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, 2001
/ / 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
-------------------------------------------------
CARRIER 1 INTERNATIONAL S.A. (EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
LUXEMBOURG 98-0199626
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
-------------------------------------------------
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)
-------------------------------------------------
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 11, 2001 there were 42,863,524 shares of Common Stock of the
registrant outstanding.
In this report, "Carrier1 International" refers to Carrier1
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. References to "the euro", "euros" or
"(u)" are to the lawful currency of the European Monetary Union and all
references to "U.S. dollars", "dollars" or "$" are to the lawful currency of
the United States.
The statements contained in this report that are not historical
facts are "forward-looking" statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 which can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should" or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks,
uncertainties and assumptions. These forward-looking statements include those
regarding Carrier1's ability to implement its business and financial plans,
its ability to develop and expand its business, its ability to reduce and
manage costs, its ability to design, configure, develop and operate its
networks successfully, its ability to continue increasing its consumer base,
its ability to take advantage of new technologies, its markets, including the
future growth of the European telecommunications market, the effects of
regulation, including tax regulations, litigation, its anticipated future
revenues, capital spending and financial resources and other statements
contained in this report regarding matters that are not historical facts.
Such forward-looking statements may be included in, but are not limited to
those set forth in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation".
We have based these forward-looking statements on our current
expectations and projections about future events and on industry
publications. We have not independently verified the data derived from
industry publications. Management of Carrier1 cautions the reader that these
forward-looking statements and performance are subject to risks,
uncertainties and other factors that could cause actual results to vary
materially from future results indicated, expressed or implied in such
forward-looking statements. No assurance can be given that the future results
will be achieved; actual events or results may differ materially as a result
of such risks and uncertainties facing Carrier1. Such risks and uncertainties
include, but are not limited to the deterioration of the market economy,
including in Europe and the technology and telecommunications segments, the
deterioration of the financial strength of our customer base, the significant
amount of indebtedness incurred by Carrier1 and its obligations to service
such indebtedness, contractual restrictions on the ability of Carrier1 to
receive dividends from certain subsidiaries, the interests of parties that
control Carrier1 may not be aligned with other holders of our securities, the
risk of termination of certain alliances, partnerships and joint ventures
through which Carrier1 operates, the volatility in the price of our common
shares, increased competition from other voice, Internet, bandwidth and
related telecommunication service providers, expected actions of third
parties such as equipment suppliers and joint venture partners that affect
our operations, exchange rate fluctuations and changing technology, its
inability to secure and hold governmental licenses, as well as regulatory,
legislative and judicial developments. Certain information contained in this
Report including information with respect to our plans and strategy for our
business and related financing, including forward-looking statements that
involve risk and uncertainties, as detailed in our most recent Form 10-K as
of December 31, 2000.
CARRIER 1 INTERNATIONAL S.A.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Balance Sheets March 31, 2001 (Unaudited) and
December 31, 2000 1
Unaudited Consolidated Statements of Operations Three Months
Ended March 31, 2001 and March 31, 2000 2
Unaudited Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 2001 3
Unaudited Consolidated Statements of Cash Flows Three Months
Ended March 31, 2001 and March 31, 2000 4
Notes To Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
MARCH 31, 2001 DECEMBER 31, 2000*
(Unaudited)
ASSETS (See Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 52,431 $ 162,162
Restricted cash 8,885 24,429
Restricted investments held in escrow 15,071 29,951
Available-for-sale securities 184,979 198,186
Accounts receivables, net of allowance for doubtful accounts of
$12,145 and $5,659 at March 31, 2001 and December 31, 2000, respectively 86,444 77,625
Unbilled receivables 37,230 32,202
Value-added tax refunds receivable 50,696 35,741
Prepaid expenses and other current assets 21,773 19,334
-------------- --------------
Total current assets 457,509 579,630
PROPERTY AND EQUIPMENT - Net (See Note 5) 455,587 423,194
INVESTMENT IN RELATED PARTY (See Note 7) 32,074 27,750
INVESTMENT - OTHER 3,098 3,258
OTHER ASSETS 20,613 20,429
-------------- --------------
TOTAL $ 968,881 $ 1,054,261
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 85,689 $ 96,713
Accrued network costs 25,690 9,487
Accrued refile costs 36,033 34,705
Accrued interest 3,884 11,915
Other liabilities 20,063 19,823
Deferred revenue 11,378 11,539
Short-term debt 2,908 2,838
-------------- --------------
Total current liabilities 185,645 187,020
DEFERRED REVENUE 97,689 103,496
LONG-TERM DEBT (See Note 6):
Senior notes 232,853 237,888
Other long-term debt - 753
-------------- --------------
Total long-term debt 232,853 238,641
-------------- --------------
COMMITMENTS AND CONTINGENCIES
Total liabilities 516,187 529,157
SHAREHOLDERS' EQUITY:
Common stock, $2 par value, 55,000,000 shares authorized,
42,862,854 and 42,844,204 issued and outstanding, respectively 85,726 85,688
Additional paid-in capital 666,225 666,205
Accumulated deficit (264,910) (219,666)
Accumulated other comprehensive loss (33,759) (6,532)
Common stock held in treasury, 71,687 and 73,337, respectively (588) (591)
-------------- --------------
Total shareholders' equity 452,694 525,104
-------------- --------------
TOTAL $ 968,881 $ 1,054,261
============== ==============
See notes to unaudited consolidated financial statements.
*Derived from audited consolidated financial statements.
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2001 31, 2000
REVENUES $ 89,577 $ 51,267
OPERATING EXPENSES:
Cost of services (exclusive of items shown
separately below) 84,691 54,536
Selling, general and administrative 19,324 7,638
Depreciation and amortization 13,458 6,151
------------ ------------
Total operating expenses 117,473 68,325
------------ ------------
LOSS FROM OPERATIONS (27,896) (17,058)
OTHER INCOME (EXPENSE):
Interest expense (8,088) (10,124)
Interest income 3,843 2,684
Currency exchange loss, net (13,106) (19,687)
Other, net 3 (3)
------------ ------------
Total other income (expense) (17,348) (27,130)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY ITEM (45,244) (44,188)
INCOME TAX BENEFIT - Net of
valuation allowance (See Note 8) - -
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (45,244) (44,188)
------------ ------------
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT -
Net of $0 benefit (See Note 6) - (3,789)
------------ ------------
NET LOSS $ (45,244) $ (47,977)
============ ============
LOSS PER SHARE (See Note 4):
Loss before extraordinary item:
Basic and diluted $ (1.06) $ (1.21)
Extraordinary loss on early extinguishment of debt:
Basic and diluted $ - $ (0.11)
------------ ------------
Net loss:
Basic and diluted $ (1.06) $ (1.32)
============ ============
See notes to unaudited consolidated financial statements.
-2-
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
ACCUMULATED OTHER COMMON STOCK
ADDITIONAL ACCUMULATED COMPREHENSIVE HELD IN
COMMON STOCK PAID-IN CAPITAL DEFICIT INCOME (LOSS) TREASURY TOTAL
BALANCE - December 31, 2000 $ 85,688 $ 666,205 $ (219,666) $ (6,532) $ (591) $ 525,104
Issuance of shares (including
treasury stock) (20,300 shares) 38 20 3 61
Comprehensive income (loss):
Net loss (45,244) (45,244)
Other comprehensive income (loss),
net of tax:
Currency translation adjustments (27,618) (27,618)
Net unrealized gain from available
for sale securities (net of $0 tax) 391 391
----------
Total comprehensive loss (72,471)
---------- ---------- ---------- --------- ---------- ----------
BALANCE - March 31, 2001 $ 85,726 $ 666,225 $ (264,910) $ (33,759) $ (588) $ 452,694
========== ========== ========== ========= ========== ==========
See notes to unaudited consolidated financial statements.
-3-
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (45,244) $ (47,977)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 13,458 6,151
Amortization of financing costs 650
Extraordinary loss on early extinguishment of debt 3,789
Bad debt expense 7,003 271
Changes in operating assets and liabilities:
Restricted cash 1,182
Accounts, unbilled and value-added tax refunds
receivables (45,168) (22,679)
Prepaid expenses and other current assets (3,781) (1,532)
Other assets 5,851 (24)
Accounts payable and accrued liabilities 37,812 4,533
Short-term deferred revenue (161)
Long-term deferred revenue 414 7,162
----------- -----------
Net cash used in operating activities (28,634) (49,656)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (109,185) (45,809)
Receipts from maturity of restricted investments held in escrow 13,594 39,365
Increase in long-term investments (4,245) (12,490)
----------- -----------
Net cash used in investing activities (99,836) (18,934)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt 40,030
Proceeds from issuance of common stock 61 683,667
Payments on short-term debt (38,397)
Payments on long-term debt (683) (77,238)
Purchase of treasury stock (65)
Restricted cash related to financing activities 14,450 (19,318)
----------- -----------
Net cash provided by financing activities 13,828 588,679
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 4,911 12,669
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (109,731) 532,758
CASH AND CASH EQUIVALENTS:
Beginning of period 162,162 28,504
----------- -----------
End of period $ 52,431 $ 561,262
=========== ===========
See notes to unaudited consolidated financial statements.
-4-
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the three months ending March 31, 2001 and 2000 was
$15,795 and $19,331, respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING AND INVESTING ACTIVITIES: At March
31, 2001 and 2000, equipment purchases of approximately $33,431 and $28,749,
respectively, are included in accounts payable and accrued network costs.
At December 31, 2000 and 1999, equipment purchases of approximately $59,721 and
$39,720 respectively, are included in accounts payable and accrued network
costs.
See notes to unaudited consolidated financial statements.
-5-
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(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 (collectively, "Carrier1"), operate in the
telecommunications industry offering voice and data services. Carrier1 offers
these services primarily to other telecommunications service providers.
Carrier1 International S.A. 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, results of operations,
changes in shareholders' equity, and cash flows for the interim periods
presented. The results of operations for the three months ended March 31,
2001 are not necessarily indicative of the results to be expected for the
full year.
These interim financial statements do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements and should be read
in conjunction with the consolidated balance sheet of Carrier1 at December
31, 2000 and the related consolidated statements of operations, shareholders
equity and cash flows for the year ended December 31, 2000.
3. CHANGE IN FUNCTIONAL CURRENCY
During the third quarter of 2000, Carrier1 determined that the functional
currency of the Luxembourg holding company, Carrier1 International S.A., had
clearly changed from the U.S. dollar to the euro due to significant changes in
economic facts and circumstances underlying Carrier1's business. The functional
currencies of Carrier1's subsidiaries have not changed and, in all instances,
are the respective local currencies.
Carrier1 applied this change prospectively as of the beginning of the third
quarter of 2000, in accordance with Accounting Principles Board Opinion No. 20
"Accounting Changes." As a result of the change, transactions entered into by
Carrier1 International S.A. that are denominated in currencies other than the
euro are now translated into euros in accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation."
The net effect of this change in functional currency for the three
months ended March 31, 2001 was to reduce the net currency exchange loss and
the net loss reported in the statement of operations for the three months
ended March 31, 2001 by approximately $12,502 and to increase the negative
currency translation adjustment component of other comprehensive loss
reported in the consolidated statement of changes in shareholders' equity for
the three months ended March 31, 2001 by approximately $12,502. The
cumulative effect of this change in functional currency as of March 31, 2001
was to increase the cumulative negative currency translation adjustment
component of other comprehensive loss reported in the consolidated statement
of changes in shareholders' equity by approximately $29,513. Also as a result
of the change, both basic and diluted loss per share for the three months
ended March 31, 2001 were decreased by $0.29.
-6-
4. LOSS PER SHARE
The following details the earnings per share calculations for the three months
ended March 31, 2001 and March 31, 2000:
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 2001 31, 2000
Loss from operations $ (27,896) $ (17,058)
============ ============
Loss before extraordinary item $ (45,244) $ (44,188)
============ ============
Extraordinary loss from
early extinguishment of debt $ -- $ (3,789)
============ ============
Net loss $ (45,244) $ (47,977)
============ ============
Total number of shares used to compute
basic and diluted loss per share 42,846,000 36,420,000
============ ============
LOSS PER SHARE:
Loss from operations:
Basic and diluted $ (0.65) $ (0.47)
============ ============
Loss before extraordinary item:
Basic and diluted $ (1.06) $ (1.21)
============ ============
Extraordinary loss:
Basic and diluted $ -- $ (0.11)
============ ============
Net loss:
Basic and diluted $ (1.06) $ (1.32)
============ ============
Potential dilutive securities have been excluded from the computation
for the three months ended March 31, 2001 and March 31, 2000 as their effect
is anti-dilutive. Had Carrier1 been in a net income position for the three
months ended March 31, 2001 and March 31, 2000, the number of
weighted-average shares used to compute diluted earnings per share would have
included an additional 3,170,000 and 4,288,000 shares, respectively, related
to outstanding warrants, stock options and stock subscriptions (determined
using the treasury stock method at the estimated average market value).
5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2001 and December 31, 2000, respectively,
consist of the following:
March 31, December 31,
2001 2000
Network equipment $ 179,595 $ 168,597
Owned fiber network 122,909 124,682
Indefeasible right-of-use investments 104,878 98,201
Leasehold improvements 29,561 25,694
Furniture, fixtures and office equipment 17,195 16,534
Construction in progress 58,737 36,682
----------- ------------
512,875 470,390
Less: accumulated depreciation and amortization (57,288) (47,196)
----------- ------------
Property and equipment, net $ 455,587 $ 423,194
=========== ============
-7-
6. DEBT
During the three months ended March 31, 2000, the early retirement of an
interim credit agreement with Morgan Stanley Senior Funding, Inc. and
Citibank N.A. and a financing facility with Nortel Networks Inc. resulted in
an after-tax extraordinary loss of $3,789, or $0.11 per share.
7. RELATED PARTY TRANSACTIONS
In January 2001, Carrier1 invested an additional $4,324 in DigiPlex S.A.,
a related party.
8. INCOME TAXES
Carrier1 has tax loss carryforwards of approximately $69,011 at March 31, 2001.
The ability of Carrier1 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 lapses. Due to its limited
history, Carrier1 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-
9. SEGMENT INFORMATION
Summarized financial information concerning Carrier1's reportable segments for
the three months ended March 31, 2001 and March 31, 2000 is shown in the
following table. The "Other" column includes unallocated shared network and
corporate-related assets which are all assets other than network equipment that
has been identified as relating to a specific segment.
THREE MONTHS ENDED MARCH 31, 2001:
VOICE DATA
SERVICES SERVICES OTHER CONSOLIDATED
Revenues $ 58,627 $ 30,950 $ 89,577
Fixed cost contribution 4,953 14,952 19,905
Identifiable assets 25,961 24,889 $918,031 968,881
THREE MONTHS ENDED MARCH 31, 2000:
VOICE DATA
SERVICES 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
The following table reconciles the fixed cost contribution for reportable
segments to the loss before income tax benefit for the three months ended March
31, 2001 and March 31, 2000:
MARCH 31, MARCH 31,
2001 2000
Total fixed cost contribution for reportable
segments $ 19,905 $ 8,080
Unallocated amounts:
Unallocated cost of services (exclusive of
items shown separately below) (15,019) (11,349)
Selling, general and administrative expenses (19,324) (7,638)
Depreciation and amortization (13,458) (6,151)
Other income (expense) (17,348) (27,130)
---------- ----------
Loss before income tax benefit and extraordinary item $ (45,244) $ (44,188)
========== ==========
Unallocated cost of services include network and transmission costs that are
shared by the voice and data services segments.
-9-
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 UNAUDITED
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, 2000.
OVERVIEW
In recent quarters and especially recent months, the overall economic
situation has worsened significantly. This is especially true for companies
operating in the technology and telecommunications related market segments. This
has affected, and will continue to affect, Carrier1. We recognize that a
sustained economic slowdown will affect companies operating in the technology
and telecommunications related markets segments and may have a material adverse
effect on our business. We have observed evidence of this slowdown in recent
public capital market sentiment and recent announcements of various technology
and telecommunications companies warning of slowing revenue growth and reduced
profits or increased financial losses. Even though we remain optimistic
regarding the long-term viability of the telecommunications industry, especially
in light of the continued growth of demand for services, we will pay very close
attention to the development of the overall economic situation within and
outside of our market segment.
Even though we expect our financial results for 2001 to demonstrate
continued growth and improved profitability, as a result of the above described
situation, we have decided to significantly increase our allowance for
doubtful accounts receivable from $5.7 million as of December 31, 2000 to
$12.1 million as of March 31, 2001. We expect to make further provisions for
bad debts during 2001 as the telecommunications industry continues to
experience business failures. These increases will negatively affect our
financial results for these periods.
However, given our relative financial strength and operational
maturity, we believe we will be able to gain additional customers from providers
that we expect will no longer be able to finance their respective business
plans. However, we cannot assure that we will be able to gain such customer
relationships or that these relationships will generate meaningful revenues for
us.
Additionally, due to our focus on telecommunications service providers
and other large telecommunications users with similar needs, we service
significantly fewer customers than a telecommunications service provider
directly addressing an end user customer base. As a result, the loss of one
customer or the shift in traffic pattern of any one customer, especially in the
near term, could have a material adverse impact on our financial results.
Furthermore, substantially all customers we target for voice services are price
sensitive and may switch suppliers for certain routes on the basis of small
price differentials. In contrast, data service customers tend to use fewer
suppliers and, in general, cannot switch suppliers as easily as our voice
customers due to significant technical obstacles.
To date, we have experienced net losses and negative cash flows from
operating activities. 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" contained elsewhere in this document.
THREE MONTHS ENDED MARCH 31, 2001
SUMMARY TABLE
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
$ 000, EXCEPT SHARES AND PER SHARE DATA
Voice services revenue........................................ $58,627 $47,709
Data services revenue......................................... 30,950 3,558
TOTAL REVENUE................................................. 89,577 51,267
Cost of services (exclusive of amounts shown separately below) 84,691 54,536
Selling, general and administrative expenses.................. 19,324 7,638
EBITDA........................................................ (14,438) (10,907)
Depreciation and amortization................................. 13,458 6,151
OTHER INCOME (EXPENSE):
Interest expense.............................................. (8,088) (10,124)
-10-
Interest income............................................... 3,843 2,684
Currency exchange loss, net................................... (13,106) (19,687)
Other income (expense)........................................ 3 (3)
Total other income (expense).................................. (17,348) (27,130)
LOSS BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEM......... (45,244) (44,188)
Income tax expense............................................ -- --
Loss before extraordinary item................................ (45,244) (44,188)
Extraordinary loss on early extinguishment of debt............ -- (3,789)
NET LOSS...................................................... $ (45,244) $ (47,977)
----------------- -----------------
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item................................ $(1.06) $(1.21)
----------------- -----------------
Extraordinary loss on early extinguishment of debt............ -- $(0.11)
----------------- -----------------
Net loss...................................................... $(1.06) $(1.32)
----------------- -----------------
Weighted average shares outstanding........................... 42,846,000 36,420,000
----------------- -----------------
We define EBITDA as earnings before interest, taxes, depreciation,
amortization, foreign currency exchange gains or losses, other income (expense)
and extraordinary items. 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
accounting principles generally accepted in the United States of America, or
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 indications of our operating performance or any
other measure of performance derived under US GAAP. 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.
REVENUE
Revenues increased from $51.3 million for the three months ended March
30, 2000 to $89.6 million for the three months ended March 31, 2001. We divide
our revenues into two principal categories: voice services revenue and data
services revenue. Voice services revenues increased from $47.7 million for the
three months ended March 31, 2000 to $58.6 million for the three months ended
March 31, 2001. Data services revenues increased from $3.6 million for the three
months ended March 31, 2000 to $31.0 million for the three months ended March
31, 2001.
Increased revenue from the prior year's three-month period reflects
significant growth in demand for our service offerings from both new and
existing customers, a variety of new service introductions and a significant
expansion of our addressable market. From late 1999 to early 2000, we expanded
our entire service portfolio into three new countries (Italy, Spain and Belgium)
and significantly enhanced our data service offerings in all of our service
countries. During the year 2000 and into the first quarter of 2001, we have
focused on developing a number of enhanced voice services as well as data
services such as Internet access, value added Internet transport, a Virtual ISP
platform as well as a variety of content distribution and caching service
offerings. Another focal point was the development of partnerships with other
data services providers in order to help distribute our core services and
provide better end-user functionality to our customer's customers.
VOICE SERVICES: Revenues from wholesale voice services and enhanced voice
services, that is, the revenues we derived from calling cards, premium number
services and other enhanced voice services, increased from $47.7 million for the
three months ended March 31, 2000 to $58.6 million for the three months ended
March 31, 2001. Voice traffic volume during the three months ended March 31,
2001 increased approximately 43% over the three months ended March 31, 2000.
The average revenue per minute during the three months ended March 31, 2001
decreased approximately 14% from the three months ended March 31, 2000. The
price decrease reflects a change in traffic mix as well as overall price
decreases for voice services as a result of increased competition. However,
we believe prices may stabilize if the number of direct competitors decreases
as the telecommunications industry continues to experience business failures
and further consolidation.
The voice volume increases from the first quarter of 2000 to the first
quarter 2001 were driven not only by the growth in our customer base, the
build out of our network, the formation of subsidiaries and the establishment
of sales teams in the Nordic countries, Italy and Spain, but also due to the
launch of the new enhanced services. With the continuous build out of our
network through the first quarter of 2001, more than half of the voice
traffic was terminated in Europe at a lower revenue rate per minute but at a
much higher profitability as this traffic was mostly handled on our owned
network.
DATA SERVICES: Repetitive data services revenues, that is, the revenues we
derived from internet transport, internet access services, bandwidth,
infrastructure, and data center services increased from $3.6 million for the
three months ended March 31, 2000 to $31.0 million for the three months ended
March 31, 2001. This increase is primarily driven by increases in revenues
from bandwidth, infrastructure and virtual ISP services. Non-recurring data
revenues, or one-time sales, such as duct, bandwidth IRU, and fiber sales
were approximately $7.9 million during the three months ended March 31, 2001.
There were no such non-recurring data revenues during the three months ended
March 31, 2000. We expect that data services revenues as a percentage of
total revenues will continue to increase due to the implementation of
existing service contracts, the introduction of new services, and the
likelihood of winning new customers as a result of our expanded services.
COST OF SERVICES
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Cost of services (exclusive of items shown separately) increased from
$54.5 million for the three months ended March 31, 2000 to $84.7 million for the
three months ended March 30, 2001. Depreciation of our network assets is
included in depreciation and amortization.
Cost of services consist of voice and Internet interconnection and
termination costs, network operating costs, transmission costs, temporary or
permanent leases for transmission capacity and costs related to duct,
bandwith IRU, and fiber sales. The increase from the first quarter of 2000 to
the first quarter of 2001 was primarily attributable to interconnection
payments associated with the volume increase in traffic for our voice
services, additional network operating costs associated with the increased
demand for our repetitive data services, the development of new services, and
our geographic expansion.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses increased from $7.6 million for the three months ended
March 31, 2000 to $19.3 million for the three months ended March 31, 2001. This
increase was primarily attributable to bad debt expense of $7.0 million in the
first quarter of 2001 as compared to $271,000 in the first quarter of 2000. We
increased our provision due to concerns over the economic viability of some of
our customers, primarily in the voice services segment, as they have been
negatively impacted by the aforementioned recent economic slowdown.
Additionally, a portion of the increase related to additional personnel
costs, in particular an increase of our sales force, information technology
costs, office costs and professional fees and expenses necessary to manage
and administer our overall growth. Expressed as a percentage of revenues,
selling, general and administrative expenses increased from 15% in the first
quarter of 2000 to 22% in the first quarter of 2001. This increase was
primarily driven by the significant amount of bad debt expense. Excluding bad
debt expense, our selling, general and administrative expenses expressed as a
percentage of our revenue remained stable from the first quarter of 2000 to
the first quarter of 2001.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses increased
from $6.2 million for the three months ended March 31, 2000 to $13.5 million for
the three months ended March 31, 2001. The increase was primarily attributable
to the completion and initial operation of the German fiber ring, additional
investments in ducts, fiber, cables, electronics, network equipment, build out
of data centers and other furniture and fixtures. Once again, the additional
investments are mainly attributable to growth of demand for our services and our
geographic expansion of our network footprint.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA")
We define EBITDA as earnings before interest, taxes, depreciation,
amortization, foreign currency exchange gains or losses, other income (expense)
and extraordinary items. Our EBITDA for the three months ended March 31, 2001
reflected a loss of $14.4 million, compared with a loss of $10.9 million for the
three months ended March 31, 2000. This increase in our EBITDA loss is primarily
attributable to the aforementioned bad debt expense. However, our EBITDA margin
improved from (21)% for the three months ended March 31, 2000 to (16)% for the
three months ended March 31, 2001. The improvement of EBITDA margins can be
attributed to an increase in data services revenues as a percentage of total
revenues. During the first quarter of 2001, we were able to continue
reducing these negative margins by moving traffic on-net thereby reducing
leased line costs, increasing the relative revenue contributions from higher
margin products and services and introducing additional products and services
such as Virtual ISP and on-net managed bandwidth services.
IT SHOULD BE NOTED THAT EBITDA IS USED BY OUR MANAGEMENT AND CERTAIN
INVESTORS AS AN INDICATOR OF OUR ABILITY TO SERVICE DEBT AND TO SATISFY OUR
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 AN INDICATION OF OUR OPERATING PERFORMANCE OR ANY
OTHER MEASURE OF PERFORMANCE DERIVED UNDER US GAAP. 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.
OTHER INCOME (EXPENSE)
INTEREST EXPENSE AND INTEREST INCOME. Net interest expense decreased from $7.4
million for the three months ended March 31, 2000 to $4.2 million for the three
months ended March 31, 2001. Interest income increased from $2.7 million for the
three months ended March 31, 2000 to $3.8 million for the three months ended
March 31, 2001. This increase is primarily attributable to interest earned
during the entire first quarter of 2001 on the remaining net proceeds of our
initial public offering that only occurred in the last month of the first
quarter of 2000. Interest expense decreased from $10.1 million for the three
months ended March 31, 2000 to $8.1 million for the three months ended March 31,
2001. This decrease is primarily attributable to the repayment of our interim
credit agreement with Morgan Stanley Senior Funding, Inc. and Citibank N.A and
financing facility with Nortel Networks Inc. as part of our initial public
offering at the end of the first quarter of 2000.
CURRENCY EXCHANGE LOSS--NET. Currency exchange loss, net, decreased from $19.7
million for the three months ended March 31, 2000 to $13.1 million for the three
months ended March 31, 2001. This decrease is primarily attributable to the
change in functional currency of the Luxembourg holding company that reduced
the currency exchange loss, net, reported in the unaudited statement of
operations by $12.5 million for the three months ended March 31, 2001 as
described under the caption "--Liquidity and Capital Resources." During the
first quarter of 2001, the U.S. dollar strengthened against most European
currencies to a slightly greater extent than during the first quarter of 2000.
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM
Our loss before income tax benefit and extraordinary item increased
from $44.2 million for the three months ended March 31, 2000 to $45.2 million
for the three months ended March 31, 2001 due to the aforementioned changes in
revenues and operating expenses.
INCOME TAX BENEFIT
For both of the two periods, we generated tax losses on ordinary
activities and therefore did not incur a tax obligation. We have recorded a
valuation allowance for the full amount of tax loss carryforwards generated
in each of the two periods.
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EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
For the three months ended March 31, 2000, an after-tax extraordinary
loss of $3.8 million resulted from the early retirement of an interim credit
agreement with Morgan Stanley Senior Funding, Inc. and Citibank N.A. and a
financing facility with Nortel Networks Inc. These facilities were repaid as
part of our initial public offering as described under the caption "--Liquidity
and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The costs associated with the initial installation and expansion of our
networks, including development, installation and initial operating expenses,
have been, and in new markets are expected to be, significant and will result in
negative cash flow. Negative cash flow is expected to continue in each of our
markets until an adequate customer base and related revenue stream have been
established. We believe that our operating losses and negative cash flow will
continue until at least 2002 as we expand our networks and service offerings.
CASH FLOW INFORMATION
Net cash used in operating activities decreased to $28.6 million for
the three months ended March 31, 2001 compared to $49.7 million for the three
months ended March 31, 2000. The decrease was primarily derived from changes
in receivables, accounts payable and accrued liabilities.
Receivables increased by $45.2 million to $174.4 million for the three
months ended March 31, 2001 compared to an increase of $22.7 million for the
three months ended March 31, 2000. Receivables increased during these periods as
a result of increased volume and number of customers as well as difficulties in
collecting certain receivables due to the change in economic conditions in the
telecommunications industry. Accounts payable and accrued liabilities increased
by $37.8 million to $171.4 million for the three months ended March 31, 2001
compared to an increase of $4.5 million for the three months ended March 31,
2000. Accounts payable and accrued liabilities increased during these periods
due to the continued expansion of the business.
We used $99.8 million in cash for investing activities during the
three months ended March 31, 2001 compared to $18.9 million during the three
months ended March 31, 2000. We paid for $109.2 million in property and
equipment during the three months ended March 31, 2001 compared to $45.8 million
for the three months ended March 31, 2000, in order to invest in fiber
infrastructure and transmission equipment. This includes payments for
major infrastructure projects including the German network, the Hanover
cross-connect, the development of the Southern Ring, and the UK network. We
plan to continue investing in infrastructure projects, such as metropolitan
networks.
Net cash provided by financing activities was $13.8 million during the
three months ended March 31, 2001 compared to $588.7 million during the three
months ended March 31, 2000. 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 (u)87 per share (approximately
$87.42 per share). We received proceeds of approximately $681.6 million, net of
underwriting discounts and commissions, listing fees, and offering-related
expenses. The net cash provided was used to help fund the purchases of property
and equipment, investments, operating losses and the repayment on a portion of
the long-term debt that was incurred during 1999.
On February 19, 1999, we issued $160 million and (u)85 million
(currently $74.7 million) of 13 1/4% senior notes, with a scheduled maturity
of February 15, 2009, with detachable warrants. These notes contain covenants
that restrict Carrier1's ability to enter into certain transactions
including, but not limited to, incurring additional indebtedness, creating
liens, paying dividends, redeeming capital stock, selling assets, issuing or
selling stock of restricted subsidiaries, or effecting a consolidation or
merger.
As required by the terms of the notes, Carrier1 used approximately
$49.2 million of the net proceeds to purchase a portfolio of U.S. Government
securities and approximately (u)26.9 million ($29.8 million) of the net proceeds
to purchase a portfolio of European government securities, and pledged these
portfolios for the benefit of the holders of the respective series of notes to
collateralize and fund the first five interest payments.
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. The
outstanding balance was repaid from the proceeds of our initial public offering
during the third quarter of 2000.
In June 1999, we entered into a financing facility with Nortel Networks
Inc., an equipment supplier. Prior to the repayment of this debt during the
first quarter of 2000, 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
interest rate on outstanding amounts was 11.04% as of December 31, 1999. The
debt was repaid from the proceeds of our initial public offering and resulted in
an after-tax extraordinary loss of $1.6 million.
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 (u)10 million ($10.1 million) of the $200.0 million (or the euro
equivalent) available under the facility. During the first quarter of 2000,
we incurred additional indebtedness of (u)30 million (approximately $29.7
million) related to this 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 was repaid from the proceeds of our initial
public offering, and the facility terminated. This debt retirement resulted
in an after-tax extraordinary loss of $2.2 million.
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We believe that the remaining net proceeds from the offerings
discussed above together with cash and marketable securities on hand and
future capacity sales on our network will provide sufficient funds for us to
expand our business as planned and to fund operating losses through 2002.
However, the amount of future capital requirements will depend on a number of
factors, including:
o the overall success of our business;
o any acquisitions or investments we make;
o the start-up of each additional segment of our network;
o the dates on which we further expand our network;
o whether our network build-out is on-time and on-budget;
o the types of services we may offer in the future;
o staffing levels;
o customer growth; and
o the overall economic situation over the foreseeable future.
Additional factors that are not within our control, including
competitive conditions, government regulatory developments and capital, may also
impact our future capital requirements. Depending on the factors listed above,
we may need to issue additional debt, secure additional credit facilities, delay
or abandon some or all of our development and expansion plans or may be required
to seek other sources of funding. Carrier1 may not be able to secure any such
financing, if and when it is needed. Our inability to secure additional funding
may have a material adverse effect on our business.
FOREIGN CURRENCY
We report our financial results in U.S. dollars. We make interest and
principal payments on our 13 1/4% senior notes in U.S. dollars and euros.
However, the majority of our revenues and operating costs 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.
During the third quarter of 2000, Carrier1 determined that the
functional currency of the Luxembourg holding company, Carrier 1 International
S.A., had clearly changed from the U.S. dollar to the euro due to significant
changes in economic facts and circumstances underlying our business. The
functional currencies of our subsidiaries have not changed and, in all
instances, are the respective local currency.
We applied this change prospectively as of the beginning of the third
quarter of 2000. As a result of this change, transactions entered into by the
holding company that are denominated in currencies other than the euro are now
translated into euros in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation."
The net effect of this change in functional currency for the three
months ended March 31, 2001 was to decrease the currency exchange loss (net) and
the net loss reported in the unaudited statement of operations by
approximately $12.5 million and to increase the negative currency translation
adjustment component of other comprehensive loss reported in the statement of
shareholders' equity by approximately $12.5 million for the three months
ended March 31, 2001.
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 engage in other similar hedging
strategies. Any reversion from the euro currency system to a system of
individual country floating currencies could subject us to increased currency
exchange risk.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because our outstanding debt at March 31, 2001 is fixed-rate debt, a
change in market interest rates has no 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 dollar notes, and with transactions in currencies other than
local currencies in which we operate. As of March 31, 2001, we did not have a
position in futures, forwards, swaps, options or other similar financial
instruments to manage the risk arising from our foreign currency exchange rate
exposures.
In addition, 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. The introduction of the euro has
significantly reduced the degree of intra-Western European currency fluctuations
to which we are subject as of March 31, 2001 (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
dollar notes.
The table below presents principal cash flows and related average
interest rates for our obligations by expected maturity dates as of March 31,
2001. The information is presented in U.S. dollar equivalents, our reporting
currency, using the exchange rate at March 31, 2001. The actual cash flows
are payable in either U.S. dollars ($) or euro (u), as indicated in the
parentheses. 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, 2001.
EXPECTED MATURITY DATE 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
- ---------------------- ---- ---- ---- ---- ---- ---------- ----- ----------
(IN THOUSANDS)
Notes payable:
Fixed rate (u)............... $74,725 $74,725 $59,967
Interest rate................ 13.25% 13.25%
Fixed rate ($)............... $160,000 $160,000 $111,200
Interest rate................ 13.25% 13.25%
Other long-term debt:
Fixed rate ($)............... $2,155 $753 $2,908 $2,908
Interest rate................ 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 than the
required maturities, the cash flow amounts in the table above could change
significantly.
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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, 2001, we issued 18,650
shares of our common stock in exchange for warrants that were exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- none.
(b) Reports on Form 8-K
During the quarterly period ended March 31, 2001 we did not file any
reports on Form 8-K.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CARRIER1 INERNATIONAL S.A.
DATE
May 15, 2001 /s/ Stig Johansson
------------------
Stig Johansson
Director, Chief Executive Officer and President
(Principal Executive Officer)
May 15, 2001 /s/ Alex Schmid
-------------------
Alex Schmid
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)