility will be repaid in one payment (and all
guarantees issued under Tranche D cancelled) on the day on which the last
repayment of Tranche B and the last repayment of Tranche C is required to be
made under the credit facility.
FirstMark Germany Holdings may cancel the whole or any part of any facility
at any time (subject to minimum amounts) provided that it can satisfy the
lenders that FirstMark Germany will be able to pay all outstanding and future
invoices under any supply contracts.
GUARANTEES
FirstMark Germany guarantees the obligations of FirstMark Germany Holdings
under the credit facility. In return for the payment of a fee by FirstMark
Germany Holdings, Siemens AG will guarantee the payment obligations of FirstMark
Germany Holdings under Tranche A1 and Nortel will guarantee the payment
obligations of FirstMark Germany Holdings under Tranche A3.
SECURITY
The obligations of FirstMark Germany Holdings under the credit facility will
be secured by:
(a) a pledge over the entire issued share capital of FirstMark Germany
Holdings;
(b) a pledge over the entire issued share capital of FirstMark Germany; and
(c) an assignment of all receivables of FirstMark Germany and FirstMark
Germany Holdings (which receivables will be paid into bank accounts
pledged in favor of the security agent).
The lenders are entitled to require FirstMark Germany and/or FirstMark
Germany Holdings to grant fixed security over any asset whose value exceeds
[EURO]1,000,000.
CONDITIONS
The first drawing under the credit facility is subject to satisfaction of
conditions precedent, including:
(a) conditions customary for financings of this nature;
(b) (in respect of Tranches A1 and A2 only), execution of the Siemens
contract and the Siemens guarantee;
(c) (in respect of Tranche A3 only), execution of the Nortel contract and
the Nortel guarantee;
(d) satisfactory insurance policies in place;
(e) lenders satisfied with the business plan of the relevant companies;
(f) evidence of the release of existing security over the shares in
FirstMark Germany; and
(g) execution of security documents and approval by the lenders of various
project documents including the service level agreement between FirstMark
Germany Holdings and FirstMark Germany, interconnection agreements with
Deutsche Telekom and MCI Worldcom and the bandwidth lease agreement with
Deutsche Telekom.
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Subsequent drawings are subject to satisfaction of conditions precedent
customary for financings of this nature. As of the date of this prospectus,
FirstMark Germany has not drawn any amounts under this credit facility.
REPRESENTATIONS AND WARRANTIES
The credit facility contains representations and warranties customarily
found in credit agreements for similar financings.
FINANCIAL COVENANTS
The credit facility contains financial covenants requiring compliance with a
senior debt leverage ratio and various other tests at successive three-monthly
intervals as follows:
(a) ratio of senior debt to annualized EBITDA (from December 31, 2003);
(b) ratio of EBITDA to interest expense (from December 31, 2003);
(c) ratio of EBITDA to debt service (from June 30, 2005);
(d) minimum annualized revenue (from March 31, 2001); and
(e) minimum annualized EBITDA (from March 31, 2001).
Each of the tests set out above is varied each subsequent quarter as set out
in the credit facility.
OTHER COVENANTS
The credit facility includes other covenants customarily found in similar
financings, including:
(a) no encumbrances other than permitted encumbrances as described below;
(b) no indebtedness other than permitted indebtedness as described below;
(c) no distributions other than permitted distributions as described below;
(d) not to carry on any business other than the "Business" as defined in the
facility; and
(e) all inter-company debt subordinated.
PERMITTED ENCUMBRANCES
Neither FirstMark Germany Holdings nor any of its subsidiaries may create or
permit to subsist any encumbrance other than:
(a) encumbrances created under the credit facility documents or Siemens
contract;
(b) encumbrances which arise by operation of law and in the normal course of
trading;
(c) retention of title arrangements under supply contracts;
(d) other encumbrances where the amount secured by such encumbrance does not
exceed [EURO]50,000 or the aggregate amount secured by all such
encumbrances does not exceed [EURO]500,000; and
(e) rights of set-off agreed by FirstMark Germany Holdings or any of its
subsidiaries with their bankers in the ordinary course of business.
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PERMITTED INDEBTEDNESS
Neither FirstMark Germany Holdings nor any of its subsidiaries shall incur
any indebtedness other than:
(a) under any credit facility document or the project documents set out in
the agreement;
(b) subordinated debt (including shareholder debt);
(c) with the consent of the lenders; and
(d) indebtedness incurred in the normal course of business provided that the
aggregate amount of such indebtedness does not exceed the greater of
[EURO]500,000 or 2% of the aggregate amount drawn and outstanding under
the facilities.
PERMITTED DISTRIBUTIONS
No relevant company shall pay any dividends to FirstMark or any payments of
interest or principal on subordinated debt other than (a) on or after the date
of each bi-annual mandatory prepayment under the credit facility provided that
the amount paid does not exceed 50% of excess cash flow for the immediately
preceding six month period or (b) with the consent of the lenders.
EVENTS OF DEFAULT
The credit facility includes standard events of default including, subject
to certain exceptions and thresholds, non-compliance with any of the following
by FirstMark Germany Holdings and, where appropriate, the guarantors:
(a) default in the payment of principal and interest;
(b) cross-default in payment of other indebtedness;
(c) incorrect representations and warranties;
(d) default in the observance or performance of any of the covenants
included in the credit facility documentation;
(e) certain events of bankruptcy or insolvency;
(f) the failure of the credit facility documents or any provision of the
documents, the guarantees, security documents or any related documents to
be in full force and effect;
(g) breach or termination or repudiation of any material contract;
(h) material adverse effect as defined in the facility;
(i) material adverse change in the business of FirstMark Germany Holdings
and its subsidiaries taken as a whole;
(j) cessation of business by the borrower group; and
(k) change of control of FirstMark Germany Holdings or any of its
subsidiaries, including FirstMark Germany.
FEES AND EXPENSES
The borrower is to pay commitment fees in an amount equal to 0.75% per annum
on the undrawn portion of Tranches B, C and D during their respective
availability periods. Additionally, the borrower is to pay various fees and
costs in connection with the credit facility, including an up-front fee and an
agency fee.
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THE [EURO]56 MILLION BANK CREDIT FACILITY
Principal terms of the senior secured credit facility dated January 21, 2000
between LambdaNet and Bayerische Hypo-und Vereinsbank Aktiengesellschaft,
Dresdner Bank AG, and Kreditanstalt fur Wiederaufbau are described below. The
funding under this credit facility is subject to a number of conditions, and we
cannot assure you that these conditions will be satisfied.
THE CREDIT FACILITY. The credit facility is a senior secured credit
facility that will provide loans in an aggregate principal amount of up to
[EURO]56 million. The facility is structured in two tranches. Tranche A is a
[EURO]10 million revolving loan that will run until November 30, 2006. Tranche B
is a [EURO]46 million term loan that will run until December 31, 2001.
USE OF CREDIT FACILITY PROCEEDS. The proceeds of the credit facility may be
used for the purpose of financing investments by LambdaNet and its corresponding
expenditure, including to meet working capital requirements. Tranche A shall be
used for intermediate financing and working capital. Tranche B shall be used to
finance LambdaNet's initial network architecture and for purchasing components
from Nortel DASA pursuant to a supply agreement with Nortel DASA and for
extended investments in accordance with LambdaNet's current business plan, if
necessary.
AVAILABILITY TESTS. Up to [EURO]6 million shall be available under Tranche
A as long as the amount available under Tranche B is below [EURO]40 million. As
soon as the amount available under Tranche B reaches or exceeds
[EURO]40 million, the amount available under Tranche A increases to
[EURO]10 million.
Once LambdaNet has concluded qualified purchasing agreements (as defined in
the credit facility) with an aggregate value of at least [EURO]7,500,000, up to
[EURO]40,000,000 will be made available under Tranche B. Once LambdaNet has
concluded qualified purchasing agreements with an aggregate vaue of at least
[EURO]20,000,000, an additional [EURO]6,000,000 will be made available under
Tranche B.
INTEREST RATES. Borrowings under the credit facility will bear interest at
a rate per annum equal to EURIBOR plus the applicable margin and mandatory
costs. The applicable margin will depend on the senior debt to annualized EBITDA
ratio but will range between 3.75% (when such ratio is greater than 6:1) and
1.75% (when such ratio is less than 2.5:1). The default rate under the credit
facility is 1.5% above the otherwise applicable rate.
REPAYMENT. The repayment structure for the loan consists of ten semi-annual
installments calculated according to annual repayment percentages beginning at
10% for 2002 and increasing to 27.5% by 2006. LambdaNet has the option to repay
Tranche B partially or in total at the end of each interest period. Tranche A
must be fully repaid at the end of year 2006.
Borrowings and commitments under Tranche B will be subject to a mandatory
prepayment at the end of each interest period of at least:
(a) 50% of excess cash flow, and
(b) 100% of the income from an investment or sale of any asset which exceeds
[EURO]500,000 but only to the extent such proceeds are not reinvested within
three months.
These mandatory prepayments reduce Tranche B and the relevant commitments in
inverse order of maturity.
GUARANTY. Nortel DASA will guarantee the payment obligations of LambdaNet
under Tranche B to an amount up to [EURO]23.8 million, which is the value of the
supplies and services purchased under the supply agreement.
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SECURITY. The obligations of LambdaNet under the credit facility will be
secured by:
(a) an assignment of all present and future claims from insurance policies,
project contracts permits, purchase contracts and patents,
(b) a transfer of all plant and machinery unencumbered by the rights of
third parties,
(c) a pledge of the shares of LambdaNet,
(d) the guarantee from Nortel DASA, and
(e) the subordination by GasLINE of any claims arising out of the GasLINE
Loan Agreement.
CONDITIONS. The credit facility is subject to satisfaction of conditions
precedent, including:
(a) the maintenance by LambdaNet of satisfactory insurance policies,
(b) the satisfaction of the lenders with the business plan of LambdaNet, and
(c) compliance by LambdaNet with each of the financial covenants specified
in the credit facility.
REPRESENTATIONS AND WARRANTIES. The credit facility contains
representations and warranties customarily found in credit agreements for
similar financings.
FINANCIAL COVENANTS. The credit facility contains financial covenants
requiring compliance with various ratios in respect of successive three-month
periods as follows:
(a) accumulated turnover,
(b) minimum annualized EBITDA,
(c) ratio of senior debt to annualized EBITDA (from June 30, 2001), and
(d) debt service coverage ratio,
(e) minimum interest coverage ratio, and
(f) ratio of senior debt to equity.
PERMITTED DISTRIBUTIONS. LambdaNet shall do everything in its legal power
not to effect any profit distributions or other payments to its shareholders or
under subordinated loans until June 30, 2003 (with the exception of the GasLINE
agreement). Following such date, profit distributions or payments from excess
cash flow shall be permitted provided that the ratio of senior debt to
annualized EBITDA falls below 2:1 for at least six consecutive months and does
not rise above this level again after the corresponding profit distributions or
payments.
EVENTS OF DEFAULT. The credit facility includes standard events of default,
including:
(a) default in the payment of principal and interest,
(b) cross-default in the payment of other indebtedness,
(c) breach of warranties or representations,
(d) default in the observance or performance of any of the covenants
included in the credit facility,
(e) certain events of bankruptcy or insolvency,
(f) repudiation of the guarantee, the security documents or any related
documents,
(g) breach, termination or repudiation of any essential project agreement,
and
(h) material adverse changes in the financial situation of LambdaNet.
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FEES AND EXPENSES. LambdaNet is required to pay commitment fees in an
amount equal to 0.875% per annum on the undrawn portions of Tranche A and
Tranche B during their respective availability periods. Additionally, LambdaNet
is required to pay various fees and costs in connection with the credit
facility, including an up-front fee, an underwriting fee and a structuring fee.
SPANISH BOND
Principal terms of the Spanish Bond by and among us, FirstMark Spain, and a
group of Spanish financial institutions, including Caja de Ahorros Provincial
San Fernando de Sevilla y Jerez ("Caja San Fernando"), Monte de Piedad y Caja de
Ahorros de Huelva y Sevilla ("El Monte"), Caja de Ahorros de Salamanca y Soria
("Caja Duero"), Caja de Ahorros y Monte de Piedad de Zaragoza Aragon y Rioja
("Ibercaja"), Sociedad Espanola de Banca de Negocios, S.A., ("EBN Bank"), Caja
de Ahorros del Mediterranneo ("CAM"), Caja de Ahorros y Monte de Piedad de
Baleares ("Sa Nostra"), and Montes de Piedad y Caja de Ahorros de Ronda, Cadiz,
Almeria, Malaga y Antequera ("Unicaja", and together with Caja San Fernando, El
Monte, Caja Duero, Ibercaja, EBN Bank, CAM and Sa Nostra, referred to as the
guarantor entities), Inmobiliaria Aztlan Sociedad Anonima de Capital Variable
("Inmobiliaria"), Promotora de Informaciones, S.A. ("Promotora"), Informatica
del Corte Ingles, S.A. ("Informatica"), Omega Capital, S.L. ("Omega"), Caja
Duero, Ibercaja, Caja San Fernando, El Monte, and Diario de Burgos, S.A.
("Diario", and together with FMCE, Inmobiliaria, Promotora, Informatica, Omega,
Caja Duero, Ibercaja, Caja San Fernando and El Monte, referred to as the
warrantors) and Fonsagrada, S.L. ("Fonsagrada"), dated as of April 7, 2000, are
described below.
THE GUARANTEES. The guarantor entities have agreed to guarantee the
obligations of FirstMark Spain to the Spanish Ministry of Public Works with
respect to its C-2 individual license in an aggregate amount of
ptas 30,621,500,000, ([EURO]184,038,921.54), through the delivery and deposit of
51 endorsements to the Spanish Ministry of Public Works. The purpose of the
endorsements is to guarantee the obligations assumed by FirstMark Spain in
relation to the grant of its C2 individual license. The individual licenses were
awarded for the establishment and use of fixed public radio access in the 3.4 to
3.6 gigahertz waveband.
THE WARRANTIES. Each of the equity owners of FirstMark Spain jointly
guarantees to the guarantor entities all of the obligations contained under the
surety bond under the same terms and conditions and time periods agreed. Each of
the equity owners is liable only for its proportionate percentage of any
obligation under the surety bond and for specified maximum amounts. Our maximum
obligation is ptas 10,717,525,000 and our percentage is 35%.
PAYMENT AND INTEREST. If the guarantor entities make a payment of their
obligations under the surety bonds, FirstMark Spain shall be bound to pay to the
guarantor entities the total amount paid by such guarantor with any accrued
interest and expenses. Outstanding amounts bear interest at the three-month
variable EURIBOR rate plus 2.5%.
RELEASE OF SURETY BOND. The guarantor entities are entitled to demand that
FirstMark Spain release their surety bond, within a period of 15 working days
after receiving notification, provided that one of the following circumstances
has taken place:
- the breach of any obligation assumed by FirstMark Spain or the other
warrantors in the contract;
- the termination, suspension, voiding, expropriation, expiration, or
resolution of the award of the C2 license granted to FirstMark Spain;
- any information provided by FirstMark Spain or the other warrantors is
found to be inaccurate or false;
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- any filing for the suspension of payments, discharge or stay of debt or
bankruptcy of FirstMark Spain or any of the warrantors (or, if bankruptcy
proceedings are initiated by a third party, where a judge has declared
such bankruptcy); and
- any of the circumstances referred to in section 1843 of the Spanish Civil
Code.
If upon such request FirstMark Spain fails to release the guarantor entities
from the surety bond, it must deposit with the guarantor entities, in cash or
shares, an amount equal to the entire outstanding guarantee. FirstMark Spain
must also pledge the cash or shares deposited in favor of the guarantor
entities, guaranteeing any obligations arising from such guarantees. In the
event that FirstMark Spain fails to deposit the amounts required, the warrantors
must do so.
COMMISSIONS. The guarantor entities shall receive the following commissions
from FirstMark Spain:
- a commission of 0.25% on ptas 30,621,500,000;
- a quarterly risk commission of 0.125% that accrues daily, commencing on
the day of the issuing of the first endorsement, on the total amount that
is secured;
- a management fee of 0.15% on ptas 30,621,500,000; and
- an agency commission of ptas 1,000,000 each year, or part thereof, while
the endorsements are in force.
GASLINE DARK FIBER LEASE AND LOAN AGREEMENT
LambdaNet entered into a contract with GasLINE GmbH & Co. KG on July 14,
1999 pursuant to which GasLINE agreed to provide LambdaNet with dark fiber
capacity by leasing to us four fiber lines in its existing fiber network with
the option to lease a further eight lines before the end of 2001. GasLINE has
also agreed to allow LambdaNet to use its premises along the routes of the fiber
lines to store communications equipment.
LambdaNet is required (subject to the loan agreement with GasLINE described
below) to pay GasLINE DM 5,250,000 per year for the use of the four fiber lines
initially provided and will be required to pay a further DM 1,700,000 per year
for the use of the additional eight optional lines. In addition, LambdaNet also
pays an annual administration charge of DM 850,000, to be increased to
DM 900,000 if it exercises its option for the use of the additional eight
optional lines, and DM 15,000 for the use of GasLINE's facilities along the
routes of the fiber line.
The term of the GasLINE fiber lease is 10 years, which may be extended for
an additional eight years if LambdaNet provides written notice at least
12 months prior to the end of the term. GasLINE has granted LambdaNet the right
to use its premises along the routes of the fiber lines for five years, and this
may be extended for a further five years if the agreement has not been
terminated by written notice at least 12 months prior to the end of the term.
In connection with the GasLINE fiber lease, we entered into a loan agreement
for a term of ten years on July 14, 1999. The loan agreement provides that
GasLINE will loan LambdaNet a total of DM 41 million in 10 annual installments
of DM 4.1 million, which are offset against the payments to be made by LambdaNet
under the GasLINE fiber lease. The loan bears interest at a rate of 9 percent.
per annum and matures on September 30, 2010.
If the loan agreement is terminated, GasLINE has the right to terminate the
fiber lease within 6 months. The loan agreement may be terminated for cause,
including the non-payment of interest.
Under the loan agreement, GasLINE has the right to convert the whole of the
loan into shares of LambdaNet if LambdaNet is converted into a German stock
corporation or if there is a direct or
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indirect change of control of LambdaNet. GasLINE may exercise the right of
conversion on or after the earlier of July 14, 2003, the date that LambdaNet's
shares are listed or the date that there is a change of control. If any direct
or indirect parent of LambdaNet goes public in Europe, GasLINE has the right to
convert the loan amount in shares of the parent company at the issue price. We
believe that the loan may be convertible into our common stock in connection
with this offering.
LOUIS DREYFUS COMMUNICATIONS DARK FIBER LEASE
LambdaNet Communications S.A.S., a subsidiary of LambdaNet, entered into a
contract with Louis Dreyfus Communications S.A. on April 26, 2000 pursuant to
which Louis Dreyfus Communications agreed to lease us two pairs of dark fiber
lines and to provide us with lease space for our equipment along the 4,800
kilometer fiber optic network that it is developing in France.
Under this contract, Louis Dreyfus Communications has committed to providing
us sections of the dark fiber lines on a schedule of dates. If any section of
the dark fiber lines is not available three weeks beyond the scheduled date, we
are entitled to receive penalties. If a section is delayed more than 12 weeks,
we can terminate the contract.
The contract term is the earlier of 20 years from the date on which the last
section of dark fiber line is commissioned or until the last section of dark
fiber line ceases to be in service. The contract may be terminated if the fiber
deteriorates below agreed-upon specifications. For the first 10 years of the
contract, Louis Dreyfus Communications has agreed to repair and replace the dark
fiber lines at their expense. Thereafter, we will be required to pay a fee for
any repairs or replacement carried out by Louis Dreyfus Communications. The term
for the leased space is also 20 years, but it terminates earlier if the fiber
lease contract is terminated.
In a separate agreement, we have agreed to provide financial support to
LambdaNet Communications' obligations under this fiber lease contract.
NORTEL DASA BACKBONE NETWORK EQUIPMENT CONTRACT
On September 21, 1999 LambdaNet entered into a contract with Nortel DASA
Network Systems GmbH & Co. KG, a joint venture between Nortel Networks and DASA
GmbH, pursuant to which Nortel DASA agreed to supply and install and maintain
SDH and DWDM transmission technology for use in our fiber optic backbone network
in Germany. Under this contract, Nortel DASA is committed to make available
developments in its products and services over the period of the contract,
subject to penalties in cases of delay in providing such developments. In
addition, Nortel DASA is subject to contractual penalties for failure to meet
delivery and installation deadlines and repair requirements set forth in the
contract.
In February 2000 LambdaNet and Nortel Networks entered into an agreement
pursuant to which Nortel Networks agreed to provide transmission equipment for
our fiber optic backbone networks in other European countries on similar terms
as the agreement entered into with Nortel DASA.
SIEMENS WIRELESS LOCAL LOOP EQUIPMENT CONTRACT
We entered into an agreement with Siemens AG on May 16, 2000 for deployment
of wireless local loop equipment in Germany and other specified European
countries. Under the agreement, Siemens:
- is responsible for the design, development, supply, installation,
integration and testing of wireless local loop transmission and management
systems and services,
- has granted us permission to use its sites in Germany to install base
stations and other equipment,
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- will use all reasonable efforts to fulfill orders for equipment placed by
us with its affiliates outside Germany,
- will provide certain technical and maintenance support after the equipment
has been delivered and accepted by us, and
- has agreed to market our products in those markets where we have placed
purchase orders for their equipment.
We will submit purchase orders for these systems and services on a market by
market basis. After May 16, 2001, we will be able to select any other supplier
for those German markets as long as Siemens has the opportunity to better or
match their terms.
The term of the agreement is five years, which is automatically extended for
an additional year unless the agreement is terminated by either party with at
least two months' notice. In addition to customary termination provisions,
including for change of control, Siemens may terminate for material breach of
the related vendor financing facilities.
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PRINCIPAL SHAREHOLDERS
The following table presents information regarding the beneficial ownership
of our shares before and after this offering, by
- each person who is known to us to beneficially own more than 5% of our
outstanding shares;
- each of our directors and named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC,
and generally includes voting or investment power with respect to securities. We
believe based on information provided to us that all persons listed below have
sole voting and investment power with respect to their shares, except as
otherwise indicated and to the extent authority is shared by spouses under
applicable law. A person is deemed to be the beneficial owner of securities that
can be acquired within 60 days from the date of this prospectus through the
exercise of any option, warrant or right. Shares subject to options, warrants or
rights that are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the ownership percentage of the person holding such
options, warrants or rights, but are not deemed outstanding for computing the
ownership percentage of any other person.
<TABLE>
NUMBER OF
NUMBER OF SHARES OF
SHARES NON-VOTING
OF CLASS A JUNIOR TOTAL NUMBER PERCENTAGE OWNED
COMMON STOCK PREFERRED STOCK OF SHARES -------------------
BENEFICIALLY BENEFICIALLY BENEFICIALLY BEFORE AFTER
OWNED(1) OWNED(2) OWNED(3) OFFERING OFFERING
--------------- --------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS & EXECUTIVE
OFFICERS:
Lynn Forester(4)(20)......... 42.7%
Michael J. Price(4)(20)...... 42.7%
Timothy Samples.............. *
Donal Byrne(5)............... *
Keith Cornell(6)............. *
Raj K. De Datta(7)........... *
Dieter Finke(8).............. *
Robert Koenig................ *
Michael Taylor(9)............ *
Victor Bischoff(10).......... *
Juan Luis Cebrian(11)........ *
Edward A. Gilhuly(12)........ *
Alan E. Goldberg(13)......... *
Francois Jaclot(14).......... *
David C. Lee(15)............. *
Sir Evelyn de
Rothschild(16)............. *
Lawrence B. Sorrel(17)....... *
Barry S. Volpert(18)......... *
Helmut Werner(19)............ *
All directors and executive
officers as a group (19
persons)................... 42.8%
</TABLE>
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<TABLE>
NUMBER OF
NUMBER OF SHARES OF
SHARES NON-VOTING
OF CLASS A JUNIOR TOTAL NUMBER PERCENTAGE OWNED
COMMON STOCK PREFERRED STOCK OF SHARES -------------------
BENEFICIALLY BENEFICIALLY BENEFICIALLY BEFORE AFTER
OWNED(1) OWNED(2) OWNED(3) OFFERING OFFERING
--------------- --------------- --------------- -------- --------
5% SHAREHOLDERS
<S> <C> <C> <C> <C> <C>
ABN AMRO Ventures B.V........ 5.0%
Benake L.P.(4)............... 42.7%
FirstMark Holdings
LLC(4)(20)................. 42.7%
The Goldman Sachs Group,
Inc.(21)................... 5.1%
Heaton Holdings L.P.(4)...... 42.7%
Alberta Partnerships(22)..... 8.5%
Morgan Stanley Dean Witter
Capital Partners
IV L.P.(23)................ 7.6%
Sandler Capital(20)(24)...... 8.3%
Welsh, Carson, Anderson &
Stowe VIII, L.P.(25)....... 7.2%
Welsh, Carson, Anderson &
Stowe IX, L.P.(26)......... 7.2%
</TABLE>
------------------------
* Less than one percent.
(1) Gives effect to the conversion of all existing series of our preferred stock
(other than the Series F-2 convertible preferred shares) into Class A common
stock on a one for one basis. Also gives effect to a to one stock
split of the Class A common stock and non-voting junior preferred stock.
(2) Gives effect to the conversion of the Series F-2 convertible preferred
shares into non-voting junior preferred stock on a one for one basis.
(3) Gives effect to (1) full conversion of the non-voting junior preferred stock
into Class A or Class B common stock and (2) the full conversion of Class A
common stock into Class B common stock. Each share of Class A common stock
is convertible into one share of Class B common stock. Upon certain
transfers, each share of non-voting junior preferred stock so transferred
shall be automatically converted into one share of Class B common stock,
subject to adjustments.
(4) Ms. Lynn Forester, co-chairman of the Board of Directors, is the general
partner of Benake L.P., a Delaware limited partnership. Mr. Michael J.
Price, co-chairman of the Board of Directors, is the general partner of
Heaton Holdings L.P., a Delaware limited partnership. Benake L.P. and Heaton
Holdings L.P. are the joint managers of FirstMark Holdings L.L.C., a
Delaware limited liability company. Ms. Forester and certain other family
interests are the limited partners of Benake L.P. Mr. Price and certain
other family interests are the limited partners of Heaton Holdings L.P.
(5) Includes shares subject to options which are currently exercisable or
exercisable within 60 days.
(6) Includes shares subject to options which are currently exercisable or
exercisable within 60 days.
(7) Mr. De Datta holds approximately 1% of the shares of FirstMark Holdings
L.L.C.
(8) Dr. Finke holds over 6% of the shares of LambdaNet GmbH.
(9) Includes shares subject to options which are currently exercisable or
exercisable within 60 days.
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(10) Does not include the shares of Class A common stock held by World
Online, for which he serves as a member and the chairman of the supervisory
board.
(11) Mr. Cebrian holds an option for shares of Class A common stock.
(12) Does not include the shares of Class A common stock held by Alberta
Partnerships, the ultimate controlling entity of which he is a shareholder.
(13) Does not include the shares of Class A common stock held by Morgan
Stanley Dean Witter Capital Partners, for which he serves as Chairman and
Chief Executive Officer.
(14) Does not include the shares of Class A common stock held by Suez
Lyonnaise des Eaux, for which he serves as Vice Chairman of the Executive
Board. Mr. Jaclot holds an option for
shares of Class A common stock.
(15) Does not include the shares of Class A common stock held by Sandler
Capital Management, for which he serves as a Managing Director.
(16) Sir Evelyn de Rothschild holds an option for shares of Class A common
stock.
(17) Does not include the shares of Class A common stock held by Welsh,
Carson, Anderson & Stowe, for which he serves as a General Partner.
(18) Does not include the shares of Class A common stock held by certain
affiliates of The Goldman Sachs Group, Inc., for which he serves as a
Managing Director.
(19) Mr. Werner holds an option for shares of Class A common stock.
(20) FirstMark Holdings LLC holds its interest through FirstMark Communications
International LLC, FirstMark Communications International II LLC and
FirstMark Fiber Holdings LLC. Sandler Capital holds most of its interest in
the company's capital stock through FirstMark Holdings LLC and FirstMark
Fiber Holdings LLC. Sandler Capital has the right to exchange this interest
into Class A common stock. If Sandler Capital exchanged its interest in
full, FirstMark Holdings LLC would own 36.6% of our common stock before the
offering and of our common stock after the offering.
(21) Represents shares of Class A common stock owned by certain investment
partnerships of which affiliates of The Goldman Sachs Group, Inc. ("GSG")
are the general partner, managing general partner or investment manager.
Includes shares held of record by GS Capital Partners III, L.P.,
shares held on record by GS Capital Partners III Offshore, L.P.,
shares held of record by Goldman, Sachs & Co. Verwaltungs GmbH, shares
held of record by Stone Street Fund 2000, L.P., and shares held of record
by Bridge Street Special Opportunities Fund 2000, L.P. GSG disclaims
beneficial ownership of the shares owned by such investment partnerships to
the extent attributable to partnership interests therein held by persons
other than GSG and its affiliates. Each of such investment partnerships
shares voting and investment power with certain of its respective
affiliates. Barry Volpert is a Managing Director of Goldman Sachs
International, an indirect wholly owned subsidiary of GSG. Mr. Volpert
disclaims beneficial ownership of shares except to the extent of his
pecuniary interest therein, if any.
(22) Represents shares of Class A common stock owned by Alberta
(European Fund), Limited Partnership and Alberta (1996 Fund), Limited
Partnership, respectively, which are ultimately controlled by KKR Europe
Limited and KKR 1996 Overseas, Limited, respectively, of which Mssrs. Henry
R. Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael
W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Scott
M. Stuart, Edward A. Gilhuly and Todd A. Fisher are shareholders. Such
individuals may be deemed to share beneficial ownership of the shares shown
as beneficially owned by each of Alberta (European
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Fund), Limited Partnership and Alberta (1996 Fund) Limited Partnership,
respectively. Such individuals disclaim beneficial ownership of any such
shares.
(23) The general partner of Morgan Stanley Dean Witter Capital
Partners IV, L.P. and the member of the general partner of Morgan Stanley
Dean Witter Capital Partners IV, L.P. are wholly owned subsidiaries of
Morgan Stanley Dean Witter & Co., the parent of Morgan Stanley & Co.
Incorporated. Does not include shares held by certain funds affiliated
with Morgan Stanley Dean Witter Capital Partners IV L.P.
(24) Most of Sandler Capital's interest is held indirectly. See Note 17 above.
(25) Does not include shares held by certain individuals and partnerships
affiliated with Welsh, Carson, Anderson & Stowe VIII, L.P.
(26) Does not include shares held by certain individuals and partnerships
affiliated with Welsh, Carson, Anderson & Stowe IX, L.P.
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DESCRIPTION OF SHARE CAPITAL
SET FORTH BELOW IS A SUMMARY OF CERTAIN INFORMATION CONCERNING OUR SHARE
CAPITAL AND CERTAIN MATERIAL PROVISIONS OF OUR AMENDED ARTICLES OF INCORPORATION
TO BE PUT IN PLACE PRIOR TO THE COMPLETION OF THIS OFFERING AND LUXEMBOURG LAW
ON COMMERCIAL COMPANIES IN EFFECT AS OF THE DATE OF THIS PROSPECTUS. THIS
SUMMARY CONTAINS INFORMATION THAT WE CONSIDER TO BE MATERIAL REGARDING OUR SHARE
CAPITAL, BUT IT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO OUR ARTICLES OF INCORPORATION AND THE LUXEMBOURG LAW ON
COMMERCIAL COMPANIES.
Immediately prior to completion of this offering, we will have outstanding
shares of Class A common stock and shares of non-voting junior preferred
stock with a par value of $1.50, all of which have been paid in full,
representing a subscribed capital amount of $ .
Our total authorized capital, including the outstanding subscribed capital,
is set at $ , consisting of a total of shares of Class A common stock,
shares of Class B common stock and shares of non-voting junior preferred
stock, each having a par value of $1.50. Following completion of this offering
our issued share capital will consist of shares of Class A common stock and
shares of Class B common stock (not including additional shares of
Class A common stock issuable upon exercise of options held by our directors and
employees) and shares of non-voting junior preferred stock.
MEETINGS OF STOCKHOLDERS
Meetings of stockholders may be either ordinary or extraordinary. At
ordinary meetings, which do not require a quorum, stockholders can decide on
most matters, but they cannot decide matters that entail a modification of our
articles of incorporation. Only at extraordinary meetings, for which more
stringent quorum and majority conditions apply, can stockholders modify our
articles of incorporation. Among other things, a merger, liquidation or
transformation of FirstMark into another form of company, increases (unless
decided by the board of directors within the limits of the authorized capital)
or decreases of share capital or issuance of a new class of shares would all
require modification of the articles. A quorum of 50% and a vote of two-thirds
of the shares present or represented are required to amend our articles of
incorporation. If the quorum is not achieved, however, then a second meeting may
be called, at which no quorum is required. Furthermore, Luxembourg law provides
that where there is more than one class of shares, as there will be following
completion of this offering, and the resolution of the general meeting is such
as to change the respective rights of any class, the resolution must, in order
to be valid, fulfil the conditions as to attendance and majority described above
with respect to each class the rights of which are being changed.
The annual general meeting of our stockholders shall be held, in accordance
with Luxembourg law, in Luxembourg at our registered office, or at such other
place in Luxembourg as may be specified in the notice of meeting, on
of each year at p.m. If such day is not a business day in the city of
Luxembourg, the annual general meeting shall be held on the next following
business day. This annual general stockholders' meeting is an ordinary meeting.
Annual general stockholders' meetings usually have on their agenda the approval
of the annual accounts and related issues, such as approval of the management
report prepared by the board and of the report of the statutory auditor, and the
use of profits shown on the balance sheet, including the distribution of
dividends.
Stockholders' meetings shall be convened by the board of directors, pursuant
to a notice containing the agenda under the form of announcements which must be
published twice with a minimum interval of eight calendar days between
publications, and at least eight calendar days prior to the meeting, in the
Luxembourg official gazette and in a Luxembourg newspaper.
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VOTING AND QUORUM REQUIREMENTS
Except for the shares of non-voting junior preferred stock, which shall not
be entitled to any voting rights other than those rights described below, and
certain rights attaching to shares of Class A common stock as described below,
all of our shares will have equal voting powers and all of them are and will
continue to be in registered form.
Matters brought before ordinary stockholders' meetings must receive a
majority of the votes cast to pass. Extraordinary meetings, which are required
to amend our articles of incorporation, require a quorum of at least half of the
outstanding shares and may only act with a vote of two-thirds of the shares
present. If the quorum condition is not fulfilled, however, a second meeting
with the same agenda may be called, for which the same two-thirds majority
condition applies but for which no quorum is required.
For purposes of Luxembourg law, a "change of nationality" of FirstMark would
require approval by all the stockholders. Such a "change of nationality" would
typically consist of a permanent transfer of its registered office outside of
Luxembourg, but would not include a merger with a non-Luxembourg company in
which the non-Luxembourg company survives. An increase of any obligations of
stockholders set forth in our articles of incorporation would also require
approval of all stockholders.
Notwithstanding any provisions contained within our articles of
incorporation to the contrary, the approval of a majority of the holders of
shares of Class A common stock, voting as a separate class, shall be required
for any of the following matters:
- a "change of control" which means (i) any sale, lease, exchange or other
transfer of all or substantially all of the property, assets or business
of the company or of the company and its subsidiaries taken as a whole,
(ii) any liquidation, dissolution or winding up of the company, (iii) any
merger or consolidation to which the company is a party and pursuant to
which either (x) the holders of the voting securities of the company
immediately prior thereto own less than 51% of the outstanding voting
securities of the surviving entity immediately following such transaction
or (y) the holders of the voting securities of the company immediately
prior thereto do not have the ability to elect a majority of the members
of the board of directors (or persons performing similar functions) of the
surviving entity immediately following such transaction, or (iv) any
person or group (as such term is used in Section 13(d) of the U.S.
Securities Exchange Act of 1934) of persons, shall either (x) beneficially
own (as defined in Rule 13d-3 under the Exchange Act) securities of the
company representing 50% or more of the voting securities of the company
then outstanding or (y) have the ability to elect a majority of the
members of the board of directors (or persons performing similar
functions) of the surviving entity. For purposes of the sentence above,
"voting securities" shall mean securities, the holders of which are
ordinarily entitled to elect the members of the board of directors (or
persons performing similar functions);
- any amendment of our articles of incorporation which adversely affects,
violates or conflicts with any of the rights of holders of the shares of
Class A common stock; and
- any issuance in a transaction or series of related transactions of equity
securities representing 20% or more of the outstanding shares of Class A
common stock, Class B common stock or non-voting junior preferred stock,
except through the authorized share capital as currently provided in our
articles of incorporation.
The holders of non-voting junior preferred stock generally do not have a
right to vote but shall be entitled to vote in every general meeting called upon
to deal with the following matters:
- the issue of new shares carrying preferential rights;
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- the determination of preferential cumulative dividend attaching to the
non-voting junior preferred stock;
- changes to the right of conversion of the non-voting junior preferred
stock into ordinary shares;
- the reduction of our capital;
- any change of our corporate object;
- the issue of convertible bonds;
- the dissolution of FirstMark before its term; and
- the transformation of FirstMark into a company of another legal form.
Where, despite the existence of profits available for that purpose, the
preferential cumulative dividends have not been paid in their entirety for any
reason whatsoever for a period of two successive financial years and until such
time as all cumulative dividends shall have been received in full, the holders
of non-voting junior preferred stock shall also have the same voting rights as
the holders of all classes of common stock at all meetings.
DIRECTORS
POWERS OF THE BOARD. Our board has wide powers to perform all acts
necessary or desirable for accomplishing our aims. Our board may delegate daily
management to one or more directors, officers, executives, employees or other
persons, provided that any delegation to a member of the board has been
previously authorized by the stockholders at a general meeting.
APPOINTMENT AND REMOVAL OF DIRECTORS. Our articles provide that directors
are elected by both Class A and Class B stockholders voting together at a
general meeting for a maximum term of three years (except for the initial terms
as described below), except in case of a vacancy where the board may
provisionally appoint a director to fill such a vacancy until the next general
meeting. Directors may be re-elected indefinitely for further terms of up to
three years.
Initially the board of directors will have 13 members. The holders of shares
of Class B common stock shall propose three of the nominees for directors, one
for each of Class I, Class II and Class III, as described below. The holders of
shares of Class A common stock shall propose the remaining nominees for
directors to the general meeting of stockholders. In case one or several
nominees are not elected at the general meeting of stockholders, the class of
shares that proposed such nominee shall be obligated to propose another
candidate.
Our board of directors shall be divided into three classes as nearly equal
in size as is practicable, hereby designated as Class I, Class II and
Class III. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted in the general meeting of stockholders. At the
third annual meeting of stockholders following the date hereof, the term of
office of the Class I directors shall expire, and Class I directors shall be
elected for a full term of three years. At the fourth annual meeting of
stockholders following the date hereof, the term of office of the Class II
directors shall expire, and Class II directors shall be elected for a full term
of three years. At the fifth annual meeting of stockholders following the date
hereof, the term of office of the Class III directors shall expire, and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting. If the number of directors changes, any newly created
directorship or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
There are no restrictions in our articles of incorporation or under
Luxembourg law as to nationality, residence or professional qualifications for
directors. There is no age limit nor are directors
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required to retire by rotation, except as explained above. Directors may be
removed, at any time with or without cause, at any ordinary stockholders'
meeting by simple majority of the shares voting.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS. Under Luxembourg
law, civil liability of directors both to the company and to third parties is
generally considered to be a matter of public policy. It is possible that
Luxembourg courts would declare void an explicit or even implicit contractual
limitation on any director's liability to FirstMark. FirstMark, however, can
validly agree to indemnify the directors against the consequences of liability
actions brought by third parties, including stockholders if such stockholders
have personally suffered damage which is independent of and distinct from the
damage caused to FirstMark. The articles contain such an agreement.
Our board of directors can deliberate or act validly only if at least the
majority of its members are present or represented. Resolutions shall be
approved if taken by a majority of the votes of the members present or
represented at such meeting.
The general meeting of stockholders shall determine the remuneration (if
any) of the board of directors.
The board of directors shall be convened by its co-chairman (or chairman as
may be decided by the board of directors) or by any two directors.
OFFICERS
Under Luxembourg law, an employee of FirstMark can only be liable to
FirstMark for damages brought about by his or her willful acts or gross
negligence. Any arrangement providing for the indemnification of officers
against claims of FirstMark would be contrary to public policy. Employees are
liable to third parties under general tort law and may enter into arrangements
with FirstMark providing for indemnification against third party claims.
Under Luxembourg law, an indemnification arrangement can never cover a
willful act or gross negligence.
DIVIDENDS
Any dividends will be payable to holders of both Class A and Class B common
stock on an equal basis. Dividends may only be paid out of our distributable
profits and unrestricted reserves as shown in our audited accounts for the most
recently completed financial year, which would consist of the profit (if any)
for such year and retained earnings from prior years after deduction for losses
carried over from prior years and reserves required by law or the articles. The
Luxembourg law on companies requires FirstMark, in priority to the payment of
dividends, to set up a reserve equal to 10% of the subscribed capital by
allocating yearly at least 5% of its profits to the reserve account until it
reaches the 10% threshold. Since FirstMark has not had profits through
December 31, 1999, it has not allocated any amount to the reserve account to
date.
Under Luxembourg law, our board of directors may pay interim dividends
because the articles of incorporation contain a specific provision to that
effect. However, formal and substantive requirements have to be met in order for
FirstMark to pay interim dividends. These include a requirement that we prepare
financial statements showing that funds are available for distribution. The
amount of such distribution may not exceed the profits earned by FirstMark since
the end of the last financial year for which the annual accounts have been
approved by the general stockholders' meeting plus retained earnings and
withdrawals from unrestricted reserves and minus carried-forward losses and
amounts to be mandatorily paid to a reserve account. No interim dividends may be
paid out during the first six months of the company's accounting year nor before
the approval of the annual accounts of the previous accounting year by a general
shareholders' meeting.
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Our statutory auditor must verify whether the conditions for the payment of
interim dividends are fulfilled.
If an interim dividend exceeds the dividend set by the shareholders at the
annual ordinary stockholders' meeting, the excess is deemed an advance payment
of the next dividend.
Dividends may be paid in U.S. dollars or in any other currency determined by
our board of directors or in shares or otherwise as the board may determine in
accordance with Luxembourg law. Payment of any dividends will be made to holders
of shares at their addresses in the register maintained by or on our behalf. We
have never declared or paid any dividends and do not expect to do so in the
foreseeable future.
Nonresidents of Luxembourg who hold shares or ADSs may be subject to
Luxembourg statutory withholding tax in respect of any cash dividends paid. See
"Taxation--Certain Luxembourg Tax Considerations."
In addition to any rights to participate in distributions, each share of
non-voting junior preferred stock, in preference to the shares of Class A common
stock and Class B common stock as to payment of dividends, shall be entitled to
receive, when, as and if declared, cumulative dividends at an annual rate equal
to $0.0075 per share of non-voting junior preferred stock as long as such share
of non-voting junior preferred stock remains outstanding.
CAPITAL INCREASES; PRE-EMPTIVE RIGHTS
Pursuant to our articles of incorporation, our board of directors has been
authorized without reserving to the existing stockholders a preferential right
of subscription to issue further shares so as to bring total capital up to the
total authorized capital in whole or in part from time to time. The
authorization lapses five years after the publication in the Luxembourg official
gazette of the grant of authorization, which occurred in 2000, and may be
renewed by stockholder vote at an extraordinary meeting. We intend to issue
additional shares of Class A common stock and Class B common stock, including
issuances from authorized capital, from time to time to directors and employees
of our group as provided in our 1999 share option plan and under our new stock
option plan.
Within the limits of the authorized share capital, the board of directors
may issue warrants, options or any other securities convertible or exchangeable
into equity securities of the company giving the holder a right to subscribe for
one or more shares, and determine the conditions under which such warrant,
option or other convertible or exchangeable security will be issued, including
and without limitation the subscription price to be paid for the shares upon the
exercise of such warrant, option or other convertible or exchangeable security,
subject to the requirement contained in article 26-5(1) of the law of
August 10, 1915 on commercial companies, as amended, that shares may not be
issued below their par value as well as the price to be paid in consideration of
such warrant, option or other convertible or exchangeable security, if any. The
board of directors may impose conditions on the exercise of such warrant, option
or other convertible or exchangeable security as it in its discretion may
determine, including restrictions, if any, as to the disposal of the shares
issued upon the exercise of such warrant, option or other convertible or
exchangeable security.
Each time the board of directors shall act to render effective the increase
of capital or the conversion of Class A common stock into Class B common stock
and non-voting junior preferred stock into Class A common stock, as authorized,
our articles of association shall be amended to reflect such action and the
board of directors shall take or authorize any person to take any necessary
steps for the purpose of obtaining execution and publication of such amendment.
In connection with this authorization to increase the capital and in
compliance with Article 32-3(5) of the law of August 10, 1915 on commercial
companies, as amended, our board of directors is
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authorized to waive or to limit the preferential subscription rights of the
existing stockholders with respect to the authorized increase in share capital
referred to above.
The subscribed capital and the authorized capital of FirstMark may be
increased or reduced by the stockholders at a stockholders' meeting under the
same quorum and majority requirements applicable to an amendment of the
articles. The board may issue shares of Class A common stock and Class B common
stock (up to the amount authorized by the articles) without stockholder
approval, and, if so decided by the board, existing stockholders will have no
pre-emptive rights in connection with such issuance. Holders of shares
outstanding prior to this offering will have no pre-emptive rights in connection
with this offering.
In the event that pre-emptive rights are not disallowed by the board, all
stockholders will be notified of the period during which pre-emptive rights may
be exercised, as determined by the board. Under Luxembourg law, this period must
be at least 30 days. Pre-emptive rights are transferable and may be sold, prior
to exercise.
LIQUIDATION RIGHTS
Our stockholders may dissolve FirstMark by resolution of the general meeting
of stockholders. If such dissolution were to occur, FirstMark would then be
liquidated, and after payment of its debts or consignment of the sums necessary
to pay such debts, the stockholders (except for the holders of non-voting junior
preferred stock, who are preferred as described below) would be entitled to the
remaining assets of FirstMark, in proportion to their holdings.
Upon the occurrence of a liquidation, the holders of shares of non-voting
junior preferred stock shall be entitled, up to their contribution in the share
capital of the company, to receive all assets of the company available for
distribution in priority to any other holders of shares of Class A common stock
or shares of Class B common stock until each such holder has received an amount
equal to its contribution. The holders of shares of Class A common stock and
Class B common stock shall then be entitled, up to their contribution, to
receive all assets of the company available for distribution, until each such
holder of shares has received an amount equal to its contribution. After all the
holders of shares have received amounts equal to their contributions, then each
of the holders of all share classes will be entitled to receive all the
remaining assets of the company pro rata.
FORM, TRANSFER AND CONVERSION OF SHARES
As a general matter under Luxembourg law, shares may be issued in registered
or bearer form, at the option of the stockholder, except that shares underlying
the ADSs quoted on the Nasdaq National Market are available in registered form
only. Shares which have not been fully paid up must be in registered form.
Registration of the shares may be evidenced at the holder's option in
certificates representing one or more shares.
The shares of Class B common stock sold in this offering will be in
registered global form and will be delivered into the custody of Clearstream
Banking AG, Frankfurt am Main, or Clearstream, Frankfurt. Clearstream, Frankfurt
will be registered in our share register as the sole stockholder for the shares
sold in this offering. Beneficial interests in the shares can be transferred in
accordance with the rules and regulations of Clearstream, Frankfurt. The shares
are also expected to be accepted for clearance through Clearstream, Frankfurt,
Euroclear and Clearstream Banking, societe anonyme, or Clearstream, Luxembourg.
The shares may be credited at the option of investors either to a German bank's
Clearstream, Frankfurt account or to the accounts of participants with Euroclear
or Clearstream, Luxembourg. The ADSs quoted on the Nasdaq National Market will
be delivered against payment in U.S. dollars through The Depository Trust
Company's book-entry facilities. The shares to be listed on the Neuer Markt
segment of the Frankfurt Stock Exchange will be delivered in book-entry form
against
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payment in euro through Clearstream, Frankfurt's, Euroclear's and Clearstream
Luxembourg's book entry facilities.
Transfers of registered shares require either (i) an inscription of the
transfer in the share register of FirstMark signed by the transferor and the
transferee or their respective agents or (ii) a notification of the transfer by
the transferor or the transferee to FirstMark which in turn must record such
transfer in the share register maintained by it or on its behalf. FirstMark or
its registrar may also enter the transfer in the register on the basis of
correspondence or other documents that establish the existence of an agreement
between the transferor and the transferee.
It is generally held that contractual restrictions on the transfer of shares
are legal provided they do not render the shares inalienable for a prolonged
period of time. Currently, our articles of incorporation provide that, if our
board of directors determines that a proposed transfer of shares would violate a
restriction on transfer agreed to by the owner of such shares or its predecessor
in interest and brought to the attention of our board of directors, our board
may refuse to record such transfer in our share register (with a provision that
such refusal will not result in a situation where a stockholder is forced to
continue to hold shares for an extended period of time).
PERMITTED TRANSFERS OF CLASS A COMMON STOCK AND NON-VOTING JUNIOR PREFERRED
STOCK. No holder of record of Class A common stock or non-voting junior
preferred stock may transfer, and we may not register the transfer of shares of
Class A common stock or non-voting junior preferred stock, whether by sale,
assignment, gift, bequest, appointment or otherwise, except to a permitted
transferee or as otherwise described below. For these purposes a permitted
transferee includes;
- existing holders that are natural persons, their spouse, any lineal
descendant of a grandparent of this holder and any spouse of such a lineal
descendant,
- the trustee of a trust principally for the benefit of this holder and
other holders and their permitted transferees,
- charitable organizations,
- any entity owned or controlled by this holder and his affiliates or other
holders and their permitted transferees and affiliates,
- the executor, administrator, personal representative or guardian of the
estate of this holder, or
- any trust, limited liability company, partnership or any other legal
entity that is an existing holder, any owner or beneficiary of such legal
entity and any permitted transferee of any person that transferred shares
to such legal entity and any permitted transferee of such transferee or
any other holder and his permitted transferees.
A Class A holder or holder of non-voting junior preferred stock may pledge
his shares of Class A common stock or non-voting junior preferred stock (as the
case may be) pursuant to a bona fide pledge of these shares as collateral
security for indebtedness due to the pledgee, provided that these shares shall
not be transferred to or registered in the name of the pledgee and shall remain
subject to the transfer restrictions in our articles of incorporation. In the
event of foreclosure or other similar action of the pledgee, these shares of
Class A common stock or non-voting junior preferred stock (as the case may be)
may only be transferred to a permitted transferee of the pledgor or any other
holder or his permitted transferee or converted into shares of Class B common
stock.
Any transfer of shares of Class A common stock or non-voting junior
preferred stock not permitted under our articles of incorporation shall result
in the conversion of the transferee's shares of Class A common stock or
non-voting junior preferred stock into shares of Class B common stock, effective
the date on which the transfer is registered in the register of the
stockholders.
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CONVERSION OF CLASS A COMMON STOCK. Subject to certain terms and
conditions, each share of Class A common stock shall be convertible at any time
at the option of the holder into one share of Class B common stock. At any time
when the outstanding shares of Class A common stock represent less than 10% of
the total number of shares of all existing classes then outstanding, then each
outstanding share of Class A common stock shall be converted into one share of
Class B common stock as of the close of business on the date upon which the
company receives notice or later date set forth in the notice.
CONVERSION OF NON-VOTING JUNIOR PREFERRED STOCK. Subject to certain terms
and conditions, each share of non-voting junior preferred stock shall be
convertible at any time at the option of the holder into one share of Class A
common stock.
REPURCHASING OF SHARES.
(1) Under Luxembourg law, the company may acquire its own shares either itself
or through a person acting in his own name but on the company's behalf
subject to the following conditions:
- the authorization to acquire shares shall be given by the general
shareholders' meeting, which shall determine the terms and conditions of
the proposed acquisition and in particular the maximum number of shares to
be acquired, the duration of the period for which the authorization is
given (which may not exceed 18 months) and, in the case of acquisition for
value, the maximum and minimum consideration;
- the nominal value or, in the absence thereof, the accounting par value of
the shares acquired, including shares previously acquired by the company
and held by it in its portfolio as well as the shares acquired by a person
acting in its own name but on behalf of the company, may not exceed 10% of
the subscribed capital;
- the acquisitions must not have the effect of reducing the net assets below
the aggregate of the subscribed capital and the reserves which may not be
distributed under law or the articles; and
- only fully paid-up shares may be included in the transaction.
(2) Where the acquisition of the company's own shares is necessary in order to
prevent serious and imminent harm to the company, the first bullet under
paragraph (1) above shall not apply. In such a case, at the next general
shareholders' meeting the board of directors must disclose the reasons for
and the purpose of the acquisitions made, the number and nominal values, or
in absence thereof, the accounting par value, of the shares acquired, the
proportion of the subscribed capital which they represent and the
consideration paid for them.
(3) The first bullet under paragraph (1) shall likewise not apply in the case of
shares acquired by either the company itself or by a person acting in his
own name but on behalf of the company for the distribution of such shares to
the employees of the company.
The distribution of any shares must take place within 12 months from the
date of their acquisition.
STATUTORY AUDITORS. Our affairs and financial situation including
particularly our books and accounts shall be supervised by one or more statutory
auditors, which may be stockholders or not. The general meeting of stockholders
shall appoint the statutory auditors, and shall determine their number,
remuneration and term of office, which may not exceed six years.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the deposit agreement. Because it is a
summary, it does not contain all the information that may be important to you.
For more complete information, you should read the entire deposit agreement and
the ADR. You can read a copy of the deposit agreement which is filed as an
exhibit to the registration statement of which this prospectus forms a part. You
may also copy the deposit agreement, which is located at the SEC's Public
Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-732-0330.
Bankers Trust Company, as our depositary, will issue ADRs. Each ADR will
represent an ownership interest in one share of Class B common stock (or the
right to receive one share of Class B common stock) which we will deposit with
the custodian in Germany under the deposit agreement among ourselves, the
depositary and yourself as a holder or beneficial owner of an ADR. Each ADR will
also represent securities, cash or other property deposited with the depositary
but not distributed to ADR holders.
The depositary's office is located at Four Albany Street, New York, New York
10006.
You may hold ADRs either directly or indirectly through your broker or other
financial institution. If you hold ADRs directly, you are an ADR holder. This
description assumes you hold your ADRs directly. If you hold ADRs indirectly,
you must rely on the procedures of your broker or other financial institution to
assert the rights of ADR holders described in this section. You should consult
with your broker or financial institution to find out what those procedures are.
Because the depositary will actually own the shares, you must rely on it to
exercise the rights of a stockholder. The obligations of the depositary are set
out in the deposit agreement. The deposit agreement and ADRs are governed by New
York law.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
HOW WILL YOU RECEIVE DIVIDENDS AND OTHER DISTRIBUTIONS ON THE SHARES?
The depositary has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities. You will receive these distributions in proportion to the number of
shares underlying your ADR.
- CASH. The depositary will convert cash distributions we pay on the shares
into U.S. dollars if it can do so on a reasonable basis and can transfer
the U.S. dollars to the United States on a reasonable basis. Before making
a distribution, the depositary will deduct (1) its expenses in converting
and transferring cash, including obtaining the approval of a government
authority therefor, and (2) any taxes withheld. IF THE EXCHANGE RATES
FLUCTUATE DURING A TIME WHEN THE DEPOSITARY CANNOT CONVERT THE CURRENCY,
YOU MAY LOSE SOME OR ALL OF THE VALUE OF THE DISTRIBUTION.
- SHARES. The depositary will distribute new ADRs representing any shares we
distribute as a dividend or free distribution if we furnish the depositary
promptly with satisfactory evidence that it is legal to do so. If the
depositary does not distribute new ADRs, each ADR will represent its
proportionate interest in any additional shares we distribute. The
depositary will only distribute whole ADRs. It will sell shares which
would require it to issue a fractional ADR and distribute the net proceeds
in the same way as it does with cash.
- RIGHTS. If we offer holders of our securities any rights to subscribe for
additional shares or any other rights, the depositary will make these
rights available to you in the manner it deems best, in its own discretion
but after consulting us, to the extent that we first furnish the
depositary with satisfactory evidence that it is legal to do so. If we do
not furnish this evidence and it is practical to sell the rights, the
depositary will sell the rights and distribute the U.S. dollar
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proceeds in the same way as it does with cash. If the depositary
determines that it is lawful to make such rights available to only certain
ADR holders but not to others, the depositary may distribute the rights to
any holders to whom it determines the distribution is lawful in proportion
to the number of shares underlying such holder's ADRs. In the event the
depositary would otherwise not distribute the rights, if you request the
distribution of warrants or other instruments in order to exercise the
rights to which you are entitled, the depositary will make such rights
available to you upon written notice from us that we have elected to
permit such rights to be executed. The depositary will not distribute
rights to ADR holders unless both the rights and the securities to which
such rights relate are either exempt from registration under the
Securities Act with respect to a distribution to ADR holders or are
registered under the provisions of such act. The depositary may allow
rights that are not distributed or not sold to lapse. IN THAT CASE, YOU
WILL RECEIVE NO VALUE FOR THEM.
- IF THE DEPOSITARY MAKES RIGHTS AVAILABLE TO YOU, IT WILL EXERCISE THE
RIGHTS AND PURCHASE THE SHARES ON YOUR BEHALF. The depositary will then
deposit the shares and issue ADRs to you. It will only exercise rights if
you pay the exercise price and any other charges the rights require you to
pay. U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADRs issued after exercise. For example, you may not be
able to trade the ADRs freely in the United States. In this case, you
would not be permitted to purchase such securities or otherwise exercise
such rights and the depositary would, to the extent possible, dispose of
such rights for your account as provided in the deposit agreement. YOU
HAVE NO ASSURANCE THAT YOU WILL BE ABLE TO EXERCISE RIGHTS ON THE SAME
TERMS AND CONDITIONS AS THE HOLDERS OF ORDINARY SHARES.
- OTHER DISTRIBUTIONS. The depositary will send to you anything else we
distribute on deposited securities by any means it thinks is legal, fair
and practical. If it cannot make the distribution in that way, the
depositary will adopt a method it thinks equitable and practicable for the
purpose of effecting such distribution, including distributing, from the
sale of what we distributed, any net proceeds to you in U.S. dollars, in
the same way as it does with cash.
To the extent the depositary decides any distribution to you is not
practical, it may make any other distribution it believes is practical,
including distributions of foreign currency, securities or property. It may
retain any of the same as deposited securities, without paying interest on or
investing it. Each ADR will represent the additional distribution received by
the depositary.
YOU HAVE NO ASSURANCE FROM THE DEPOSITARY THAT THEY WILL BE ABLE TO EFFECT
ANY CURRENCY CONVERSION OR TO SELL ANY DISTRIBUTED PROPERTY, RIGHTS OR OTHER
SECURITIES TIMELY OR AT A SPECIFIED RATE OR PRICE.
RECORD DATE
Whenever:
- any cash dividend or cash distribution is to become payable or any
distribution other than cash is to be made,
- rights are to be issued,
- the depositary finds it necessary or convenient in connection with the
giving of any notice, solicitation of any consent or any other matter,
- the depositary receives notice of any meeting of holders of shares or
other deposited securities, or
- for any reason the depositary causes a change in the number of shares that
are represented by each ADR,
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the depositary will fix a record date as close as practicable to the record date
fixed by us with respect to the shares, for determining which holders of ADRs
are:
- entitled to receive such dividend, distribution, rights or the net
proceeds of the sale thereof,
- entitled to give instructions for the exercise of voting rights at any
meeting,
- entitled to act in respect of any other matter,
for determining the date on or after which each ADR will represent a changed
number of our shares, as the case may be.
DEPOSIT, WITHDRAWAL AND CANCELLATION
HOW DOES THE DEPOSITARY ISSUE ADRS?
The depositary will issue ADRs if you or your broker deposit shares or
evidence of rights to receive shares with the custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will register the appropriate number of
ADRs in the names you request and will deliver ADRs at its office to the persons
you request.
HOW DO ADR HOLDERS WITHDRAW AN ADR AND OBTAIN SHARES?
You may turn in your ADRs at the depositary's office. Upon payment of fees
and expenses and of any taxes or charges, the depositary will deliver (1) the
underlying shares to an account designated by you with Electronic Book-Entry
Settlement System and any other securities, property and cash to you or as
ordered by you or (2) at your risk, expense and request, the depositary will
deliver any deposited securities, property or cash to which the holder is then
entitled at its office.
The depositary will not accept for surrender an ADR representing less than
one share of Class B common stock. If you surrender an ADR representing other
than a whole number of shares, it will deliver to you (1) the appropriate whole
number of shares and (2) a new ADR representing any remaining fractional share.
VOTING RIGHTS
HOW DO YOU VOTE?
You may instruct the depositary to vote the shares underlying your ADRs.
Upon our request, the depositary will notify you of the upcoming vote and
arrange to deliver our voting materials to you. The materials will (1) describe
the matters to be voted on and (2) explain how you, on a certain date, may
instruct the depositary to vote the shares or other deposited securities
underlying your ADRs as you direct. For instructions to be valid, the depositary
must receive them on or before the date specified. The depositary will try, as
practical, subject to the provisions of and governing the underlying shares or
other deposited securities, to vote or have its agents vote the shares or other
deposited securities as you instruct. The depositary will only vote or attempt
to vote as you instruct.
We can not assure you that you will receive from the depositary the voting
materials in time to ensure that you can instruct the depositary to vote your
shares. In addition, the depositary and its agents are not responsible for
failing to carry out voting instructions or for the manner of carrying out
voting instructions. THIS MEANS THAT YOU MAY NOT BE ABLE TO EXERCISE YOUR RIGHT
TO VOTE AND THERE MAY BE NOTHING YOU CAN DO IF YOUR SHARES ARE NOT VOTED AS YOU
REQUESTED.
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FEES AND EXPENSES
<TABLE>
<CAPTION>
ADR HOLDERS MUST PAY: FOR:
--------------------- --------------------------------------------------------
<S> <C> <C>
$5.00 per 100 ADRs (or portion thereof)..... - Each issuance of an ADR, including as a
result of a distribution of shares or rights
or the reclassification of deposited
securities or any recapitalization,
reorganization, merger or consolidation or
sale of assets.
- Each withdrawal of an ADR
A fee of $1.50 per receipt.................. - Any combination or split-up of receipts
Register or transfer fees................... - Transfer and registration of shares on any
applicable register payable by you when you
deposit or withdraw shares
$2.00 per 100 ADRs (or portion thereof)..... - Any cash distribution.
Expense of the depositary................... - Conversion of foreign currency to U.S.
dollars
Expenses of the depositary.................. - Cable, telex and facsimile transmission
expenses
Taxes and other governmental charges the
depositary or the custodian have to pay on
any ADR, or share underlying an ADR, for
example, stock transfer taxes, stamp duty or
withholding taxes........................... - As necessary
</TABLE>
PAYMENT OF TAXES
You have to pay any taxes payable by or on behalf of the depositary or the
custodian with respect to the ADRs, other deposited securities or any
distribution thereon to the depositary. Until you pay such taxes, the depositary
may refuse to effect a registration, registration of transfer, split-up,
combination or withdrawal of the deposited securities.
The depositary may deduct the amount of any taxes owed from any payments to
you. It may also sell deposited securities or property, other than cash, by
public or private sale, to pay any taxes owed. You will remain liable if the
proceeds of the sale are not enough to pay the taxes. If the depositary sells
deposited securities, it will, if appropriate, reduce the number of ADRs to
reflect the sale and will pay to you any proceeds, or send to you any cash or
other property, remaining after it has paid the taxes.
The depositary or the custodian will remit to the relevant governmental
authority any amounts required to be withheld by either of them in connection
with a distribution. We will similarly remit any amounts so owed by us.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If we:
- change the nominal or par value of our shares,
- reclassify, split up or consolidate any of the deposited securities, or
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- recapitalize, reorganize, merge, consolidate, sell all or substantially
all of our assets, or take any similar action,
then:
- the cash, shares or other securities received by the depositary will
become deposited securities. Each ADR will automatically represent its
equal share of the new deposited securities; and
- the depositary may also issue new ADRs or ask you to surrender your
outstanding ADRs in exchange for new ADRs identifying the new deposited
securities.
REPORTS
We will furnish to the depositary and the custodian summaries in English or
English-language versions of any reports, notices and other communications that
we generally transmit to holders of our shares or other deposited securities.
The depositary will make the items listed above available for your inspection at
its corporate trust office and at the office of the custodian.
Upon our request, the depositary will promptly mail to you such notices,
reports and communications, which we generally make available to the holders of
our shares and other deposited securities, and will make a copy of such notices,
reports and communications available to you for inspection at its corporate
trust office.
AMENDMENT AND TERMINATION
HOW MAY THE DEPOSIT AGREEMENT BE AMENDED?
We may agree with the depositary to amend the deposit agreement and the ADRs
without your consent for any reason. If the amendment imposes or increases fees
or charges, except for taxes and other governmental charges or certain expenses
of the depositary, or prejudices an important right of ADR holders, it will only
become effective 30 days after the depositary notifies you of the amendment. AT
THE TIME AN AMENDMENT BECOMES EFFECTIVE, YOU ARE CONSIDERED, BY CONTINUING TO
HOLD YOUR ADR, TO AGREE TO THE AMENDMENT AND TO BE BOUND BY THE ADRS AND THE
DEPOSIT AGREEMENT AS AMENDED.
No amendment will impair your right to surrender your ADR and receive the
underlying securities and all money and other property, if any, to which your
ADR entitles you. If a governmental body adopts new laws, regulations or rules
which require the deposit agreement or ADR to be amended, we and the depositary
may make the necessary amendment, which could take effect before you receive
notice thereof.
HOW MAY THE DEPOSIT AGREEMENT BE TERMINATED?
The depositary will terminate the deposit agreement if we ask it to do so.
The depositary may also terminate the deposit agreement at its own initiative.
If we terminate the deposit agreement, you must be given 30 days notice of such
termination. If the depositary terminates the deposit agreement, you must be
given 90 days notice of such termination.
After termination, the depositary will be required to do only the following
under the deposit agreement: (1) collect and hold distributions on the deposited
securities, (2) sell rights and other property, as provided in the deposit
agreement and (3) deliver shares and other deposited securities upon the
cancellation of the ADRs. At any time after one year from the termination date,
the depositary may sell any remaining deposited securities by public or private
sale. After the expiration of one year from the date of expiration, the
depositary may sell any deposited securities it then holds and may hold,
uninvested, the money it received on the sale, as well as any other cash it is
holding under the deposit agreement for the pro rata benefit of the ADR holders
that have not surrendered their
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ADRs. It has no liability for interest. After making such sale, the depositary's
only obligations will be to account for the money and other cash and its
obligations with respect to indemnification.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
LIMITS ON OUR OBLIGATIONS AND THE OBLIGATIONS OF THE DEPOSITARY; LIMITS ON
LIABILITY TO HOLDERS OF ADRS
The deposit agreement expressly limits our obligations and the obligations
of the depositary. It also limits our liability and the liability of the
depositary. We and the depositary:
- are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith,
- are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations under the
deposit agreement,
- are not liable if either of us exercises discretion permitted under the
deposit agreement,
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the deposit agreement on your behalf or any other
party, unless it has been provided an indemnity,
- may rely upon any document we believe in good faith to be genuine and to
have been signed or presented by the proper party,
- will not be liable for any action or inaction while relying on advice or
information from legal counsel, other advisor, yourself or anyone else
competent to give advice or information, and
- will not be responsible for failing to carry out instructions to vote
securities or for the manner in which same are voted or the effect of the
vote.
The depositary may own and deal in our securities and in ADRs.
In the deposit agreement, we and the depositary agree to indemnify each
other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before the depositary will issue or register transfer of an ADR, make a
distribution on an ADR or permit withdrawal of shares, the depositary may
require:
- payment of stock transfer or other taxes or other governmental charges and
transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities,
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary, and
- compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of transfer
documents.
The depositary may refuse to deliver, transfer, or register transfers of
ADRs generally when our transfer books or the transfer books of the depositary
are closed or at any time if we or the depositary think it advisable to do so.
YOUR RIGHT TO RECEIVE THE SHARES UNDERLYING YOUR ADRS
You have the right to cancel your ADRs and withdraw the underlying shares at
any time except:
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- when temporary delays arise because: (1) the depositary or we has/have
closed its/our transfer books; (2) the transfer of shares is blocked to
permit voting at a stockholder's meeting; or (3) we are paying a dividend
on the shares,
- when you or other ADR holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges, and
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of shares or other deposited securities.
This right to withdrawal may not be limited by any other provisions of the
deposit agreement.
PRE-RELEASE OF ADRS
In certain circumstances, subject to the provisions of the deposit
agreement, the depositary may issue ADRs before deposit of the underlying
shares. This is called a pre-release of the ADRs. A pre-release is closed out as
soon as the underlying shares are delivered to the depositary. The depositary
may pre-release ADRs only under the following conditions: (1) before or at the
time of the pre-release, the person to whom the pre-release is being made must
represent to the depositary in writing that it or its customer owns the shares
or ADRs to be deposited; (2) the owner of the shares or ADRs must (a) assign its
beneficial ownership interest in the shares or ADRs to the depositary for the
benefit of the ADR holders and (b) agree not to take any action with respect to
such shares or ADRs that is inconsistent with this transfer of beneficial
ownership; (3) the pre-released ADRs must be fully collateralized with cash or
other property the depositary deems appropriate, held by the depositary for your
benefit; and (4) the depositary must be able to close out the pre-release on not
more than five (5) business days' notice.
In addition, the depositary will limit the number of ADRs that may be
outstanding at any time as a result of pre-release to not more than 30% of all
ADRs, although the depositary may disregard the limit from time to time if it
deems appropriate and may change such limit for purposes of general application.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, there will be shares of Class B
common stock of FirstMark outstanding (assuming no exercise of the underwriters'
over-allotment option), of which shares of Class B common stock to be sold
in the offering, whether in the form of shares or ADSs, will be freely tradeable
without restriction by persons other than "affiliates" of FirstMark. The
remaining shares will be deemed "restricted" securities within the meaning of
the U.S. Securities Act, and, as such, may not be sold within the United States
in the absence of registration under the U.S. Securities Act or an exemption
therefrom, including the exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have owned
shares of an issuer for at least one year, including an "affiliate," is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of 1% of the then outstanding number of shares of such class
(approximately shares after the offering) or the average weekly trading volume
in composite trading in all national securities exchanges during the four
calendar weeks preceding the filing of the required notice of such sale. A
person (or persons whose shares are required to be aggregated) who is not deemed
an affiliate of an issuer at the time of the sale and for at least three months
prior to the sale and who has owned shares for at least two years is entitled to
sell such shares under Rule 144 without regard to the volume limitations
described above. Affiliates continue to be subject to such limitations. As
defined in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such issuer.
Many of our existing shareholders have the right to require us to file a
registration statement after the offering and the lock-up referred to below to
permit them to sell their shares.
Each of FirstMark, its executive officers and directors, and all other
existing shareholders of FirstMark, have agreed that, without the prior written
consent of the underwriters, it will not, for a period of 180 days from the date
of this prospectus, subject to certain exceptions described under
"Underwriters":
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of FirstMark or any securities convertible into
or exercisable or exchangeable for shares of FirstMark; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
shares of FirstMark,
whether any such transaction described above is to be settled by delivery of
shares of FirstMark or such other securities, in cash or otherwise, for a period
of 180 days after the date of this prospectus. See "Underwriters." In addition,
under the rules of the Neuer Markt segment of the Frankfurt Stock Exchange, the
shareholders have undertaken not to offer or sell shares, directly or
indirectly, in an exchange or off-exchange transaction, within a period of six
months from the date of admission of the shares to the Neuer Markt.
Prior to the offering, there has been no established market for the shares
or ADSs, and no predictions can be made about the effect, if any, that future
sales of shares or ADSs or the availability of such shares for sale would have
on the market price prevailing from time to time. Sales of substantial amounts
of shares or ADSs in the public market, or the perception that such sales could
occur, may have an adverse impact on the market price for the shares and the
ADSs and on the ability of FirstMark to raise capital through an offering of its
equity securities.
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MARKET INFORMATION
Prior to the offering, there has been no public market for the shares or the
ADSs. We have applied to have the ADSs approved for quotation on the Nasdaq
National Market and to have the shares of Class B common stock approved for
listing on the Neuer Markt of the Frankfurt Stock Exchange.
THE FRANKFURT STOCK EXCHANGE AND THE NEUER MARKT
The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges and accounted for approximately 86.2% of the turnover in
exchange-traded shares in Germany in 1999. The aggregate annual turnover of the
Frankfurt Stock Exchange in 1999 of approximately [EURO]4.08 billion, based on
the Frankfurt Stock Exchange's practice of separately recording the sale and
purchase components involved in any trade for both equity and debt instruments,
made it the fourth largest stock exchange in the world behind the New York,
London and Tokyo Stock Exchanges in terms of turnover. As of December 31, 1999,
the shares of 3,265 corporations, including 2,554 foreign corporations, were
traded on the official regulated market (including the Neuer Markt) and the
regulated unofficial market of the Frankfurt Stock Exchange.
The Neuer Markt segment of the Frankfurt Stock Exchange is a new trading
segment that was launched in March 1997. It is designed for innovative, small to
mid-size companies in high growth industries that have an international
orientation and that are willing to provide active investor relations. Issuers
are requested to provide investors on an ongoing basis with information such as
annual and quarterly reports, including cash flow statements, and a corporation
action timetable.
TRADING ON THE NEUER MARKT
Trading of shares listed on the Neuer Markt takes place simultaneously on
the floor of the stock exchange as well as via the system Xetra (Exchange
electronic trading). Electronic trading via Xetra takes place on every business
day between 9:00 a.m. and 5:30 p.m., Frankfurt time. The Frankfurt Stock
Exchange has recently adopted a resolution to extend trading hours until
8:00 p.m., beginning in summer 2000. Trading within the Xetra system is done by
banks and securities dealers who have been admitted to trading on at least one
of Germany's stock exchanges. Xetra is integrated into the Frankfurt Stock
Exchange and is subject to its rules and regulations.
Markets in listed securities are generally of the auction type, but listed
securities also change hands in inter-bank dealer markets off the Frankfurt
Stock Exchange. Price formation is determined by open bid by state-appointed
specialists (AMTLICHE MAKLER) who are themselves exchange members, but who do
not, as a rule, deal with the public. Prices of currently traded securities are
displayed continuously during trading hours. At the half-way point of each
trading day, a single standard quotation is determined for all shares. The
members' association of the Frankfurt Stock Exchange publishes a daily list of
prices which contains the standard prices of all traded securities, as well as
their highest and lowest quotations during the past year.
Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions off the Frankfurt Stock Exchange for large volumes or if one of the
parties is foreign are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
According to the conditions of German banks for securities trading
(SONDERBEDINGUNGEN FUR WERTPAPIERGESCHAFTE), customers' orders to buy or sell
listed securities must be executed on a stock exchange, unless the customer
instructs otherwise. Trading can be suspended by the Frankfurt Stock Exchange if
orderly stock exchange trading is temporarily endangered or if a suspension is
in the public interest.
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A specific feature of the Neuer Markt segment of the Frankfurt Stock
Exchange is the introduction of the obligatory designated sponsor, I.E., an
entity admitted for trading at the Frankfurt Stock Exchange which provides
additional liquidity by quoting prices for the buying and selling of shares on
request. Each issuer on the Neuer Markt of the Frankfurt Stock Exchange has to
nominate at least two designated sponsors which will not only ensure that there
is sufficient liquidity for its shares, but also serve as consultants on all
stock market related matters for the issuer.
Trading on German stock exchanges is regulated by, among others, the Federal
Supervisory Office for Securities Trading (BUNDESAUFSICHTSAMT FUR DEN
WERTPAPIERHANDEL).
GENERAL INFORMATION RELATING TO NEUER MARKT LISTING
In connection with this offering, we will apply for the admission of the
entirety of our issued and outstanding shares of Class B common stock to the
regulated market with trading on the Neuer Markt segment of the Frankfurt Stock
Exchange. We currently expect that the admission will take place on ,
2000. The first day on which the offered shares of Class B common stock will be
quoted on the Neuer Markt is currently anticipated to be , 2000.
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TAXATION
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
consequences of the acquisition, ownership and disposition of common shares or
ADSs, which we collectively refer to in this discussion as shares, to U.S.
Holders (as defined below). The discussion is based upon provisions of the U.S.
Internal Revenue Code of 1986, as amended, known as the Code, its legislative
history, judicial authority, current administrative rulings and practice, and
existing and proposed Treasury regulations, all as in effect and existing on the
date of this prospectus. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the conclusions
set forth below, possibly on a retroactive basis. This discussion assumes that
any share is or will be held as a capital asset (as defined in Section 1221 of
the Code) by the holders of the share. This discussion applies only to a person
who is an initial holder or other beneficial owner of shares purchased pursuant
to this offering and who is for U.S. federal income tax purposes
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under the laws of
the United States, any State of the United States or the District of
Columbia,
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source, or
- a trust if, in general, a court within the United States is able to
exercise primary supervision over the administration of such trust and one
or more U.S. persons has the authority to control all substantial
decisions of such trust (a "U.S. Holder").
Non-U.S. Holders are advised to consult their own tax advisors regarding the tax
considerations incident to the acquisition, ownership and disposition of shares.
In addition, this discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to other particular holders in
light of their personal investment circumstances or status, nor does it discuss
the U.S. federal income tax consequences to certain types of holders that may be
subject to special rules under the U.S. federal income tax laws, such as
- persons owning (or treated as owning) 10% or more of the total combined
voting power of FirstMark,
- financial institutions,
- insurance companies,
- real estate investment trusts,
- dealers in securities or foreign currency,
- traders in securities,
- tax-exempt organizations,
- foreign corporations or nonresident alien individuals,
- U.S. expatriates,
- persons that hold shares that are a hedge against, or that are hedged
against, currency risk or that are part of a straddle or conversion
transaction, or
- persons whose functional currency is not the U.S. dollar.
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In addition, this discussion does not address alternative minimum tax
consequences or the indirect effects on the holders of equity interests in the
holder of shares. The effect of any applicable state, local or foreign tax laws
is not discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER IS
URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF THE
PURCHASER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SHARES.
GENERAL
For purposes of the Code, holders of ADSs will be treated as the beneficial
owners of the common shares represented by those ADSs. Exchanges of ADSs for the
Class B common stock and Class B common stock for ADSs will be tax free for
purposes of the Code.
TREATMENT OF DISTRIBUTION
FirstMark has not paid any dividends on its shares and does not intend to
pay dividends in the foreseeable future. See "Dividend Policy". However, if you
receive a dividend on shares, generally, you will be required to include such
distribution (including any withholding taxes imposed on such distribution) in
gross income as ordinary income to the extent such distribution is paid from the
current or accumulated earnings and profits of FirstMark as determined under
U.S. federal income tax principles. Distributions in excess of the earnings and
profits of FirstMark generally will first be treated, for U.S. federal income
tax purposes, as a nontaxable return of capital to the extent of your basis in
the shares and then as gain from the sale or exchange of a capital asset.
Dividends paid in euros will be includible in your income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the day the
dividends are received which, in the case of ADSs, will be the date the
dividends are received by the depositary. If the depositary converts the euros
into dollars on the day it receives them, U.S. Holders of ADSs generally should
not recognize foreign currency gain or loss in respect of dividend income.
Dividends received on shares by U.S. corporate shareholders will not be eligible
for the corporate dividends received deduction.
You will be entitled to claim a foreign tax credit with respect to income
received from FirstMark only for foreign taxes (such as withholding taxes), if
any, imposed on dividends paid to you, and not for taxes, if any, imposed on
FirstMark or on any entity in which FirstMark has made an investment.
Distributions to you from FirstMark that are treated as dividends generally will
be classified as foreign source passive income (or, for U.S. Holders that are
"financial service entities" as defined in the Treasury Regulations, financial
service income). The rules relating to foreign tax credits are extremely
complex, and you should consult your own tax advisor with regard to the
availability of a foreign tax credit and the application of the foreign tax
credit to your particular situation.
SALE OR EXCHANGES OF THE SHARES
With certain exceptions, gain or loss realized on the sale or exchange of
shares will be treated as U.S. source capital gain or loss in an amount equal to
the difference between your adjusted basis in the shares and the amount realized
on the sale or exchange (or, if the amount realized is denominated in foreign
currency, the U.S. dollar equivalent of the foreign currency determined at the
spot rate on the date of sale or exchange). This capital gain or loss will be
long-term capital gain or loss if you have held the shares for more than one
year at the time of the sale or exchange.
FOREIGN PERSONAL HOLDING COMPANY
In general, if FirstMark or any of its foreign corporate subsidiaries were
to be classified as a foreign personal holding company ("FPHC"), and you own or
are deemed to own FirstMark's stock or
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the stock of one of its foreign subsidiaries on the last day of its taxable
year, you would be treated as receiving a dividend at the end of the taxable
year of FirstMark or that subsidiary in an amount equal to your pro rata share
of the undistributed foreign personal holding company income (generally, taxable
income with certain adjustments) of FirstMark or that subsidiary. This income
would be taxable to you as a dividend, even if no cash dividend were actually
paid. You generally would not be subject to tax under these rules if you dispose
of all of your shares prior to the last of day of FirstMark's taxable year. If
FirstMark were treated as an FPHC, U.S. Holders who acquire shares from
decedents would, in some circumstances, be denied the step-up of the income tax
basis for those shares to fair market value at the date of death which would
otherwise have been available and instead would have a tax basis equal to the
lower of the fair market value or the decedent's basis.
A foreign corporation will be classified as an FPHC if (1) five or fewer
individuals, who are U.S. citizens or residents, directly or indirectly (taking
into account ownership attribution rules), own more than 50% of the
corporation's stock (measured either by voting power or value) (the "stockholder
test") and (2) at least 60% of the corporation's gross income (regardless of
source), as specifically adjusted, is from certain passive sources (the "income
test"). After a corporation becomes an FPHC, the income test percentage for each
subsequent taxable year is reduced to 50%. For purposes of the income test,
FirstMark and each of its subsidiaries, other than subsidiaries treated for U.S.
tax purposes as a branch or pass-through entity, are considered separately.
Five or fewer individuals who are U.S. citizens or residents currently may
be treated as owning more than 50% of the voting power of the outstanding shares
of FirstMark and its foreign corporate subsidiaries for purposes of the FPHC
rules, and FirstMark believes that the stockholder test may be met on a going
forward basis. During its current fiscal year, FirstMark will have interest
income from the temporary investment of funds from this offering and earlier
private equity investments and will have only limited amounts of gross income
from operations. Accordingly, FirstMark, and possibly one or more of its
subsidiaries, may be an FPHC. Nevertheless, FirstMark believes that if it or any
of its subsidiaries is an FPHC for the current fiscal year, its undistributed
foreign personal holding company income would be small and FirstMark intends to
manage its affairs and the affairs of the subsidiaries for the current fiscal
year and any subsequent fiscal year in which FirstMark or any subsidiary may be
an FPHC so as to attempt to avoid or minimize having income imputed to U.S.
shareholders under these rules, to the extent such management of its affairs is
consistent with its other business goals and commitments.
PASSIVE FOREIGN INVESTMENT COMPANY
In general, FirstMark will be a "passive foreign investment company"
("PFIC") if either (1) 75% or more of its gross income constitutes "passive
income," or (2) 50% or more of the average value (for the current year, tax
basis) of its assets produce passive income or are held for the production of
passive income. Passive income generally includes, among other things,
dividends, interest, certain rents and royalties and any gain from the sale or
exchange of property that produces any of these types of income or that produce
no income and net gains from certain commodity and foreign currency
transactions. The Internal Revenue Service takes the position that cash and cash
equivalents, including the working capital of an operating business, are passive
assets. For purposes of these tests, if FirstMark owns at least 25% by value of
the stock of another corporation, it is considered to have directly received its
proportionate share of the gross income of the other corporation and to directly
own its proportionate share of the assets of the other corporation. FirstMark
intends to manage its affairs and the affairs of its subsidiaries so as to avoid
or minimize the chances that FirstMark will be classified as a PFIC following
this offering, to the extent consistent with its other business goals and
commitments. However, because FirstMark will not immediately invest the funds
from this offering in active assets and it is likely not eligible for a special
exception for "start-up" companies, it is possible
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(depending on the rate of utilization of those funds) that FirstMark will be a
PFIC for the current fiscal year.
If FirstMark becomes a PFIC for any taxable year, you (whether you own
shares directly or indirectly) may be subject to reporting requirements and a
special tax and interest charge upon a sale or other disposition of those
shares, or upon the receipt of certain distributions from FirstMark, unless you
elect to include in your income your pro rata share of the ordinary earnings and
net capital gain of FirstMark or, under some circumstances, on the difference
between the fair market value and the adjusted basis of such shares as described
below. In addition, if FirstMark is or becomes a PFIC for any taxable year in
your holding period, it generally will remain a PFIC for all subsequent taxable
years with respect to you if you do not make a timely QEF election, discussed
below.
The special tax is computed by assuming that the gain, if any, with respect
to the shares was earned ratably over each day in your period of ownership (or
certain portions thereof). The portion allocable to the taxable year of the
disposition is taxed as ordinary income. The portion allocable to each taxable
year prior to the taxable year of the disposition (with certain exceptions) is
taxed as ordinary income at the maximum marginal tax rate applicable for each
such taxable year. An interest charge is imposed on the amount of the special
tax in each such prior year that is deemed to arise from the allocation of the
gain to such prior year and is charged at the applicable rates imposed on
underpayments of U.S. federal income tax for the period commencing on the due
date of the tax return for each prior period and ending on the due date of the
tax return for the year of the gain. These rules would also apply to the receipt
of an "excess distribution" with respect to shares. In general, a shareholder of
a PFIC is treated as having received an excess distribution to the extent that
the amount of the distribution is more than 125% of the average annual
distributions with respect to its shares during the three preceding taxable
years (or, if shorter, period during which the shareholder held the shares).
If FirstMark were a PFIC, U.S. Holders who acquire shares from decedents
could be denied the step-up of the income tax basis for such shares which would
otherwise have been available.
Under certain circumstances, a shareholder of a corporation which is a PFIC
may elect to treat the PFIC as a "qualified electing fund" (a "QEF"), in which
case the electing shareholder would generally not be subject to the special tax
rules discussed above. Instead, the electing shareholder would include in its
income each taxable year for which the corporation is a PFIC (1) as ordinary
income, a pro rata share of the PFIC's ordinary earnings and (2) as long-term
capital gain, a pro rata share of the PFIC's net capital gain, whether or not
distributed. Moreover, FirstMark believes, based on projections, that it is
unlikely that it would be a PFIC in years after the current taxable year and, as
discussed above, if you make a QEF election for the current taxable year, you
would not be required to include any imputed amounts in income as a result of
making the election for later taxable years for which FirstMark is not a PFIC.
If FirstMark determines that it is a PFIC, FirstMark will provide the requisite
information to a shareholder upon reasonable request of such shareholder to
enable such shareholder to make the "QEF" election. If applicable, the rules
pertaining to an FPHC, discussed above, generally override those pertaining to a
PFIC with respect to which a "QEF" election is in effect.
As an alternative election, a mark-to-market election may be made by a U.S.
person who owns marketable stock in a PFIC at the close of such person's taxable
year. An electing U.S. Holder would, in general, include as ordinary income in
each taxable year an amount equal to the increase, if any, in value of its
shares for that year (measured at the close of the U.S. Holder's taxable year)
and would be allowed a deduction for any decrease in the value of its shares for
that year, but only to the extent of previously included mark-to-market income.
The mark-to-market election is made with respect to marketable stock in a PFIC
on a shareholder-by-shareholder basis and, once made, can only be revoked with
the consent of the IRS. Under Treasury regulations published on January 25,
2000, the term "marketable stock" includes stock of a PFIC that is "regularly
traded" on a qualified exchange or other
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market. For these purposes, a class of stock is regularly traded on a qualified
exchange or other market for any calendar year during which such class of stock
is traded (other than in DE MINIMIS quantities) on at least 15 days during each
calendar quarter. It is expected that the shares will be treated as marketable
stock for these purposes, but no assurances can be given.
YOU SHOULD CONSULT YOUR OWN TAX ADVISERS AS TO THE EFFECT OF THE PFIC RULES
(INCLUDING THE PROPOSED REGULATIONS) ON THE OWNERSHIP, SALE OR OTHER DISPOSITION
OF THE SHARES.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements and a 31% backup withholding
tax may apply to the payment of dividends on shares and the proceeds of certain
sales of shares in respect of U.S. Holders. Backup withholding will not apply if
the holder (1) is a corporation or other exempt recipient or (2) complies with
the applicable backup withholding requirements. Any amounts, withheld under the
backup withholding rules will be allocated as a credit against such U.S.
Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a
refund, provided the required information is furnished to the IRS.
Treasury regulations, generally effective for payments made after
December 31, 2000, modify certain of the certification requirements for backup
withholding. It is possible that FirstMark and other withholding agents may
request a new withholding exemption certification from holders in order to
qualify for continued exemption from backup withholding under Treasury
Regulations when they become effective.
CERTAIN LUXEMBOURG TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX CONSULTANTS TO DETERMINE POSSIBLE
LUXEMBOURG TAX CONSEQUENCES OF A PURCHASE OF SHARES.
The following summary outlines certain Luxembourg tax consequences to
persons who are nonresidents of Luxembourg and who do not have a permanent
establishment in Luxembourg ("Non-Resident Holders") with respect to the
ownership and disposition of shares. It does not examine tax consequences to
residents or to some extent, former residents.
COMMON STOCK
Non-Resident Holders of shares are not liable for Luxembourg tax on capital
gains on any such shares; PROVIDED, HOWEVER, that if they hold more than 25% of
the share capital of FirstMark, they are subject to tax on capital gains on the
disposal of shares held for not more than six months.
Dividends paid on shares to Non-Resident Holders are subject to a
withholding tax of 25%. Under certain circumstances, European Union Non-Resident
Holders may benefit from an exemption of withholding tax. Reductions of the
withholding rate may also be provided by tax treaties. In the case of the
current treaty between Luxembourg and the United States, the withholding tax is
reduced to 7.5% or less, and in the new proposed treaty the rate will be reduced
to 15% or less, PROVIDED that the holder is entitled to claim treaty benefits.
A non-resident holder of shares is not liable to inheritance tax except if
the deceased holder was a resident of Luxembourg at the time of death.
The issuance of shares will trigger the levy of a capital duty payable by
FirstMark of 1% of the subscription price.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the U.S.
underwriting agreement dated , 2000, each U.S. underwriter named
below, for whom Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc.
are serving as representatives, has severally agreed to purchase, and FirstMark
has agreed to sell to them, the number of shares indicated in the table below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Salomon Smith Barney Inc....................................
--------
Total...................................................
========
</TABLE>
The U.S. underwriting agreement provides that the obligations of the several
U.S. underwriters to pay for and accept delivery of the shares offered by this
prospectus are subject to certain conditions, including the conditions that no
stop order suspending the effectiveness of the registration statement is in
effect and no proceedings for such purpose are pending before or threatened by
the Securities and Exchange Commission and that there has been no material
adverse change or any development involving a prospective material adverse
change in the condition, financial or otherwise, or in the earnings, business or
operations of FirstMark and its subsidiaries, taken as a whole, from that set
forth in the registration statement. The U.S. underwriters are obligated to take
and pay for all of the shares offered by this prospectus, other than those
covered by the over-allotment option described below, if any shares are taken.
Pursuant to the U.S. underwriting agreement, FirstMark has granted to the
U.S. underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of shares, which may be in
the form of shares or ADSs, at the initial public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
U.S. underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares and
ADSs offered by this prospectus. To the extent the underwriters exercise this
option, each U.S. underwriter will become obligated, subject to conditions, to
purchase approximately the same percentage of such additional shares as the
number listed next to the U.S. underwriter's name in the preceding table bears
to the total number of shares offered by the U.S. underwriters by this
prospectus.
FirstMark has also entered into an international underwriting agreement with
ABN AMRO Rothschild, Morgan Stanley & Co. International Limited and Salomon
Brothers International Limited, as representatives of the international
underwriters named in the international underwriting agreement, providing for
the offering and sale of shares in connection with the international
offering. The lead managers for the international offering are ABN AMRO
Rothschild, Morgan Stanley & Co. International Limited and Salomon Brothers
International Limited. FirstMark has granted to the international underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to additional shares solely for the purpose of covering over-allotments,
if any.
Morgan Stanley & Co. International Limited and ABN AMRO Rothschild are
acting as joint global coordinators for FirstMark in connection with the
combined U.S. and international offering.
To provide for the coordination of their activities, the U.S. underwriters
and the international underwriters have entered into an intersyndicate agreement
which provides, among other things, that the U.S. underwriters and the
international underwriters may purchase and sell among each other such
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number of shares as is mutually agreed upon among the U.S. representatives and
the international representatives. To the extent there are sales among the U.S.
underwriters and the international underwriters pursuant to the intersyndicate
agreement, the number of shares or ADSs initially available for sale by the U.S.
underwriters and the number of shares initially available for sale by the
international underwriters may be more or less than the numbers appearing on the
cover page of this prospectus. Except as permitted by the intersyndicate
agreement, the price of any ADSs or shares so sold will be the initial public
offering price, less an amount not greater than the selling concession.
Pursuant to the intersyndicate agreement, as part of the distribution of the
ADSs and shares the U.S. underwriters will offer and sell ADSs and shares,
directly or indirectly, only in the United States and Canada and the
international underwriters will offer and sell shares, directly or indirectly,
only outside the United States and Canada and to institutional and retail
investors in Germany. For these purposes, an offer or sale is considered to be
made in a country if it is made to any individual resident in such country or to
any corporation, partnership, pension, profit-sharing or other trust or other
entity, including any such entity constituting an investment advisor acting with
discretionary authority, whose office most directly involved with the purchase
is located in such country. "United States" means the United States of America,
its territories, its possessions and all areas subject to its jurisdiction.
This prospectus may be used by the U.S. underwriters and dealers in
connection with offers and sales of the ADSs and shares in the United States and
Canada.
No action has been or will be taken in any jurisdiction by FirstMark or any
underwriter that would permit an offering to the general public of the shares
offered by this prospectus in any jurisdiction other than the United States and
Germany.
Shares and ADSs sold by the U.S. underwriters to the public will initially
be offered at the initial public offering price set forth on the cover of this
prospectus. Any shares or ADSs sold by the U.S. underwriters to securities
dealers may be sold at a discount of up to [EURO] per share or $ per ADS
from the initial public offering price. Any such securities dealers may resell
any share purchased from the U.S. underwriters to certain other brokers or
dealers at a discount of up to [EURO] per share or $ per ADS from the
initial public offering price. If all the shares or ADSs are not sold at the
initial public offering price, the U.S. representatives may change the offering
price and the other selling terms.
The U.S. underwriters have informed FirstMark that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
offered by them.
The following table shows the per share price to the public, the total
underwriting discounts and commissions to be paid to the U.S. underwriters by
FirstMark, and the total proceeds to FirstMark if the U.S. underwriters'
over-allotment option is exercised in full:
<TABLE>
<CAPTION>
U.S. DOLLARS* EURO
------------- --------
<S> <C> <C>
Per share price to the public...........................
Total U.S. underwriters discounts and commissions.......
Total proceeds to FirstMark.............................
</TABLE>
------------------------
* translated at an exchange rate of [EURO]1.00=$ .
FirstMark has agreed with the U.S. underwriters that, without the prior
written consent of the global coordinators, it will not, during the period
ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell any option or contract to purchase
any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares or ADSs of FirstMark or any securities convertible
into or exercisable or exchangeable for such shares or ADSs, or
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- enter into any swap or other arrangement that transfers to another, in
whole or in part, the economic consequences of ownership of the shares,
whether any such transaction described above is to be settled by delivery of
shares or other such securities, in cash or otherwise. These restrictions do not
apply to shares issued in this offering or pursuant to our existing share option
plan and employment arrangements.
In order to facilitate the offering of the shares, the U.S. and/or
international underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the shares. Specifically, the underwriters may
sell more shares than they are obligated to purchase under the underwriting
agreements, creating a short position. A short sale is covered if the short
position is no greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters can close out a
covered short sale by exercising the over-allotment option or purchasing shares
in the open market. In determining the source of shares to close out a covered
short sale, the underwriters will consider, among other things, the open market
price of shares compared to the price available under the over-allotment option.
The underwriters may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. As an
additional means of facilitating the offering, the underwriters may bid for, and
purchase, shares in the open market to stabilize the price of the shares. The
underwriting syndicate may also reclaim selling concessions allowed to an
underwriter or a dealer for distributing the shares in the offering, if the
syndicate repurchases previously distributed shares to cover syndicate short
positions or to stabilize the price of the shares. These activities may raise or
maintain the market price of the shares above independent market levels or
prevent or retard a decline in the market price of the shares. The underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
FirstMark estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ million.
Morgan Stanley Dean Witter Capital Partners IV, L.P. and certain other funds
affiliated with Morgan Stanley & Co. Incorporated, hold shares of Class A
common stock or 8.5% of FirstMark.
Application has been made for the listing of the shares on the Neuer Markt
segment of the Frankfurt Stock Exchange under the symbol " ", and for
quotation of the ADSs on the Nasdaq National Market under the symbol "FMRK".
From time to time in the ordinary course of their respective businesses, one
or more of the U.S. underwriters and their affiliates may engage in the future
in commercial and/or investment banking transactions with us and our affiliates.
FirstMark and the U.S. underwriters have agreed to indemnify each other
against some liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to the offering, there will be no public market for the shares. The
initial public offering price will be determined by negotiations between
FirstMark and the U.S. and international underwriters. Among the factors that
will be considered in determining the initial public offering price are the
future prospects of FirstMark and its industry in general, sales, earnings and
certain other financial and operating information of FirstMark in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of FirstMark.
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VALIDITY OF SECURITIES
Arendt & Medernach, our Luxembourg counsel, will pass upon the validity of
the shares. Fried, Frank, Harris, Shriver & Jacobson, our U.S. counsel, will
pass upon certain legal matters. Sullivan & Cromwell, U.S. counsel for the
underwriters, will pass upon the validity of the ADSs, and Elvinger, Hoss &
Prussen, Luxembourg counsel for the underwriters, will pass upon certain legal
matters. A partnership in which partners of Fried, Frank, Harris, Shriver &
Jacobson are partners is a shareholder of the company and FirstMark
Communications International.
EXPERTS
The consolidated financial statements of FirstMark and subsidiaries as of
December 31, 1998 and 1999 and for the period ended December 31, 1998 and the
year ended December 31, 1999 included herein and in the registration statement
have been audited by Arthur Andersen, independent public accountants as
indicated in their reports with respect thereto and are included herein, in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The consolidated financial statements of LambdaNet Communications GmbH as of
November 15, 1999 and for the period from April 21, 1999 (Date of inception) to
November 15, 1999 included herein and in the registration statement have been
audited by Arthur Andersen, independent public accountants as indicated in their
reports with respect thereto and are included herein, in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 and, accordingly, file annual and quarterly and other information with
the United States Securities and Exchange Commission. We are also subject to the
Exchange Act rules regarding the content and furnishing of proxy statements to
shareholders. You may read and copy at prescribed rates any reports, statements
and other information we file at the Commission's public reference rooms located
at: Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
You may also obtain information about us from the following regional offices of
the Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, 13th Floor, New York, New York 10048. Please call
1-800-SEC-0330 in the United States for further information on the public
reference rooms. Our filings will also be available to the public from
commercial document retrieval services and at the web site maintained by the
Commission at http://www.sec.gov. When the ADSs begin trading on the Nasdaq
National Market, copies of the information we file with the Commission may also
be read at the offices of the National Association of Securities Dealers at
1735 K Street, N.W., Washington, D.C. 20006.
We have agreed to furnish copies of these reports to the depositary promptly
after they have been filed with the Commission. Our financial statements
included in such reports will be prepared in accordance with United States
generally accepted accounting principles, or U.S. GAAP for short, will express
all amounts in euro and will also indicate the appropriate amounts in United
States dollars in accordance with the rules of the Commission.
We have filed a registration statement on Form S-1 to register with the
Commission the shares and ADSs being offered by this prospectus. This prospectus
is part of that registration statement. As allowed by the Commission's rules,
this prospectus does not contain all of the information you can find in the
registration statement or the exhibits to the registration statement. You should
read the registration statement for further information with respect to the
shares and ADSs.
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SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES
We are a Luxembourg company and substantially all of our assets are located
outside the United States. In addition, certain members of our management and
board of directors are residents of countries other than the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons or to enforce in the United States against
such persons or us judgments of courts of the United States predicated upon
civil liabilities under the United States federal securities laws. We have been
advised by our Luxembourg counsel, Arendt & Medernach, that since there is no
treaty between the United States and Luxembourg providing for the reciprocal
recognition and enforcement of judgments, United States judgments are not
enforceable in Luxembourg. However, a final judgment for the payment of money
obtained in a United States court, which is not subject to appeal or any other
means of contestation and is enforceable in the United States, would in
principle be upheld by a Luxembourg court of competent jurisdiction when asked
to render a judgment in accordance with such final judgment by a United States
court, without substantive re-examination of the merits of the subject matter
thereof; provided that such judgment has been rendered by a court of competent
jurisdiction, in accordance with rules of proper procedure, that it has not been
rendered in proceedings of a penal or revenue nature and that its content and
possible enforcement are not contrary to public policy or public order of
Luxembourg. Notwithstanding the foregoing, there can be no assurance that United
States investors will be able to enforce against us, or members of our
management or board of directors or certain experts named herein who are
residents of Luxembourg or other countries outside the United States, any
judgments in civil and commercial matters, including judgments under the federal
securities laws. In addition, there is doubt as to whether a Luxembourg court
would impose civil liability on us or on the members of our management or board
of directors in an original action predicated solely upon the federal securities
laws of the United States brought in a court of competent jurisdiction in
Luxembourg against us or such members.
INFORMATION REQUIRED FOR LISTING ON THE NEUER MARKT SEGMENT OF THE FRANKFURT
STOCK EXCHANGE
CAPITAL EXPENDITURES AND INVESTMENTS
We invested approximately $2.5 million from our inception on July 8, 1998 to
December 31, 1999 in equipment and office related equipment. During the first
quarter of 2000, we invested approximately $15.0 primarily in the initial roll
out of our German fiber optic backbone network. Future expenditures are expected
to cover completion of the fiber optic backbone network in Germany and costs
relating to establishing wireless local loop and DSL services in Germany,
completion of our planned fiber optic backbone networks in France and Spain and
establishing wireless local loop services in Spain, France, Switzerland,
Portugal and Finland. We believe that the net proceeds of this offering,
together with cash on hand and anticipated future debt financings, will be
sufficient to finance the deployment of these parts of our broadband internet
network, fund operating losses and meet our capital needs until the end of 2001.
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SUBSIDIARY INFORMATION
The following is a chart showing the subsidiaries or affiliates in which we
own, directly or indirectly, shares with a book value that amounts to at least
10% of our stated capital or contributes to at least 10% of our net income.
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBSCRIBED
AND PAID IN
NAME OF SUBSIDIARY--REGISTERED SEAT COUNTRY CURRENCY OWNERSHIP BOOK VALUE CAPITAL NET LOSS
----------------------------------- -------- -------- --------- ---------- ----------- ----------
(EURO)
<S> <C> <C> <C> <C> <C> <C>
LambdaNet Communications GmbH,
Hannover..................... Germany euro 80% 25,578,186 32,025,200 (6,447,014)
</TABLE>
ADDITIONAL CORPORATE INFORMATION
FORMATION AND PURPOSE
The company was incorporated under the name FirstMark Communications Europe
S.C.A. on July 8, 1998 under the laws of the Grand-Duchy of Luxembourg as a
"SOCIETE EN COMMANDITE PAR ACTIONS", which is a legal partnership that includes
a general partner, who assumes an unlimited liability (FirstMark Communications
International II LLC) and limited partners (FirstMark Communications
International LLC), who assume limited liability. On January 19, 2000, the
company was converted into a "SOCIETE ANONYME" and changed its name to FirstMark
Communications Europe S. A. When the Company was converted into a "SOCIETE
ANONYME" the general partner was removed and the limited partners continued to
hold their shares. The company has its seat in Luxembourg and is registered in
the Luxembourg commercial register under number R.C.B. 65 610. The Company is
governed by Luxembourg law.
Pursuant to Article 3 of its articles of association, the company's
objectives are:
"The Company shall have as its business purpose the holding of
participations, in any form whatsoever, in Luxembourg companies and foreign
companies, the acquisition by purchase, subscription, or in any other manner as
well as the transfer by sale, exchange or otherwise of stock, bonds, debentures,
notes and other securities of any kind, and the ownership, administration,
development and management of its portfolio.
The Company may carry on directly any commercial, industrial and financial
activity or maintain a commercial establishment open to the public. The Company
may participate in the establishment and development of any financial,
industrial or commercial enterprises in Luxembourg and abroad and may render
them every assistance whether by ways of loans, guarantees or otherwise. The
Company may borrow in any form and proceed to the issuance of bonds.
The Company may further guarantee, grant loans or otherwise assist the
companies in which it holds a direct or indirect participation or which form
part of the same group of companies as the Company.
In general, it may take any controlling and supervisory measures and carry
out any operation which the Company may deem useful for the accomplishment and
development of its purposes.
The duration of the Company is not limited to a specific time period. The
Company can be dissolved by resolution of the General Shareholders' Meeting, if
the special requirements under Luxembourg law for amendments of the Articles of
Association are met."
The fiscal year of the company runs from January 1 to December 31 of each
year.
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DEVELOPMENT OF SHARE CAPITAL SINCE INCORPORATION
Since our formation on July 8, 1998, we have issued and sold the following
unregistered securities:
On July 8, 1998, we were formed as FirstMark Communications Europe SCA, a
legal partnership with a capital of $40,000 consisting of 1 registered unlimited
liability share, par value $1,000, issued to FirstMark Communications
International II LLC and 39 registered limited liability shares, par value of
$1,000, issued to FirstMark Communications International LLC.
On May 21, 1999, we replaced 1 registered unlimited liability share, par
value $1,000 issued to FirstMark Communications International II LLC with 1
registered unlimited liability share, par value $1.50. We also replaced 39
registered limited liability shares, par value of $1,000, issued to FirstMark
Communications International LLC with 26,000 shares of common stock, par value
$1.50 per share, and further increased its share capital by the issuance of
64,000 shares of common stock, par value $1.50 per share, to FirstMark
Communications International LLC.
On May 21, 1999, pursuant to a subscription agreement, we agreed to issue an
aggregate of 10,015 shares of Series A convertible preferred stock, par value
$1.50 per share, to a private investor. Under the subscription agreement, we
issued to the investor 10,000 shares of Series A convertible preferred stock. In
August and October 1999, we issued the remaining 15 shares of Series A
convertible preferred stock to the investor on January 19, 2000.
On January 24, 2000, in connection with a credit facilities agreement
between the registrant and ABN AMRO Ventures B.V., we issued 1,198 share of
Series E convertible preferred stock, par value $1.50 per share, to ABN AMRO
Ventures B.V.
On January 24, 2000, pursuant to a subscription agreement, we issued 2,272
shares of Series B convertible preferred stock, par value $1.50 per share, to a
private investor.
On January 24, 2000, pursuant to a private investor's exercise of its
preemptive rights under the registrant's stockholders agreement, we issued 253
shares of Series B convertible preferred stock, par value $1.50 per share, and
1,106 shares of Series C convertible preferred stock, par value $1.50 per share.
On January 24, 2000, pursuant to a contribution agreement, we issued 9,937
shares of Series C convertible preferred stock, par value $1.50 per share, to
FirstMark Fiber Holdings LLC in exchange for FirstMark Fiber Holdings LLC's 80%
ownership interest in LambdaNet Communications GmbH.
On April 7, 2000, pursuant to a subscription agreement, the registrant
issued 10,392 shares of Series F-1 convertible preferred stock, par value $1.50
per share, to ABN AMRO Ventures B.V. On June 15, 2000, we repurchased these
shares as described below.
On April 27, 2000, we issued 383 shares of Series E convertible preferred
stock, par value $1.50 per share, to ABN AMRO Ventures B.V. For a limited time,
we have a call right to acquire all 383 shares of Series E convertible preferred
stock at an exercise price of $1.50 per share. In connection with the issuance
of shares of Series E convertible preferred stock, we exercised this call right
as described below. On June 15, 2000, we repurchased these shares as described
below.
One June 15, 2000, pursuant to a sale and transfer agreement with ABN AMRO
Ventures B.V., we repurchased 10,392 shares of Series F-1 convertible preferred
stock, par value $1.50 per share, belonging to ABN AMRO Ventures B.V. and 383
shares of Series E convertible preferred stock, par value $1.50 per share. These
shares were subsequently reissued pursuant to a subscription agreement with
certain private investors.
On June 15 and July 18, 2000, pursuant to a subscription agreement, we
issued 96,000 shares of Series F convertible preferred stock, par value $1.50
per share, and 24,000 shares of Series F-2 convertible preferred stock, par
value $1.50 per share, to a group of private investors.
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On June 15, 2000, pursuant to a contribution agreement, we issued 466 shares
of common stock, par value $1.50 per share, to FirstMark Communications
International LLC.
On June 26, 2000, pursuant to a letter agreement, we committed and became
obligated to issue, subject to certain adjustments contained in the letter,
approximately 541 shares of common stock, par value $1.50 per share, to Audiocom
S.A.
Immediately prior to this offering we had no shares of Class B common stock
outstanding, so that following the issue of new shares of Class B common
stock in this offering, we will have shares of Class B common stock issued
and outstanding and another shares of Class B common stock authorized, but
not issued.
Immediately prior to this offering we had shares of Class A common
stock outstanding and another shares of Class A common stock authorized,
but not issued.
Immediately prior to this offering we had shares of non-voting junior
preferred stock outstanding and another shares of non-voting junior
preferred stock authorized, but not issued.
RECENT DEVELOPMENTS AND OUTLOOK
From our inception in July 1998 until March 31, 2000 we have earned total
sales revenues of $2.5 million and grown into a company with over 160 full time
employees. The first three months of 2000 reflected the substantial growth we
have undergone since inception. We anticipate revenues for 2000 to be
significantly higher than 1999 as a result of capacity sales and co-location
services on our fiber optic backbone network in Germany.
We expect to generate most of our revenue for the next 12 months by offering
end-to-end "clear-bandwidth" and co-location services to alternative operators
and internet service providers for hosting and transport of data, voice, video
and internet services. Most of our revenue will be derived initially from our
fiber optic backbone network in Germany. As we expand services in Germany and in
other countries, we expect to generate revenue from a variety of other services,
such as broadband access via wireless local loop and DSL.
We anticipate cost of sales to be significantly higher as we generate
additional sales. Cost of sales will primarily consist of the cost of leased
lines, the cost to interconnect and terminate traffic with other network
providers and the rental cost of the points of presence. We are likely to need
to incur expenditures for co-location space, leased lines for DSL services and
various telecommunications equipment in advance of sales generated from these
activities.
We recently started our operations with the opening of our fiber optic
backbone network in Germany in January 2000, and wireless local loop services in
Germany and Luxembourg in May 2000 and in Portugal in July 2000. Our planned
rapid expansion of operations will place a significant strain on our management,
financial and other resources. Our ability to manage its expansion effectively
will depend upon, among other things, monitoring operations, controlling costs,
maintaining regulatory compliance, maintaining effective quality controls,
significantly expanding our internal management, technical, information and
accounting systems, and attracting, assimilating and retaining qualified
management and technical personnel. If we are unable to hire and retain staff,
expand our facilities, purchase adequate supplies of equipment and deploy and
maintain efficient management information systems, customers could experience
delays in connection of service and/or of lower level of customer service.
Failure to meet the demands of our customers and to manage the expansion of our
business and operations would have a material adverse effect on our business,
financial condition and results of operations. For further information on some
of the risk to our business, see the "Risk Factors" section of this prospectus.
176
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 2000:
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Profit and Loss.................. F-4
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Unaudited Consolidated Financial Statements........ F-7
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE PERIOD FROM JULY 8, 1998 (DATE
OF INCEPTION) TO DECEMBER 31, 1998:
Report of Independent Auditors.............................. F-16
Consolidated Balance Sheets................................. F-17
Consolidated Statements of Profit and Loss.................. F-19
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-20
Consolidated Statements of Cash Flows....................... F-21
Notes to Audited Consolidated Financial Statements.......... F-22
AUDITED FINANCIAL STATEMENTS OF LAMBDANET COMMUNICATIONS
GMBH FOR THE PERIOD FROM APRIL 21, 1999 (DATE OF
INCEPTION) TO NOVEMBER 15, 1999
Report of Independent Auditors.............................. F-49
Balance Sheet............................................... F-50
Statement of Profit and Loss................................ F-52
Statement of Change in Equity............................... F-53
Statement of Cash Flows..................................... F-54
Notes to the Audited Financial Statements of LambdaNet...... F-55
</TABLE>
F-1
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
NOTES (UNAUDITED) 1999
-------- ------------ ------------
US$ US$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 17,887,816 20,886,790
Accounts receivable--
Trade, net of allowance of $29,451 and nil
respectively.......................................... 2,068,459 68,759
From affiliated companies............................... 3,776,436 553,078
Other................................................... 9,831,373 7,838,804
------------ -----------
15,676,268 8,460,641
Deferred costs............................................ 5 5,972,675 --
Prepaid expenses and other current assets................. 2,032,451 799,728
------------ -----------
TOTAL CURRENT ASSETS.................................... 41,569,210 30,147,159
------------ -----------
PROPERTY AND EQUIPMENT, AT COST............................. 37,046,323 35,339,456
Less--accumulated depreciation............................ (1,549,350) (690,894)
------------ -----------
35,496,973 34,648,562
------------ -----------
INTANGIBLE ASSETS, AT COST:
Goodwill.................................................. 4 76,154,757 73,275,606
Licenses.................................................. 4 113,294,443 6,219,407
GasLINE Agreement......................................... 11,517,201 11,517,201
Other..................................................... 5,496,091 1,398,851
------------ -----------
206,462,492 92,411,065
Less--accumulated amortization............................ (3,835,979) (1,366,766)
------------ -----------
202,626,513 91,044,299
------------ -----------
INVESTMENTS
Affiliated companies...................................... -- 4,264
------------ -----------
-- 4,264
------------ -----------
TOTAL ASSETS................................................ 279,692,696 155,844,284
============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
NOTES (UNAUDITED) 1999
-------- ------------ ------------
US$ US$
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade................................................... 4 125,784,348 8,548,689
Other................................................... 9,424,727 3,612,361
------------ -----------
135,209,075 12,161,050
Accrued liabilities....................................... 7,792,680 5,946,099
Short term debt........................................... 5 15,000,000 --
Long term debt maturing within one year................... -- 225,034
------------ -----------
158,001,755 18,332,183
LONG TERM LIABILITIES:
Long term debt and financing.............................. 5 26,381,140 27,729,828
Advances from stockholders................................ 2,581,587 2,607,903
------------ -----------
28,962,727 30,337,731
------------ -----------
TOTAL LIABILITIES....................................... 186,964,482 48,669,914
------------ -----------
MINORITY INTEREST........................................... 5,168,172 7,460,255
------------ -----------
COMMITMENTS AND CONTINGENCIES............................... 6
STOCKHOLDERS' EQUITY:
Common stock (110,001 shares authorized, 90,001 shares
issued with par value of $1.50)......................... 135,002 135,002
Preferred convertible Series A stock (10,100 shares
authorized, 10,015 shares issued with par value of
$1.50).................................................. 15,023 15,000
Preferred convertible Series B stock (2,525 shares
authorized and issued with par value of $1.50).......... 3,788 --
Preferred convertible Series C stock (11,043 shares
authorized and issued with par value of $1.50).......... 16,564 14,905
Preferred convertible Series E stock (1,198 shares
authorized and issued with par value of $1.50).......... 1,797 --
Additional paid-in capital................................ 154,161,423 140,127,144
Accumulated deficit....................................... (60,203,354) (31,237,293)
Deferred compensation cost................................ (5,910,904) (9,149,630)
Accumulated other comprehensive loss...................... (659,297) (191,013)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY.............................. 87,560,042 99,714,115
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. 279,692,696 155,844,284
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PROFIT AND LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
NOTES (UNAUDITED) (UNAUDITED)
-------- ------------------ ------------------
US$ US$
<S> <C> <C> <C>
Revenue............................................. 2,518,752 --
Cost of revenue..................................... (1,277,081) --
----------- ----------
Gross margin........................................ 1,241,671 --
Selling, general and administrative expenses........ (27,163,922) (1,189,839)
License acquisition costs........................... (298,568) --
----------- ----------
Operating loss.................................... (26,220,819) (1,189,839)
----------- ----------
Interest expense and other.......................... (3,306,078) --
Interest income and other........................... 29,651 --
Exchange loss, net.................................. (288,268) --
Equity in net loss of affiliates.................... (1,872,883) --
----------- ----------
Loss before income taxes.......................... (31,658,397) (1,189,839)
----------- ----------
Income taxes........................................ (1,945) --
----------- ----------
Loss after income taxes............................. (31,660,342) (1,189,839)
Minority interest................................... 597,734 --
----------- ----------
Net loss.......................................... (31,062,608) (1,189,839)
=========== ==========
Weighted average number of shares outstanding
during the period............................... 90,001 90,001
Basic and diluted loss per common share........... (345) (13)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PREFERRED ADDITIONAL
COMMON SHARES CONVERTIBLE SHARES COMMON PREFERRED PAID IN DEFERRED
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL COMPENSATION
--------------- ------------------- -------- --------- ----------- ------------
US$ US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1999..................... 90,001 19,937 135,002 29,905 140,127,144 (9,149,630)
Stock issuance of January 24, 2000:
Convertible preferred Series A
stock............................... 15 23
Convertible perferred Series B
stock............................... 2,525 3,788 5,584,060
Convertible preferred Series C
stock............................... 1,106 1,659 2,568,140
Convertible preferred Series E
stock............................... 1,198 1,797 5,988,203
Exchange of stock options............... (106,124)
Gain arising on stock issuance by French
subsidiary............................
Amortization of compensation cost....... 3,238,726
Charge to equity........................
Comprehensive loss
--loss for the period.................
--other comprehensive loss............
- Currency translation adjustment.....
Total comprehensive loss................
------ ------ ------- ------ ----------- -----------
Balance as of March 31, 2000
(Unaudited)........................... 90,001 24,781 135,002 37,172 154,161,423 (5,910,904)
====== ====== ======= ====== =========== ===========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT LOSS TOTAL
----------- ------------- -----------
US$ US$ US$
<S> <C> <C> <C>
Balance as of
December 31, 1999..................... (31,237,293) (191,013) 99,714,115
Stock issuance of January 24, 2000:
Convertible preferred Series A
stock............................... 23
Convertible perferred Series B
stock............................... 5,587,848
Convertible preferred Series C
stock............................... 2,569,799
Convertible preferred Series E
stock............................... 5,990,000
Exchange of stock options............... (106,124)
Gain arising on stock issuance by French
subsidiary............................ 2,139,892 2,139,892
Amortization of compensation cost....... 3,238,726
Charge to equity........................ (43,345) (43,345)
Comprehensive loss
--loss for the period................. (31,062,608) (31,062,608)
--other comprehensive loss............
- Currency translation adjustment..... (468,284) (468,284)
Total comprehensive loss................ (31,530,892)
----------- ---------- -----------
Balance as of March 31, 2000
(Unaudited)........................... (60,203,354) (659,297) 87,560,042
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
NOTES (UNAUDITED) (UNAUDITED)
-------- ------------ ------------
US$ US$
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. (31,062,608) (1,189,839)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization........................... 3,413,637 8,273
Provision for losses on accounts receivable............. 29,451 --
Non cash compensation costs............................. 3,238,726 --
Loss applicable to minority interest.................... (597,734) --
Equity in net loss of affiliates........................ 1,872,883 --
Gain on stock issuance by French subsidiary............. 2,139,892 --
Charge to equity........................................ (43,345) --
Changes in operating assets and liabilities--
--(Increase) in accounts receivable..................... (7,245,078) --
--(Increase) in prepaid expenses and other current
assets................................................ (1,217,195) --
--Increase in accounts payable.......................... 6,153,230 158,802
--Increase in accrued liabilities....................... 1,846,581 --
----------- ----------
Net cash used in operating activities................. (21,471,560) (1,022,764)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (14,965,591) (18,462)
Purchase of licenses and other intangible assets.......... (1,856,541) --
----------- ----------
Net cash used in investing activities................. (16,822,132) (18,462)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of share capital................... 8,159,466 --
Proceeds from short-term debt............................. 15,000,000 --
Proceeds from long-term debt.............................. 11,463,600 --
Proceeds from long-term debt from stockholders............ -- 1,067,368
----------- ----------
Net cash provided by financing activities............. 34,623,066 1,067,368
----------- ----------
(Decrease) Increase in cash and cash equivalents.......... (3,670,626) 26,142
Effect of exchange rate changes on cash................... 671,652 --
Cash and cash equivalents at beginning of the period...... 20,886,790 265,378
----------- ----------
Cash and cash equivalents at end of the period........ 17,887,816 291,520
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... 104,577 --
Cash paid for income taxes................................ -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
1. ORGANIZATION
FirstMark Communications Europe S.A. (the "Company" or "FirstMark") was
incorporated on July 8, 1998 under the laws of the Grand-Duchy of Luxembourg
under the name FirstMark Communications Europe S.C.A. as a "Societe en
Commandite par Actions". On January 19, 2000 the Company was converted into a
"Societe Anonyme" and changed its name to FirstMark Communications Europe S.A.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of FirstMark Communications
Europe S.A. and subsidiaries (the "Group" or the "Company") are unaudited and
have been prepared in accordance with generally accepted accounting principles
in the United States and Securities and Exchange Commission ("SEC") regulations
for interim financial reporting. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the financial statements reflect all adjustments (of a normal and recurring
nature) which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. The financial statements
should be read in conjunction with the audited consolidated financial statements
as of December 31, 1999 and 1998 presented elsewhere in this prospectus. The
results for the three month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
Until December 31, 1999, the Group qualified as a development stage company
and presented its financial statements as such. Since January 2000, the Group
has generated sufficient revenues to no longer qualify as a development stage
company as of March 31, 2000. The Group mainly operates in one reportable
industry segment, telecommunications services throughout Europe.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which has been subsequently amended by SFAS
No. 137 and SFAS No. 138. This statement establishes accounting and reporting
standards for derivatives and derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The adoption of this
standard is effective for the first quarter of our fiscal year ending
December 31, 2001. We have not yet completed our analysis of this new accounting
standard and, therefore, have not determined whether this standard will have a
material effect on our financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 outlines the
F-7
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEC's views on applying generally accepted accounting principles to revenue
recognition in financial statements. Specifically, the bulletin provides both
general and specific guidance as to the periods in which companies should
recognize revenues. In addition, SAB 101 also highlights factors to be
considered when determining whether to recognize revenues on a gross or net
basis. The Group believes that its policies in regards to the recognition of
revenues are in compliance with SAB 101.
3. EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) per common share are comprised as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Net loss....................................... $(31,062,608) $(1,189,839)
============ ===========
Weighted average number of shares outstanding
during the period............................ 90,001 90,001
============ ===========
Weighted average number of diluted shares
outstanding during the period................ 90,001 90,001
============ ===========
Basic and diluted loss per common share........ $ (345) $ (13)
============ ===========
</TABLE>
As of March 31, 2000, the Group had 9,725 stock options (1999--nil) on the
Company's share capital and 3.75 percent of LambdaNet's nominal capital under
the option plan, which were not included in the computation of diluted earnings
per share, because to do so would have been anti-dilutive for the periods
presented.
4. INVESTING ACTIVITIES
In January 2000, the Company entered into a shareholders' agreement with
several partners granting them equity interests in FirstMark Communications
France S.ar.l., and reducing the Company's ownership from 100 percent to 34
percent. The Company recognized a gain on the dilution in the amount of
$2,139,892, which was recorded in stockholders' equity as a gain arising from
stock issuance by subsidiaries. Under this shareholders' agreement, the partners
have the right to convert their shares of stock into the Company's common stock
at the time the Company files a registration statement in the United States for
an initial public offering of common stock. They also have the option under
certain circumstances to exchange their shares in the French subsidiary for
common equity securities of the company on a fair market value basis.
LambdaNet owns a class 3 license in Germany which enables it to operate as a
carriers' carrier beginning January 1, 2000. The Company started operations on
January 2, 2000 and has since been generating revenues.
On January 31, 2000, the Group submitted, through a joint venture, its final
bid for a license in France.
F-8
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
4. INVESTING ACTIVITIES (CONTINUED)
In February 2000, the Group purchased an additional 3.325 percent of
LambdaNet previously held by an external consultant for a total cash
consideration of DM 8,312,500 ($4,192,742). The excess of the purchase price
over the fair value of the net identifiable assets amounts to $2,904,316 and has
been recorded as goodwill. Such goodwill is amortized on a straight-line basis
over a period of 15 years. In addition to the cash consideration, the seller
received the right to purchase shares of common stock in FirstMark
Communications Europe S.A. up to a maximum of DM 1,800,000 at a price equal to
the price per share paid by third party investors in the next round of equity
financing raised by the Company. This right expires on December 31, 2000.
During the three month period ended March 31, 2000, the Group incorporated
wholly owned subsidiaries in Finland, Italy and Denmark. As of March 31, 2000,
these companies are dormant.
In March 2000, the Group received, through a joint venture, a license to
operate a wireless local loop service in Spain.
In March 2000, the Group received, through an auction process, licenses to
operate wireless local loop services in Switzerland for a total consideration of
$109,970,909. These licenses are payable to the Swiss regulatory authorities by
June 30, 2000.
5. FINANCIAL INSTRUMENTS
Financial instruments are primarily cash and cash equivalent, time deposits,
investments and accounts receivable. On March 15, 2000, the company has been
granted warrants to purchase 5,066 ordinary shares of Floware Wireless Systems
Ltd. a private company. The warrants are accounted for at their original cost of
$nil to the Company.
6. DEBT AND FINANCING
On January 19, 2000, the Group finalized a one-year $50 million convertible
bridge loan facility (the "Convertible Facility") and, upon expiration of the
one year period, an optional $50 million working capital facility for two years,
for the initial purpose of financing the Company's expansion of its broadband
wireless telecommunication network, and thereafter for the working capital
requirements of the Company.
Under the Convertible Facility, the Group is required to maintain certain
covenants which include, among others, a limitation on the use of proceeds, a
limitation on the Group's indebtedness outside of the Convertible Facility, and
a limitation on the investments of the Group. In addition, the maximum Total
Senior Leverage Ratio of the Group, which is defined in the Credit Facility
Agreement as the ratio of the sum of the total outstanding advances from the
Credit Facility and any other senior indebtedness of the Group to the total
amount of contributed equity capital of the Group, must not exceed 2.50 to 1.00
at any time.
The interest rate for the Convertible Facility is 15 percent per annum,
compounded quarterly. The interest rate for the Working Capital Facility is
LIBOR (for the advances denominated in USD or in an optional currency) or
EURIBOR plus 3.5 percent (for the advances denominated in euro).
F-9
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
6. DEBT AND FINANCING (CONTINUED)
The Company agreed to pay the lender a commitment fee of 2 percent per annum
for unused funds for the Convertible Facility and a commitment fee of 1.5
percent per annum for unused funds for the Working Capital Facility.
The Company has the option either to repay the loan with interest and fees
in cash at any time on or before maturity, or to convert the amounts outstanding
under the Convertible Facility into Series D Convertible Preferred Stock at
maturity. If the Company is in default, the lender has the option to convert at
any time all or any part of the loan outstanding under the Convertible Facility
into Convertible Preferred Stock including interest and fees. The Company has
pledged all shares of capital stock as collateral for the Convertible Facility.
In addition, all shares, securities, monies or property representing a dividend
or similar return of capital as well as all intercompany demand notes have been
pledged to the lender.
In connection with the agreement, the lender received 1,198 Series E
Convertible Preferred Stock for a nominal price. The lender will be entitled to
Series E Convertible Preferred Stock representing an additional 1 percent if the
loan is not repaid by June 30, 2000, and Series E Convertible Preferred Stock
representing a further 1 percent if the Company or an affiliate has not
completed an initial public offering by December 31, 2001. Each Series E
Convertible Preferred Stock has no liquidation preference as long as there are
no shares of the Series D Convertible Preferred Stock issued and outstanding. If
shares of Series D Convertible Preferred Stock are issued, each share of Series
E Convertible Preferred Stock will then be converted into one share of Series D
Convertible Preferred Stock and will therefore have a liquidation preference
equal to the product of the Series D preference amount and a fraction consisting
of a numerator equal to the number of shares of common stock to which a Series E
Convertible Preferred Stock may be converted, and a denominator consisting of
the number of shares of common stock to which Series D Convertible Preferred
Stock may be converted. The fair value of the shares issued as of January 19,
2000 amounts to $5,988,203 and has been recorded as arrangement for the facility
in deferred costs. This amount is amortized using the straight line method over
the term of the financing. The amortization for the period ended March 31, 2000
amounts to $1,164,373 and has been recorded as interest expense. As of
March 31, 2000, the Company has drawn $15,000,000 against the Convertible
Facility.
On January 21, 2000 the Group finalized a facility agreement of
$56.3 million (euro 56 million), consisting of $46.2 million (euro 46 million)
supplier guaranteed loan (the "Supplier Guaranteed Loan") and a revolving
facility (the "Revolving Facility") of $10.1 million (euro 10 million). The
purpose of the facility agreement is to secure the initial rollout of
LambdaNet's transmission network and to finance the start-up losses. As of
March 31, 2000, $11.4 million (euro 12.0 million) were drawn from this facility.
Both the Supplier Guaranteed Loan and the Revolving Facility bear interest
at EURIBOR plus 3.75 percent to 1.75 percent, depending on the senior debt to
EBITDA ratio. The commitment fee for unused funds is 0.875 percent per annum.
F-10
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
6. DEBT AND FINANCING (CONTINUED)
The Company has agreed to the following repayment structure for the loan,
payable in two installments per year:
<TABLE>
<S> <C>
2002........................................................ 10.0%
2003........................................................ 15.0%
2004........................................................ 22.5%
2005........................................................ 25.0%
2006........................................................ 27.5%
------
100.00%
======
</TABLE>
Additionally the Company has the option to repay the supplier guaranteed
loan partially or in total at the end of each interest period. The Revolving
Facility is to be fully repaid at the end of 2006.
7. RELATED PARTY AGREEMENTS
On March 31, 2000, we entered into an agreement with FirstMark
Communications Latin America L.L.C. for the provision of certain advisory
services in connection with the development of our respective telecommunications
businesses in Europe and Latin America. FirstMark Holdings LLC, an indirect
shareholder of ours, holds a controlling interest in FirstMark Latin America.
Under the agreement, each of us has agreed to provide:
- services related to the implementation of technical, scientific and
engineering systems,
- financial, legal, administrative, marketing and regulatory support
services, and
- advisory services based on our relationships with customers, suppliers,
consultants and regulatory bodies.
Under the agreement FirstMark Latin America and the Company will invoice
each other for the fair market value of these services.
The agreement will terminate after five years unless terminated by for cause
or in the event of a change in control of either company.
8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are contingently liable with respect to
lawsuits and other matters that arise in the normal course of business.
Management is of the opinion that while it is impossible to ascertain the
ultimate legal and financial liability with respect to these contingencies, the
ultimate outcome of these contingencies is not anticipated to have a material
effect on the Group's financial position and operations.
OPERATIONAL ENVIRONMENT
Through its various subsidiaries, the Group will enter into interconnect
agreements with several local incumbent operators. Interconnect rates are
regulated by various regulatory bodies within the subsidiaries' countries of
operation. Periodically, interconnect agreements are disputed with the local
F-11
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
incumbent operators and are typically resolved by regulatory rulings. The
outcome of any such dispute could negatively impact the Group's gross margin.
DIVIDENDS
The ability of the Company to make dividend payments is subject to, among
other things, the terms of the indebtedness, local legal restrictions,
shareholders' agreements and the ability to repatriate funds from FirstMark's
various operations.
9. SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
In April 2000, ABN AMRO committed to invest $62,996,304 in consideration for
preferred equity securities in the Company. This amount serves as collateral for
a bank guarantee that the Group has provided to guarantee network rollout costs
in Spain. The Company had the right to repurchase these securities from ABN
AMRO, which was exercised in May 2000 after raising $600 million through private
equity financing.
In April 2000, the lender increased the Convertible Facility described in
Note 5 to $66,000,000 in order to provide the Company with a guarantee in the
amount of $16,000,000 to be given to the Swiss government in the context of the
Swiss auctions. As consideration for providing this additional credit, the
Company issued 383 shares of Series E Convertible Preferred Stock to the benefit
of the lender. Provided that the Company does not draw upon the addition
$16,000,000 Convertible Facility, the Company has the right to purchase these
securities from the lender at par value.
In May 2000, the Group finalized a $600 million private equity offer issuing
96,000 shares of series F convertible preferred stock and 24,000 shares of
series F-2 convertible preferred stock. The shares of series F convertible
preferred stock are convertible into common stock at any time at the option of
the holder and are mandatorily redeemable on June 30, 2007 if they have not yet
been converted to common stock. In connection with the private equity offer, the
Group repaid the $50 million outstanding on the ABN Amro Convertible Facility
and converted a loan received from FirstMark Communications International to
equity.
In June 2000, the Company agreed to issue, subject to certain adjustments,
approximately 541 shares of common stock to Audicom in return for their 25
percent holding in FirstMark Communications Luxembourg. The number of FirstMark
shares issued to Audiocom shall be adjusted for any stock split, stock
combination, stock dividend or other recapitalization.
The Company has filed a registration statement in connection with an initial
public offering of its shares of Class B common stock. It is anticipated that
upon consummation of the initial public offering the Company will (1) file new
articles of incorporation, which will provide for all existing shareholders to
receive Class A common stock for their existing common stock, and (2) issue
shares of Class B common stock. The shares of Class A common stock will be able
to nominate a majority of the directors for election by all shareholders and
will have the right to vote as a class to approve mergers and other corporate
transactions.
F-12
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
9. SUBSEQUENT EVENTS (CONTINUED)
The Company will also undertake to a stock split of its shares, which will
be effective immediately prior to the consummation of the initial public
offering.
All existing shares of preferred stock will be converted into Class A common
stock or non-voting junior preferred stock.
The Company's existing stock option plan will be closed for future issuances
immediately following the initial public offering. The Company will enter into a
new stock option plan which will become effective upon the initial public
offering.
LICENCES AND OPERATIONS
Since April 2000, the Group incorporated wholly-owned subsidiaries for its
fiber optic backbone services in Belgium, Spain, and the UK. The Group also
incorporated wholly-owned subsidiaries for its wireless local loop service in
Germany and Poland.
In April 2000, the Group received a licence to possess and operate fixed
wireless access system radio transmitters in Finland.
In April 2000, LambdaNet Communications SAS, a wholly owned subsidiary of
LambdaNet Communications GmbH incorporated in January 2000, signed a leasing
agreement with Louis Dreyfus Communications S.A. by which LambdaNet
Communications SAS (the lessee) agreed to lease two pairs of dark optical fibers
for a period of 20 years from the date of delivery from Louis Dreyfus
Communications S.A. (the lessor). The total commitment is for an amount of
$36,778,766 (FRF 270,794,700) which is payable as follows:
- 15 percent on the date of signature of the lease agreement
- 45 percent on the date of commencement of operations
- 40 percent six months after the date of the commencement of operations
This agreement is guaranteed by the Company.
In May 2000, the Company entered into an eighteen year 876 km dark fiber
lease with Global Connect linking Rostak with Hamburg. The monthly base fee
amounts to [EURO]68,862 ($63,883) and includes maintenance.
In June 2000, the Group purchased an additional 3.325 percent of LambdaNet
previously held by an external consultant for a total cash consideration of
DM8,312,500 ($3,930,207).
In June 2000, we entered into a services agreement with FirstMark
Communications International LLC, a stockholder of the company, for services
provided to us as of April 1, 2000 by Lynn Forester and Michael J. Price, our
co-chairmen of the board of directors, Raj K. De Datta, one of our executive
officers, and other individuals. Ms. Forester and Mr. Price control FirstMark
Communications International. FirstMark Communications International provides
certain corporate advisory services to the company and under this services
agreement will receive a monthly fee of $750,000, which is intended to
compensate FirstMark Communications International for expenses fairly and
reasonably incurred on behalf of us and our subsidiaries plus a profit margin
consistent with margins charged within the FirstMark Group for intercompany
services (expected to be approximately 7.5%). On or
F-13
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
9. SUBSEQUENT EVENTS (CONTINUED)
prior to April 1 of each year, there will be an annual review of the actual
expenses of FirstMark Communications International and an adjustment will be
made to determine whether the payments received by FirstMark Communications
International for the preceding 12-month period were greater or less than the
actual costs incurred by FirstMark Communications International that are
allocable to services to us and our subsidiaries, plus the appropriate margin.
Any balance due from FirstMark Communications International to the company or
from the company to FirstMark Communications International as a result of this
review shall be paid to the other within ten days of such determination. The
agreement terminates on March 31, 2003 but will be automatically extended each
year for an additional year if written notice is not given by either party 90
days before the end of the term.
In August 2000, FirstMark Communications France received a national license
to operate fixed wireless access system radio transmitters in France. There are
success fees due to certain industrial partners and consultants that are still
under negotiation but are expected to be approximately [EURO]2.5 million
($2.3 million) and payable before December 31, 2000.
DEBT AND FINANCING
In May 2000 the Company entered into a ten-year credit facility with
Deutsche Bank AG, consisting of four tranches, totaling $445 million ([EURO]480
million). The loan will bear interest at EURIBOR plus 350 basis points with an
interest margin step down according to the ratio of senior debt to EBITDA of
FirstMark Communications Deutschland GmbH.
The credit facility contains financial covenants requiring compliance with a
senior debt leverage ratio and various other tests at successive three-monthly
intervals as follows:
(a) ratio of senior debt to annualized EBITDA (from December 31, 2003);
(b) ratio of EBITDA to interest expense (from December 31, 2003);
(c) ratio of EBITDA to debt service (from June 30, 2005);
(d) minimum annualized revenue (from March 31, 2001); and
(e) minimum annualized EBITDA (from March 31, 2001).
Each of the tests set out above is varied each subsequent quarter as set out
in the credit facility.
The credit facility includes other covenants customarily found in similar
financings, including:
(a) no encumbrances other than permitted encumbrances;
(b) no indebtedness other than permitted indebtedness;
(c) no distributions other than permitted distributions;
(d) not to carry on any business other than the "Business" as defined in the
facility; and
(e) all inter-company debt subordinated.
F-14
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MARCH 31, 2000
9. SUBSEQUENT EVENTS (CONTINUED)
EMPLOYMENT AGREEMENT
In March 2000 the Board of Directors of the Company proposed an employment
agreement to its newly appointed President and Chief Executive Officer (CEO).
This agreement was finalized and approved by both parties on April 28, 2000, and
provides for, among other things, an annual base salary amount plus a target
bonus in the amount of 100% of his base salary. In addition, the Company entered
into a Stock Option agreement with the President and CEO providing for, among
other things, the grant of options to purchase 4,544 shares of common stock of
the Company. The Company also entered into a promissory note with the President
and CEO in the amount of $1,000,000 due in five annual installments, together
with any accrued and unpaid interest.
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and the Board of Directors of
FirstMark Communications Europe S.A.:
We have audited the accompanying consolidated balance sheets of FirstMark
Communications Europe S.A. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of profit and loss, changes in
stockholders' equity, and cash flows for the year ended December 31, 1999, for
the period from July 8, 1998 (date of inception) to December 31, 1998 and for
the accumulated period from July 8, 1998 to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FirstMark Communications
Europe S.A. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the year ended December 31, 1999,
for the period from July 8, 1998 (date of inception) to December 31, 1998 and
for the accumulated period from July 8, 1998 to December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN
Independent Auditors
Luxembourg, Grand Duchy of Luxembourg--April 28, 2000
F-16
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
NOTES 1999 1998
-------- ----------- ----------
US$ US$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 20,886,790 265,378
Accounts receivable--
Trade................................................... 68,759 --
From affiliated companies............................... 553,078 --
Other................................................... 6 7,838,804 --
----------- ----------
8,460,641 --
Prepaid expenses and other current assets................. 799,728 --
----------- ----------
TOTAL CURRENT ASSETS.................................. 30,147,159 265,378
----------- ----------
PROPERTY AND EQUIPMENT, AT COST............................. 4 35,339,456 152,908
Less--accumulated depreciation............................ (690,894) --
----------- ----------
34,648,562 152,908
----------- ----------
INTANGIBLE ASSETS, AT COST: 5
Goodwill.................................................. 73,275,606 --
Licenses.................................................. 6,219,407 --
GasLINE Agreement......................................... 11,517,201 --
Other 1,398,851 --
----------- ----------
92,411,065 --
----------- ----------
Less--accumulated amortization............................ (1,366,766) --
----------- ----------
91,044,299 --
----------- ----------
INVESTMENTS................................................. --
Affiliated companies...................................... 4,264 --
----------- ----------
4,264 --
----------- ----------
TOTAL ASSETS.......................................... 155,844,284 418,286
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
NOTES 1999 1998
-------- ----------- ----------
US$ US$
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade................................................... 8,548,689 --
Other................................................... 8 3,612,361 --
----------- ----------
12,161,050 --
Accrued liabilities....................................... 5,946,099 --
Long-term debt maturing within one year................... 225,034 --
----------- ----------
18,332,183 --
----------- ----------
LONG-TERM LIABILITIES:
Long-term debt and financing............................ 9 27,729,828 --
Advances from stockholders.............................. 10 2,607,903 1,725,487
----------- ----------
30,337,731 1,725,487
----------- ----------
TOTAL LIABILITIES..................................... 48,669,914 1,725,487
----------- ----------
MINORITY INTEREST........................................... 7,460,255 (6,603)
----------- ----------
COMMITMENTS AND CONTINGENCIES............................... 15
STOCKHOLDERS' EQUITY:....................................... 7
Common stock (102,001 shares authorized, 90,001 shares
issued with par value of $1.50--1998: 40 shares
authorized and issued with par value of $1,000,
subscribed with 37.5% paid-in).......................... 135,002 40,000
Preferred convertible Series A stock (10,000 shares
authorized and issued with par value of $1.50).......... 15,000 --
Preferred convertible Series C stock (9,937 shares
authorized and issued with par value of $1.50).......... 14,905 --
Stock subscription receivables............................ -- (25,000)
Additional paid-in capital................................ 140,127,144 --
Deficit accumulated during the development stage.......... (31,237,293) (1,315,598)
Deferred compensation cost................................ (9,149,630) --
Accumulated other comprehensive loss...................... (191,013) --
----------- ----------
TOTAL STOCKHOLDERS' EQUITY.............................. 99,714,115 (1,300,598)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ 155,844,284 418,286
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PROFIT AND LOSS
FOR THE YEAR ENDED DECEMBER 31, 1999, FOR THE PERIOD
FROM JULY 8, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
AND FOR THE ACCUMULATED PERIOD FROM JULY 8, 1998 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACCUMULATED FROM
JULY 8, 1998 FROM JULY 8, 1998
TO DECEMBER 31, TO DECEMBER 31,
NOTES 1999 1999 1998
----------- ---------------- ----------- -----------------
US$ US$ US$
<S> <C> <C> <C> <C>
Revenue.............................. 117,409 117,409 --
Cost of revenue...................... (69,088) (69,088) --
----------- ----------- ----------
Gross margin......................... 48,321 48,321 --
Selling, general and administrative
expenses........................... 4,5, (25,932,290) (24,543,589) (1,388,701)
10,11
License acquisition costs............ (194,831) (135,331) (59,500)
----------- ----------- ----------
Operating loss................... (26,078,800) (24,630,599) (1,448,201)
----------- ----------- ----------
Interest expense and other........... (369,730) (369,730) --
Interest income and other............ 342,182 342,182 --
Exchange loss, net................... (429,124) (429,124) --
Equity in net loss of affiliates..... (5,934,118) (5,934,118) --
----------- ----------- ----------
Loss............................. (32,469,590) (31,021,389) (1,448,201)
----------- ----------- ----------
Minority interest................ 1,058,124 1,031,240 26,884
----------- ----------- ----------
Net loss......................... (31,411,466) (29,990,149) (1,421,317)
=========== =========== ==========
Weighted average number of shares
outstanding during the
period......................... 17 90,001 90,001 90,001
Basic and diluted loss per common
share.......................... 17 (349) (333) (16)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM JULY 8, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
COMMON NUMBER OF PREFERRED STOCK
SHARES CONVERTIBLE SHARES COMMON PREFERRED SUBSCRIPTION ADDITIONAL
OUTSTANDING OUTSTANDING STOCK STOCK RECEIVABLES PAID-IN CAPITAL
------------ ------------------- -------- --------- ------------ ---------------
US$ US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Stock issued on July 8,
1998....................... 40 -- 40,000 -- (25,000) --
Gain arising on stock
issuance by Luxembourg
subsidiary................. -- -- -- -- -- --
Comprehensive loss
- loss for the period...... -- -- -- -- -- --
------ ------ ------- ------ ------- -----------
Balance as of December 31,
1998....................... 40 -- 40,000 -- (25,000) --
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 449 673 6,819
Stock conversion on May 21,
1999:
--Cancellation of previous
stock...................... (40) (40,000) 25,000
--Issuance of Common Stock
(note 7a).................. 26,001 39,002 373
--Issuance of Common Stock
(note 7a).................. 64,000 96,000
Issuance of Convertible
preferred Series A......... 10,000 15,000 4,985,000
Additional contribution from
stockholders............... 15,000,000
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 3,029 4,544 11,771,193
Gain arising on stock
issuance by UK Subsidiary
(note 7c)..................
Gain arising on stock
issuance by Luxembourg
subsidiary (note 7c).......
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 6,459 9,688 97,665,054
Stock appreciation rights
(LambdaNet)................ 10,698,705
Amortization of compensation
cost (LambdaNet)...........
Charge to equity (note 7c)...
Comprehensive loss
--Loss for the year........
--Other comprehensive
loss.....................
- currency translation
adjustment.............
------ ------ ------- ------ ------- -----------
Total comprehensive loss...
------ ------ ------- ------ ------- -----------
Balance as of December 31,
1999....................... 90,001 19,937 135,002 29,905 -- 140,127,144
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE ACCUMULATED OTHER
DEFERRED DEVELOPMENT COMPREHENSIVE
COMPENSATION STAGE LOSS TOTAL
------------ ---------------- ----------------- -----------
US$ US$ US$ US$
<S> <C> <C> <C> <C>
Stock issued on July 8,
1998....................... -- -- -- 15,000
Gain arising on stock
issuance by Luxembourg
subsidiary................. -- 105,719 -- 105,719
Comprehensive loss
- loss for the period...... -- (1,421,317) -- (1,421,317)
----------- ----------- -------- -----------
Balance as of December 31,
1998....................... -- (1,315,598) -- (1,300,598)
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 7,492
Stock conversion on May 21,
1999:
--Cancellation of previous
stock...................... (15,000)
--Issuance of Common Stock
(note 7a).................. 39,375
--Issuance of Common Stock
(note 7a).................. 96,000
Issuance of Convertible
preferred Series A......... 5,000,000
Additional contribution from
stockholders............... 15,000,000
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 11,775,737
Gain arising on stock
issuance by UK Subsidiary
(note 7c).................. 69,300 69,300
Gain arising on stock
issuance by Luxembourg
subsidiary (note 7c)....... 92,163 92,163
Convertible preferred Series
C stock issued in exchange
for LambdaNet (note 1)..... 97,674,742
Stock appreciation rights
(LambdaNet)................ (10,698,705) --
Amortization of compensation
cost (LambdaNet)........... 1,549,075 1,549,075
Charge to equity (note 7c)... (93,009) (93,009)
Comprehensive loss
--Loss for the year........ (29,990,149) (29,990,149)
--Other comprehensive
loss.....................
- currency translation
adjustment............. (191,013) (191,013)
----------- ----------- -------- -----------
Total comprehensive loss... (30,181,162)
----------- ----------- -------- -----------
Balance as of December 31,
1999....................... (9,149,630) (31,237,293) (191,013) 99,714,115
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999, FOR THE PERIOD
FROM JULY 8, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
AND FOR THE ACCUMULATED PERIOD FROM JULY 8, 1998 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACCUMULATED
FROM JULY 8, 1998 FROM JULY 8, 1998
TO DECEMBER 31, TO DECEMBER 31,
NOTES 1999 1999 1998
-------- ----------------- ------------ -----------------
US$ US$ US$
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... (31,411,466) (29,990,149) (1,421,317)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization.................... 2,057,660 2,057,660 --
Loss applicable to minority interest............. (1,058,124) (1,031,240) (26,884)
Equity in net loss of affiliates................. 5,934,118 5,934,118 --
Charge to equity................................. (93,009) (93,009) --
Non cash compensation cost....................... 1,549,075 1,549,075 --
Changes in operating assets and liabilities-
--(Increase) in accounts receivable.............. (6,546,882) (6,546,882) --
--(Increase) in prepaid expenses and other
current assets................................. (275,134) (275,134) --
--Increase in accounts payable................... 5,579,473 5,579,473 --
--Increase in accrued liabilities................ 4,857,752 4,857,752 --
------------ ------------ -----------
Net cash used in operating activities.......... (19,406,537) (17,958,336) (1,448,201)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES: 14
Purchase of property and equipment................. (2,521,809) (2,368,901) (152,908)
Purchase of controlling interest in LambdaNet,
net of cash acquired............................. 27,862,153 27,862,153 --
Purchase of other subsidiaries, joint ventures and
associates, net of cash acquired................. (1,893,198) (1,893,198) --
Proceeds from sale of minority interest............ 236,993 216,712 20,281
Purchase of licenses and other intangible assets... (8,445,601) (8,445,601) --
------------ ------------ -----------
Net cash provided by (used in) investing
activities..................................... 15,238,538 15,371,165 (132,627)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES: 14
New receipts from stockholders..................... 267,182 161,463 105,719
Proceeds from issuance of stock.................... 20,135,375 20,120,375 15,000
Proceeds from long-term debt from stockholders..... 2,557,903 832,416 1,725,487
------------ ------------ -----------
Net cash provided by financing activities........ 22,960,460 21,114,254 1,846,206
------------ ------------ -----------
Increase in cash and cash equivalents.............. 18,792,461 18,527,083 265,378
Effect of exchange rate changes on cash............ 2,094,329 2,094,329 --
Cash and cash equivalents at beginning of the
period........................................... -- 265,378 --
------------ ------------ -----------
Cash and cash equivalents at end of the period... 20,886,790 20,886,790 265,378
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
ALL AMOUNTS IN US DOLLARS
1. ORGANIZATION
GENERAL ORGANIZATION
FirstMark Communications Europe S.A. (the "Company" or "FirstMark") was
incorporated on July 8, 1998 under the laws of the Grand-Duchy of Luxembourg as
a "Societe en Commandite par Actions," which is a legal partnership between a
General Partner (FirstMark Communications International II LLC) assuming an
unlimited liability, and Limited Partners (FirstMark Communications
International LLC) assuming limited liability. Partners are issued stock in the
partnership. On January 19, 2000, the Company was converted into a "Societe
Anonyme" and changed its name to FirstMark Communications Europe S.A. When the
Company was converted into a "Societe Anonyme" the General Partner was removed
and the Limited Partners continued to hold their stock. Due to the subsequent
conversion of the Company into a "Societe Anonyme" and the continuity of the
Limited Partners as stockholders, the equity section of the balance sheet has
been labeled as "Stockholders' equity." As of December 31, 1999, the majority
stockholder of the Company is FirstMark Communications International LLC, a
limited liability company formed under the laws of the State of Delaware. The
Company is registered in Luxembourg under the number R.C. B 65 610 and has its
registered office at 3, rue Jean Piret, L-2350 Luxembourg.
The Company and its subsidiaries (the "Group") plan to become one of the
first providers of pervasive broadband internet access and on-net business
solutions on a pan-European basis to small and medium size enterprises. The
Group plans for its network to use wireless local loop, DSL and fiber to provide
coverage of business customers across Europe.
During 1999, the Group either directly or through joint ventures, obtained
wireless local loop licenses in Germany, Luxembourg and Portugal, where it
started to develop telecom infrastructure. In March 2000, the Group, either
directly or through joint ventures, obtained further wireless local loop
licenses in Spain and Switzerland. The Group, either directly or through joint
ventures, is currently bidding for licenses in France. As of December 31, 1999,
most Group companies have not yet started operations.
The Group companies are start-up ventures with limited histories. The Group
has experienced significant start-up losses and at December 31, 1999, has an
accumulated deficit of $31,237,293 (1998: $1,315,598).
The Group has significant funding requirements to finance capital
expenditures and operating and marketing costs in order to develop its business
in accordance with management's plans. Management does not expect the business
to generate positive cash flows from operations for a considerable period of
time. The Group currently has limited external debt facilities (notes 9 and
18) and will need to secure further debt or equity financing to continue to
develop the business. The ability to raise financing will depend on a number of
factors, including technology, regulations and subscriber base developments, and
there can be no assurance that the Group will be able to secure such financing.
The Company is making additional preliminary investments and pursuing
telecommunication licensing opportunities in various countries. There can be no
assurance that the Group will be successful in acquiring such licenses or in
converting experimental licenses into fully operational license agreements.
F-22
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
1. ORGANIZATION (CONTINUED)
REORGANIZATION OF COMPANIES UNDER COMMON CONTROL
On April 16, 1999, FirstMark Communications International LLC, the
controlling stockholder of FirstMark Communications Europe S.A., along with
private investors, incorporated FirstMark Fiber Holdings LLC. FirstMark
Communications International LLC received 35 percent of the ownership interests
in FirstMark Fiber Holdings LLC and accounted for this investment under the
equity method.
On April 21, 1999, FirstMark Fiber Holdings LLC, along with the current
LambdaNet management team, incorporated LambdaNet Communications GmbH
("LambdaNet") with a total contribution of approximately $26,000. FirstMark
Fiber Holdings LLC received 80 percent of the common stock of LambdaNet with
LambdaNet management and external consultants receiving the remaining 20
percent. Following the signing of the GasLINE agreement (note 15) on July 14,
1999, FirstMark Fiber Holdings LLC subscribed for its proportion of the
additional stocks and paid 100 percent of the share premium for an aggregate
consideration of $33.5 million in cash.
On November 15, 1999, the private investors exchanged their 65 percent
ownership interest in FirstMark Fiber Holdings LLC for common stock of FirstMark
Communications International LLC. This resulted in FirstMark Fiber Holdings LLC
becoming a 100 percent owned subsidiary of FirstMark Communications
International LLC. This transaction has been accounted for under the purchase
method of accounting by FirstMark Communications International LLC and the
excess of consideration given over the fair value of net assets acquired
amounting to $72,762,818 has been recorded as goodwill.
On January 24, 2000, FirstMark Fiber Holdings LLC contributed its 80 percent
ownership interest in LambdaNet to FirstMark Communications Europe S.A. in
exchange for 9,937 Convertible Preferred Series C Stock newly issued by the
Company (note 18). At the date of this transaction, both FirstMark Fiber
Holdings LLC and the Company were under the common control of FirstMark
Communications International LLC. Accordingly, the transaction has been effected
based on historical cost in a manner similar to that in pooling-of-interest
accounting. Because this is considered a reorganization of companies under
common control, the financial statements of LambdaNet have been fully
consolidated in the financial statements since November 15, 1999, the date when
FirstMark Fiber Holdings LLC and the Company came under common control. For the
period up to November 15, 1999, the financial statements reflect the 28 percent
effective interest in LambdaNet controlled by FirstMark Fiber Holdings LLC using
the equity method of accounting. Because this transaction is considered a
transfer between companies under common control, the goodwill recorded by
FirstMark Communications International LLC on November 15, 1999, as mentioned
above, has been pushed down to the Company as of that date (note 5).
Since FirstMark Fiber Holdings LLC increased its investment in LambdaNet in
three separate transactions, the statement of changes in stockholders' equity
reflects three separate issuances of convertible preferred Series C stock as
follows:
<TABLE>
<CAPTION>
NUMBER OF CONVERTIBLE
DATE PREFERRED SERIES C SHARES AGGREGATE CONSIDERATION (US$)
---- ------------------------- -----------------------------
<S> <C> <C>
April 21, 1999................. 449 7,492
July 14, 1999.................. 3,029 11,775,737
November 15, 1999.............. 6,459 97,674,742
----- -----------
Total.......................... 9,937 109,457,971
===== ===========
</TABLE>
F-23
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Group are presented in US
dollars ("US$") in conformity with generally accepted accounting principles in
the United States ("US GAAP"). These consolidated accounts are not prepared for
the purposes of statutory filing.
As the Group is devoting substantially all of its efforts to establishing a
new business and as principal operations have not yet commenced, the Group
qualifies as a development stage company and is presenting its financial
statements as such. The Group had no significant operating income as of
December 31, 1999 and accumulated start-up losses as of December 31, 1999 total
$31,411,466.
The financial statements are prepared in accordance with the following
significant consolidation and accounting policies:
A) USE OF ESTIMATES
The preparation of the financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the accounts and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in the consolidation. When cumulative losses applicable to
minority interests exceed the minority's interest in the subsidiary's capital,
the excess is charged against the majority interest and is not reflected as an
asset except when the minority shareholders have a binding obligation to make
good such losses. Subsequent profits earned by the subsidiary under such
circumstances that are applicable to the minority interests are allocated to the
majority interest to the extent minority losses have been previously absorbed.
Investments in joint ventures that are jointly controlled and associate
companies in which the Company has a significant influence, are accounted for by
the equity method. The Group discontinues applying the equity method when the
investment is reduced to zero. However, the Group provides for additional
charges when it is committed, legally or otherwise, to provide further financial
support to the investee.
Long term investments of less than 20 percent ownership in unquoted
securities are accounted for under the cost method.
C) GAINS AND LOSSES ARISING ON SALE OF STOCK BY A SUBSIDIARY
The difference between the consideration received by a subsidiary for the
sale of its stock and the reduction in the share of net assets owned by the
group is charged/credited directly to stockholders' equity.
F-24
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. All repairs and
maintenance expenditures are expensed as incurred. Maximum estimated useful
lives are:
<TABLE>
<S> <C>
Buildings & improvements............. 40 years or life of lease, if less
Networks............................. 5 to 10 years
Other................................ 2 to 7 years
</TABLE>
Construction in progress consists of the cost of labor and other direct
costs associated with property and equipment being constructed by the Group.
Significant costs directly associated with the establishment of new networks
are recorded as construction in progress in tangible fixed assets in the
consolidated balance sheets. Such costs are primarily related to engineering and
design work for the installation of the network and systems integral to its
operation. Prior to the commencement of the operations of telecommunication
networks, the depreciation of these networks is recorded in general and
administrative expenses. This expense will be recorded as cost of sales at the
time the networks become operational.
E) GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The excess of the cost of an acquisition over the Company's interest in the
fair value of the net identifiable assets acquired at the date of the
transaction is recorded as goodwill and recognized as an asset in the balance
sheet. Goodwill is amortized using the straight-line basis over periods of up to
15 years. Management considers that these amortization periods best reflect the
anticipated future benefits to the Group.
LICENSES
The Group operates in an industry that is subject to changes in competition,
regulation, technology and subscriber base evolution. In addition, the terms of
the licenses, are subject to periodic review for, among other things, rate
making, frequency allocation and technical standards. Licenses held, subject to
certain conditions, are renewable and are generally non-exclusive. FirstMark
does not currently expect any of the Group's operations to be required to cease
due to license reviews and renewals. Under the terms of the respective licenses,
the Group companies are entitled to enter into interconnection agreements with
operators of both landline and other wireless systems.
Licenses are acquired through acquisitions from third parties, by
application to local telecommunications regulators and auctions. Licenses that
have been purchased for a fixed fee over a finite life are capitalized and
amortized on a straight-line basis over the life of the license.
OTHER INTANGIBLE ASSETS
Other intangible assets include software purchased from third party
suppliers, which are amortized using the straight-line basis over periods of up
to 5 years.
F-25
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other intangible assets also include upfront costs incurred with independent
third parties by the Company on its own behalf in consummating the GasLINE
Agreement (note 15), which have been deferred and are being amortized on a
straight-line basis over 10 years, being the term of the GasLINE Agreement.
F) REVENUE RECOGNITION
The Group records revenues for telecommunications services at the time of
customer usage. Service discounts and incentives are accounted for as a
reduction of revenues when granted.
G) CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
when purchased are considered to be cash equivalents. The Company also considers
all highly liquid temporary cash investments that are readily convertible to
cash to be cash equivalents.
H) CAPITALIZATION OF INTEREST
Interest on financing is recognized as an expense in the period in which it
is incurred except when directly associated with tangible assets in the course
of construction or with licensing costs. Such interest costs are capitalized and
included as part of the cost of the underlying asset. The capitalization rate
used to calculate the amount of interest to capitalize is either (a) the
interest rate on the finance being used to directly finance the construction of
the asset or (b) the weighted average of the borrowing costs applicable to the
borrowings of the joint venture or subsidiary which is constructing the asset,
after excluding any finance being used to directly finance other projects.
I) LICENSE ACQUISITION COSTS
Costs incurred in relation to the acquisition of licenses are expensed when
incurred due to the fact that the outcome of such application processes is
subject to, among other things, competition, regulation or to the outcome of an
auction or selection process, and is therefore not certain.
J) FOREIGN CURRENCY TRANSLATION
In the financial statements of Group companies, transactions denominated in
foreign currencies are recorded in the local currency at the actual exchange
rate existing at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the year-end are reported at the exchange
rates prevailing at the year-end. Any gain or loss arising from a change in
exchange rates subsequent to the date of the transaction is included as an
exchange gain or loss in the consolidated statements of profit and loss.
K) TRANSLATION OF FINANCIAL STATEMENTS DENOMINATED IN FOREIGN CURRENCIES
The functional currency of the Company is the euro. The functional currency
of individual Group Companies (note 3) is the respective local currency.
F-26
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The financial statements of Group companies are translated into US dollars,
the Group's reporting currency. Assets and liabilities are translated using
exchange rates on the respective balance sheet dates. Income and expense items
are translated using the average rates of exchange for the periods involved. The
resulting translation adjustments are recorded in stockholders' equity.
Cumulative translation adjustments are recognized as income or expense upon
disposal of operations.
The following is a table of the principal currency translation rates to the
US dollar:
<TABLE>
<CAPTION>
1999 1999 1998 1998
AVERAGE PERIOD-END AVERAGE PERIOD-END
COUNTRY CURRENCY RATE RATE RATE RATE
------- --------------------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Austria.................... Austrian Schilling 12.91 13.70 -- --
Belgium.................... Belgium Franc 37.85 40.16 36.26 34.35
Euro....................... Euro 0.94 1.00 -- --
France..................... French Franc 6.15 6.53 5.76 5.62
Germany.................... German Mark 1.84 1.95 1.72 1.67
Luxembourg................. Luxembourg Franc 37.85 40.16 36.26 34.35
Portugal................... Portuguese Escudo 187.97 199.60 -- --
Spain...................... Spanish Peseta 156.01 165.56 -- --
Switzerland................ Swiss Franc 1.50 1.60 -- --
The Netherlands............ Dutch Guilder 2.07 2.19 -- --
United Kingdom............. Great Britain Pound 0.62 0.62 0.60 0.60
</TABLE>
FirstMark seeks to reduce its foreign currency exposure through a policy of
matching, as far as possible, assets and liabilities denominated in foreign
currencies. In some cases, FirstMark may borrow in US dollars because it is
either advantageous for joint ventures and subsidiaries to incur debt
obligations in US dollars or because US dollar-denominated borrowing is the only
funding source available to a Group company. In these circumstances, FirstMark
has currently decided to accept the remaining currency risk associated with the
financing of its operations.
L) TAXATION
The Group companies are subject to taxation in the countries in which they
operate. Corporate tax, including deferred taxation where appropriate, is
applied at the applicable current rates on their taxable profits. Deferred
income taxes are determined using the asset and liability method whereby the
future expected consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
are recognized as deferred tax assets and liabilities. Deferred tax assets are
recognized subject to a valuation allowance to reduce the amount to that which
is more likely than not to be realized.
M) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is based on the net profit (loss)
after taxes divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing the net
income attributable to the shareholders by the sum of the weighted average
number of dilutive potential ordinary shares.
F-27
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Group to concentrations
of credit risk are primarily cash and cash equivalents. The counterparties to
the agreements relating to the Group's cash and cash equivalents are significant
financial institutions; accordingly, management does not believe there is a
significant risk of non-performance by these counterparties.
O) LEASES
Operating lease rentals are charged to the profit and loss account on a
straight-line basis over the life of the lease. Assets held under finance leases
are capitalized and depreciated over the shorter of the life of the lease or the
life of the asset. The related liability is included in debt and other financing
and the implied interest charge is allocated to the profit and loss account over
the lease term using the effective interest rate method.
P) STOCK BASED COMPENSATION
The Group accounts for stock based compensation issued to employees in
accordance with the intrinsic value method under APB Opinion 25. Where options
are issued to acquire a fixed number of stocks with a fixed exercise price the
intrinsic value measured at the grant date is amortized over the vesting period
of the options. Such plans are referred to as "fixed plans." Where either the
number of stocks under option or the exercise price is not known at the grant
date, the expense is recalculated based on the intrinsic value at each balance
sheet date and the expense is recognized over the vesting period. Such plans are
referred to as "variable plans." The Company has provided pro forma disclosures
of net loss as if the fair value method prescribed by Statement of Financial
Accounting Standards (SFAS) N DEG.123 "Accounting for Stock Based Compensation"
had been adopted.
Options issued to non-employees are accounted for in accordance with the
fair value method under SFAS N(o)123. This requires the use of an option pricing
model, for example the Black-Scholes model, to determine the fair value of the
option. The measurement date is the earlier of either of the following:
1. The date at which a commitment for performance by the counterparty to
earn the equity instrument is reached (a "performance commitment"); or
2. The date at which the counterparty's performance is complete.
Q) IMPAIRMENT OF LONG-LIVED ASSETS
The recoverability of the Group's assets, including its intangible assets,
is subject to the future profitability of the Group's operations and the
evolution of the business in accordance with its plans. In evaluating the
recoverability of its assets, the value and future benefits of the Group's
operations are periodically reviewed by management based on technological,
regulatory and market conditions. When certain operational and financial factors
indicate an impairment of value, the Group evaluates the carrying value of
property and equipment as well as other long-lived assets, including licenses,
in relation to the operating performance, and future undiscounted cash flows of
the underlying assets. When indicated, the impairment losses are measured based
on the difference between the estimated
F-28
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value and the carrying amount of the asset. Management's estimates of fair
value are based on prices of similar assets and the result of valuation
techniques to the extent available in the circumstances. These include net
present values of expected future cash flows and valuations based on market
transactions in similar circumstances. For new product launches where no
comparable market information is available, management bases its view on
recoverability primarily on cash flow forecasts. In addition to evaluation of
possible impairment to the long-lived assets' carrying value, the foregoing
analysis also evaluates the appropriateness of the estimated useful lives of the
long-lived assets. Management believes that the carrying value of its assets is
recoverable against future operating results.
R) AMOUNTS DUE FROM AFFILIATED COMPANIES
In the ordinary course of business, the Company advances cash to fund the
development of the infrastructure of the joint ventures and associate companies.
During consolidation of the Group's financial statements, these amounts are not
eliminated and are classified as amounts due from affiliated companies.
S) TENANCY EXPENSES
According to certain tenancy agreements, the Group is obliged to restore
properties to their original state at the end of the periods of these
agreements. The Group accrues for these costs on a straight-line basis over the
terms of the agreements.
T) DEFERRED COSTS
Deferred costs comprise direct costs incurred with securing bank financing.
They are capitalized and amortized over the life of the financing.
U) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which has been subsequently amended by SFAS
No. 137. This statement establishes accounting and reporting standards for
derivatives and derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The adoption of this
standard is effective for the first quarter of our fiscal year ending
December 31, 2001. We have not yet completed our analysis of this new accounting
standard and, therefore, have not determined whether this standard will have a
material effect on our financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 outlines the
F-29
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEC's views on applying generally accepted accounting principles to revenue
recognition in financial statements. Specifically, the bulletin provides both
general and specific guidance as to the periods in which companies should
recognize revenues. In addition, SAB 101 also highlights factors to be
considered when determining whether to recognize revenues on a gross or net
basis. The Group believes that its policies in regards to the recognition of
revenues are in compliance with SAB 101.
F-30
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
3. GROUP COMPANIES
The main Group companies included in the consolidated financial statements
are the following:
<TABLE>
<CAPTION>
HOLDING AS OF HOLDING AS OF
NAME OF THE COMPANY COUNTRY DEC. 31, 1999 DEC. 31, 1998
------------------- ------- ------------- -------------
% %
<S> <C> <C> <C>
A) SUBSIDIARIES
FirstMark Communications Luxembourg, S.a Luxembourg
r.l............................................ 75 85.4
FirstMark Communications Deutschland, GmbH..... Germany 100 100
FirstMark Communications France, S.a r.l....... France 100 100
FirstMark Communications Services Europe United Kingdom
Ltd............................................ 100 --
Direct Telecom S.A............................. Luxembourg 75 --
FirstMark Communications Austria GmbH.......... Austria 100 --
FirstMark Communications Switzerland GmbH...... Switzerland 100 --
FirstMark Communications Netherlands B.V....... The Netherlands 100 --
FirstMark Communications, Ltd.................. United Kingdom 79 100
FirstMark Communications Netz GmbH............. Germany 100 --
LambdaNet Communications GmbH.................. Germany 80 --
B) JOINT VENTURES
FirstMark Communications Belgium, S.p.r.l...... Belgium 50 100
FirstMark Communicaciones Espana S.L........... Spain 35 --
C) ASSOCIATE COMPANIES
Teleweb Comunicacoes Interactivas S.A.......... Portugal 35 --
</TABLE>
The following table represents the pro forma effects of the business
combination with LambdaNet (note 1) as if it had occurred as of January 1, 1999.
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
US $
<S> <C>
Sales......................................... 117,409
-----------
Net loss...................................... (42,920,999)
-----------
Loss per share................................ (477)
-----------
</TABLE>
Further details relating to the acquisition of LambdaNet are explained in
notes 1 and 14.
F-31
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
US $ US $
<S> <C> <C>
Networks............................................... 17,192,509 --
Construction in progress............................... 5,233,110 --
Other.................................................. 12,913,837 152,908
---------- -------
35,339,456 152,908
---------- -------
LESS
Accumulated depreciation............................... (690,894) --
---------- -------
34,648,562 152,908
========== =======
Cost of leased assets included in the above............ 41,689 --
========== =======
</TABLE>
The depreciation charge for the year ended December 31, 1999, amounts to
$690,894 (1998: nil) and is included in general and administrative expenses. As
of December 31, 1999 and 1998, no interest has been capitalized.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
US $ US $
<S> <C> <C>
Goodwill (1) (2)....................................... 73,275,606 --
Licenses............................................... 6,219,407 --
GasLINE Agreement (3).................................. 11,517,201 --
Other.................................................. 1,398,851 --
---------- -------
92,411,065 --
========== =======
LESS
Accumulated amortization............................... (1,366,766) --
---------- -------
91,044,299 --
========== =======
</TABLE>
------------------------
(1) In October 1999, the Group purchased, through FirstMark Communications
Luxembourg S.a r.l., Direct Telecom S.A. for a total cash consideration of
DM 800,000. The excess of the purchase price over the fair value of the net
identifiable assets amounts to $512,788 and has been recorded as goodwill.
Such goodwill is amortized on a straight-line basis over a period of
15 years.
(2) As a result of the transfer of assets between companies under common control
described in note 1, goodwill of $72,762,818 has been pushed down to the
Company from FirstMark Communications International LLC.
(3) This amount reflects the success fee incurred by the Group on consummating
the GasLINE Agreement as described in notes 12 and 15. These costs have been
deferred and are amortized on a straight-line basis over 10 years.
F-32
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
5. INTANGIBLE ASSETS (CONTINUED)
The amortization charge of intangible assets for the year ended
December 31, 1999 amounts to $1,366,766 (1998: nil) and is included in general
and administrative expenses.
6. OTHER ACCOUNTS RECEIVABLE
Other accounts receivable include an amount of $7,269,172 representing value
added tax receivables from various European governments and $569,632
representing other miscellaneous receivables.
7. STOCKHOLDERS' EQUITY
A) COMMON STOCK, PREFERRED STOCK AND ADDITIONAL PAID-IN CAPITAL
On July 8, 1998, the Company was incorporated with a share capital of
$40,000 consisting of 1 registered unlimited liability share and 39 registered
limited liability shares, at a par value of $1,000 each. Out of the subscribed
share capital, an amount of $25,000 was unpaid as of December 31, 1998 and has
been recorded as a deduction from the stockholders' equity.
On May 21, 1999, the 40 outstanding shares with a par value of $1,000 each
were replaced respectively by one registered unlimited liability share, 26,000
common shares with a par value of $1.50 and an additional paid-in capital of
$373.50. On the same day, the share capital was increased by the issuance of
64,000 common shares with a par value of $1.50. The effect of these transactions
has been retroactively restated in the calculation of EPS for all periods
presented (Note 17).
Also on May 21, 1999, World Online International B.V. ("World Online"), a
company incorporated under the laws of the Netherlands, signed a Subscription
Agreement (the "Subscription Agreement") with the stockholders of the Company.
Under the Subscription Agreement, World Online committed, among other things, to
invest $20,000,000 into the Company under certain conditions, with an initial
equity investment of $5,000,000 received by the Company in May 1999 in exchange
for the issuance of 10,000 Series A Convertible Preferred Stock. Series A
Convertible Preferred Stock is a new class of stock created with a par value of
$1.50 and a credit to the additional paid-in capital of $4,985,000. In August
and October 1999, World Online contributed the remaining committed additional
paid-in capital totaling $15,000,000 to the Company.
As of December 31, 1999, common and preferred stock reflect the
reorganization of companies under common control described in note 1 and are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER NUMBER OF
PAR VALUE OF SHARES SHARES TOTAL
DESCRIPTION (US$) AUTHORIZED OUTSTANDING (US$)
----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Registered Unlimited Liability Stock.............. 1.50 1 1 1.50
Common Stock...................................... 1.50 102,000 90,000 135,000
Series A Convertible Preferred Stock (i).......... 1.50 10,000 10,000 15,000
Series C Convertible Preferred Stock (ii)......... 1.50 9,937 9,937 14,905.50
------- ------- ---------
121,938 109,938 164,907
======= ======= =========
</TABLE>
------------------------
(i) Each Series A share may be converted into one common share of the Company
or any successor security at any time at the option of its holder without
charge, fee, premium or payment of any kind. Series A shares have rights
and obligations similar to common shares except, that each
F-33
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Series A share shall have a liquidation preference equal to one hundred
percent of the World Online International B.V. initial investment
(corresponding to $2,000 per share), less any distributions to or proceeds
received by the holder thereof with respect to such Series A shares from
the Company prior to the liquidation event.
(ii) The issuance of Series C Convertible Preferred Stocks was made as part of
the transaction accounted for as a reorganization of entities under common
control as described in note 1. Each Series C share may be converted into
one common share in the Company or any successor security at any time at
the option of its holder without charge, fee, premium or payment of any
kind. Series C shares have rights and obligations similar to common shares
except that each Series C share shall have a liquidation preference equal
to one hundred percent of the FirstMark Fiber Holdings LLC initial
investment (corresponding to $2,351.60 per share), less any distributions
to or proceeds received by the holder thereof with respect to such
Series C shares from the Company prior to the liquidation event.
B) CONVERSION RIGHTS
In a number of the countries where the Group has legal entities, the other
shareholders have the right to exchange their ownership in the legal entity
for the Company's Common shares as described below:
- In November 1998, the Company entered into a shareholders' agreement with
several partners in respect of FirstMark Communications Luxembourg Sarl,
reducing the Company's ownership in two stages, initially to 85.4 percent,
then to 75 percent. Under this agreement, at the time the Company files a
registration statement in the United States for an initial public offering
of common stock, or at the time more than 50 percent of the Company's
outstanding common stock is sold, the partners have the right to exchange
their shares for the Company's common stock based on a formula which
compares the Luxembourg entity's revenues and licensed territory to the
revenues and licensed territory of the Company.
- In March 1999, the Company finalized its shareholders' agreement with its
partner in FirstMark Communications Belgium Sprl, its Belgian joint
venture giving the Company a 50 percent ownership. Under this agreement,
at the time the Company files a registration statement in the United
States or in any other jurisdiction for an initial public offering of
common stock, the partner has the right to exchange its shares for the
Company's common stock based on a formula which compares the Belgian
entity's revenues and licensed territory to the revenues and licensed
territory of the Company.
- In October 1999, the Company entered into shareholders' agreements with
several partners in respect of FirstMark Communications Limited, its UK
subsidiary, reducing the Company's ownership to 79 percent. Under this
agreement, at the time the Company files a registration statement in the
United States for an initial public offering of common stock, the partners
have the right to exchange their shares for the Company's common stock
based on a formula which compares the UK entity's revenues and licensed
territory to the revenues and licensed territory of the Company.
- In November 1999, the Company entered into shareholders' agreement with
several partners in respect of FirstMark Communicaciones Espana SL, its
Spanish joint venture, reducing the Company's ownership to 35 percent.
Under this agreement, at the time the Company files a
F-34
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
registration statement in the United States for an initial public offering
of common stock, or 30 days after the fifth anniversary of the date of the
shareholders' agreement, the partners have the right to exchange their
shares for the Company's common stock based on a formula which compares
the Spanish entity's revenues and licensed territory to the revenues and
licensed territory of the Company.
Since the number of shares to be issued by the Company in connection with
the above agreements depends upon the application of a formula to the various
entities and the Company's own stocks at the date of conversion, it is not
possible to determine the number of potentially dilutive securities to be
issued.
C) ACCUMULATED DEFICIT
GAIN ARISING ON STOCK ISSUANCE BY SUBSIDIARIES
In connection with its Shareholders' Agreement, FirstMark Communications
Luxembourg S.a r.l. issued new shares to a third party. The transaction diluted
the Company's ownership in FirstMark Communications Luxembourg S.a r.l. from 100
percent to 85.4 percent in a first stage in 1998 and to 75 percent in a second
stage in 1999. The Company recognized a gain on the dilution, which was recorded
as gain arising on stock issuance by subsidiaries in the stockholders' equity
for a total amount of $105,719 for the first dilution in 1998 and of $92,163 for
the second dilution in 1999.
In connection with its Shareholders' Agreement, FirstMark
Communications Ltd. issued new shares to third parties in 1999. The transaction
diluted the Company's ownership in FirstMark Communications Ltd. from 100
percent to 79 percent. The Company recognized a gain on the dilution, which was
recorded as gain arising on stock issuance by subsidiaries in the stockholders'
equity for a total amount of $69,300.
CHARGE TO EQUITY
As mentioned under note 10, FirstMark Communications International LLC
recharges to the Company the costs incurred on its behalf, including a mark-up.
A mark-up of $93,009 for the year ended December 31, 1999 (1998--nil) has been
recorded in general and administrative expenses, and has consequently been
included in deficit accumulated during the development stage.
D) LEGAL RESERVE
On an annual basis, if the Company reports a net profit for the year,
Luxembourg law requires appropriation of an amount equal to at least 5 percent
of the annual net income to a legal reserve until such reserve equals 10 percent
of the issued share capital. This reserve is not available for dividend
distributions.
F-35
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
8. OTHER ACCOUNTS PAYABLE
Other accounts payable consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- --------
US $ US $
<S> <C> <C>
Capital expenditures.............................. 2,261,474 --
Value added taxes payable......................... 1,319,997 --
Social security payables.......................... 30,890 --
--------- -----
3,612,361 --
========= =====
</TABLE>
9. DEBT AND FINANCING
On December 31, 1999, the Group had a short-term payable of $27,729,828 to a
supplier of equipment, which has been refinanced on January 21, 2000 with a
long-term debt as described in note 18.
As of December 31, 1999 and 1998, the Group does not have any other
significant external debt financing. During these periods the Group has financed
its development through equity investments (note 7). Significant external debt
financing has started to be secured in 2000, as described in note 18.
10. RELATED PARTY TRANSACTIONS
As of December 31, 1999, the Group companies have received advances from the
Company's shareholders in the total amount of $2,607,903 (1998-$1,725,487),
bearing interest from 5 percent to 6.03 percent, which approximates market rates
for the applicable currency at the time of the advances.
FirstMark Communications International LLC, the majority shareholder of the
Company is rendering services to Group companies. For the year ended
December 31, 1999, the charge related to these services was $1,860,189 (1998:
nil) and is recorded in general and administrative expenses.
11. PERSONNEL CHARGES
The following personnel charges are included in general and administrative
expenses:
<TABLE>
<CAPTION>
1999 1998
--------- --------
US $ US $
<S> <C> <C>
Wages and salaries............................... 2,525,809 74,939
Social charges................................... 283,216 12,176
Other personnel charges.......................... 3,734,521 --
--------- ------
6,543,546 87,115
========= ======
</TABLE>
Other personal charges mainly include compensation costs detailed in
note 12.
The average number of permanent employees during 1999 was 63 (1998 - 3).
During 1999 and 1998, no payment was made to any Director of any Group
company for services rendered to the Group.
The Group does not have any pension or post retirement plan arrangements.
F-36
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
12. STOCK-BASED COMPENSATION
A) 1999 STOCK INCENTIVE PLAN
In December 1999, the Company adopted a stock option plan (the "1999 Plan").
Under the 1999 Plan, certain employees and directors were granted options to
purchase the Company's common stock. The number of options granted was based on
a formula that corresponded to the employee's compensation. The exercise price
of the options granted is below the estimated fair value at the grant date.
Generally, all the options granted under the 1999 Plan vest cumulatively over
1/16 of the stocks at the expiry of each three month period following the date
of grant and expire ten years from the date of grant. Options are not
exercisable until the earlier of a sale or an initial public offering of the
Company. As such an event did not occur as of December 31, 1999, no compensation
cost has been recorded in the financial statement as of that date. As of
December 31, 1999, an additional 6,385 shares have been authorized for granting
under the 1999 Plan.
A summary of the Company's stock options as of December 31, 1999, and
changes during the year then ended is as follows:
<TABLE>
<CAPTION>
1999
--------------------------------
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE (US$)
--------- --------------------
<S> <C> <C>
Outstanding at beginning of year................. -- --
Granted.......................................... 5,615 2,369
Outstanding at year-end.......................... 5,615 2,369
===== =====
Exercisable at year-end.......................... -- --
----- -----
</TABLE>
The following table summarizes information at December 31, 1999 about
outstanding stock options, which have been issued to officers and employees of
the Group:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
EXERCISE PRICES NUMBER OUTSTANDING AT AVERAGE REMAINING LIFE
(US$) DEC. 31, 1999 (IN YEARS)
--------------- --------------------- ----------------------
<S> <C> <C>
0 650 9.92
2,200 4,115 9.92
5,000 850 9.92
------ -----
TOTAL 5,615 9.92
====== =====
</TABLE>
The weighted average fair value of options granted in the year ended
December 31, 1999, are set out in the following table and have been estimated
using the Black-Scholes option-pricing model. The
F-37
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
12. STOCK-BASED COMPENSATION (CONTINUED)
following assumptions were used: dividend yield of 0 percent expected volatility
of 70 percent, risk-free interest rate of 6.19 percent and expected life of
4 years.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE COMPARED TO MARKET PRICE AS OF GRANT DATE FAIR VALUE (US$) EXERCISE PRICE (US$)
-------------------------------------------------------- ---------------- --------------------
<S> <C> <C>
Equals............................................ 2,876 5,000
Exceeds........................................... -- --
Is less than...................................... 3,911 1,900
All options....................................... 3,755 2,369
----- -----
</TABLE>
B) STOCK APPRECIATION RIGHTS ISSUED TO LAMBDANET EMPLOYEES
On August 17, 1999, the Company granted, at nominal value, shares to a trust
whose beneficiaries are employees and management of LambdaNet. At the end of six
years, or after one year if the employees' contracts are terminated by
LambdaNet, the trust will make cash payments to the employees equal to the
appreciation in the market value of the shares. Accordingly, the Company has
accounted for these as stock appreciation rights, based on the fair value of the
shares at each balance sheet date, over a one-year period. As of December 31,
1999, the total estimated compensation cost amounts to $10,698,705 and is
recorded as an expense ratably over the one year period. For the period ended
December 31, 1999, the Company recorded a compensation cost of $1,549,075
related to the stock appreciation rights.
C) LAMBDANET SHARE COMPENSATION PLANS
As disclosed in note 2, LambdaNet has been accounted for under the equity
method from its inception in April 1999 to November 15, 1999. From that date,
LambdaNet is fully consolidated in the financial statements.
SHARES ISSUED TO EMPLOYEES AND THIRD PARTIES AT BELOW DEEMED FAIR VALUE
Certain shareholders were not required to pay fair value for the shares
issued by LambdaNet on July 14, 1999. The difference between the fair value of
the shares issued to an employee of LambdaNet and the amount paid, or
$9,749,419, has been recognized as compensation expense.
The shares issued to external consultants were issued to them below fair
value in exchange for their securing the agreement with GasLINE. Accordingly,
the difference between the fair value of these shares and the amount paid of
$10,815,891 has been recorded as an intangible asset (note 5) and will be
amortized over ten years, being the term of GasLINE agreement. The amortization
will start as of January 2, 2000 which is the date that the GasLINE network is
available for use.
OPTIONS ISSUED TO EMPLOYEES AND THIRD PARTIES
At the same time as the share issuance on July 14, 1999, LambdaNet granted
options to certain of its management and to external consultants with an
exercise price determined using the formula described below:
- At the grant date the exercise price was euro 1,125 ($1,161) per share.
F-38
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
12. STOCK-BASED COMPENSATION (CONTINUED)
- If the nominal capital of LambdaNet is increased and the new capital is
distributed to the shareholders without compensation or against payment of
only the nominal value, the exercise price is reduced by applying the
factor euro 200,000 (the nominal capital on the grant date) divided by the
new nominal amount of share capital.
The options vest over a period of five years and are exercisable over a
period of five years. The options may be exercised in parts.
Since the exercise price is not known at the grant date these options have
been accounted for as variable plans under APB Opinion 25 for management and
SFAS 123 for external consultants. Accordingly, the compensation cost arising on
these options is remeasured at each balance sheet date.
The compensation cost arising from the options issued to management is
recognised over the vesting period. During the period from November 15, 1999 to
December 31, 1999 no compensation cost was recognised for these options since
the exercise price was in excess of the fair value of the shares at
December 31, 1999.
The compensation expense arising on the options awarded to the external
consultants has been determined using the Black-Scholes model with the following
assumptions: risk-free interest rate of 6.19 percent; dividend yield of 0
percent; expected volatility of 70 percent and an expected life of 5 years.
Since the options were issued to the consultants in exchange for their
securing the GasLINE agreement, the expense of $701,310 has been capitalized as
part of intangible assets (see note 5).
A summary of the status of the LambdaNet share option plans, as of
December 31, 1999, including both management and external consultants and
changes during the period then ended is presented below:
<TABLE>
<CAPTION>
SHARE OF NOMINAL CAPITAL WEIGHTED AVERAGE
UNDER OPTION PLAN EXERCISE PRICE
------------------------ ----------------
US$ US$
<S> <C> <C>
Outstanding at the beginning of the
period................................. -- --
Granted.................................. 7,779 8,707,500
----- ---------
Outstanding at the end of the period..... 7,779 8,705,500
===== =========
</TABLE>
No options were exercisable at period-end and the average remaining
contractual life was 4 years 9 months.
D) OTHER NON-CASH COMPENSATION
In order to provide an incentive to the managers of the Group's operating
companies, the Company has agreed to issue to management a certain number of
shares of common stock in their respective subsidiary companies when certain
specific targets are achieved (for example, when the particular subsidiary is
awarded a license to operate in that country). Compensation expenses, measured
as the fair value of the subsidiary shares granted, will be recorded when the
performance condition is satisfied. For the year ended December 31, 1999, no
such shares were granted and therefore, the Company recorded no related
compensation expense.
F-39
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
12. STOCK-BASED COMPENSATION (CONTINUED)
E) PRO FORMA DISCLOSURES REQUIRED BY SFAS 123
The Group accounts for stock options granted to employees under APB Opinion
N(o)25. Had compensation costs been determined in accordance with SFAS N(o)123,
the charge to income for 1999 would have been $439,216 and the net loss and loss
per share would have been reduced to the following pro forma amounts for 1999.
<TABLE>
<CAPTION>
1999
-----------
US $
<S> <C>
Net loss
As reported................................... (29,990,149)
Pro forma..................................... (30,429,365)
Loss per share
As reported................................... (448)
Pro forma (basic and fully diluted)........... (454)
</TABLE>
F-40
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
13. TAXES
For the years ended December 31, 1999 and 1998, the Company did not record
any charge for income taxes.
The tax effects of significant items comprising the Group's net deferred
income tax asset/liability as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
US $ US $
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards.................................. 143,635 --
Net operating and other loss carryforwards................ 8,558,614 532,283
---------- --------
Total deferred income tax assets............................ 8,702,249 532,283
Valuation allowance......................................... (8,702,249) (532,283)
---------- --------
Deferred income tax assets, net of allowance................ -- --
Deferred income tax liabilities:
Differences between book and tax basis of assets and
liabilities............................................... -- --
---------- --------
Net deferred income tax asset/liability -- --
========== ========
</TABLE>
Net operating and other loss carryforwards have expiry periods depending on
their jurisdiction as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
US $ US $
<S> <C> <C>
Between one and five years............ 2,147,322 --
Between six and ten years............. 1,078,133 --
Unlimited period...................... 17,462,065 1,421,317
---------- ---------
20,687,520 1,421,317
========== =========
</TABLE>
For tax purposes $20,687,520 (1998: $1,421,317) of these net operating and
other loss carryforwards are not anticipated to be used within expiry periods.
Realization of the Group's deferred tax asset is dependent on the ability of
the Company, its subsidiaries and its joint ventures to generate sufficient
taxable income to utilize reversing temporary differences and carryforwards
within the carryforward periods. In view of the start-up phase that the Company
is currently in, a 100 percent valuation allowance has been established.
The operations incurring losses operate in tax jurisdictions with rates
ranging from 20 percent to 53 percent (1998: 30 percent to 45 percent). There
are currently no operations generating profit.
A reconciliation between the statutory rate and the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
% %
<S> <C> <C>
Statutory tax rate.................................. 37.45 37.45
Effect of tax rates in foreign jurisdictions........ 4.56 --
Effect of valuation allowance....................... (42.01) (37.45)
------ ------
Effective tax rate.................................. -- --
====== ======
</TABLE>
F-41
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
14. STATEMENT OF CASH FLOWS INFORMATION
Supplemental disclosures of cash flows information are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- --------
US$ US$
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................. 369,730 --
Income tax................................................ -- --
----------- --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Non cash capital expenditures............................. 27,729,828 --
----------- --
SUPPLEMENTAL SCHEDULE OF ACQUISITION OF SUBSIDIARIES, JOINT
VENTURES AND AFFILIATES:
ACQUISITION OF LAMBDANET (NOTE 1):
Current assets acquired..................................... 30,300,506 --
Tangible assets acquired.................................... 7,082,076 --
Intangible assets acquired.................................. 11,975,227 --
Liabilities assumed......................................... (7,950,871) --
----------- --
Net assets.................................................. 41,406,938 --
Less minority interest...................................... (8,281,388) --
Less carrying value of equity investment at date of
acquisition............................................... (11,593,942) --
----------- --
Net assets acquired......................................... 21,531,608 --
Goodwill.................................................... 72,762,818 --
----------- --
Total consideration through stock issuance (non cash)....... 94,294,426 --
----------- --
Cash acquired............................................... 27,862,153 --
----------- --
OTHER ACQUISITIONS (NOTE 3):
Assets acquired............................................. 73,495 --
Liabilities assumed......................................... (163,751) --
----------- --
Net assets acquired......................................... (90,256) --
Equity investments acquired................................. 1,470,666 --
Goodwill.................................................... 512,788 --
----------- --
Total purchase price........................................ 1,893,198 --
Less cash acquired.......................................... -- --
----------- --
Net cash paid............................................... 1,893,198 --
----------- --
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are contingently liable with respect to
lawsuits and other matters that arise in the normal course of business.
Management is of the opinion that while it is impossible to ascertain the
ultimate legal and financial liability with respect to these contingencies, the
ultimate outcome of these contingencies is not anticipated to have a material
effect on the Group's financial position and operations.
F-42
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL COMMITMENTS
The Group has contracted with Nortel Dasa Network Systems GmbH&Co.KG,
Frankfurt am Main ("Nortel Dasa") as supplier of transmission equipment to
LambdaNet. Under this contract, the Group has committed to purchase equipment
for points of presence in Germany amounting to $23,867,000 (DM 46,540,000) over
a total period of two years. Nortel Dasa is responsible for delivery,
installation and commissioning of this Dense Wave Division Multiplex (DWDM)
equipment for the deployment of the LambdaNet broadband services. The Company is
reliant on the ability of Nortel Dasa to deliver these services appropriately.
LEASE COMMITMENTS
On July 14, 1999, LambdaNet contracted with GasLINE
Telekommunikationsnetzgesellshaft deutscher Gasversorgungsunternehmen mbH & Co.
KG ("GasLINE") to utilize their lightwave conductors and system technology
spaces for a period of 10 years (the "GasLINE Agreement"). The total commitment
is for an amount of $31,282,051 (DM 61,000,000) and may be extended on the
existing terms for an additional period of 8 years at the Company's option. This
agreement is effective at the time the facilities to be set up by GasLINE are in
place. On December 31, 1999, these facilities are not yet in place. The
commitment resulting from this agreement has been recorded as an operating lease
commitment. In connection with the foregoing agreement LambdaNet finalized a
10-year $21,025,641 (DM 41,000,000) loan facility with GasLINE. The interest
rate for the loan is fixed at 9 percent per annum, compounded twice a year as of
April 1st and October 1st. The repayable installment per annum is fixed at
$2,102,564 (DM 4,100,000). GasLINE may convert the entire loan into shares of
LambdaNet provided that LambdaNet is converted into a German stock company
("Aktiengesellschaft") by June 30, 2001.
OPERATING LEASES:
<TABLE>
<CAPTION>
1999 1998
---------- --------
US $ US $
<S> <C> <C> <C>
Minimum lease commitments
Within: 1 year........................................ 556,618 65,000
Between: 1-2 years..................................... 7,806,420 --
2-3 years..................................... 5,925,933 --
3-4 years..................................... 5,660,196 --
4-5 years..................................... 5,622,723 --
After: 5 years....................................... 31,662,173 --
---------- ------
Total................................................... 57,234,063 65,000
========== ======
</TABLE>
Operating lease expense of $772,046 was recorded in 1999 (1998: nil). The
estimated costs for removing improvements at point of presence under the tenancy
agreements (note 2s) amounts to $4,837,000. The Group accrues for these costs on
a straight-line basis over the terms of the agreements.
F-43
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
FINANCE LEASES:
<TABLE>
<CAPTION>
1999 1998
-------- --------
US $ US $
<S> <C> <C> <C>
Finance lease repayments
Within: 1 year............................................ 9,199 --
Between: 1-2 years......................................... 9,759 --
2-3 years......................................... 9,759 --
3-4 years......................................... 9,759 --
4-5 years......................................... 8,732 --
After: 5 years........................................... -- --
------ ------
Total....................................................... 47,208 --
====== ======
</TABLE>
The finance leases are comprised mainly of lease agreements relating to
transportation vehicles used by the Group.
OPERATIONAL ENVIRONMENT
Through its various subsidiaries, the Group will enter into interconnect
agreements with several local incumbent operators. Interconnect rates are
regulated by various regulatory bodies within the subsidiaries' countries of
operation. Periodically, interconnect agreements are disputed with the local
incumbent operators and are typically resolved by regulatory rulings. The
outcome of such disputes could negatively impact the Group's gross margin.
See also notes 1, 2e and 2q for further description of the operational
environment.
DIVIDENDS
The ability of the Company to make dividend payments is subject to, among
other things, the terms of the indebtedness, local legal restrictions,
shareholders' agreements and the ability to repatriate funds from FirstMark's
various operations.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable and accrued expenses approximate
carrying value, principally because of the short maturity of these items.
The fair values of capital lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
F-44
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
17. EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) per common share is comprised as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net loss ($)................................................ (29,990,149) (1,421,317)
=========== ==========
Weighted average number of shares outstanding during the
period (see Note 7)....................................... 90,001 90,001
=========== ==========
Effect of dilutive securities............................... -- --
Weighted average number of diluted shares outstanding during
the period................................................ 90,001 90,001
=========== ==========
Basic and diluted loss per common share ($)................. (333) (16)
=========== ==========
</TABLE>
As of December 31, 1999, the Group had 5,615 stock options (1998--nil) on
the Company's share capital and 3.75 percent of LambdaNet's nominal capital
under the option plan, which were not included in the computation of diluted
earnings per share, because to do so would have been anti-dilutive for the
periods presented.
18. SUBSEQUENT EVENTS
STOCKHOLDERS' EQUITY
On January 19, 2000, the Company was converted into a "Societe Anonyme" and
the articles of incorporation were amended.
On January 24, 2000, FirstMark Fiber Holdings LLC, an affiliated company,
contributed its 80 percent participation in LambdaNet Communications GmbH to the
Company in exchange for 9,937 Series C Convertible Preferred shares issued by
the Company (note 1). Following this transaction and a further capital increase
of $7,266 representing the issuance of 4,844 stocks (15 Series A Convertible
Preferred shares, 2,525 Series B Convertible Preferred shares, 1,106 Series C
Convertible Preferred shares, 1,198 Series E Convertible Preferred shares) which
occurred on the same date, the subscribed share capital of the Company amounts
to $172,173 and is composed as follows:
<TABLE>
<CAPTION>
NUMBER OF STOCKS
DESCRIPTION PAR VALUE OUTSTANDING TOTAL (US$)
----------- --------- ---------------- -----------
<S> <C> <C> <C>
Common Stock............................................. 1.50 90,001 135,001.50
Series A Convertible Preferred Stock..................... 1.50 10,015 15,022.50
Series B Convertible Preferred Stock..................... 1.50 2,525 3,787.50
Series C Convertible Preferred Stock..................... 1.50 11,043 16,564.50
Series E Convertible Preferred Stock..................... 1.50 1,198 1,797.00
----------
172,173.00
==========
</TABLE>
In January 2000, the Company entered into a shareholders' agreement with
several partners granting them equity interests in FirstMark Communications
France S.ar.l. and reducing the Company's ownership from 100 percent to 34
percent. Under this shareholders' agreement, the partners have the right to
convert their shares for the Company's common stock at the time the Company
files a registration statement in the United States for an initial public
offering of common stock. They also
F-45
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
18. SUBSEQUENT EVENTS (CONTINUED)
have the option under certain circumstances to exchange their shares in the
French subsidiary for common equity securities of the company on a fair market
value basis.
On April 7, 2000, ABN AMRO committed to invest $62,996,304 in consideration
for preferred equity securities in the Company. This amount serves as collateral
for a bank guarantee that the Group has provided to guarantee network rollout
costs in Spain. The Company has the right to repurchase these securities from
ABN AMRO.
LICENSES AND OPERATIONS
On December 17, 1999, LambdaNet was awarded a class 3 license in Germany
that enables it to operate as a carriers' carrier beginning January 1, 2000. The
Company started operations on January 2, 2000 and has since been generating
revenues.
Since January 1, 2000, the Group incorporated wholly-owned subsidiaries in
Finland, Italy and Denmark. As of today, these companies are dormant.
On January 31, 2000, the Group submitted, through a joint venture, its final
bid for a license in France.
In February 2000, the Group purchased an additional 3.325 percent of
LambdaNet previously held by an external consultant for a total cash
consideration of DM 8,312,500 ($4,192,742). The excess of the purchase price
over the fair value of the net identifiable assets amounts to $2,904,316 and has
been recorded as goodwill. Such goodwill is amortized on a straight-line basis
over a period of 15 years. In addition to the cash consideration, the seller
received right to purchase shares of common stock in FirstMark Communications
Europe S.A. up to a maximum of DM 1,800,000 at a price equal to the price per
share paid by third party investors in the next round of equity financing raised
by the Company. This right expires on December 31, 2000.
In March 2000, the Group received, through a joint venture, a license to
operate a wireless local loop service in Spain.
In March and April 2000, the Group received, through an auction process,
five licenses to operate wireless local loop services in Switzerland for a total
consideration of $109,970,909. These licenses are payable to the Swiss
regulatory authorities by June 30, 2000.
On April 7, 2000 the Group received a license to possess and operate fixed
wireless access system radio transmitters in Finland.
DEBT FINANCING
On January 19, 2000, the Group finalized a one-year $50 million convertible
bridge loan facility (the "Convertible Facility") and, upon expiration of the
one year period, an optional $50 million working capital facility (the "Working
Capital Facility") for two years, for the initial purpose of financing the
Company's expansion of its broadband wireless telecommunication network, and
thereafter for the working capital requirements of the Company.
F-46
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
18. SUBSEQUENT EVENTS (CONTINUED)
The interest rate for the Convertible Facility is 15 percent per annum,
compounded quarterly. The interest rate for the Working Capital Facility is
LIBOR (for the advances denominated in US Dollars or in an optional currency) or
EURIBOR, plus 3.5 percent (for the advances denominated in euro).
The Company agreed to pay the lender a commitment fee of 2 percent for
unused funds for the Convertible Facility and a commitment fee of 1.5 percent
per annum for unused funds for the Working Capital Facility.
The Company has the option either to repay the loan with interest and fees
in cash at any time on or before maturity, or to convert the amounts outstanding
under the Convertible Facility into Series D Convertible Preferred Stock at
maturity. If the Company is in default, the lender has the option to convert at
any time all or any part of the loan outstanding under the Convertible Facility
into Convertible Preferred Stock, with interest and fees. The Company has
pledged all shares of capital stock as collateral for the facility. In addition
all shares, securities, monies or property representing a dividend or similar
return of capital as well as all intercompany demand notes have been pledged to
the lender.
In connection with the agreement, the lender received 1,198 shares of
Series E Convertible Preferred Stock for a nominal price. The lender will be
entitled to Series E Convertible Preferred Stock representing an additional 1
percent if the loan is not repaid by June 30, 2000, and Series E Convertible
Preferred Stock representing a further 1 percent if the Company or an affiliate
has not completed an initial public offering by December 31, 2001. Each
Series E Convertible Preferred share has no liquidation preference as long as
there are no shares of Series D Convertible Preferred Stock issued and
outstanding. If shares of Series D Convertible Preferred Stock are issued, each
share of Series E Convertible Preferred Stock will then be converted into one
share of Series D Convertible Preferred Stock and will therefore have a
liquidation preference equal to the product of the Series D preference amount
and a fraction consisting of a numerator equal to the number of shares of common
stock to which a Series E Convertible Preferred Stock may be converted and a
denominator consisting of the number of shares of common stock to which
Series D Convertible Preferred Stock may be converted.
On April 27, 2000, the lender increased the Convertible Facility to
$66,000,000 in order to provide the Company with a guarantee in the amount of
$16,000,000 to be given to the Swiss government in the context of the Swiss
auctions. As consideration for providing this additional credit, the Company
issued 383 shares of series E Convertible Preferred Stock for the benefit of the
lender. Provided that the Company does not draw upon the additional $16,000,000
Convertible Facility, the Company has the right to repurchase these securities
from the lender at par value.
On January 21, 2000 the Group finalized a facility agreement of
$56.3 million (euro 56 million), consisting of a $46.2 million (euro
46 million) supplier guaranteed loan (the "Supplier Guaranteed Loan") and a
revolving facility (the "Revolving Facility") of $10.1 million (euro
10 million). The purpose of the facility agreement is to secure the initial
rollout of LambdaNet's transmission network and to finance the start-up losses.
Both the Supplier Guaranteed Loan and the Revolving Facility bear interest
at EURIBOR plus 3.75 percent to 1.75 percent, depending on the senior debt to
EBITDA ratio. The commitment fee for unused funds is 0.875 percent per annum.
F-47
<PAGE>
FIRSTMARK COMMUNICATIONS EUROPE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998
18. SUBSEQUENT EVENTS (CONTINUED)
The Company has agreed to the following repayment structure for the loan,
payable in two installments per year:
<TABLE>
<S> <C>
2002........................................................ 10.0%
2003........................................................ 15.0%
2004........................................................ 22.5%
2005........................................................ 25.0%
2006........................................................ 27.5%
-------
100.00%
=======
</TABLE>
Additionally, the Company has the option to repay the supplier guaranteed
loan partially or in total at the end of each interest period. The Revolving
Facility has to be fully repaid at the end of year 2006.
COMMITMENTS
On April 26, 2000, LambdaNet Communications SAS, a wholly-owned subsidiary
of LambdaNet Communications GmbH incorporated in January 2000, signed a leasing
agreement with Louis Dreyfus Communications S.A. by which LambdaNet
Communications SAS (the lessee) agreed to lease two pairs of dark optical fibers
for a period of 20 years from the date of delivery from Louis Dreyfus
Communications S.A (the lessor). The total commitment is for an amount of
$36,778,766 (FFR 270,794,700) which is payable as follows:
- 15 percent on the date of signature of the lease agreement
- 45 percent on the date of commencement of operations
- 40 percent six months after the date of the commencement of operations
This agreement is guaranteed by the Company.
EMPLOYMENT AGREEMENT
On March 27, 2000 the Board of Directors of the Company proposed an
employment agreement to its newly appointed President and Chief Executive
Officer (CEO). This agreement was finalized and approved by both parties on
April 28, 2000, and provides for, among other things, an annual base salary
amount plus a target bonus in the amount of 100 percent of his base salary. In
addition, the Company entered into a Stock Option agreement with the President
and CEO providing for, among other things, the grant of options to purchase
4,544 shares of common stock of the Company. The Company also entered into a
promissory note with the President and CEO in the amount of $1,000,000 due on
February 2, 2005, together with any accrued and unpaid interest.
F-48
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of
LambdaNet Communications GmbH:
We have audited the accompanying balance sheet of LambdaNet Communications
GmbH as of November 15, 1999, and the related statements of income, changes in
equity, and cash flows for the period from April 21, 1999 (date of inception) to
November 15, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LambdaNet Communications
GmbH as of November 15, 1999, and the results of its operations and its cash
flows for the period from April 21, 1999 (date of inception) to November 15,
1999 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN
Independent Auditors
Hannover, Germany--April 28, 2000
F-49
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
BALANCE SHEET
AS OF NOVEMBER 15, 1999
<TABLE>
<CAPTION>
NOVEMBER 15,
NOTES 1999
-------- ------------
US$
<S> <C> <C>
ASSETS
-------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents................................. 27,862,153
Accounts receivable--
Other................................................... 1,913,760
-----------
29,775,913
Prepaid expenses and other current Assets................... 524,594
-----------
TOTAL CURRENT ASSETS.................................. 30,300,507
-----------
PROPERTY AND EQUIPMENT, AT COST............................. 4 7,180,993
Less--accumulated depreciation............................ (98,917)
-----------
7,082,076
-----------
INTANGIBLE ASSETS, AT COST.................................. 5 11,989,198
Less--accumulated amortization............................ (13,971)
-----------
11,975,227
-----------
TOTAL ASSETS.......................................... 49,357,810
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
BALANCE SHEET (CONTINUED)
AS OF NOVEMBER 15, 1999
<TABLE>
<CAPTION>
NOVEMBER 15,
NOTES 1999
-------- ------------
US$
<S> <C> <C>
LIABILITIES AND EQUITY
-------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable--
Trade................................................... 523,293
To affiliated companies................................. 6 6,082,580
Other................................................... 256,651
-----------
6,862,524
Accrued liabilities....................................... 1,088,348
-----------
7,950,872
-----------
TOTAL LIABILITIES..................................... 7,950,872
-----------
COMMITMENTS AND CONTINGENCIES............................... 12
EQUITY:..................................................... 7
Nominal Capital........................................... 207,455
Additional paid in capital................................ 68,456,810
Deferred compensation cost................................ (10,697,705)
Deficit accumulated during the development stage.......... (16,702,417)
Currency translation adjustment........................... 142,795
-----------
TOTAL EQUITY.......................................... 41,406,938
-----------
TOTAL LIABILITIES AND EQUITY........................ 49,357,810
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
STATEMENT OF PROFIT AND LOSS
FOR THE PERIOD FROM APRIL 21, 1999
(INCEPTION DATE) TO NOVEMBER 15, 1999
<TABLE>
<CAPTION>
FROM APRIL 21,
1999 TO
NOVEMBER 15,
NOTES 1999
----- --------------
US$
<S> <C> <C>
General and administrative expenses......................... (16,802,220)
-----------
Operating loss............................................ (16,802,220)
-----------
Interest income............................................. 4,252
Other income................................................ 95,551
-----------
Net loss.................................................. (16,702,417)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
STATEMENT OF CHANGES IN EQUITY
FOR THE PERIOD FROM APRIL 21, 1999
(INCEPTION DATE) TO NOVEMBER 15, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE CURRENCY
NOMINAL PAID IN DEFERRED DEVELOPMENT TRANSLATION
EQUITY CAPITAL COMPENSATION STAGE ADJUSTMENT TOTAL
-------- ---------- ------------ ------------ ----------- -----------
US$ US$ US$ US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares on April 21,
1999.......................... 26,212 -- -- -- -- 26,212
Issuance of shares on July 14,
1999.......................... 181,243 33,334,439 -- -- -- 33,515,682
Share based Compensation........ -- 35,122,371 -- -- -- 35,122,371
Deferred Compensation........... -- -- (14,263,607) -- -- (14,263,607)
Amortization of Compensation
cost.......................... -- -- 3,565,902 -- -- 3,565,902
Loss for the period............. -- -- -- (16,702,417) -- (16,702,417)
Other comprehensive income...... -- -- -- -- 142,795 142,795
------- ---------- ----------- ----------- ------- -----------
Balance as of November 15,
1999.......................... 207,455 68,456,810 (10,697,705) (16,702,417) 142,795 41,406,938
======= ========== =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 21, 1999
(INCEPTION DATE) TO NOVEMBER 15, 1999
<TABLE>
<CAPTION>
FROM APRIL 21,
1999 TO
NOVEMBER 15,
1999
--------------
US$
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. (16,702,417)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Write-down of assets.................................... 11,497
Depreciation and amortization........................... 115,159
Non cash compensation cost.............................. 13,316,280
Unrealized holding gains on cash equivalents............ (91,329)
--(Increase) in prepaid expenses and other current
assets................................................ (2,487,410)
--Increase in accounts payable.......................... 795,635
--Increase in accrued liabilities....................... 1,110,244
--Increase in liabilities to affiliated companies....... 6,204,952
-----------
Net cash provided by operating activities............. 2,272,611
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (7,224,556)
Purchase of intangible assets............................. (467,240)
-----------
Net cash used in investing activities................. (7,691,796)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nominal capital............................. 207,455
Proceeds from additional paid in capital.................. 33,334,439
-----------
Net cash provided by financing activities................. 33,541,894
-----------
Increase in cash and cash equivalents..................... 28,122,709
Effect of foreign exchange rate changes on cash........... (260,556)
Cash and cash equivalents at beginning of the period.... --
-----------
Cash and cash equivalents at end of the period.......... 27,862,153
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS
AS OF NOVEMBER 15, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS
LambdaNet Communications GmbH ("LambdaNet", "LNC" or "the Company") was
incorporated on April 21, 1999 under German law as Carriers' Carrier GmbH (CCG).
CCG was registered in Hannover, Germany under registration number HRB57818. On
October 1, 1999 CCG was renamed LambdaNet Communications GmbH (LNC) and moved
its headquarter from Karlsruher Strae 2 to Gunther-Wagner-Allee 13 in Hannover,
the current address.
The Company intends to become a market leader for broadband services across
Europe, starting in Germany, taking advantage of the recent deregulation of the
telecommunication industry. The German network operation started on January 2,
2000. The Company sells broadband and wavelength services in the range of 2
Mbit/s to 10 Gbit/s. LNC's target customer segment include alternative
telecommunication operators, large corporates, Internet service providers and
application service providers.
On July 14, 1999, LambdaNet contracted with GasLINE
Telekommunikationsnetzgesellshaft deutscher Gasversorgungsunternehmen mbH & Co.
KG ("GasLINE") to utilize their lightwave conductors and system technology
spaces for a period of 10 years ("the GasLINE Agreement"). The total commitment
is for an amount of $32,166,210 (DM 61,000,000) and may be extended on the
existing terms for an additional period of 8 years at the Company's option. This
agreement is effective at the time the facilities to be set up by GasLINE are in
place. On November 15, 1999, these facilities are not yet in place. In
connection with the foregoing agreement LambdaNet finalized a 10-year
$21,619,940 (DM 41,000,000) loan facility with GasLINE. The interest rate for
the loan is fixed at 9% per annum, compounded twice a year as of April 1st and
October 1st. The repayable installment per annum is fixed at $2,161,994 (DM
4,100,000). GasLINE may convert the entire loan into shares of LambdaNet
provided that LambdaNet is converted into a German stock company
("Aktiengesellschaft") by June 30, 2001.
2. DEVELOPMENT STAGE ENTERPRISE
The Company is a start up venture with a limited history. It reported
operating losses in the period from inception until November 15, 1999 of
$16,702,417.
The Company has significant funding requirements to finance capital
expenditure, operating and marketing costs in order to develop its business in
accordance with management's plans. Management does not expect the business to
generate positive cash flows from operations for a considerable period of time.
The Company currently has limited external debt facilities (note 14) and will
need to secure further debt or equity finance to continue to develop the
business. The ability to raise finance will depend on a number of factors,
including technology, regulations and subscriber base developments, and there
can be no assurance that the Company will be able to secure such finance.
The Company is making additional preliminary investments and pursuing
telecommunication licensing opportunities in various countries. There can be no
assurance that the Company will be successful in acquiring such licenses or in
converting experimental licenses into fully operational license agreements.
By July 1999, the Company hired most of the management team and as of
November 15, 1999 the Company employed 68 people.
As of November 15, 1999 the Company had issued share capital for an
aggregate cash consideration of $33.5 million. In order to finance the potential
growth, LNC negotiated a Facility
F-55
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
2. DEVELOPMENT STAGE ENTERPRISE (CONTINUED)
Agreement with a Bank Consortium for euro 56 million ($57.8 million), which was
signed on January 21, 2000 (note 14).
The Company submitted the license application for its class 3 license to the
regulation office in Germany (Regulierungsbehorde fur Telekommunikation und
Post--RegTP) on July 20, 1999 and was awarded the license on December 17, 1999.
In order to achieve operational status as of January 2, 2000, the Company
signed supplier contracts with Nortel Dasa Network Systems GmbH&Co.KG, Frankfurt
am Main ("Nortel Dasa") (note 12) and GasLINE to build point's of presence,
install and test the network by year end 1999. The Company has served customers
since January 2, 2000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company are presented in conformity with
Generally Accepted Accounting Principles in the United States ("US GAAP"). These
financial accounts are not prepared for the purpose of statutory filing.
As the Company is devoting substantially all of its efforts to establishing
a new business and as principal operations have not yet commenced, the Company
qualifies as a development stage company and is presenting its financial
statements as such. It had no significant operating income as of November 15,
1999. The accumulated start-up losses amount to $16,702,417 as of November 15,
1999.
The financial statements are prepared in accordance with the following
significant accounting policies:
A) USE OF ESTIMATES
The preparation of the financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the accounts and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
B) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. All repairs and
maintenance expenditure is expensed as it occurs. Maximum estimated useful lives
are:
<TABLE>
<S> <C>
Buildings & improvements....................... 40 years or life of lease if less
Networks....................................... 5 to 10 years
Other.......................................... 2 to 7 years
</TABLE>
Construction in progress consists of costs directly attributable to property
and equipment being constructed by the Company.
Significant costs directly associated to the establishment of new networks
are recorded as construction in progress in tangible fixed assets in the balance
sheet. Such costs are primarily related to engineering and design work for the
installation of the network and systems integral to its operation. The
amortization of these costs commences on the date that the network is available
for use. Prior to
F-56
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the commencement of the operations of telecommunication networks, the
depreciation of these networks is recorded in general and administrative
expenses. This expenses will be recorded as cost of sales at the time the
networks become operational.
C) INTANGIBLE ASSETS
LICENSES
Licenses are acquired by applications to the local telecommunications
regulator. Licenses which have been purchased for a fixed fee over a finite life
are capitalized and amortized on a straight line basis over the useful life of
the license.
The Company operates in an industry that is subject to changes in
competition, regulation, technology and subscriber base evolution. In addition,
the terms of the license which have been awarded for an unlimited period of time
are subject to periodic review for, amongst other things, frequency allocation
and technical standards. Licenses held, subject to certain conditions, are
generally non-exclusive. The Company does not currently expect any of its
operations to be required to cease due to license reviews.
Costs incurred in connection with the application for licenses are expensed
when incurred due to the fact that the outcome of such application processes is
subject to, amongst other things, regulation and is therefore not certain.
OTHER INTANGIBLE ASSETS
Other intangible assets include software purchased from third party
suppliers, which are amortized using the straight-line basis over periods of up
to 5 years.
Other intangible assets also include upfront costs incurred with independent
third parties by the Company on its own behalf in consummating the GasLINE
Agreement (note 13), which have been deferred and are being amortized on a
straight-line basis over 10 years, being the term of the GasLINE Agreement.
D) REVENUE RECOGNITION
The Company records revenues for telecommunications services at the time of
customer usage. Service discounts and incentives are accounted for as a
reduction of revenues when granted.
E) CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
when purchased are considered to be cash equivalents. The Company also considers
all highly liquid temporary cash investments that are readily convertible to
cash to be cash equivalents.
F) CAPITALIZATION OF INTEREST
Interest on financing is recognized as an expense in the period in which it
is incurred except when directly associated with tangible assets in the course
of construction or with licensing costs. Such interest costs are capitalized and
included as part of the cost of the underlying asset. The capitalization rate
used to calculate the amount of interest to capitalize is either (a) the
interest rate on the finance being used to directly finance the construction of
the asset or (b) the weighted average of the
F-57
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
borrowing costs applicable to the borrowings of the joint venture or subsidiary
which is constructing the asset, after excluding any finance being used to
directly finance other projects.
G) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
The Company's functional currency is the Deutsche Mark (DM). Transactions
denominated in other foreign currencies are translated to Deutsche Marks at the
exchange rate existing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the year-end are reported at
the exchange rates prevailing at the year-end. Any gain or loss arising from a
change in exchange rates subsequent to the date of the transaction is included
as an exchange gain or loss in the consolidated statement of profit and loss.
The financial statements are translated into US dollars ($ or US$), the
Company's reporting currency. Assets and liabilities are translated using
exchange rates at the balance sheet date. Income and expense items are
translated using the average rates of exchange for the periods involved. Equity
is translated using the historical exchange rate. The resulting translation
adjustments are recorded as a separate component of equity. The currency
translation average and period end rates from the Deutsche Mark to the US Dollar
are respectively 1 US Dollar = 1.89640 DM and 1 US Dollar = 1.85900 DM for the
period from April 21, 1999 to November 15, 1999.
H) TAXATION
The Company is subject to taxation in Germany. Corporate tax, including
deferred taxation, is applied at the applicable current rates on their taxable
profits. Deferred income taxes are determined using the asset and liability
method whereby the future expected consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements are recognized as deferred tax assets and liabilities.
Deferred tax assets are recognized subject to a valuation allowance to reduce
the amount to that which is more likely than not to be realized.
I) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents. The
counterparties to the agreements relating to the Company's cash and cash
equivalents are significant financial institutions; accordingly, management does
not believe there is a significant risk of non-performance by these
counterparties.
J) LEASES
Operating lease rentals are charged to the profit and loss account on a
straight-line basis over the life of the lease. Assets held under finance leases
are capitalized and depreciated over the shorter of the life of the lease or the
life of the assets. The related liability is included in debt and other
financing and the implied interest charge is allocated to the profit and loss
account over the lease term using the effective interest rate method.
Direct costs incurred in obtaining a lease agreement are capitalized and
amortized on a straight line basis over the term of the lease.
F-58
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K) IMPAIRMENT OF LONG-LIVED ASSETS
The recoverability of long-lived assets, including its intangible assets, is
subject to the future profitability of the Company's operations and the
evolution of the business in accordance with its plans. In evaluating the
recoverability of its assets, the value and future benefits of the Company's
operations are periodically reviewed by management based on technological,
regulatory and market conditions. When certain operational and financial factors
indicate an impairment of value, the Company evaluates the carrying value of
property, plant and equipment as well as other long-lived assets, including
licenses, in relation to the operating performance, and future undiscounted cash
flows of the underlying assets. When indicated, the impairment losses are
measured based on the difference between the estimated fair value and the
carrying amount of the asset. Management's estimates of fair value are based on
prices of similar assets and the result of valuation techniques to the extent
available in the circumstances. These include net present values of expected
future cash flows and valuations based on market transactions in similar
circumstances. For new product launches where no comparable market information
is available, management bases its view on recoverability primarily on cash flow
forecasts. In addition to evaluation of possible impairment to the long-lived
assets, carrying value, the foregoing analysis also evaluates the
appropriateness of the estimated useful lives of the long-lived assets.
Management believes that the carrying value of its assets is recoverable against
future operating results.
L) TENANCY EXPENSES
According to the tenancy agreements for the points of presence (pop's) the
Company is obliged to restore properties to their original state at the end of
the periods of these agreements. The Company accrues for these costs on a
straight-line basis over the terms of the agreements.
M) SHARE BASED COMPENSATIONS
The Company accounts for share based compensation issued to employees in
accordance with the intrinsic value method under APB Opinion 25. Where options
are issued over a fixed number of shares with a fixed exercise price the
intrinsic value measured at the grant date is amortized over the vesting period
of the options. Such plans are referred to as "fixed plans". Where either the
number of shares under option or the exercise price is not known at the grant
date the expense is recalculated based on the intrinsic value at each balance
sheet date and the expense is recognized over the vesting period. Such plans are
referred to as "variable plans". The Company has provided proforma disclosures
of net loss as if the fair value method prescribed by SFAS N(o) 123 "Accounting
for Stock Based Compensation" had been adopted.
Options issued to non-employees are accounted for in accordance with the
fair value method under SFAS N(o)123. This requires the use of an option-pricing
model, for example the Black Sholes model, to determine the fair value of the
option. The measurement date is the earlier of either of the following:
1. The date at which a commitment for performance by the counterparty to
earn the equity instruments is reached (a "performance commitment") or
2. The date at which the counterpart's performance is complete.
Where a principal shareholder i.e., one owning more than 10% of the
Company's shares, issues share based compensation to the Company's employees or
its suppliers such arrangements are
F-59
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounted for as if entered into by the Company with a corresponding credit to
additional paid in capital.
N) CONTRIBUTIONS TO BUILDING COSTS
The Company makes contributions to certain building costs of several
customers within the framework of overall agreements with such customers to
provide services. These contributions are capitalized and amortized on a
straight-line basis over the term of the corresponding contracts.
O) NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards (SFAS) N(o)133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998 and
requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
SFAS N(o)137 extends the effective date to all fiscal years beginning after
June 15, 2000. The Company believes that the adoption of accounting treatments
under this standard will not require significant changes to its current
accounting policies and will not have a significant impact on its financial
statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 outlines the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Specifically, the bulletin provides both general and specific guidance as to the
periods in which companies should recognize revenues. In addition, SAB 101 also
highlights factors to be considered when determining whether to recognize
revenues on a gross or net basis. The Group believes that its policies in
regards to the recognition of revenues are in compliance with SAB 101.
4. PROPERTY AND EQUIPMENT
The movements in the year were as follows:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
COST
Networks.................................................... 403,255
Construction in progress.................................... 5,852,158
Other....................................................... 925,580
---------
7,180,993
=========
LESS
Accumulated depreciation.................................... (98,917)
---------
7,082,076
=========
</TABLE>
As of November 15, 1999, no interest has been capitalized.
F-60
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
5. INTANGIBLE ASSETS
The movements in the year were as follows:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
COST
GasLINE agreement (1)....................................... 11,517,201
Other....................................................... 471,997
----------
11,989,198
==========
LESS
Accumulated amortization.................................... (13,971)
----------
11,975,227
==========
</TABLE>
------------------------
(1) This amount reflects the success fee incurred by the Company on consumating
the GasLINE Agreement as described in notes 1, 11 end 12. These cost have
been deferred and are amortized on a straight-line basis over 10 years.
6. CURRENT LIABILITIES TO AFFILIATED COMPANIES
The current liabilities to affiliated companies arose from an overpayment of
a part of the capital premium in an amount of $5,827,062 of FirstMark Fiber
Holding, L.L.C. This amount was repaid by the Company on November 24, 1999.
This residual amount results from an amount payable to FirstMark
Communications Europe S.A. in relation to services rendered as described in
note 8.
7. EQUITY
A) NOMINAL CAPITAL
The Company was incorporated on April 21, 1999, with a nominal capital of
Euro 25,200.00 ($26,212).
Pursuant to a shareholder resolution dated April 21, 1999 the nominal
capital was increased by Euro 174,800 ($181,243) on July 14, 1999 following the
signature of the GasLINE Agreement (note 1).
As part of this capital increase, FirstMark Fiber Holdings, L.L.C., the
majority shareholder, paid an aggregate capital premium of euro 32,000,000
($33,334,439). The other shareholders were not required to pay any capital
premium. The difference of $9,749,419 between the fair value of the shares
issued to employees of the Company, and the amount paid by them has been
recognized as compensation expense (note 11). The other beneficiaries of this
transaction are consultants external to the Company (note 11).
B) ULTIMATE PARENT COMPANY
The ultimate parent company is the FirstMark Holdings, LLC, a company
incorporated in the state of Delaware.
F-61
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
8. RELATED PARTY TRANSACTIONS
The Company received services from FirstMark Communications Europe S.A. For
the period ended November 15, 1999, the charge related to these services amounts
to $248,894.
As described in note 11c) FirstMark Communications Europe S.A. transferred
part of its interest in the Company to an employee trust the beneficiaries of
which were employees of the Company.
9. PERSONNEL CHARGES
The following personnel charges are included in general and administrative
expenses, selling expenses and cost of sales:
<TABLE>
<CAPTION>
1999
----------
US$
----------
<S> <C>
Wages and salaries.......................................... 1,408,411
Social security............................................. 177,597
Compensation costs.......................................... 14,382,752
----------
15,968,760
==========
</TABLE>
The average number of permanent employees during the year was 43.
The Company does not have any pension or post retirement plan arrangements.
10. TAXES
German trade tax on income is levied on a company's taxable income adjusted
for certain revenues which are not taxable for trade tax purposes and for
certain expenses which are not deductible for trade tax purposes. The trade tax
rate is dependent on the municipalities in which the company operates. The
applicable trade tax rate was approximately 18.7% for the year 1999. Trade tax
is deductible for corporate income tax purposes.
Corporate income tax in Germany is levied at 40% for retained profits and at
30% on profits distributed after deduction of trade tax. Additionally a
solidarity surcharge of 5.5% is added to the corporate income tax.
The effective tax rate for 1999 is as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Corporate income tax........................................ 32.5%
Trade tax on income......................................... 18.7%
Solidarity surcharge........................................ 1.8%
----
53.0%
====
</TABLE>
F-62
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
10. TAXES (CONTINUED)
Temporary differences, which gave rise to deferred tax assets and
liabilities at November 15, 1999 were as follows:
<TABLE>
<CAPTION>
1999
----------
US$
<S> <C>
Deferred tax assets
Tax losses carried forward................................ 1,872,062
Accrual for restoration costs............................. 26,855
----------
1,898,917
Valuation allowance......................................... (1,794,366)
----------
Deferred tax liabilities.................................... 104,551
Deferred charges related to a loan........................ (104,551)
----------
Net deferred tax assets, net of allowance................... --
----------
</TABLE>
The deferred taxes are calculated using a tax rate of 53%.
A valuation allowance is provided for the full amount against the deferred
tax assets because the Company is still in its start up phase and has incurred
losses since inception.
Due to incurred losses, the Company did not record any charge for income
taxes for the period ended November 15, 1999.
The difference between income tax provided in the financial statements and
the expected income tax benefit at statutory rates is reconciled as follows:
<TABLE>
<CAPTION>
1999
--------
%
<S> <C>
Expected income tax benefit at the German Statutory rate of
53%....................................................... 53
---
Tax effect of permanent and other differences:
Valuation allowance....................................... (11)
Non-deductible expenses................................... (42)
---
Total income tax benefit.................................... --
===
</TABLE>
The non-deductible expenses are mainly resulting from the compensation costs
(note 11).
As of November 15, 1999 the Company has total tax loss carryforwards of
$3,532,192. There is neither limitation in time nor amount related to the future
deduction of this loss for tax purposes.
For the period ended November 15, 1999, the Company did not pay any income
taxes.
11. SHARE BASED COMPENSATION
A) SHARES ISSUED TO EMPLOYEES AND THIRD PARTIES AT BELOW DEEMED FAIR VALUE
As described in note 7a certain shareholders were not required to pay fair
value for the shares issued on July 14, 1999. The difference ($9,749,419)
between the fair value of the shares issued to an employee of the Company, and
the amount paid has been recognized as compensation expense.
F-63
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
11. SHARE BASED COMPENSATION (CONTINUED)
The shares issued to external consultants were issued to them at below fair
value in exchange for their securing the agreement with GasLINE described in
note 1. Accordingly, the difference between the fair value of these shares and
the amount paid of $10,815,891 has been recorded as an intangible asset and will
be amortized over ten years, being the term of GasLINE agreement. The
amortization will start as of January 2, 2000 which is the date that the GasLINE
network is available for use.
B) OPTIONS ISSUED TO EMPLOYEE AND THIRD PARTIES
At the same time as the share issuance on July 14, 1999, the Company granted
options to certain of its management and to external consultants with an
exercise price determined using the formula described below:
- At the grant date the exercise price was euro 1,125 ($1,161) per share.
- If the nominal capital of the Company is increased and the new capital is
distributed to the shareholders without compensation or against payment of
only the nominal value, the exercise price is reduced by applying the
factor Euro 200,000 (the nominal capital on the grant date) divided by the
new raised amount of share capital.
The options vest over a period of five years and are exercisable in parts
over a period of five years.
Since the exercise price is not known at the grant date these options have
been accounted for as variable plans under APB Opinion 25. Accordingly, the
compensation cost arising on these options is remeasured for management and
SFAS 123 for external consultant at each balance sheet date.
The compensation cost arising from the options issued to management is
recognised over the vesting period of five years. In the period ended
November 15, 1999 no compensation cost was recognised for these options since
the exercise price was in excess of the fair value of the shares at
November 15, 1999.
The compensation expense arising on the options awarded to the external
consultants has been determined using the Black Sholes model with the following
assumptions: risk free interest rate of 6.19%, dividend yield of 0%; expected
volatility of 70% and an expected life of 5 years.
Since the options were issued to the consultants in exchange for their
securing the GasLINE agreement the expense of $701,310 has been capitalised as
part of intangible assets (see note 3).
A summary of the status of the Company's share option plans including both
management and external consultants as of November 15, 1999 and changes during
period then ended is presented below:
<TABLE>
<CAPTION>
SHARE OF NOMINAL
CAPITAL UNDER WEIGHTED AVERAGE
OPTION PLAN EXERCISE PRICE
---------------- ----------------
$ $
<S> <C> <C>
Outstanding at the beginning of the
period.................................... -- --
Granted..................................... 7,779 8,707,500
----- ---------
Outstanding at the end of the period........ 7,779 8,705,500
===== =========
</TABLE>
F-64
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
11. SHARE BASED COMPENSATION (CONTINUED)
No options were exercisable at period end and the average remaining
contractual life was 4 years 9 months.
C) SHARE APPRECIATION RIGHTS GRANTED BY PRINCIPAL SHAREHOLDERS
On August 17, 1999 the Company's principal shareholder at that time,
FirstMark Fiber Holdings LLC, transferred part of its shares in the Company to a
trust whose beneficiaries are the Company's employees and management. At the end
of six years, or after one year if the Company terminates the employees'
contracts, the trust will make a cash payment to the employees equal to the
appreciation in the market value of the shares. Accordingly, the Company has
accounted for these as share appreciation rights, based on the fair value of the
shares at each balance sheet date, over a one-year period. For the period ended
November 15, 1999, the Company recorded a compensation cost of $3,566,861 in
respect of this arrangement.
D) PROFORMA DISCLOSURES REQUIRED BY SFAS 123
The Company applies APB Opinion 25 and related Interpretations in accounting
for its share based plans. Had compensation cost for the Company's share based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement 123,
the charge to income for the period would have been $303,639 and the net loss
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
Net loss: As reported........................................... $16,702,417
Proforma.............................................. $17,006,056
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable with respect to lawsuits and other
matters that arise in the normal course of business. Management is of the
opinion that while it is impossible to ascertain the ultimate legal and
financial liability with respect to these contingencies, the ultimate outcome of
these contingencies is not anticipated to have a material effect on the
Company's financial position and operations.
CAPITAL COMMITMENTS
The Company has contracted with Nortel Dasa as supplier of transmission
equipment to LambdaNet. Under this contract, the Company has committed to
purchase equipment for points of presence in Germany amounting to $24,541,000
(DM 46,540,000) over a total period of two years. Nortel Dasa is responsible for
delivery, installation and commissioning of such Dense Wave Division Multiplex
equipment for the deployment of the LambdaNet broadband services. The Company is
reliant on the ability of Nortel Dasa to deliver these services appropriately.
LEASE COMMITMENTS
On July 14, 1999 (note 1), LambdaNet contracted with GasLINE to utilize
their lightwave conductors and system technology spaces for a period of
10 years. The total commitment is for an amount of $32,166,209 (DM 61,000,000)
and may be extended on the existing terms for an additional
F-65
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
period of 8 years at the Company's option. This agreement is effective at the
time the facilities to be set up by GasLINE are in place. On November 15, 1999,
these facilities are not yet in place. The commitment resulting from this
agreement has been recorded as an operating lease commitment. In connection with
the foregoing agreement LambdaNet finalized a 10-year $21,619,911 (DM
41,000,000) loan facility with GasLINE. The interest rate for the loan is fixed
at 9% per annum, compounded twice a year as of April 1st and October 1st. The
repayable installment per annum is fixed at $2,161,991 (DM 4,100,000). GasLINE
may convert the entire loan into shares of LambdaNet provided that LambdaNet is
converted into a German stock company ("Aktiengesellschaft") by June 30, 2001.
OPERATING LEASES:
<TABLE>
<CAPTION>
1999
----------
<S> <C> <C>
Minimum lease commitments
Within: 1 year................................................ 5,492,000
Between: 1-2 years............................................. 5,559,000
2-3 years............................................. 5,559,000
3-4 years............................................. 5,559,000
4-5 years............................................. 5,559,000
After: 5 years............................................... 26,786,000
----------
Total........................................................... 54,514,000
==========
</TABLE>
Operating lease expense was approximately $290,000 in the period ended
November 15, 1999. The estimated costs for removing improvements at point of
presence under the tenancy agreements (note 2) amount to $4,837,000. The Company
accrues for these costs on a straight-line basis over the terms of the
agreements.
FINANCE LEASES:
<TABLE>
<CAPTION>
1999
------
<S> <C> <C>
Finance lease repayments
Within: 1 year................................................... 10,000
Between: 1-2 years................................................ 10,000
2-3 years................................................ 10,000
3-4 years................................................ 9,000
------
Total 39,000
======
</TABLE>
The finance leases are comprised mainly of lease agreements relating to
transportation vehicles used by the Company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, short term investments,
accounts receivable and accounts payable and accrued expenses approximate
carrying value, principally because of the short maturity of these items.
F-66
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of capital lease obligations approximate the carrying value
based on their effective interest rates compared to current market rates.
14. SUBSEQUENT EVENTS
A) LICENSES AND OPERATIONS
On December 17, 1999, the Company was awarded a class 3 license which
enables the Company to operate as a carriers' carrier. The Company started
operations on January 2, 2000 and is generating revenue.
B) SUBSIDIARIES
On January 19, 2000 the Company founded a subsidiary, LambdaNet
Communications France ("LNCF"), in France, located 1, Boulevard Vivier Merle,
69003 Lyon.
C) FUNDING
On January 21, 2000 the Company finalized a facility agreement of
$56.3 million (euro 56 million), consisting of $46.2 million (euro 46 million)
supplier guaranteed loan and a revolving facility of $10.1 million (euro
10 million) (working capital facility). The purpose of the facility is to secure
the initial roll out of LambdaNet's transmission network and to finance the
start-up losses.
Both the supplier guaranteed loan and the working capital facility bear
interest at EURIBOR plus 3.75% to 1.75%, depending on the senior debt to EBITDA
ratio. The commitment fee for unused funds is 0.875% per annum.
The Company has agreed to the following repayment structure for the loan,
payable in two installments per year:
<TABLE>
<S> <C>
2002........................................................ 10.0%
2003........................................................ 15.0%
2004........................................................ 22.5%
2005........................................................ 25.0%
2006........................................................ 27.5%
-------
100.00%
=======
</TABLE>
Additionally the Company has the option to repay the supplier guaranteed
loan partially or in total at the end of each interest period. The working
capital facility has to be fully repaid at the end of year 2006.
D) COMMITMENTS
On April 26, 2000, LambdaNet Communications SAS, a wholly owned subsidiary
incorporated in January 2000 signed a leasing agreement with Louis Dreyfus
Communications S.A. by which LambdaNet Communications SAS (the lessee) is
leasing two pairs of dark optical fibers for a period of
F-67
<PAGE>
LAMBDANET COMMUNICATIONS GMBH, HANNOVER
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS OF NOVEMBER 15, 1999
14. SUBSEQUENT EVENTS (CONTINUED)
20 years from the date of delivery from Louis Dreyfus Communications S.A (the
lessor). The total commitment is for an amount of $36,778,766 (FFR 270,794,700)
which is payable as follows:
- 15% on the date of signature of the lease agreement
- 45% on the date of commencement of operations
- 40% six months after the date of the commencement of operations
This agreement is guaranteed by FirstMark Communications Europe S.A.
F-68
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE SUCH OFFER OR SALE IS NOT PERMITTED.
<PAGE>
ALTERNATIVE PAGE FOR INTERNATIONAL OFFERING
INTERNATIONAL PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED AUGUST 11, 2000
[LOGO]
SHARES OF CLASS B COMMON STOCK
IN THE FORM OF SHARES OR AMERICAN DEPOSITARY SHARES
FIRSTMARK COMMUNICATIONS
EUROPE S.A.
------------------------
THIS IS AN INITIAL PUBLIC OFFERING OF SHARES OF CLASS B COMMON STOCK OF
FIRSTMARK COMMUNICATIONS EUROPE S.A. OF THE SHARES OF CLASS B COMMON STOCK
BEING OFFERED, SHARES OF CLASS B COMMON STOCK ARE BEING OFFERED OUTSIDE
THE UNITED STATES AND CANADA AND TO INSTITUTIONAL AND RETAIL INVESTORS IN
GERMANY BY THE INTERNATIONAL UNDERWRITERS AND SHARES OF CLASS B COMMON
STOCK ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS UNDER A SEPARATE PROSPECTUS. THE SHARES OF CLASS B COMMON STOCK
OFFERED IN THIS PROSPECTUS WILL BE SOLD IN THE FORM OF REGISTERED SHARES. UPON
REQUEST, THE SHARES OF CLASS B COMMON STOCK OFFERED IN THE UNITED STATES MAY BE
SOLD IN THE FORM OF AMERICAN DEPOSITARY SHARES. EACH AMERICAN DEPOSITARY SHARE
REPRESENTS THE RIGHT TO RECEIVE ONE SHARE OF CLASS B COMMON STOCK. THE AMERICAN
DEPOSITARY SHARES WILL BE EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS.
------------------------
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES OR
AMERICAN DEPOSITARY SHARES. FIRSTMARK COMMUNICATIONS EUROPE S.A. CURRENTLY
ANTICIPATES THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN
[EURO] AND [EURO] , WHICH IS EQUIVALENT TO $ AND $ PER AMERICAN
DEPOSITARY SHARE AT AN EXCHANGE RATE OF [EURO]1.00=$ .
------------------------
FIRSTMARK COMMUNICATIONS EUROPE S.A. WILL APPLY TO HAVE THE CLASS B COMMON
STOCK LISTED ON THE NEUER MARKT SEGMENT OF THE FRANKFURT STOCK EXCHANGE UNDER
THE SYMBOL " " AND TO HAVE THE AMERICAN DEPOSITARY SHARES QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "FMRK".
INVESTING IN THE SHARES AND AMERICAN DEPOSITARY SHARES INVOLVES SIGNIFICANT
RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 15.
------------------------
PRICE [EURO] A SHARE AND $ AN AMERICAN DEPOSITARY SHARE
------------------------
FIRSTMARK COMMUNICATIONS EUROPE S.A. HAS GRANTED THE INTERNATIONAL
UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL SHARES TO COVER
OVER-ALLOTMENTS. FIRSTMARK COMMUNICATIONS EUROPE S.A. HAS GRANTED THE U.S.
UNDERWRITERS A SIMILAR RIGHT TO PURCHASE UP TO AN ADDITIONAL SHARES OR
AMERICAN DEPOSITARY SHARES. THE INTERNATIONAL AND U.S. UNDERWRITERS EXPECT TO
DELIVER THE SHARES OR AMERICAN DEPOSITARY SHARES TO PURCHASERS ON OR ABOUT
, 2000.
------------------------
JOINT GLOBAL COORDINATORS AND JOINT BOOKRUNNERS
MORGAN STANLEY DEAN WITTER ABN AMRO ROTHSCHILD
---------------------
JOINT LEAD MANAGERS
ABN AMRO ROTHSCHILD MORGAN STANLEY DEAN WITTER
SCHRODER SALOMON SMITH BARNEY
<PAGE>
GENERAL INFORMATION
Schroder is a trademark of Schroders Holdings plc and is used under license
by Salomon Brothers International Limited.
UNDERWRITERS
Under the terms and subject to the conditions contained in the international
underwriting agreement dated , 2000 each international
underwriter named below, for whom ABN AMRO Rothschild, Morgan Stanley & Co.
International Limited and Salomon Brothers International Limited are serving as
representatives, has severally agreed to purchase, and FirstMark has agreed to
sell to them, the number of shares indicated in the table below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
ABN AMRO Rothschild.........................................
Morgan Stanley & Co. International Limited..................
Salomon Brothers International Limited......................
--------
Total...................................................
========
</TABLE>
The international underwriting agreement provides that the obligations of
the several international underwriters to pay for and accept delivery of the
shares offered by this prospectus are subject to certain other conditions
including the conditions that no stop order suspending the effectiveness of the
registration statement filed with the U.S. Securities and Exchange Commission is
in effect and no proceedings for such purpose are pending before or threatened
by the U.S. Securities and Exchange Commission and that there has been no
material adverse change or any development involving a prospective material
adverse change in the condition, financial or otherwise, or in the earnings,
business or operations of FirstMark and its subsidiaries, taken as a whole, from
that set forth in the registration statement. The international underwriters are
obligated to take and pay for all of the shares offered by this prospectus,
other than those covered by the over-allotment option described below, if any
shares are taken.
Pursuant to the international underwriting agreement, FirstMark has granted
to the international underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to an aggregate of shares at the
initial public offering price listed on the cover page of this prospectus, less
underwriting discounts and commissions. The international underwriters may
exercise this option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares offered by this prospectus.
To the extent the underwriters exercise this option, each international
underwriter will become obligated, subject to conditions, to purchase
approximately the same percentage of such additional shares as the number listed
next to the international underwriter's name in the preceding table bears to the
total number of shares offered by the international underwriters by this
prospectus.
FirstMark has also entered into a U.S. underwriting agreement with Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc., as representatives of
the U.S. underwriters named in the U.S. underwriting agreement providing for the
offering and sale of shares or ADSs in connection with the U.S. offering.
The lead managers for the U.S. offering are Morgan Stanley & Co. Incorporated
and Salomon Smith Barney Inc. FirstMark has granted to the U.S. underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase up
to additional shares or ADSs solely for the purpose of covering
over-allotments, if any.
<PAGE>
Morgan Stanley & Co. International Limited and ABN AMRO Rothschild are
acting as joint global coordinators for FirstMark in connection with the
combined international and U.S. offering.
To provide for the coordination of their activities, the international
underwriters and the U.S. underwriters have entered into an intersyndicate
agreement which provides, among other things, that the international
underwriters and the U.S. underwriters may purchase and sell among each other
such number of shares as is mutually agreed upon among the international
representatives and the U.S. representatives. To the extent there are sales
among the international underwriters and the U.S. underwriters pursuant to the
intersyndicate agreement, the number of shares initially available for sale by
the international underwriters and the number of shares or ADSs initially
available for sale by the U.S. underwriters may be more or less than the numbers
appearing on the cover page of this prospectus. Except as permitted by the
intersyndicate agreement, the price of any shares or ADSs so sold will be the
initial public offering price, less an amount not greater than the selling
concession.
Pursuant to the intersyndicate agreement, as part of the distribution of the
shares the international underwriters will offer and sell shares, directly or
indirectly, only outside the United States and Canada and to institutional and
retail investors in Germany and the U.S. underwriters will offer and sell ADSs
and shares, directly or indirectly, only in the United States and Canada. For
these purposes, an offer or sale is considered to be made in a country if it is
made to any individual resident in such country or to any corporation,
partnership, pension, profit-sharing or other trust or other entity, including
any such entity constituting an investment advisor acting with discretionary
authority, whole office most directly involved with the purchase is located in
such country. "United States" means the United States of America, its
territories, its possessions and all areas subject to its jurisdiction.
This international prospectus may be used by the international underwriters
and dealers in connection with offers and sales of the shares outside the United
States and Canada.
Shares sold by the international underwriters to the public will initially
be offered at the initial public offering price set forth on the cover of this
international prospectus. Any shares sold by the international underwriters to
securities dealers may be sold at a discount of up to [EURO] per share from
the initial public offering price. Any such securities dealers may resell any
share purchased from the international underwriters to certain other brokers or
dealers at a discount of up to [EURO] per share from the initial public
offering price. If all the shares are not sold at the initial public offering
price, the international representatives may change the offering price and other
selling terms.
Under the terms and subject to the conditions of the international
underwriting agreement, each international underwriter has agreed that:
- it has not offered or sold and, prior to the date six months after the
issue of the shares, will not offer or sell any shares to persons in the
United Kingdom, except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to
the public in the United Kingdom within the meaning of the Public Offers
of Securities Regulations 1995, as amended;
- it has complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything done
by it in relation to the shares in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of the shares to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 (as amended) of Great Britain or is a person to whom the
document may lawfully be issued or passed on.
Each international underwriter has acknowledged and agreed that the shares
have not been registered under the Securities and Exchange Law of Japan and are
not being offered or sold and may not be offered or sold, directly or
indirectly, in Japan or to or for the account of any resident of Japan,
<PAGE>
except (1) pursuant to an exemption from the registration requirements of the
Securities and Exchange Law of Japan and (2) in compliance with any other
applicable requirements of Japanese law. As part of the international offering,
ABN AMRO Rothschild, Morgan Stanley & Co. International Limited and Salomon
Brothers International Limited only may offer shares in Japan to a list of 49
offerees in accordance with the above provisions.
The ordinary shares may not be offered or sold in The Netherlands, as part
of their initial distribution or as part of any re-offering, and this
international prospectus and any documents in respect of the international
offering may not be distributed or circulated in The Netherlands, other than to
individuals or legal entities who or which trade in securities in the conduct of
a business or a profession or as a result thereof.
No action has been or will be taken in any jurisdiction other than the
United States or Germany that would permit a public offering of the shares or
the possession, circulation or distribution of this international prospectus in
any jurisdiction where action for that purpose is required. Accordingly, the
shares may not be offered or sold, directly or indirectly, and neither this
international prospectus nor any other offering material or advertisements in
connection with the shares may be distributed or published in or from any
country or jurisdiction except under circumstances that will result in
compliance with any applicable rules and regulations of any such country or
jurisdiction.
The international underwriters have informed FirstMark that they do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares offered by them.
The following table shows the per share price to the public, the total
underwriting discounts and commissions to be paid to the international
underwriters by FirstMark, and the total proceeds to FirstMark if the
international underwriters' over-allotment option is exercised in full:
<TABLE>
<CAPTION>
U.S. DOLLARS* EURO
---------------- --------
<S> <C> <C>
Per share price to the public.....................
Total international underwriters discounts and
commissions.....................................
Total proceeds to FirstMark.......................
</TABLE>
------------------------
* translated at an exchange rate of [EURO]1.00 to $ .
FirstMark has agreed with the international underwriters that, without the
prior written consent of the global coordinators, it will not, during the period
ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell any option or contract to purchase
any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of FirstMark or any securities convertible into or
exercisable or exchangeable for such shares, or
- enter into any swap or other arrangement that transfers, to another in
whole or in part, the economic consequences of ownership of the shares,
whether any such transaction described above is to be settled by delivery of
shares or other such securities, in cash or otherwise. These restrictions do not
apply to shares issued in this offering or pursuant to our existing share option
plan and employment arrangements.
In order to facilitate the offering of the common stock, the international
underwriters and/or U.S. underwriters may engage in transactions that stabilize,
maintain or otherwise affect the price of the shares. Specifically, the
underwriters may sell more shares than they are obligated to purchase under the
underwriting agreements creating a short position. A short sale is covered if
the short position is no greater than the number of shares available for
purchase by the underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out a covered short sale, the underwriters will consider, among other
things, the open market price of shares compared to
<PAGE>
the price available under the over-allotment option. The underwriters may also
sell shares in excess of the over-allotment option, creating a naked short
position. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the shares in the open market after pricing that could adversely affect
investors who purchase in the offering. As an additional means of facilitating
the offering, the underwriters may bid for, and purchase, shares in the open
market to stabilize the price of the shares. The underwriting syndicate may also
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the shares in the offering, if the syndicate repurchases previously
distributed shares to cover syndicate short positions or to stabilize the price
of the shares. These activities may raise or maintain the market price of the
shares above independent market levels or prevent or retard a decline in the
market price of the shares. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
FirstMark estimates that its share of the total expenses of the offering
excluding underwriting discounts and commissions will be approximately $
million.
The international underwriters have the following shareholdings in
FirstMark:
- ABN AMRO Ventures B.V., an affilate of ABN AMRO Rothschild holds
shares of Class A common stock or 5.0% of FirstMark.
- Morgan Stanley Dean Witter Capital Partners IV, L.P. and certain other
funds affiliated with Morgan Stanley & Co. International Limited hold
shares of Class A common stock or 8.5% of FirstMark.
In addition, ABN AMRO Rothschild and its affiliates have provided FirstMark
with senior bank financing and performance guarantees in the past. From time to
time in the ordinary course of their respective businesses, one or more of the
international underwriters may engage in the future in other commercial and/or
investment banking transactions with FirstMark or its affiliates.
Applications have been made for the listing of the shares on the Neuer Markt
segment of the Frankfurt Stock Exchange under the symbol `` ", and for
quotation of the ADSs on the Nasdaq National Market under the symbol ``FMRK".
FirstMark and the international underwriters have agreed to indemnify each
other against some liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to the offering, there will be no public market for the shares. The
initial public offering price will be determined by negotiations between
FirstMark and the U.S. and international underwriters. Among the factors that
will be considered in determining the initial public offering price are the
future prospects of FirstMark and its industry in general, sales, earnings and
certain other financial and operating information of the company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of FirstMark.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by FirstMark
(other than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Registration fee under Securities Act....................... $ 59,400
NASD filing fee............................................. 23,000
The Nasdaq National Market fees............................. *
Neuer Markt fees............................................ *
Legal fees and expenses..................................... *
Blue sky fees and expenses.................................. *
Accounting fees and expenses................................ *
Printing and engraving expenses............................. *
Registrar and transfer agent fees........................... *
Miscellaneous expenses...................................... *
-----------
Total................................................... $ *
===========
</TABLE>
------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our articles of incorporation provide for indemnification of directors and
officers to the full extent provided by Luxembourg law.
We have obtained insurance policies insuring our directors and officers and
those of our subsidiaries against certain liabilities they may incur in their
capacity as directors and officers. Under these policies, the insurer, on behalf
of FirstMark, may also pay amounts for which FirstMark has granted
indemnification to the directors or officers.
Additionally, reference is made to the underwriting agreements filed as
Exhibits 1.1 and 1.2 to this registration statement, which provides for
indemnification by the underwriters of FirstMark, its directors and officers who
sign the registration statement and persons who control FirstMark, under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the registrant's formation on July 8, 1998, the registrant has issued
and sold the following unregistered securities:
1. On July 8, 1998, the registrant was formed as FirstMark Communications
Europe SCA, a legal partnership with a capital of $40,000 consisting of 1
registered unlimited liability share, par value $1,000, issued to
FirstMark Communications International II LLC and 39 registered limited
liability shares, par value of $1,000, issued to FirstMark Communications
International LLC. The sale was conducted pursuant to an exemption from
the U.S. Securities Act pursuant to Section 4(2) thereof.
II-1
<PAGE>
2. On May 21, 1999, the registrant replaced 1 registered unlimited
liability share, par value $1,000 issued to FirstMark Communications
International II LLC with 1 registered unlimited liability share, par
value $1.50. The registrant also replaced 39 registered limited liability
shares, par value of $1,000, issued to FirstMark Communications
International LLC with 26,000 shares of common stock, par value $1.50 per
share, and further increased its share capital by the issuance of 64,000
shares of common stock, par value $1.50 per share, to FirstMark
Communications International LLC. The sale was conducted pursuant to an
exemption from the U.S. Securities Act pursuant to Section 4(2) thereof
and Section 3(c)(a) thereof.
3. On May 21, 1999, pursuant to a subscription agreement, the registrant
agreed to issue an aggregate of 10,015 shares of Series A convertible
preferred stock, par value $1.50 per share, to a private investor. Under
the subscription agreement, the registrant issued to the investor 10,000
shares of Series A convertible preferred stock. In August and October
1999, the registrant issued the remaining 15 shares of Series A
convertible preferred stock to the investor on January 19, 2000. The
shares were issued in accordance with Regulation S of the U.S. Securities
Act.
4. On January 24, 2000, in connection with a credit facilities agreement
between the registrant and ABN AMRO Ventures B.V., the registrant issued
1,198 share of Series E convertible preferred stock, par value $1.50 per
share, to ABN AMRO Ventures B.V. The shares were issued in accordance
with Regulation S of the U.S. Securities Act.
5. On January 24, 2000, pursuant to a subscription agreement, the
registrant issued 2,272 shares of Series B convertible preferred stock,
par value $1.50 per share, to a private investor. The sale was conducted
pursuant to an exemption from the U.S. Securities Act pursuant to
Section 4(2) thereof.
6. On January 24, 2000, pursuant to a private investor's exercise of its
preemptive rights under the registrant's stockholders agreement, the
registrant issued 253 shares of Series B convertible preferred stock, par
value $1.50 per share, and 1,106 shares of Series C convertible preferred
stock, par value $1.50 per share. The shares were issued in accordance
with Regulation S of the U.S. Securities Act.
7. On January 24, 2000, pursuant to a contribution agreement, the
registrant issued 9,937 shares of Series C convertible preferred stock,
par value $1.50 per share, to FirstMark Fiber Holdings LLC in exchange
for FirstMark Fiber Holdings LLC's 80% ownership interest in LambdaNet
Communications GmbH. The exchange was conducted pursuant to an exemption
from the U.S. Securities Act pursuant to Section 4(2) thereof.
8. On April 7, 2000, pursuant to a subscription agreement, the registrant
issued 10,392 shares of Series F-1 convertible preferred stock, par value
$1.50 per share, to ABN AMRO Ventures B.V. The shares were issued in
accordance with Regulation S of the U.S. Securities Act. On June 15,
2000, the registrant repurchased these shares as described below.
9. On April 27, 2000, the registrant issued 383 shares of Series E
convertible preferred stock, par value $1.50 per share, to ABN AMRO
Ventures B.V. For a limited time, the registrant has a call right to
acquire all 383 shares of Series E convertible preferred stock at an
exercise price of $1.50 per share. The options were granted in accordance
with Regulation S of the U.S. Securities Act. In connection with the
issuance of shares of Series E convertible preferred stock, the
registrant exercised this call right as described below. On June 15,
2000, the registrant repurchased these shares as described below.
10. On June 15, 2000, pursuant to a sale and transfer agreement with ABN
AMRO Ventures B.V., the registrant repurchased 10,392 shares of
Series F-1 convertible preferred stock, par value
II-2
<PAGE>
$1.50 per share, belonging to ABN AMRO Ventures B.V. and 383 shares of
Series E convertible preferred stock, par value $1.50 per share. These
shares were subsequently reissued pursuant to a subscription agreement
with certain private investors. The shares were issued in accordance with
Regulation S of the U.S. Securities Act.
11. On June 15 and July 18, 2000, pursuant to a subscription agreement, the
registrant issued 96,000 shares of Series F convertible preferred stock,
par value $1.50 per share, and 24,000 shares of Series F-2 convertible
preferred stock, par value $1.50 per share, to a group of private
investors. The sale was conducted pursuant to an exemption from the U.S.
Securities Act pursuant to Section 4(2) thereunder and in accordance with
Regulation S.
12. On June 15, 2000, pursuant to a contribution agreement, the registrant
issued 466 shares of common stock, par value $1.50 per share, to
FirstMark Communications International LLC. The shares were issued
pursuant to an exemption from the U.S. Securities Act pursuant to
Section 4(2) thereof.
13. On June 26, 2000, pursuant to a letter agreement, the registrant
committed and became obligated to issue, subject to certain adjustments
contained in the letter, approximately 541 shares of common stock, par
value $1.50 per share, to Audiocom S.A. The exchange is expected to be
conducted pursuant to an exemption from the U.S. Securities Act pursuant
to Regulation S thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.*
1.2 Form of International Underwriting Agreement.*
3.1 Form of Amended Articles of Incorporation of FirstMark
Communications Europe S.A.*
4.1 Specimen Certificate representing the Class B Common Stock.*
4.2 Form of Depositary Agreement among FirstMark Communications
Europe S.A., Bankers Trust Company (as Depositary) and
Registered Holders and Beneficial Owners of American
Depositary Receipts issued thereunder.*
5.1 Opinion of Arendt & Medernach as to the legality of the
shares of Common Stock registered hereunder.*
10.1 Form of Fourth Amended and Restated Stockholders Agreement
by and among FirstMark Communications Europe S.A., FirstMark
Communications International L.L.C., FirstMark
Communications International II L.L.C., FirstMark Fiber
Holdings L.L.C. and Other Investors Signatory thereto.*
10.2 1999 Stock Option Plan.*
10.3 2000 Stock Option Plan.*
10.4 Shareholders Agreement among the Shareholders of FirstMark
Communications France SAS, dated as of January 21, 2000.
10.5 Partners Agreement between the Partners of FirstMark
Communications Espana, S.L., dated November 18, 1999.
10.6 Credit Agreement between LambdaNet Communications GmbH,
Hanover and Bayerische Hypo- und Vereinsbank
Aktiengesellschaft, Munich, dated January 21, 2000.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.7 Euro 480 Million Multi-Tranche Senior Facility Agreement
between FirstMark Communications Deutschland Holdings GmbH
(as borrower), FirstMark Communications Deutschland GmbH (as
guarantor), Deutsche Bank AG (as arranger and fronting
bank), Deutsche Bank Luxembourg S.A. (as facility agent),
Deutsche Bank Luxembourg S.A. (as security agent), and each
Financial Institutions Listed therein, dated May 2000;
Supplemental Agreement dated May 2000; Equity Commitment
Undertaking dated May 2000; and Amendment Agreement dated
2000.
10.8 ABN-AMRO Bank's Guarantee for FirstMark Communications
Espana, S.L., dated April 7, 2000.
10.9 Commercial Contract of Counter Guaranteee and Disclosure of
Security Bond between FirstMark Communications Europe and
the other parties named therein, dated April 7, 2000.
10.10 Contract on the Usage of Optical Waveguides and Technical
Systems Premises between Carriers' Carrier Gesellschaft mbH
and GasLine GmbH & Co. KG, dated July 14, 1999. Application
to be filed with the Securities and Exchange Commission,
pursuant to Rule 406 of the Securities Act of 1933, as
amended, for confidential treatment of certain portions of
this exhibit.
10.11 Loan Contract and Convertible Bond between CCG Carriers'
Carrier GmbH, FirstMark Fiber Holdings L.L.C., LambdaNet
Communications Mitarbeiter GbR, and GasLINE
Telekommunikationsnetzgesellschaft, dated July 14, 1999.
10.12 Connection Service Agreement between Louis Dreyfus
Communications S.A. and LambdaNet Communications France SAS,
dated April 26, 2000. Application to be filed with the
Securities and Exchange Commission, pursuant to Rule 406 of
the Securities Act of 1933, as amended, for confidential
treatment of certain portions of this exhibit.
10.13 Contract for Access to Subscriber's Line between FirstMark
Communications Deutschland GmbH and Deutsche Telekom AG,
dated November 19, 1999.
10.14 Interconnection Contract between FirstMark Communications
Deutschland GmbH and Deutsche Telekom AG, dated March 29,
2000. Application to be filed with the Securities and
Exchange Commission, pursuant to Rule 406 of the Securities
Act of 1933, as amended, for confidential treatment of
certain portions of this exhibit.
10.15 Agreement regulating the Provision of and Transferring
Control over Carrier Fixed Links for the FirstMark Network
between FirstMark Communications Deutschland GmbH and
Deutsche Telekom AG, dated April 6, 2000.
10.16 Skeleton Contract between Carriers' Carrier Gesellschaft mbH
and Nortel DASA Network Systems GmbH & Co. KG for Purchase
of Transmission Systems and Related Services, dated
September 21, 1999. Application to be filed with the
Securities and Exchange Commission, pursuant to Rule 406 of
the Securities Act of 1933, as amended, for confidential
treatment of certain portions of this exhibit.
10.17 Framework Agreement between LambdaNet Communications
Gesellschaft mbH and Nortel Networks plc, dated April 12,
2000. Application to be filed with the Securities and
Exchange Commission, pursuant to Rule 406 of the Securities
Act of 1933, as amended, for confidential treatment of
certain portions of this exhibit.
10.18 European Agreement between FirstMark Communications Europe
SA and Siemens AG, dated May 16, 2000; PMP Contract between
FirstMark Communications Deutschland GmbH and Siemens
Aktiengesellschaft, dated May 25, 2000. Application to be
filed with the Securities and Exchange Commission, pursuant
to Rule 406 of the Securities Act of 1933, as amended, for
confidential treatment of certain portions of this exhibit.
10.19 Services Agreement between FirstMark Communications
International L.L.C. and FirstMark Communications Europe
S.A., executed as of June 15, 2000.
10.20 Services Agreement between FirstMark Communications Europe
S.A. and FirstMark Communications Latin American L.L.C.,
made on March 31, 2000.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.21 Employment Contract between FirstMark Europe Ltd. and
Timothy A. Samples, made on May 11, 2000.
10.22 Promissory Note between Timothy A. Samples and FirstMark
Communications Europe SA for $1,000,000, dated May 11, 2000.
10.23 Stock Option Agreement between FirstMark Communications
Europe SA and Timothy A. Samples, dated May 11, 2000.
10.24 Employment Contract between FirstMark Europe Ltd. and Bob
Koenig, made on April 5, 2000.
10.25 Promissory Note between Bob Koenig and FirstMark
Communications Europe SA for $500,000, dated April 5, 2000.
10.26 Employment Contract between FirstMark Europe SCA and Michael
J. Taylor, made on April 19, 1999.
10.27 Employment Contract between FirstMark Europe Ltd. and Keith
Cornell, made on October 13, 1999.
10.28 Employment Contract between FirstMark Europe SCA and Donal
Byrne, made on September 13, 1999.
10.29 Employment Contract between FirstMark Europe SCA and
Dr. Dieter Finke, made on April 30, 1999.
10.30 License Class 3 for the Operation of Infrastructure for
Offering Telecommunications Services to the public by the
Licensee or Third Parties.
10.31 License Class 4 for Voice Telephony based on Self-Operating
Telecommunciations Networks.
10.32 Granting of Spanish C2 Licenses by the Spanish Ministry of
Development and Infrastructure, dated March 8, 2000.
10.33 Trademark Agreement between FirstMark Holdings L.L.C. and
FirstMark Communications Europe S.A., dated ,
2000.*
11.1 Statement re computation of earnings per share.*
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen.
23.2 Consent of Arthur Andersen.
23.3 Consent of Arendt & Madernach (included in exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27 Financial Data Schedule.*
</TABLE>
------------------------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the U.S. Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than 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 Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
(1) It will provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery
to each purchaser.
(2) For purposes of determining any liability under the U.S. Securities Act,
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 U.S. Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the U.S. Securities
Act, 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in London, England, on August 11, 2000.
<TABLE>
<S> <C> <C>
FIRSTMARK COMMUNICATIONS EUROPE S.A.
BY: /S/ TIMOTHY SAMPLES
-----------------------------------------
Timothy Samples
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Timothy Samples, Robert Koenig, Donal Byrne and
Raj De Datta, and each of them, his true and lawful attorneys-in-fact and
agents, with full powers of substitution and resubstitution, for and in his
name, place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this registration statement, and any
registration statement related to the offering contemplated by this registration
statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange 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 might or could be done in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
II-7
<PAGE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LYNN FORESTER Co-Chairman of Board of
------------------------------------------- Directors August 11, 2000
Lynn Forester
/s/ MICHAEL PRICE Co-Chairman of Board of
------------------------------------------- Directors August 11, 2000
Michael Price
/s/ TIMOTHY SAMPLES Chief Executive Officer
------------------------------------------- (Principal Executive August 11, 2000
Timothy Samples Officer) and Director
/s/ ROBERT KOENIG Chief Financial Officer
------------------------------------------- (Principal Financial August 11, 2000
Robert Koenig Officer)
/s/ VICTOR BISCHOFF Director
------------------------------------------- August 11, 2000
Victor Bischoff
/s/ JUAN LUIS CEBRIAN Director
------------------------------------------- August 11, 2000
Juan Luis Cebrian
/s/ EDWARD A. GILHULY Director
------------------------------------------- August 11, 2000
Edward A. Gilhuly
Director
------------------------------------------- , 2000
Alan E. Goldberg
/s/ FRANCOIS JACLOT Director
------------------------------------------- August 11, 2000
Francois Jaclot
/s/ DAVID LEE Director
------------------------------------------- August 11, 2000
David Lee
/s/ SIR EVELYN DE ROTHSCHILD Director
------------------------------------------- August 11, 2000
Sir Evelyn de Rothschild
/s/ LAWRENCE B. SORREL Director
------------------------------------------- August 11, 2000
Lawrence B. Sorrel
/s/ BARRY S. VOLPERT Director
------------------------------------------- August 11, 2000
Barry S. Volpert
/s/ HELMUT WERNER Director
------------------------------------------- August 11, 2000
Helmut Werner
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.*
1.2 Form of International Underwriting Agreement.*
3.1 Form of Amended Articles of Incorporation of FirstMark
Communications Europe S.A.*
4.1 Specimen Certificate representing the Class B Common Stock.*
4.2 Form of Depositary Agreement among FirstMark Communications
Europe S.A., Bankers Trust Company (as Depositary) and
Registered Holders and Beneficial Owners of American
Depositary Receipts issued thereunder.*
5.1 Opinion of Arendt & Medernach as to the legality of the
shares of Common Stock registered hereunder.*
10.1 Form of Fourth Amended and Restated Stockholders Agreement
by and among FirstMark Communications Europe S.A., FirstMark
Communications International L.L.C., FirstMark
Communications International II L.L.C., FirstMark Fiber
Holdings L.L.C. and Other Investors Signatory thereto.*
10.2 1999 Stock Option Plan.*
10.3 2000 Stock Option Plan.*
10.4 Shareholders Agreement among the Shareholders of FirstMark
Communications France SAS, dated as of January 21, 2000.
10.5 Partners Agreement between the Partners of FirstMark
Communications Espana, S.L., dated November 18, 1999.
10.6 Credit Agreement between LambdaNet Communications GmbH,
Hanover and Bayerische Hypo- und Vereinsbank
Aktiengesellschaft, Munich, dated January 21, 2000.
10.7 Euro 480 Million Multi-Tranche Senior Facility Agreement
between FirstMark Communications Deutschland Holdings GmbH
(as borrower), FirstMark Communications Deutschland GmbH (as
guarantor), Deutsche Bank AG (as arranger and fronting
bank), Deutsche Bank Luxembourg S.A. (as facility agent),
Deutsche Bank Luxembourg S.A. (as security agent), and each
Financial Institutions Listed therein, dated May 2000;
Supplemental Agreement dated May 2000; Equity Commitment
Undertaking dated May 2000; and Amendment Agreement dated
2000.
10.8 ABN-AMRO Bank's Guarantee for FirstMark Communications
Espana, S.L., dated April 7, 2000.
10.9 Commercial Contract of Counter Guaranteee and Disclosure of
Security Bond between FirstMark Communications Europe and
the other parties named therein, dated April 7, 2000.
10.10 Contract on the Usage of Optical Waveguides and Technical
Systems Premises between Carriers' Carrier Gesellschaft mbH
and GasLine GmbH & Co. KG, dated July 14, 1999. Application
to be filed with the Securities and Exchange Commission,
pursuant to Rule 406 of the Securities Act of 1933, as
amended, for confidential treatment of certain portions of
this exhibit.
10.11 Loan Contract and Convertible Bond between CCG Carriers'
Carrier GmbH, FirstMark Fiber Holdings L.L.C., LambdaNet
Communications Mitarbeiter GbR, and GasLINE
Telekommunikationsnetzgesellschaft, dated July 14, 1999.
10.12 Connection Service Agreement between Louis Dreyfus
Communications S.A. and LambdaNet Communications France SAS,
dated April 26, 2000. Application to be filed with the
Securities and Exchange Commission, pursuant to Rule 406 of
the Securities Act of 1933, as amended, for confidential
treatment of certain portions of this exhibit.
10.13 Contract for Access to Subscriber's Line between FirstMark
Communications Deutschland GmbH and Deutsche Telekom AG,
dated November 19, 1999.
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10.14 Interconnection Contract between FirstMark Communications
Deutschland GmbH and Deutsche Telekom AG, dated March 29,
2000. Application to be filed with the Securities and
Exchange Commission, pursuant to Rule 406 of the Securities
Act of 1933, as amended, for confidential treatment of
certain portions of this exhibit.
10.15 Agreement regulating the Provision of and Transferring
Control over Carrier Fixed Links for the FirstMark Network
between FirstMark Communications Deutschland GmbH and
Deutsche Telekom AG, dated April 6, 2000.
10.16 Skeleton Contract between Carriers' Carrier Gesellschaft mbH
and Nortel DASA Network Systems GmbH & Co. KG for Purchase
of Transmission Systems and Related Services, dated
September 21, 1999. Application to be filed with the
Securities and Exchange Commission, pursuant to Rule 406 of
the Securities Act of 1933, as amended, for confidential
treatment of certain portions of this exhibit.
10.17 Framework Agreement between LambdaNet Communications
Gesellschaft mbH and Nortel Networks plc, dated April 12,
2000. Application to be filed with the Securities and
Exchange Commission, pursuant to Rule 406 of the Securities
Act of 1933, as amended, for confidential treatment of
certain portions of this exhibit.
10.18 European Agreement between FirstMark Communications Europe
SA and Siemens AG, dated May 16, 2000; PMP Contract between
FirstMark Communications Deutschland GmbH and Siemens
Aktiengesellschaft, dated May 25, 2000. Application to be
filed with the Securities and Exchange Commission, pursuant
to Rule 406 of the Securities Act of 1933, as amended, for
confidential treatment of certain portions of this exhibit.
10.19 Services Agreement between FirstMark Communications
International L.L.C. and FirstMark Communications Europe
S.A., executed as of June 15, 2000.
10.20 Services Agreement between FirstMark Communications Europe
S.A. and FirstMark Communications Latin American L.L.C.,
made on March 31, 2000.
10.21 Employment Contract between FirstMark Europe Ltd. and
Timothy A. Samples, made on May 11, 2000.
10.22 Promissory Note between Timothy A. Samples and FirstMark
Communications Europe SA for $1,000,000, dated May 11, 2000.
10.23 Stock Option Agreement between FirstMark Communications
Europe SA and Timothy A. Samples, dated May 11, 2000.
10.24 Employment Contract between FirstMark Europe Ltd. and Bob
Koenig, made on April 5, 2000.
10.25 Promissory Note between Bob Koenig and FirstMark
Communications Europe SA for $500,000, dated April 5, 2000.
10.26 Employment Contract between FirstMark Europe SCA and Michael
J. Taylor, made on April 19, 1999.
10.27 Employment Contract between FirstMark Europe Ltd. and Keith
Cornell, made on October 13, 1999.
10.28 Employment Contract between FirstMark Europe SCA and Donal
Byrne, made on September 13, 1999.
10.29 Employment Contract between FirstMark Europe SCA and
Dr. Dieter Finke, made on April 30, 1999.
10.30 License Class 3 for the Operation of Infrastructure for
Offering Telecommunications Services to the public by the
Licensee or Third Parties.
10.31 License Class 4 for Voice Telephony based on Self-Operating
Telecommunciations Networks.
10.32 Granting of Spanish C2 Licenses by the Spanish Ministry of
Development and Infrastructure, dated March 8, 2000.
10.33 Trademark Agreement between FirstMark Holdings L.L.C. and
FirstMark Communications Europe S.A., dated ,
2000.*
11.1 Statement re computation of earnings per share.*
21.1 Subsidiaries of the registrant.
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23.1 Consent of Arthur Andersen.
23.2 Consent of Arthur Andersen.
23.3 Consent of Arendt & Madernach (included in exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27 Financial Data Schedule.*
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*To be filed by amendment.
