UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______.
Commission file number 001-15693
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CARRIER 1 INTERNATIONAL S.A.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LUXEMBOURG 98-0199626
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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ROUTE D'ARLON 3
L-8009 STRASSEN, LUXEMBOURG (011) (41-1) 297-2600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
At May 1, 2000 there were 41,719,278 shares of Common Stock of the
registrant outstanding.
In this report, "Carrier1 International" refers to Carrier 1 International
S.A., a societe anonyme organized under the laws of the Grand Duchy of
Luxembourg, and "Carrier1," "we," "our" and "us" refers to Carrier1
International and its subsidiaries and their predecessors, except where the
context otherwise requires. In our filings with the United States Securities
Commission in "EDGAR" format, the symbol for the euro may be represented by
"(u)", "e", "[euro]", or similar symbol.
Certain statements contained herein which express "belief," "anticipation"
"expectation," or "intention" or any other projection, including statements
concerning the design, configuration, feature and performance of our network and
related services, the development and expansion of our business, the markets in
which our services are or will be offered, capital expenditures and regulatory
reform, insofar as they may apply prospectively and are not historical facts,
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the factors set forth in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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CARRIER1 INTERNATIONAL S.A.
FORM 10Q
INDEX
PAGE
Part I. FINANCIAL INFORMATION.......................................................................
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999......................
Consolidated Statement of Operations (unaudited) for the Three Months Ended March 31, 2000, and 1999.
Consolidated Statement of Shareholders' Equity (unaudited) for the Three Months Ended March 31, 2000.
Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2000, and 1999.
Notes to Unaudited Consolidated Financial Statements.................................................
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................
Part II. OTHER INFORMATION...........................................................................
Item 1. Legal Proceedings...........................................................................
Item 2. Changes In Securities and Use of Proceeds...................................................
Item 4. Submission of Matters to a Vote of Security Holders.........................................
Item 5. Other Information...........................................................................
Item 6. Exhibits and Reports on Form 8-K............................................................
Signatures ............................................................................................
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
MARCH 31, DECEMBER 31,
2000 1999*
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 561,262 $ 28,504
Restricted cash ........................................................ 24,619 5,512
Restricted investments held in escrow .................................. 37,993 61,863
Accounts receivable, net of allowance for
doubtful accounts of $1,074 and $840 at March 31,
2000 and December 31,1999, respectively ............................ 39,487 26,795
Unbilled receivables ................................................... 23,834 18,226
Value-added tax refunds receivable ..................................... 21,795 20,499
Prepaid expenses and other current assets .............................. 11,240 9,873
----------- -----------
Total current assets ............................................ 720,230 171,272
PROPERTY AND EQUIPMENT - NET (SEE NOTE 4) ................................. 240,012 213,743
INVESTMENT IN JOINT VENTURES .............................................. 17,181 4,691
RESTRICTED INVESTMENTS HELD IN ESCROW ..................................... 12,818 28,314
OTHER ASSETS .............................................................. 14,942 19,635
----------- -----------
TOTAL ..................................................................... $ 1,005,183 $ 437,655
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable ............................................... $ 28,996 $ 46,338
Accrued network costs ................................................ 21,281 22,154
Accrued refile costs ................................................. 33,619 18,234
Accrued interest ..................................................... 3,996 12,984
Other accrued liabilities ............................................ 29,144 17,020
Short-term debt (See Note 5) ......................................... 2,640 12,658
----------- -----------
Total current liabilities ....................................... 119,676 129,388
DEFERRED REVENUE .......................................................... 12,050 5,020
LONG-TERM DEBT (See Note 5)
Senior notes ........................................................... 239,288 243,415
Other long-term debt ................................................... 28,923 94,341
----------- -----------
Total long-term debt ............................................ 268,211 337,756
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $2 par value, 55,000,000 and 55,000,000 shares
respectively authorized, 41,719,218 and 33,010,700, respectively
issued and outstanding at March 31, 2000 and December 31, 1999 ... 83,438 66,021
Additional paid-in capital ............................................. 668,774 2,524
Accumulated deficit .................................................... (155,711) (107,734)
Accumulated other comprehensive income ................................. 8,818 4,688
Common stock held in treasury ........................................ (73) (8)
----------- -----------
Total shareholders' equity (deficit)............................. 605,246 (34,509)
----------- -----------
TOTAL ..................................................................... $ 1,005,183 $ 437,655
----------- -----------
----------- -----------
See notes to unaudited consolidated financial statements.
* Derived from audited consolidated financial statements.
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CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
-------------- --------------
REVENUES ................................ $ 51,267 $ 12,293
OPERATING EXPENSES:
Cost of services (exclusive of
items shown separately below) ... 54,536 17,015
Selling, general and administrative .. 7,638 3,318
Depreciation and amortization ........ 6,151 1,336
-------- --------
Total operating expenses ............. 68,325 21,669
-------- --------
LOSS FROM OPERATIONS .................... (17,058) (9,376)
OTHER INCOME (EXPENSE):
Interest expense ..................... (13,913) (4,205)
Interest income ...................... 2,684 979
Currency exchange loss, net .......... (19,687) (2,428)
Other, net ........................... (3) --
-------- --------
Total other income (expense) ....... (30,919) (5,654)
-------- --------
LOSS BEFORE INCOME TAX
BENEFIT ................................. (47,977) (15,030)
INCOME TAX BENEFIT - Net of
valuation allowance ..................... -- --
-------- --------
NET LOSS ................................ $(47,977) $(15,030)
-------- --------
-------- --------
EARNINGS (LOSS) PER SHARE:
Net loss:
Basic ............................ $ (1.32) $ (0.53)
-------- --------
-------- --------
Diluted ............................ $ (1.32) $ (0.53)
-------- --------
-------- --------
See notes to unaudited consolidated financial statements.
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CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
ACCUMULATED COMMON
OTHER STOCK HELD
COMMON ADDITIONAL ACCUMULATED COMPREHENSIVE IN
STOCK PAID-IN CAPITAL DEFICIT INCOME TREASURY TOTAL
------- --------------- ----------- ------------ ---------- ---------
BALANCE-December 31, 1999......... $66,021 $ 2,524 $(107,734) $4,688 $ (8) $(34,509)
Issuance of Shares
(8,708,518 shares)............... 17,417 666,250 683,667
Repurchase of shares ............. (65) (65)
Comprehensive income (loss):
Net loss....................... (47,977) (47,977)
Other comprehensive income,
net of tax:
Currency translation
adjustments................. 4,130 4,130
---------
Total comprehensive loss....... (43,847)
------- --------------- ----------- ------------ ---------- ---------
BALANCE-March 31, 2000 $83,438 $668,774 $(155,711) $8,818 $(73) $605,246
======= =============== =========== ============ ========== =========
See notes to unaudited consolidated financial statements.
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CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (47,977) $ (15,030)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................. 6,151 1,336
Amortization and write-off of capitalized financing costs ..... 4,439
Changes in operating assets and liabilities
Restricted cash ............................................ -- 71
Receivables ................................................ (22,408) (12,077)
Prepaid expenses and other current assets .................. (1,532) (677)
Other assets ............................................... (24) (8,515)
Accounts payable and accrued liabilities ................... 4,533 15,982
Deferred revenue ........................................... 7,162 --
--------- ---------
Net cash used in operating activities .................. (49,656) (18,910)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of restricted investments held in escrow ................ -- (143,034)
Purchase of property and equipment ................................ (45,809) (9,688)
Investments in joint ventures ..................................... (12,490) --
Receipts from maturity of restricted investments .................. 39,365 --
--------- ---------
Net cash used in investing activities .................. (18,934) (152,722)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt ......................... 48,388 --
Proceeds from issuance of long-term debt .......................... -- 249,608
Proceeds from issuance of common stock and warrants ............... 683,667 24,533
Payment on debt ................................................... (123,993) --
Purchase of treasury stock ........................................ (65) --
Cash pledged for letter of credit ................................. (19,318) --
--------- ---------
Net cash provided by financing activities .............. 558,679 274,141
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .............................................. 12,669 1,267
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 532,758 103,776
CASH AND CASH EQUIVALENTS
Beginning of period ............................................... 28,504 4,184
--------- ---------
End of period ..................................................... $ 561,262 $ 107,960
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND INVESTING ACTIVITIES:
At March 31, 2000 and March 31, 1999, equipment purchases of approximately
$28,749 and $21,713, respectively, are included in accounts payable
and accrued network costs.
At December 31, 1999 and 1998, equipment purchases of $39,720 and $17,315,
respectively, are included in accounts payable and accrued network costs.
See notes to unaudited consolidated financial statements.
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CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
1. NATURE OF OPERATIONS
Carrier1 International S.A., its subsidiaries in Europe and its
subsidiary in the United States ("Carrier1" or the "Company"), operate in the
telecommunications industry offering voice, Internet and bandwidth and
related telecommunication services. Carrier1 offers these services primarily
to other telecommunications companies. Carrier1 is a societe anonyme
organized under the laws of the Grand Duchy of Luxembourg and has adopted a
fiscal year end of December 31.
2. UNAUDITED FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position and results of operations
and cash flows for the interim periods presented. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of
the results to be expected for the full year.
3. EARNINGS PER SHARE
The following details the earnings per share calculations for the three
months ended March 31, 2000 and March 31, 1999 (in thousands of U.S. dollars,
except share information):
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
-------------- --------------
Loss from operations ................. $ (17,058) $ (9,376)
=========== ===========
Net loss ............................. $ (47,977) $ (15,030)
=========== ===========
Total number of shares used to compute
basic earnings (loss) per share ...... 36,420,000 28,145,000
=========== ===========
Loss from operations:
Basic and diluted loss per share ...... $ (0.47) $ (0.33)
=========== ===========
Net loss:
Basic and diluted loss per share........ $ (1.32) $ (0.53)
=========== ===========
Potential dilutive securities have been excluded from the computation for
the three months ended March 31, 2000 and March 31, 1999 as their effect is
antidilutive. Had the Company been in a net income
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position for the three months ended March 31, 2000 and March 31, 1999, diluted
earnings per share would have included an additional 4,288,000 and 3,583,000
shares, respectively, related to outstanding warrants, stock options and stock
subscriptions.
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2000, consist of the following:
Network equipment ............................. $ 79,724
Indefeasible right of use investments ......... 47,031
Leasehold improvements ........................ 10,837
Furniture, fixtures and office equipment ...... 10,754
Construction in progress ...................... 111,250
---------
259,596
Less: accumulated depreciation and amortization (19,584)
---------
Property and equipment, net ................. $ 240,012
=========
5. DEBT
The details of other long-term debt are as follows:
Seller financing .............................. $26,016
Network fiber lease ........................... 2,907
-------
Total ......................................... 28,923
=========
Approximately $26.0 million of other long term indebtedness is
attributable to seller financing of fiber optic cable for the Company's
German network. Pursuant to the terms of the financing agreement, the seller
will either provide financing for the entire amount of the purchase with the
contract value to be repaid over three years in equal annual installments
beginning on December 31, 2001 together with interest, or will allow the
Company to make payment in full by December 31, 2000 without interest. The
loan, if provided, will bear interest at the U.S. dollar LIBOR rate plus 4%
per annum.
The Company repaid the financing facility with Nortel Networks Inc. on March
3, 2000. The amount paid was approximately $77.2 million including accrued
interest. The Company also repaid the credit facility with Morgan Stanley
Senior Funding Inc. on February 29, 2000. The amount paid was approximately
$39 million including accrued interest.
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6. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
On April 1, 2000, Carrier1 signed a purchase order with Nortel for the
provision of a first line maintenance, technical support and spares management
service for 3 years for a total cost of $8.6 million.
7. INCOME TAXES
The Company has tax loss carry forwards of approximately $45,642 at March
31, 2000. The ability of the Company to fully realize deferred tax assets
related to these tax loss carryforwards in future years is contingent upon its
success in generating sufficient levels of taxable income before the statutory
expiration periods for utilizing such net operating losses lapse. Due to its
limited history, the Company was unable to conclude that realization of such
deferred tax assets in the near future was more likely than not. Accordingly, a
valuation allowance was recorded to offset the full amount of such assets.
8. INITIAL PUBLIC OFFERING
On March 1, 2000, Carrier1 completed its initial public offering of 8,625,000
shares of common stock (including the underwriters' overallotment of
1,125,000 shares) at a price of (U)87 per share (approximately $87.42 per
share). Carrier1 received proceeds of approximately $683.6 million, net of
underwriting discounts and commissions, listing fees, and offering-related
expenses. Carrier1's shares are quoted and traded in the Federal Republic of
Germany on the Neuer Market segment of the Frankfurt Stock Exchange. In the
United States of America, Carrier1's shares are traded in the form of
American Depositary Shares ("ADSs"). Each ADS represents the right to receive
0.2 shares of common stock. The ADS's are quoted and traded in the U.S. on
the NASDAQ National Market.
9. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments for the three months ended March 31, 2000 and 1999 is shown in the
following table. The "Other" column includes unallocated shared and corporate
related assets.
Three Months Ended March 31, 2000:
INTERNET AND
VOICE SERVICES BANDWIDTH SERVICES OTHER CONSOLIDATED
-------------- ------------------ ----- ---------
Revenues .............. $ 47,709 $ 3,558 $ 51,267
Fixed cost contribution 4,703 3,377 8,080
Identifiable assets ... 31,767 6,059 967,357 1,005,183
Three Months Ended March 31, 1999:
INTERNET AND
VOICE SERVICES BANDWIDTH SERVICES OTHER CONSOLIDATED
-------------- ------------------ ----- ------------
Revenues .............. $ 11,911 $ 382 $ 12,293
Fixed cost contribution 2,345 382 2,727
Identifiable assets ... 14,656 2,040 313,081 329,777
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes. Certain information contained in the
discussion and analysis or set forth elsewhere in this report, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risk and
uncertainties, as detailed in our most recent Form 10-K as of December 31, 1999.
OVERVIEW
We are a rapidly expanding European facilities-based provider of voice,
Internet and bandwidth and related telecommunications services. We offer these
services primarily to other telecommunications service providers. In March 1998,
our experienced management team and Providence Equity Partners formed Carrier1
to capitalize on the significant opportunities emerging for facilities-based
carriers in Europe's rapidly liberalizing telecommunications markets. By
September 1998, we had deployed our initial network and commenced selling
services. By March 31, 2000, we had 310 contracts with voice customers and 110
contracts with Internet and bandwidth customers.
We are developing an extensive city-to-city European fiber optic network
accessing and linking key population centers. In select European cities, we are
also developing intra-city networks and data centers for housing and managing
equipment. We expect these intra-city networks to give us faster, lower cost
access to customers, with better quality control. We also expect to bundle and
cross-sell our intra-city network and data center capabilities with our other
services. We intend to continue rapidly expanding our network in a
cost-effective manner by building, buying or swapping network assets.
To date, we have experienced net losses and negative cash flow from
operating activities. From our inception to September 1998, our principal
activities included developing our business plans, obtaining governmental
authorizations and licenses, acquiring equipment and facilities, designing and
implementing our voice and Internet networks, hiring management and other key
personnel, developing, acquiring and integrating information and operational
support systems and operational procedures, negotiating interconnection
agreements and negotiating and executing customer service agreements. In
September 1998, we commenced the roll-out of our services. We expect to continue
to generate net losses and negative cash flow through at least 2002 as we expand
our operations. Whether or when we will generate positive cash flow from
operating activities will depend on a number of financial, competitive,
regulatory, technical and other factors. See "--Liquidity and Capital
Resources."
Although our management is highly experienced in the wholesale
telecommunications business, our company itself has a limited operating history.
Prospective investors therefore have limited operating and financial information
about our company upon which to base an evaluation of our performance and an
investment in our securities.
Our consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles. We have adopted a fiscal year end of
December 31.
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FACTORS AFFECTING FUTURE OPERATIONS
REVENUES
We expect to generate most of our revenues through the sale of wholesale
long distance voice and Internet and bandwidth services to other
telecommunications service providers. We record revenues from the sale of voice
and Internet services at the time of customer usage. Revenue from bandwidth IRU
sales is recognized in accordance with the SEC interpretation of accounting
rules on a monthly basis over contract life, typically over 15 to 20 years. Our
agreements with our voice customers are typically for an initial term of twelve
months and will be renewed automatically unless cancelled. They employ
usage-based pricing and do not provide for minimum volume commitments by the
customer. We generate a steady stream of voice traffic by providing high-quality
service and superior customer support. Our Internet and bandwidth services are
generally charged at a flat monthly rate, regardless of usage, based on the line
speed and level of performance made available to the customer. Since March 31,
1999, we have migrated to offering usage-based Internet pricing for our Internet
transport services, "Internet Exchange Connect" and "Global Transit", only in
combination with Internet contracts that have a fee-based component that
guarantees minimum revenue, in order to encourage usage of our network services
by our Internet customers. Our agreements with our Internet transport customers
are generally for a minimum term of twelve months, although we may seek minimum
terms of two years or more for agreements providing for higher line speeds.
Currently, our bandwidth services are typically also for an initial term of
twelve months, although we expect to be able to offer more flexible pricing
alternatives to bandwidth customers in the future. We believe that, if the
quality of the service is consistently high, Internet transport customers will
typically increase the amount of capacity they purchase from us. We believe that
they will also generally renew their contracts because it is costly and
technically burdensome to switch carriers.
Our services are priced competitively and we emphasize quality and
customer support. The rates charged to voice and Internet and bandwidth
customers are subject to change from time to time. Although our revenue per
billable minute for voice traffic in the first quarter of 2000 increased as a
result of a more favorable traffic and services mix, we generally expect to
experience declining revenue per billable minute for voice traffic and declining
revenue per Mb for Internet traffic and bandwidth, in part as a result of
increasing competition.
As a result of the construction of European fiber optic networks by our
competitors, the price of wholesale bandwidth capacity is declining rapidly,
which has lowered the price at which we are able to sell our Internet and
bandwidth products, including dark fiber. We also expect technological
advances that greatly enhance the capacity of fiber optic cable to increase
downward price pressure. We anticipate, however, that the incremental costs
of lighting dark fiber with transmission equipment will remain significant
and will therefore serve as an economic restraint to increases in available
managed bandwidth capacity at low marginal costs. Furthermore, we believe
that price decreases will promote demand for high volumes and opportunities
for volume related revenue increases. We believe that much of the impact on
our results of operations from price decreases has been in prior quarters and
we believe it will continue to be, at least partially offset by decreases in
our cost of providing services, largely due to the increased use of our own
fiber and our consequent decreased termination costs, and increases in our
voice and Internet traffic volumes. In addition, we believe that our ability
to bundle and cross-sell network services allows us to compete effectively
and to protect our business, in part, against the impact of these price
decreases.
-12-
Our focus on the wholesale markets results in us having substantially
fewer customers than a carrier in the mass retail sector. As a result, a
shift in the traffic pattern of any one customer, especially in the near term
and on one of our high volume routes, could have a material impact, positive
or negative, on our revenues. Furthermore, many wholesale customers of voice
services tend to be price sensitive and may switch suppliers for certain
routes on the basis of small price differentials. In contrast, Internet and
bandwidth customers tend to use fewer suppliers than voice customers, cannot
switch suppliers as easily and, we believe, are more sensitive to service
quality than to price. We believe that customers for data center services are
more sensitive to the differential services that we plan to provide than to
price. In addition, we believe that they are unlikely to move between
facilities due to their initial investments in tenant improvements and the
high costs and risks of network outage associated with moving to another
facility.
COST OF SERVICES, EXCLUSIVE OF ITEMS DISCUSSED SEPARATELY BELOW
Cost of services, exclusive of depreciation and amortization, which is
discussed separately below, are classified into the following general
categories: access costs, transmission costs, voice and Internet termination
costs and other costs of services.
ACCESS COSTS. We have minimal access costs as our wholesale customers are
typically responsible for the cost of accessing our network. We have begun to
provide services to switchless resellers. Switchless resellers do not have any
telecommunications infrastructure. Therefore, for services to switchless
resellers we will have access costs payable to the originating local provider,
usually the incumbent telephone operator. These costs are reflected in our
pricing and will vary based on calling volume and the distance between the
caller and our point of presence.
TRANSMISSION COSTS. Our transmission costs currently consist of leased capacity,
operation, administration and maintenance cost of owned fibre as well as switch
and router facilities costs. Leased capacity charges are fixed monthly payments
based on capacity provided and are typically higher than a "dark fiber cost
level," which is our target cost level and represents the lowest possible per
unit cost. Dark fiber cost level is the per unit cost of high-capacity fiber
that has been laid and readied for use but which has not been "lit" with
transmission electronics. Dark fiber cost levels can be achieved not only
through owned facilities, but also may be possible through other rights of use
such as multiple investment units, known as "MIUs," or indefeasible rights of
use, known as "IRUs."
As part of our strategy to lower our cost base over time, we will seek
dark fiber cost levels for our entire transmission platform, through building,
acquiring or swapping capacity. For example, we anticipate that the German
network will be operational in the first half of 2000 and the Amsterdam
intra-city network will be operational in the third quarter of 2000. We have
acquired intra-city capacity in London to lower our access costs, and we have
made capital-efficient arrangements to swap capacity on the German network for
capacity on other networks. We further minimize our transmission costs by
optimizing the routing of our voice traffic and increasing volumes on our
fixed-cost leased and owned lines, thereby spreading the allocation of fixed
costs over a larger number of voice minutes or larger volume of Internet
traffic, as applicable. To the extent we overestimate anticipated traffic
volume, however, per unit costs will increase. As we continue to develop our
owned network and rely less on leased capacity, per unit voice transmission
costs are expected to decrease substantially, offset partially by an increase in
depreciation and amortization expense. We also expect to experience declining
transmission costs per billable minute or per Mb, as applicable, as a result of
increasing use of our owned network as opposed to leased network assets,
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decreasing cost of leased transmission capacity, increasing availability of
more competitively priced IRUs and MIUs and increasing traffic volumes.
VOICE TERMINATION COSTS. Termination costs represent the costs we are required
to pay to other carriers from the point of exit from our network to the final
point of destination. Generally, most of the total costs associated with a call,
from receipt to completion, are termination-related costs. Voice termination
costs per unit are generally variable based on distance, quality, geographical
location of the termination point and the degree of competition in the country
in which the call is being terminated.
If a call is terminated in a city in which we have a point of presence and
an interconnection agreement with the national incumbent telephone operator, the
call will be transferred to the public switched telephone network for local
termination. This is usually the least costly mode of terminating a call. If a
call is to a location in which we do not have a point of presence, or have a
point of presence but do not have an interconnection agreement giving us access
to the public switched telephone network, then the call must be transferred to,
and refiled with, another carrier that has access to the relevant public network
for local termination. We pay this carrier a refile fee for terminating our
traffic. Most refilers currently operate out of London or New York, so that the
refiled traffic is rerouted to London or New York and from there is carried to
its termination point. Refile agreements provide for fluctuating rates with rate
change notice periods typically of one or four weeks. We seek to reduce our
refile costs by utilizing least cost routing. For example, where we do not yet
have interconnection agreements, we implement "resale" agreements whereby a
local carrier that has an interconnection agreement with the incumbent telephone
operator "resells" or shares this interconnection right with us for a fee.
Termination through resale agreements is more expensive than through
interconnection agreements but significantly less expensive than through refile
agreements because the traffic does not need to be rerouted to another country.
In countries where we have not been directly authorized to provide
services, we will negotiate to obtain direct operating agreements with
correspondent telecommunications operators where such agreements will result in
lower termination costs than might be possible through refile arrangements. We
believe our refile and resale agreements are competitively priced. If our
traffic volumes are higher than expected, we may have to divert excess traffic
onto another carrier's network, which would also increase our termination costs.
We believe, however, that we have sufficient capacity and could, if necessary,
obtain more. In addition, our technologically advanced daily traffic monitoring
capabilities allow us to identify changes in volume and termination cost
patterns as they begin to develop, thereby permitting us to respond in a
cost-efficient manner.
In general, the majority of our voice traffic originates and terminates in
Europe where prices are generally lower, but where we have implemented
interconnection agreements and therefore generally do not need to terminate
traffic via more costly refile or resale arrangements.
We believe that our termination costs per unit should decrease as we
extend our network, increase transmission capacity and interconnect with more
incumbent telephone operators. We also believe that continuing liberalization in
Europe will lead to decreases in termination costs as new telecommunications
service providers emerge, offering alternatives to the incumbent telephone
operators for local termination, and as European Union member states implement
and enforce regulations requiring incumbent telephone operators to establish
rates which are set on the basis of forward-looking, long run economic costs
that would be incurred by an efficient provider using advanced technology. There
can be no assurance, however, regarding the extent or timing of such decreases
in termination costs.
-14-
INTERNET TERMINATION COSTS. Termination costs represent costs we are required to
pay to other Internet backbone providers from the point of exit of our network.
Internet termination is effected through peering and transit arrangements.
Peering arrangements provide for the exchange of Internet traffic
free-of-charge. We have entered into peering arrangements with ISPs in the
United States and Europe, including recent peering arrangements with several
European incumbent telephone operators. There can be no assurance that we will
be able to negotiate additional peering arrangements. Under transit
arrangements, we are required to pay a fee to exchange traffic. That fee has a
variable and a fixed component. The variable component is based on monthly
traffic volumes. The fixed component is based on the minimum Mb amount charged
to us by our transit partners. The major United States ISPs require almost all
European ISPs and Internet backbone providers, including us, to pay a transit
fee to exchange traffic.
Recently, the Internet services industry has experienced increased merger
and consolidation activity. This activity is likely to increase the
concentration of market power of Internet backbone providers, and may adversely
affect our ability to obtain peering and cost-effective transit arrangements.
OTHER COSTS OF SERVICES. Other costs of planned services include the expenses
associated with providing value-added Internet services and data center
capabilities. These expenses will consist primarily of certain engineering
costs, personnel costs and lease expenses within our data center facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our wholesale strategy allows us to maintain lower selling, general and
administrative expenses than companies providing services to the mass retail
market. Our selling, general and administrative expenses consist primarily of
personnel costs, information technology costs, office costs, travel,
commissions, billing, professional fees and advertising and promotion expenses.
We employ a direct sales force located in the major markets in which we offer
services. To attract and retain a highly qualified sales force, we offer our
sales personnel a compensation package emphasizing performance-based commissions
and equity options. We expect to incur significant selling and marketing costs
in advance of anticipated related revenue as we continue to expand our
operations and service offerings. Our selling, general and administrative
expenses are expected to decrease as a percentage of revenues, however, once we
have established our operations in targeted markets and expanded our customer
base.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which consist principally of
equipment (such as switches, multiplexers and routers), investments in
indefeasible rights of use and in multiple investment units, furniture and
equipment. We depreciate our network over periods ranging from 5 to 15 years
and amortize our intangible assets over a period of 5 years. We depreciate
our investments in indefeasible rights of use and in multiple investment
units over their estimated useful lives of not more than 15 years. We expect
depreciation and amortization expense to increase significantly as we expand
our owned network, including the development of the German network.
-15-
RESULTS OF OPERATIONS
FINANCIAL POSITION
Current assets at March 31, 2000 were approximately $720.2 million,
representing an increase of approximately 321% over current assets at
December 31, 1999 of approximately $171.3 million. The increase is primarily
related to the receipt of the net proceeds of our initial public offering
(the "IPO") of common stock in February 2000. In addition, accounts and
unbilled receivables increased from approximately $26.8 million and $18.2
million, respectively, at December 31, 1999 to approximately $39.5 million
and $23.8 million, respectively, at March 31, 2000 as a result of increased
revenues.
Investment in joint ventures increased approximately 266% from
approximately $4.7 million at December 31, 1999 to approximately $17.2
million at March 31, 2000 as a result of our investment in the Digiplex joint
venture (formerly Hubco)).
Restricted investments held in escrow (both current and long-term)
decreased from December 31, 1999 to March 31, 2000 as a result of our funding
of scheduled interest payments on our senior notes and additions to our
German network.
Deferred revenue increased approximately 140% from approximately $5.0
million at December 31, 1999 to approximately $12.1 million at March 31, 2000
as a result of new bandwidth sales agreements.
Total long-term debt was approximately $268.2 million at March 31, 2000,
representing a decrease of approximately 21% from long-term debt at December
31, 1999 of approximately $337.8 million. The decrease is related to the
repayment of our credit facility with Nortel Networks of approximately $77.2
million, offset by an increase in borrowings under a vendor financing
arrangement of approximately $10.3 million.
Shareholders' equity (deficit) rose from a deficit of approximately $34.5
million at December 31, 1999 to an equity balance of approximately $605.2
million at March 31, 2000 mainly as a result of our IPO and the net loss
incurred in the first quarter of 2000.
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THREE MONTHS ENDED MARCH
31, 1999 AND THREE MONTHS ENDED DECEMBER 31, 1999:
Revenues for the three months ended March 31, 2000 were approximately
$51.3 million, representing an increase of approximately 37% over revenues
for the three months ended December 31, 1999 of approximately $37.3 million
and approximately 317% over revenues for the three months ended March 31,
1999 of approximately $12.3 million. Revenues primarily related to voice
services, which contributed approximately $47.7 million or 93% of total
revenue. Voice revenue grew 30% compared to the three months ended December
31, 1999 and 399% over the three months ended March 31, 1999. Voice traffic
volume during the three months ended March 31, 2000 was approximately 309
million minutes compared with approximately 238 million and 62 million
minutes during the three months ended December 31, 1999 and March 31, 1999,
respectively. Average revenue per minute was 15 cents, which represented an
increase of approximately 5% compared to the three months ended December 31,
1999 due primarily to changes in traffic mix and, to a lesser extent, price
reductions. Average revenue per minute decreased by approximately 20%
compared to the first quarter of 1999, which primarily reflects price
reductions. The majority of voice traffic in the first quarter of 2000 both
originated and terminated in Europe where prices are generally lower, but
where we have implemented interconnection agreements and therefore generally
do not need to terminate traffic via more costly refile or resale
arrangements. Internet and bandwidth services revenue was approximately $3.6
million during the three months ended March 31, 2000, representing an
increase of 17% over the three months ended December 31, 1999 and 829% over
the three months ended March 31, 1999, primarily due to increases in our
customer base.
Cost of services (exclusive of items shown separately) for the three
months ended March 31, 2000 were approximately $54.5 million compared with
approximately $41.9 million and $17.0 million for the three months ended
December 31, 1999 and March 31, 1999, respectively. Such costs increased
primarily as a result of costs directly associated with our increased voice
traffic. These costs consisted primarily of operation of the network, leases
for transmission capacity, operation, administration and maintenance cost of
owned fibre as well as termination expenses including refiling.
Expressed as a percentage of revenues, cost of services was 106% during
the three months ended March 31, 2000 compared with 112% and 138% for the
three months ended December 31, 1999 and March 31, 1999, respectively. These
decreases are primarily the result of higher volumes carried on our existing
network.
Depreciation and amortization for the three months ended March 31, 2000
was approximately $6.2 million compared with approximately $6.0 million and
$1.3 million for the three months ended December 31, 1999 and March 31, 1999,
respectively. These costs increased over the three months ended March 31,
1999 due to higher investments for network equipment, indefeasible rights of
use, and other furniture and equipment.
Selling, general and administrative expenses were approximately $7.6
million during the three months ended March 31, 2000 compared with
approximately $6.8 million and $3.3 million for the three months ended
December 31, 1999 and March 31, 1999, respectively. Such costs consisted
primarily of personnel costs, information technology costs, office costs,
professional fees and expenses. These costs increased over the three months
ended March 31, 1999 primarily as a result of increased headcount,
information technology costs, promotional costs and office costs.
Net interest expense for the three-month period ended March 31, 2000
was approximately $11.2 million. It consisted during this period of
approximately $9.0 million of interest accrued on the notes, the write-off of
capitalized financing cost of $4.9 million less interest income
of approximately $2.7 million. Interest income consists of interest earned
from investing the unused proceeds of our senior notes and the net proceeds
of our IPO. Net interest expense increased approximately $3.8 million, or
52%, over the three months ended December 31, 1999 and approximately $8.0
million, or 248%, over the three months ended March 31, 1999. Such increases
were primarily the result of the write-off of capitalized financing costs.
-16-
The strengthening of the U.S. dollar to the euro in the first quarter of
2000 resulted in a currency exchange loss of $19.7 million, compared with
losses of $10.2 million and $2.4 million during the quarters ended
December 31, 1999 and March 31, 1999, respectively.
Our management evaluates the relative performance of our voice and
internet and bandwidth operations based on their respective fixed cost
contributions. Fixed cost contribution consists of the revenues generated by
the provision of voice services or internet and bandwidth services, as the
case may be, less direct variable costs incurred as a result of providing
such services. Certain direct costs, such as network and transmission costs,
are shared by both the voice and data operations and are not allocated by
management to either service.
Fixed cost contribution for voice services for the three-month period
ended March 31, 2000 was $4.7 million, representing $47.7 million in voice
revenue less $43.0 million, or 14.0 cents per minute, in voice termination
costs. Fixed cost contribution for data services for the same period was $3.4
million representing $3.6 million in data revenue less $0.2 million in data
direct cost.
-17-
LIQUIDITY AND CAPITAL RESOURCES
We broadly define liquidity as our ability to generate sufficient cash
flow from operating activities to meet our obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
From our inception through December 31, 1998, we financed our operations
through equity contributions. During the year ended December 31, 1999, we
financed our operations through additional equity contributions and with the
proceeds of the issuance of our 13 1/4% senior notes and related warrants,
vendor financing and other long term debt, and an interim credit facility. The
further development of our business and deployment of our network will require
significant capital to fund capital expenditures, working capital, cash flow
deficits and debt service. Our principal capital expenditure requirements
include the expansion of our network, including construction of the German and
intra-city networks, the acquisition of multiplexers, routers and transmission
equipment and the construction of data center facilities through an investment
in the Digiplex (formerly named Hubco) joint venture. Additional funding will
also be required for office space, switch site buildout and corporate overhead
and personnel.
Between our inception and December 31, 1998, we had incurred capital
expenditures of approximately $37.2 million, and during the year ended December
31, 1999 we incurred capital expenditures of approximately $195.4 million,
including amounts related to the German network in both periods. Capital
expenditures in 1998 and 1999 were principally for investments in fiber
infrastructure and transmission equipment. We estimate that we will incur
capital expenditures of approximately $362 million from January 2000 through the
end of 2001 ($242 million for 2000 and $120 million for 2001), including
approximately $23 million of which we estimate will be required for our
investment in the Digiplex joint venture. We expect capital expenditures in 2000
and 2001 will be principally for investments in fiber infrastructure and
transmission equipment. By the end of the first half of 2000, we plan to
complete construction of the German network and to purchase additional
multiplexers and routers, and we plan to complete the Amsterdam intra-city
network in the third quarter of 2000.
As of December 31, 1998 funds managed by our equity sponsors had invested
a total of approximately $37.8 million to fund start-up operations. By February
19, 1999, such funds had completed their aggregate equity investment totaling
$60 million in equity contributions. On February 19, 1999, we issued 13 1/4%
senior notes, with warrants, for net proceeds of approximately $242 million,
after deducting discounts and commissions and expenses. Approximately $79.0
million of the net proceeds were originally used to secure the first five
interest payments on the notes. In addition, as of December 31, 1999, employees
and directors had directly or indirectly invested approximately $6.7 million in
our shares, approximately $0.5 million of which relates to shares formally
issued under Luxembourg law after December 31, 1999.
On March 1, 2000, we completed our initial public offering of 8,625,000
shares of common stock (including the underwriters' overallotment of 1,125,000
shares) at a price of Euro 87 per share (approximately $87.42 per share). We
received proceeds of approximately $712 million, net of underwriting discounts
and commissions and listing fees.
-18-
In addition to the net proceeds of our initial public offering, other
potential sources of capital, if available on acceptable terms or at all, may
include possible sales of dark fiber on the German or Amsterdam networks or
additional private or public financings, such as an offering of debt or equity
in the capital markets, an accounts receivable or bank facility or equipment
financings. We believe, based on our current business plan, that these sources,
or a combination of them, will be sufficient to fund the expansion of our
business as planned, and to fund operations until we achieve positive cash flow
from operations. We expect to continue to generate net losses and negative cash
flow through at least 2002 as we expand our operations, and we do not expect to
generate positive cash flow from operating activities until at least 2003.
Whether or when we will generate positive cash flow from operating activities
will depend on a number of financial, competitive, regulatory, technical and
other factors. For example, our net losses and negative cash flow from operating
activities are likely to continue beyond that time if:
- we decide to build extensions to our network because we cannot
otherwise reduce our transmission costs,
- we do not establish a customer base that generates sufficient
revenue,
- we do not reduce our termination costs by negotiating competitive
interconnection rates and peering arrangements as we expand our
network,
- prices decline faster than we have anticipated,
- we do not attract and retain qualified personnel,
- we do not obtain necessary governmental approvals and operator
licenses or
- we are unable to obtain any additional financing as may be required.
Our ability to achieve these objectives is subject to financial,
competitive, regulatory, technical and other factors, many of which are beyond
our control. There can be no assurance that we will achieve profitability or
positive cash flow.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand for
our services and regulatory, technological and competitive developments. There
can be no assurance that sources of additional financing will be available on
acceptable terms or at all.
As of March 31, 2000, we had total current assets of $720.2 million, of
which $32.0 million was escrowed for interest payments on the 13 1/4% senior
notes and $25.3 million of which was allocated to the construction cost of the
German network. Net unrestricted cash as of the same date was $561.3 million. In
the first quarter of 2000, we allocated approximately $19.3 million in
additional funds for the construction cost of the German network and provided a
letter of credit to secure payment of that amount.
EBITDA, which we define as earnings before interest, taxes,
depreciation, amortization, foreign currency exchange gains or losses and
other income (expense), decreased from negative $12.3 million in the fourth
quarter of 1999 to negative $10.9 million in the first quarter of 2000.
EBITDA is used by management and certain investors as an indicator of a
company's ability to service debt and to satisfy capital requirements.
However, EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered as an alternative
to cash flows from operating, investing or financing activities as a measure
of liquidity or an alternative to net income as an indication of our
operating performance or any other measure of performance derived under
-19-
generally accepted accounting principles. EBITDA as used in this report may not
be comparable to other similarly titled measures of other companies or to
similarly titled measures as calculated under our debt agreements.
Our significant debt and vendor financing activity to date has consisted
of the following:
- On February 19, 1999, we issued $160 million and Euro 85 million of
13 1/4% senior notes, with a scheduled maturity of February 15, 2009,
with detachable warrants.
- On February 18, 1999 we entered into an agreement to purchase fiber
optic cable for the German network for $20.3 million plus value-added
tax. We have borrowed an additional amount of approximately $4.0
million under this agreement since December 31, 1999. We have the
right to defer payment until December 31, 2000 without interest,
after which we may obtain seller financing, with interest accruing
from January 1, 2001.
- In June 1999, we entered into a financing facility with Nortel
Networks Inc., an equipment supplier. As of December 31, 1999, we had
borrowed substantially the full amount of the $75 million available
under the facility. The debt outstanding under this facility bore
interest at a LIBOR-based floating interest rate, and the weighted
average on outstanding amounts was 11.04% as of December 31, 1999.
The debt was repaid from the proceeds of our initial public offering.
- In December 1999, we entered into an interim credit agreement with
Morgan Stanley Senior Funding, Inc. and Citibank N.A. As of December
31, 1999, we had borrowed Euro 10 million of the $200.0 million (or
the euro equivalent) available under the facility. This debt bore
interest at a LIBOR-based floating interest rate equal to 6.72% as of
December 31, 1999. The debt outstanding under this facility (Euro 40
million at the time of our initial public offering), was repaid from
the proceeds of our initial public offering, and the facility
terminated.
FOREIGN CURRENCY
Our reporting currency is the U.S. dollar, and interest and principal
payments on the 13 1/4% senior notes are in U.S. dollars and euros. However, the
majority of our revenues and operating costs are derived from sales and
operations outside the United States and are incurred in a number of different
currencies. Accordingly, fluctuations in currency exchange rates may have a
significant effect on our results of operations and balance sheet data. The euro
has eliminated exchange rate fluctuations among the 11 participating European
Union member states. Adoption of the euro has therefore reduced the degree of
intra-Western European currency fluctuations to which we are subject. We will,
however, continue to incur revenues and operating costs in non-Euro denominated
currencies, such as pounds sterling. Although we do not currently engage in
exchange rate hedging strategies, we may attempt to limit foreign exchange
exposure by purchasing forward foreign exchange contracts or engaging in other
similar hedging strategies. We have outstanding one contract to purchase
Deutsche Marks in exchange for dollars from time to time in amounts anticipated
to satisfy our Deutsche Mark-denominated obligations under our German network
arrangements. Any reversion from the euro currency system to a system of
individual country floating currencies could subject us to increased currency
exchange risk.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report (other than the
financial statements and other statements of historical fact) are
forward-looking statements, including, without limitation:
-20-
(i) the statements in "--Overview" concerning (a) our expectations of
improved access to customers and better quality control associated with the
building of intra-city networks, (b) our expectations with regard to our ability
to bundle and cross-sell our intra-city network and data center capabilities
with our other services and (c) our expectation that we will continue to
generate net losses and negative cash flow through at least 2002;
(ii) the statements in "--Revenues" concerning (a) the generation of most
of our revenues through the sale of wholesale long distance voice and Internet
and bandwidth services to other telecommunications service providers, (b) our
belief that, if the quality of the service is consistently high, Internet
transport customers will typically increase the amount of capacity they purchase
from us and will also generally renew their contracts, (c) our expectation of
declining revenue per billable minute for voice traffic and declining revenue
per Mb for Internet traffic and bandwidth, (d) our expectation that
technological advances will exacerbate downward price pressure, (e) our
anticipation that the incremental costs of lighting dark fiber will serve as an
economic restraint to increases in available managed bandwidth capacity at low
marginal costs, (f) our belief that price decreases will promote demand for high
volumes, (g) our belief that the impact on our results of operations from price
decreases will continue to be at least partially offset by decreases in our cost
of providing services and increases in our traffic volumes, (h) our belief that
our ability to bundle and cross-sell network services allows us to compete
effectively and to protect our business, in part, against the impact of these
price decreases and (i) our belief that customers for data center services are
more sensitive to the differential services that we plan to provide than to
price and that they are unlikely to move between facilities;
(iii) the statements in "--Transmission Costs" concerning (a) the times at
which our German network and Amsterdam intra-city networks will be operational,
(b) our expectation that per unit voice transmission costs will decrease,
partially offset by increases in depreciation and amortization expenses and (c)
our expectation that we will experience declining transmission costs as a result
of increasing use of our owned network, decreasing cost of leased transmission
capacity, increasing availability of more competitively priced IRUs and MIUs and
increasing traffic volumes;
(iv) the statements in "--Voice Termination Costs" concerning (a) our
belief that we can obtain more transmission capacity, if necessary, (b) our
belief that our termination costs per unit should decrease as we extend our
network, increase capacity and interconnect with more incumbent telephone
operators and (c) our belief that continuing liberalization in Europe will lead
to decreases in termination costs;
(v) the statement in "--Internet Termination Costs" that the increase in
merger and consolidation activity in the Internet services industry is likely to
increase the concentration of market power of Internet backbone providers;
(vi) the statements in "--Selling, General and Administrative Expenses"
concerning (a) expected incurrence of significant selling and marketing costs in
advance of anticipated related revenue and (b) our expectation that selling,
general and administrative expenses will decrease as a percentage of revenues
once our operations are more established and our customer base expands;
(vii) the statement in "--Depreciation and Amortization" regarding our
expectation that depreciation and amortization expense will increase as we
expand our owned network; and
(viii) other statements as to management's or the Company's expectations
and beliefs presented in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-21-
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon us. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on us will be those anticipated by management. The important
factors described elsewhere in this report (including, without limitation, those
discussed in "--Financial Condition, Liquidity and Capital Resources"), our most
recent report on Form 10-K for the year ended December 31, 1999, or in other
Securities and Exchange Commission filings, could affect (and in some cases have
affected) our actual results and could cause such results to differ materially
from estimates or expectations reflected in such forward-looking statements.
While we periodically reassess material trends and uncertainties affecting
our results of operations and financial condition in connection with our
preparation of management's discussion and analysis of results of operations and
financial condition contained in our quarterly and annual reports, we do not
intend to review or revise any particular forward-looking statement referenced
in this report in light of future events.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement
No. 66." The interpretation is effective for sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. Under this
interpretation, fiber is considered integral equipment and accordingly title
must transfer to a lessee in order for a lease transaction to be accounted for
as a sales-type lease. After June 30, 1999, the effective date of FASB
Interpretation No. 43, sales-type lease accounting is not appropriate for fiber
leases and, therefore, these transactions are accounted for as operating leases
unless title to the fibers under lease transfers to the lessee or the agreement
was entered into prior to June 30, 1999.
During the second quarter of 1999, we recognized revenue of approximately
$3.2 million and cost of services of approximately $1.9 million from one
bandwidth IRU contract that was treated as a sales-type lease. In the future,
similar revenues and expenses will be recognized over the term of the related
contracts, typically 15 to 20 years.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. The adoption of this standard is effective for the first quarter
of our fiscal year ending December 31, 2001. Management has not yet completed
its analysis of this new accounting standard and, therefore, has not
determined whether this standard will have a material effect on our financial
statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because most of our outstanding debt at March 31, 2000 is fixed-rate
debt, a change in market interest rates is not likely to have a material
effect on our earnings, cash flows or financial condition. We are exposed to
market risk from changes in foreign currency exchange rates. Our market risk
exposure exists from changes in foreign currency exchange rates associated
with our non-derivative financial instruments, such as our 13 1/4% senior
euro notes, and with transactions in currencies other than functional
currencies in which we operate. As of March 31, 2000, we did not have a
position in futures, forwards, swaps, options or other similar financial
instruments to manage the risk arising from these interest rate and foreign
currency exchange rate exposures.
We have foreign currency exposures related to purchasing services and
equipment and selling our services in currencies other than the local
currencies in which we operate. Our most significant foreign currency
exposures relate to Western European countries, primarily Germany,
Switzerland, and the United Kingdom, where our principal operations exist.
However, the introduction of the euro has significantly reduced the degree of
intra-Western European currency fluctuations to which we are subject (other
than fluctuations in currencies that were not converted to the euro, such as
the British pound and the Swiss franc). Additionally, we are exposed to cash
flow risk related to debt obligations denominated in foreign currencies,
particularly our 13 1/4% senior euro notes.
The table below presents principal cash flows and related average interest
rates for our obligations by expected maturity dates as of March 31, 2000. The
information is presented in U.S. dollar equivalents, our reporting currency,
using the exchange rate at March 31, 2000. The actual cash flows are payable in
either U.S. dollars (US$) or euro (Euro ), as indicated in the parentheses.
Average variable interest rates are based on our borrowing rate as of March 31,
2000. Fair value of the dollar and euro notes was estimated based on quoted
market prices. Fair value for all other debt obligations was estimated using
discounted cash flows analyses, based on our borrowing rate as of March 31,
2000.
EXPECTED FAIR
MATURITY DATE 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
- --------------------- ---- ---- ---- ---- ---------- ----- ------
(IN THOUSANDS)
Notes payable:
Fixed rate (Euro )........ $ 81,347 $ 81,347 $ 87,658
Interest rate......... 13.25% 13.25%
Fixed rate ($)........ $ 160,000 $ 160,000 $ 160,700
Interest rate......... 13.25% 13.25%
Other long-term debt:
Fixed rate ($)........ $ 2,640 $ 2,154 $ 754 $ 5,548 $ 5,548
Interest rate......... 9.7% 9.7% 9.7%
Variable rate ($)..... $ 8,005 $ 8,005 $ 8,006 $ 24,016 $ 24,198
Interest rate......... 9.7% 9.7% 9.7%
The cash flows in the table above are presented in accordance with the
maturity dates defined in the debt obligations. However, the dollar and euro
notes allow for early redemption at specified dates in stated principal amounts,
plus accrued interest. We have not determined if these debt obligations will be
redeemed at the specified early redemption dates and amounts. We may elect to
redeem these debt obligations early at a future date. Cash flows associated with
the early redemption of these debt obligations are not assumed in the table
above. Should we elect to redeem these debt obligations earlier
-23-
than the required maturities, the cash flow amounts in the table above could
change significantly. We have not presented in the above table information
relating to our obligations under the Nortel facility since those obligations
were repaid with proceeds of our initial public offering
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may, from time to time, be a party to litigation that arises in the normal
course of our business operations. Since our inception we have not been, and we
are not presently, a party to any litigation or arbitration that we believe had
or would reasonably be expected to have a material adverse effect on our
business or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the quarterly period ended March 31,2000, we have sold and issued the
following securities that were not registered under the United States Securities
Act:
Approximately 55,000 shares of our capital stock which were purchased by
our employees at $5.00 and $10.00 per share prior to January 1, 2000 were
formally issued under Luxembourg law on January 19, 2000.
The securities issued in the transactions described above were deemed exempt
from registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act, or Regulation D or Regulation S under the Securities Act,
or Rule 701 under the Securities Act as transactions by an issuer not
involving a public offering, or transactions pursuant to compensation benefit
plans and contracts relating to compensation. The recipients of securities in
each of such transactions represented their intentions to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution of the securities. All recipients were
either furnished with or had adequate access to, through their relationship
with us, information about Carrier1 International.
Through March 31, 2000, we have used the net proceeds from our IPO (File
No. 333-94541, effective date February 22, 2000) as described in our annual
report on Form 10-K, filed on March 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2000, the following matters were submitted to a
vote of security holders.
On January 20, 2000, at a special meeting, holders of our capital stock
voted on the ratification, approval and confirmation of the entry by the
Company into a Credit Agreement dated December 21, 1999. At the meeting,
30,582,312 out 33,065,840 shares issued by the Company were present or
represented and 30,582,312 votes were cast in favor of the proposal, 0 votes
against, and there were no abstentions. Accordingly, the proposal was
approved.
ITEM 5. OTHER INFORMATION
Carrier1 has revised the terms of its previously-announced swap into France,
which was executed during the third quarter 1999. In the first stage of this
revised swap, Carrier1 and the French company have determined during 2000 to
swap two strands of dark fiber on Carrier1's German ring for two strands of dark
fiber of comparable route length in France, reflecting each party's estimated
needs during 2000. In addition, the parties are discussing the potential swap or
mutual sale of local loop fiber and co-location facilities in certain cities in
France in which Carrier1 is not present for comparable local loop fiber in
certain European cities presently being built by Carrier1. The parties also have
agreed to make incremental long haul capacity available to each other on
commercial terms.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1 Articles of Incorporation of Carrier1
International S.A.*
27.1 Financial Data Schedule
- --------------
* Filed as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 (Amendment No. 1) filed February 3, 2000.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the fiscal quarter ended
March 31, 2000:
Form 8-K dated January 4, 2000, and filed with the Securities and Exchange
Commission on January 4, 2000, regarding our joint venture investment in Hubco
S.A.;
Form 8-K/A dated February 9, 2000, and filed with the Securities and Exchange
Commission on February 9, 2000, regarding our joint venture investment in
Hubco S.A. and certain changes in the structure of the Hubco joint venture;
Form 8-K/A dated February 17, 2000, and filed with the Securities and Exchange
Commission on February 17, 2000 in response to certain comments of the
Securities and Exchange Commission regarding our request for confidential
treatment of certain portions of the documents pertaining to our joint venture
investment in Hubco S.A.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/s/ Stig Johansson Director, Chief Executive Officer and May 9, 2000
- ------------------------- President (Principal Executive Officer)
Stig Johansson
/s/ Joachim W. Bauer Chief Financial Officer (Principal Financial May 9, 2000
- ------------------------- Officer and Principal Accounting Officer)
Joachim W. Bauer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
3.1 Articles of Incorporation of Carrier1 International S.A.*
27.1 Financial Data Schedule
- --------------
* Filed as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 (Amendment No. 1) filed February 3, 2000.