<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<Table>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</Table>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
<Table>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
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)
<Table>
LUXEMBOURG 98-0199626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
------------------------
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 August 12, 2001 there were 42,870,870 shares of Common Stock of the
registrant outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
In this report, "Carrier1 International" and "Carrier1 International S.A."
refer 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. 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, actions or performance failure 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, includes forward-looking statements that involve risk and
uncertainties, as detailed in our most recent Form 10-K as of December 31, 2000.
2
<Page>
CARRIER1 INTERNATIONAL S.A.
FORM 10-Q
INDEX
PART I--FINANCIAL INFORMATION
<Table>
ITEM 1. FINANCIAL STATEMENTS........................................ 4
Consolidated Balance Sheets--June 30, 2001 (Unaudited) and
December 31, 2000........................................... 4
Unaudited Consolidated Statements of Operations--Three and
Six Months Ended June 30, 2001 and 2000..................... 5
Unaudited Consolidated Statement of Changes in Shareholders'
Equity--Six Months Ended June 30, 2001...................... 6
Unaudited Consolidated Statements of Cash Flows--Six Months
Ended June 30, 2001 and 2000................................ 7
Notes To Unaudited Consolidated Financial Statements........ 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 24
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 25
ITEM 5. OTHER INFORMATION........................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 26
Signatures.................................................. 27
</Table>
3
<Page>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(In Thousands of U.S. Dollars, Except Share Information)
<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000*
------------- ------------------
(UNAUDITED)
(SEE NOTE 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 48,245 $ 162,162
Restricted cash........................................... 13,370 24,429
Restricted investments held in escrow..................... 14,885 29,951
Available-for-sale securities............................. 84,955 198,186
Accounts receivables, net of allowance for doubtful
accounts of $29,592 and $5,659 at June 30, 2001 and
December 31, 2000, respectively 88,610 77,625
Unbilled receivables...................................... 40,447 32,202
Value-added tax refunds receivable........................ 61,517 35,741
Prepaid expenses and other current assets................. 20,919 19,334
----------- -----------
Total current assets.................................... 372,948 579,630
PROPERTY AND EQUIPMENT--NET (See Note 5).................... 480,265 423,194
INVESTMENT IN RELATED PARTY (See Note 7).................... 32,074 27,750
INVESTMENT--OTHER........................................... 2,989 3,258
OTHER ASSETS................................................ 19,334 20,429
----------- -----------
TOTAL....................................................... $ 907,610 $ 1,054,261
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 87,348 $ 96,713
Accrued network costs..................................... 24,154 9,487
Accrued refile costs...................................... 45,381 34,705
Accrued interest.......................................... 11,526 11,915
Other liabilities......................................... 21,441 19,823
Deferred revenue.......................................... 10,272 11,539
Short-term debt........................................... 2,207 2,838
----------- -----------
Total current liabilities............................... 202,329 187,020
DEFERRED REVENUE............................................ 92,796 103,496
LONG-TERM DEBT (See Note 6):
Senior notes.............................................. 230,214 237,888
Other long-term debt...................................... -- 753
----------- -----------
Total long-term debt.................................... 230,214 238,641
----------- -----------
COMMITMENTS AND CONTINGENCIES
Total liabilities....................................... 525,339 529,157
SHAREHOLDERS' EQUITY:
Common stock, $2 par value, 55,000,000 shares authorized,
42,867,261 and 42,844,204 issued and outstanding,
respectively 85,735 85,688
Additional paid-in capital.................................. 666,226 666,205
Accumulated deficit......................................... (324,264) (219,666)
Accumulated other comprehensive loss........................ (44,820) (6,532)
Common stock held in treasury, 73,923 and 73,337,
respectively.............................................. (606) (591)
----------- -----------
Total shareholders' equity.............................. 382,271 525,104
----------- -----------
TOTAL....................................................... $ 907,610 $ 1,054,261
=========== ===========
</Table>
*Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements.
4
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In THOUSANDS OF U.S. Dollars, Except Per Share Information)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
THREE MONTHS THREE MONTHS ENDED ENDED
ENDED ENDED JUNE 30, JUNE 30,
JUNE 30, 2001 JUNE 30, 2000 2001 2000
-------------- -------------- ---------- ----------
REVENUES...................................... $108,033 $ 57,531 $ 197,610 $108,798
-------- -------- --------- --------
OPERATING EXPENSES:
Cost of services (exclusive of items shown
separately below)......................... 108,850 58,467 193,541 113,003
Selling, general and administrative......... 29,080 9,165 48,404 16,803
Depreciation and amortization............... 16,166 7,228 29,624 13,379
-------- -------- --------- --------
Total operating expenses...................... 154,096 74,860 271,569 143,185
-------- -------- --------- --------
LOSS FROM OPERATIONS.......................... (46,063) (17,329) (73,959) (34,387)
-------- -------- --------- --------
OTHER INCOME (EXPENSE):
Interest expense............................ (7,987) (5,712) (16,075) (15,836)
Interest income............................. 2,889 6,406 6,732 9,090
Currency exchange (loss) gain, net.......... (8,186) 3,862 (21,292) (15,825)
Other, net.................................. (7) (3) (4) (6)
-------- -------- --------- --------
Total other income (expense)............ (13,291) 4,553 (30,639) (22,577)
-------- -------- --------- --------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY ITEM...................... (59,354) (12,776) (104,598) (56,964)
INCOME TAX BENEFIT--Net of valuation allowance
(See Note 8)................................ -- -- -- --
-------- -------- --------- --------
LOSS BEFORE EXTRAORDINARY ITEM................ (59,354) (12,776) (104,598) (56,964)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT--Net of $0 benefit
(See Note 6)................................ -- -- -- (3,789)
-------- -------- --------- --------
NET LOSS...................................... $(59,354) $(12,776) $(104,598) $(60,753)
======== ======== ========= ========
LOSS PER SHARE (See Note 4):
Loss before extraordinary item:
Basic and diluted....................... $ (1.38) $ (0.31) $ (2.44) $ (1.46)
======== ======== ========= ========
Extraordinary loss on early extinguishment
of debt:
Basic and diluted....................... $ -- $ -- $ -- $ (0.10)
======== ======== ========= ========
Net loss:
Basic and diluted....................... $ (1.38) $ (0.31) $ (2.44) $ (1.56)
======== ======== ========= ========
</Table>
See notes to unaudited consolidated financial statements.
5
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001
(In Thousands of U.S. Dollars, Except Share Information)
<Table>
<Caption>
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK HELD
COMMON PAID-IN ACCUMULATED COMPREHENSIVE IN
STOCK 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) (24,707
shares).......................... 47 21 3 71
Repurchase of shares (2,236
shares).......................... (18) (18)
Comprehensive income (loss):
Net loss......................... (104,598) (104,598)
Other comprehensive income
(loss), net of tax:
Currency translation
adjustments.................. (38,441) (38,441)
Net unrealized loss from
available-for-sale securities
(net of $0 tax).............. (233) (233)
Net realized gain from
available-for-sale securities
(net of $0 tax).............. 386 386
---------
Total comprehensive loss....... (142,886)
------- -------- --------- -------- ----- ---------
BALANCE--June 30, 2001............. $85,735 $666,226 $(324,264) $(44,820) $(606) $ 382,271
======= ======== ========= ======== ===== =========
</Table>
See notes to unaudited consolidated financial statements.
6
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In Thousands of U.S. Dollars)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(104,598) $ (60,753)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 29,624 13,379
Amortization of financing costs......................... 505 987
Extraordinary loss on early extinguishment of debt...... -- 3,789
Bad debt expense........................................ 23,771 1,181
Changes in operating assets and liabilities:
Restricted cash....................................... (4,661) (748)
Accounts, unbilled and value-added tax refunds
receivables........................................... (85,284) (31,954)
Prepaid expenses and other current assets............. (3,575) (8,366)
Other assets.......................................... 7,100 478
Accounts payable and accrued liabilities.............. 50,884 33,327
Short-term deferred revenue........................... (204) --
Long-term deferred revenue............................ (694) 25,753
--------- ---------
Net cash used in operating activities............. (87,132) (22,927)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (153,041) (111,742)
Receipts from maturity of restricted investments held in
escrow.................................................... 13,594 42,931
Receipts from sale of available-for-sale securities....... 98,737 --
Increase in long-term investments......................... (4,138) (23,480)
--------- ---------
Net cash used in investing activities............. (44,848) (92,291)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt................. -- 29,726
Proceeds from issuance of long-term debt.................. -- 10,304
Proceeds from issuance of common stock.................... 71 682,067
Payments on short-term debt............................... -- (38,397)
Payments on long-term debt................................ (1,384) (78,001)
Purchase of treasury stock................................ (18) (558)
Payments on restricted cash related to financing
activities................................................ -- (19,318)
Proceeds from restricted cash related to financing
activities................................................ 14,450 4,376
--------- ---------
Net cash provided by financing activities......... 13,119 590,199
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 4,944 5,329
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (113,917) 480,310
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 162,162 28,504
--------- ---------
End of period............................................. $ 48,245 $ 508,814
========= =========
</Table>
See notes to unaudited consolidated financial statements.
7
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In Thousands of U.S. Dollars)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest for the six months ending June 30, 2001 and 2000 was
$16,040 and $19,499, respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING AND INVESTING ACTIVITIES:
At June 30, 2001 and 2000, network asset purchases of approximately $52,213
and $16,486, respectively, are included in accounts payable and accrued network
costs.
At December 31, 2000 and 1999, network asset 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.
8
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 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 and six months ended June 30, 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 six months
ended June 30, 2001 was to reduce the net currency exchange loss and the net
loss reported in the statement of operations for the six months ended June 30,
2001 by approximately $14,945 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 six months ended June 30,
2001 by approximately $14,945. The cumulative effect of this change in
functional currency as of June 30, 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 $31,957. Also as a result of the change, both basic and diluted
loss per share for the six months ended June 30, 2001 were decreased by $0.35.
9
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In Thousands of U.S. Dollars, Except Share Information)
4. LOSS PER SHARE
The following details the loss per share calculations for the three and six
months ended June 30, 2001 and June 30, 2000:
<Table>
<Caption>
SIX MONTHS SIX MONTHS
THREE MONTHS THREE MONTHS ENDED ENDED
ENDED ENDED JUNE 30, JUNE 30,
JUNE 30, 2001 JUNE 30, 2000 2001 2000
-------------- -------------- ---------- ----------
Loss from operations........................ $ (46,063) $ (17,329) $ (73,959) $ (34,387)
========== ========== ========== ==========
Loss before extraordinary item.............. $ (59,354) $ (12,776) $ (104,598) $ (56,964)
========== ========== ========== ==========
Extraordinary loss from early extinguishment
of debt................................... $ -- $ -- $ -- $ (3,789)
========== ========== ========== ==========
Net loss.................................... $ (59,354) $ (12,776) $ (104,598) $ (60,753)
========== ========== ========== ==========
Total number of shares used to compute basic
and diluted loss per share................ 42,865,000 41,663,000 42,858,000 39,047,000
========== ========== ========== ==========
LOSS PER SHARE:
Loss from operations:
Basic and diluted......................... $ (1.07) $ (0.42) $ (1.73) $ (0.88)
========== ========== ========== ==========
Loss before extraordinary item:
Basic and diluted......................... $ (1.38) $ (0.31) $ (2.44) $ (1.46)
========== ========== ========== ==========
Extraordinary loss:
Basic and diluted......................... $ -- $ -- $ -- $ (0.10)
========== ========== ========== ==========
Net loss:
Basic and diluted......................... $ (1.38) $ (0.31) $ (2.44) $ (1.56)
========== ========== ========== ==========
</Table>
Potential dilutive securities have been excluded from the computation for
the three and six months ended June 30, 2001 and June 30, 2000 as their effect
is anti-dilutive. Had Carrier1 been in a net income position, the number of
weighted-average shares used to compute diluted earnings per share would have
included an additional 1,754,000 and 2,473,000 shares for the three and six
months ended June 30, 2001, respectively and 4,507,000 shares for the three and
six months ended June 30, 2000, related to outstanding warrants, stock options
and stock subscriptions (determined using the treasury stock method at the
estimated average market value).
10
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In Thousands of U.S. Dollars, Except Share Information)
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2001 and December 31, 2000, respectively,
consist of the following:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Network equipment........................................... $194,573 $168,597
Owned fiber network......................................... 119,045 124,682
Indefeasible right-of-use investments....................... 101,536 98,201
Leasehold improvements...................................... 36,195 25,694
Furniture, fixtures and office equipment.................... 19,447 16,534
Construction in progress.................................... 80,921 36,682
-------- --------
551,717 470,390
Less: accumulated depreciation and amortization............. (71,452) (47,196)
-------- --------
Property and equipment, net............................... $480,265 $423,194
======== ========
</Table>
6. DEBT
During the six months ended June 30, 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 $0.10 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 $90,253 at June 30,
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.
9. SEGMENT INFORMATION
Summarized financial information concerning Carrier1's reportable segments
for the six months ended June 30, 2001 and June 30, 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.
11
<Page>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In Thousands of U.S. Dollars, Except Share Information)
9. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001:
<Table>
<Caption>
VOICE DATA
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- -------- ------------
Revenues........................................... $127,649 $69,961 $197,610
Fixed cost contribution............................ 5,351 30,733 36,084
Identifiable assets................................ 23,577 25,691 $858,342 907,610
</Table>
SIX MONTHS ENDED JUNE 30, 2000:
<Table>
<Caption>
VOICE DATA
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- -------- ------------
Revenues............................................ $95,635 $13,163 $ 108,798
Fixed cost contribution............................. 9,453 10,925 20,378
Identifiable assets................................. 29,642 6,421 $971,976 1,008,039
</Table>
The following table reconciles the fixed cost contribution for reportable
segments to the loss before income tax benefit for the six months ended
June 30, 2001 and June 30, 2000:
<Table>
<Caption>
JUNE 30, JUNE 30,
2001 2000
--------- --------
Total fixed cost contribution for reportable segments....... $ 36,084 $ 20,378
Unallocated amounts:
Unallocated cost of services (exclusive of items shown
separately below)....................................... (32,015) (24,583)
Selling, general and administrative expenses.............. (48,404) (16,803)
Depreciation and amortization............................. (29,624) (13,379)
Other expense............................................. (30,639) (22,577)
--------- --------
Loss before income tax benefit and extraordinary item....... $(104,598) $(56,964)
========= ========
</Table>
Unallocated cost of services include network and transmission costs that are
shared by the voice and data services segments.
12
<Page>
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 months, the overall economic situation has worsened significantly,
especially for companies operating in technology and telecommunications-related
market segments. The economic slowdown has affected and will continue to affect
Carrier1. We recognize that a sustained economic slowdown for companies
operating in technology and telecommunications-related markets segments may have
a material adverse effect on our business. This slowdown recently has manifested
itself in the capital markets downturn, announcements by various technology and
telecommunications companies warning of slowing revenue growth and reduced
profits or increased financial losses, and certain of our suppliers and
customers experiencing business failures.
In light of these developments, we have begun to take the following actions:
- Significantly increase our overall bad debt provisions for this quarter
and for the whole year 2001
- Actively discontinue commercial relationships with customers and customer
groups that we believe may expose us to bad debt in the future or who do
not provide us with a minimum monthly revenue base which we feel is
necessary to deliver viable economic returns
- Reduce the number of products and services we offer in certain geographic
markets
- Implement stringent credit policies and monitoring tools
- Allocate significant management time and effort to receivables management
- Replace certain suppliers of network and termination capacity as the
economic viability of the overall supplier base for such services remains
uncertain
As a result of economic conditions and related actions taken by us as
described above, our financial performance has been negatively affected. We
expect that certain of these conditions will require further action that may
materially affect our future financial performance.
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THREE MONTHS ENDED JUNE 30, 2001, MARCH 31, 2001 AND JUNE 30, 2000 AND SIX
MONTHS ENDED JUNE 30, 2001 AND 2000
SUMMARY TABLE
<Table>
<Caption>
THREE THREE THREE
MONTHS MONTHS MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, 2001 MARCH 31, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- -------------- ------------- ------------- -------------
$000, EXCEPT SHARES AND PER SHARE DATA
Voice services revenue........ $ 69,022 $ 58,627 $ 47,926 $ 127,649 $ 95,635
Data services revenue......... 39,011 30,950 9,605 69,961 13,163
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE................. 108,033 89,577 57,531 197,610 108,798
Cost of services (exclusive of
amounts shown separately
below)...................... 108,850 84,691 58,467 193,541 113,003
Selling, general and
administrative expenses..... 29,080 19,324 9,165 48,404 16,803
---------- ---------- ---------- ---------- ----------
EBITDA........................ (29,897) (14,438) (10,101) (44,335) (21,008)
Depreciation and
amortization................ 16,166 13,458 7,228 29,624 13,379
OTHER INCOME (EXPENSE):
Interest expense.............. (7,987) (8,088) (5,712) (16,075) (15,836)
Interest income............... 2,889 3,843 6,406 6,732 9,090
Currency exchange (loss) gain,
net......................... (8,186) (13,106) 3,862 (21,292) (15,825)
Other income (expense)........ (7) 3 (3) (4) (6)
---------- ---------- ---------- ---------- ----------
Total other income
(expense)................... (13,291) (17,348) 4,553 (30,639) (22,577)
---------- ---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX EXPENSE
AND EXTRAORDINARY ITEM...... (59,354) (45,244) (12,776) (104,598) (56,964)
Income tax expense............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY
ITEM........................ (59,354) (45,244) (12,776) (104,598) (56,964)
Extraordinary loss on early
extinguishment of debt...... -- -- -- -- (3,789)
---------- ---------- ---------- ---------- ----------
NET LOSS...................... $ (59,354) $ (45,244) $ (12,776) $ (104,598) $ (60,753)
========== ========== ========== ========== ==========
BASIC AND DILUTED LOSS PER
SHARE:
Loss before extraordinary
item........................ $ (1.38) $ (1.06) $ (0.31) $ (2.44) $ (1.46)
========== ========== ========== ========== ==========
Extraordinary loss on early
extinguishment of debt...... -- -- -- -- $ (0.10)
========== ========== ========== ========== ==========
Net loss...................... $ (1.38) $ (1.06) $ (0.31) $ (2.44) $ (1.56)
========== ========== ========== ========== ==========
Weighted average shares
outstanding................. 42,865,000 42,846,000 41,663,000 42,858,000 39,047,000
========== ========== ========== ========== ==========
</Table>
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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.
THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2001 AND THREE MONTHS ENDED JUNE 30, 2000:
REVENUE
Revenues for the three months ended June 30, 2001 were approximately
$108.0 million, representing an increase of approximately 21% over revenues for
the three months ended March 31, 2001 of approximately $89.6 million and
approximately 88% over revenues for the three months ended June 30, 2000 of
approximately $57.5 million. We divide our revenues into two principal
categories: voice services revenue and data services revenue. Voice services
revenue increased from the three months ended June 30, 2000 of $47.9 million and
the three months ended March 31, 2001 of $58.6 million to $69.0 million for the
three months ended June 30, 2001. Data services revenues increased from the
three months ended June 30, 2000 of $9.6 million and the three months ended
March 31, 2001 of $31.0 million to $39.0 million for the three months ended
June 30, 2001.
Increased revenue from the prior periods reflects significant growth in
demand for our service offerings primarily from existing customers. During 2000
and the first quarter of 2001, we focused on developing a number of enhanced
voice services and data services, such as Internet access, value added Internet
transport, a Virtual Internet Service Provider, or VISP, platform, as well as a
variety of content distribution and caching service offerings. Since the second
quarter of 2001, we have concentrated on identifying our core customer groups
and geographic market segments and have attempted to market our existing
products and services in those markets and to those customers. We did not expand
our geographic footprint or product offerings but rather looked to exploit our
existing capabilities.
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, for the three months ended June 30,
2001 were approximately $69.0 million, representing an increase of approximately
18% over revenues for the three months ended March 31, 2001 of approximately
$58.6 million and approximately 44% over revenues for the three months ended
June 30, 2000 of approximately $47.9 million. Voice traffic volume during the
three months ended June 30, 2001 was approximately 579 million minutes compared
with approximately 443 million and 343 million minutes during the three months
ended March 31, 2001 and June 30, 2000, respectively. The average revenue per
minute during the three months ended June 30, 2001 decreased approximately 10%
and 15% from the three months ended March 31, 2001 and June 30, 2000,
respectively. 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.
We have made significant efforts during this quarter to discontinue
commercial relationships with voice customers and voice customer groups that may
expose us to bad debt in the future or provide us with an inadequate return on
capital. Instead we have attempted to concentrate on selling our services to our
core customers. Therefore, the voice volume increases from the three months
ended March 31,
15
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2001 and June 30, 2000 to the three months ended June 30, 2001, were driven
mostly by the growth in volume from certain of our existing customers.
DATA SERVICES: Repetitive data services revenues, that is, the revenues we
derived from Internet transport, Internet access services, bandwidth,
infrastructure, and data center services for the three months ended June 30,
2001 were approximately $28.6 million, representing a 24% increase over revenues
for the three months ended March 31, 2001 of approximately $23.1 million and
approximately 484% over revenues for the three months ended June 30, 2000 of
approximately $4.9 million. This increase was primarily driven by increases in
revenues from bandwidth, infrastructure and VISP services. Non-recurring data
revenues, or one-time sales, such as duct, bandwidth IRU, and fiber sales were
approximately $10.4 million, $7.9 million, and $4.7 million during the three
months ended June 30, 2001, March 31, 2001, and June 30, 2000, respectively. 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.
The increase in non-recurring data revenues from the three months ended
March 31, 2001 and June 30, 2000, is primarily attributable to services provided
to two customers. During the three months ended June 30, 2001, we recognized
approximately $7.7 million in revenue and $1.2 million in gross margin for a
sale of fiber optic cable. We also recognized revenue that was previously
deferred from an IRU sale to a customer that went into bankruptcy proceedings
during the second quarter of 2001. Net revenue of approximately $1.9 million, or
$3.2 million of gross revenue reduced by the unpaid receivable balance of
$1.3 million, was recognized during the second quarter of 2001.
COST OF SERVICES
Cost of services (exclusive of items shown separately) for the three months
ended June 30, 2001 were approximately $108.9 million, representing a 29%
increase over cost of services for the three months ended March 31, 2001 of
approximately $84.7 million and an 86% increase over cost of services for the
three months ended June 30, 2000 of approximately $58.5 million. 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, bandwidth
IRU, and fiber sales. The increase from the second quarter of 2000 and the first
quarter of 2001 to the second 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, VISP termination costs, which were new
in 2001, the development of new services, and our geographic expansion. The
voice market suffered from extreme instability during the second quarter of
2001. Unusually high traffic due to the reduced number of carriers and
volatility among suppliers we use to terminate traffic significantly increased
our termination costs and negatively impacted our gross margin. We expect, as we
optimize our supplier base and the overall market stabilizes, that gross margins
should improve.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were approximately $29.1 million, representing a 51%
increase over the three months ended March 31, 2001 of approximately $19.3
million and a 216% increase over the three months ended June 30, 2000 of
approximately $9.2 million. This increase was primarily attributable to
increases in bad debt expense. Bad debt expense totaled $16.8 million,
$7.0 million and $0.9 million for the three months ended June 30, 2001,
March 31, 2001 and June 30, 2000, respectively. Bad debt expense for the second
quarter of 2001, specifically relating to the voice business, was higher than
previously anticipated due to
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<Page>
the increased number of bankruptcies in the industry and our further efforts to
trim our customer base. During the second quarter of 2001, we began reducing the
number of companies connected to our pan-European network to reduce potential
credit risks.
A portion of the increase in selling, general, and administrative expenses
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 16% in the second quarter of 2000 to 22% in the first
quarter of 2001 and to 27% in the second 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 has improved over these three periods from 14% in the
second quarter of 2000 and first quarter of 2001 to 11% in the second quarter of
2001.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses was
approximately $16.2 million during the three months ended June 30, 2001 compared
to approximately $13.5 million and $7.2 million for the three months ended
March 31, 2001 and June 30, 2000, respectively. The increase was primarily
attributable to the completion and initial operation of the German fiber ring
during the third quarter of 2000 and additional investments in metro rings,
ducts, fiber, cables, electronics, network equipment, and the build-out of data
centers during the second half of 2000 and first half of 2001. Once again, the
additional investments are mainly attributable to growth of demand for our
services and the 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 June 30, 2001
reflected a loss of $29.9 million, compared with losses of $14.4 million and
$10.1 million for the three months ended March 31, 2001 and June 30, 2000,
respectively. This increase in our EBITDA loss is primarily attributable to bad
debt expense. In addition, our EBITDA margin declined from (16)% and (18)% for
the three months ended March 31, 2001 and June 30, 2000, respectively, to (28)%
for the three months ended June 30, 2001. This decline is primarily attributable
to the increase in bad debt expense and termination costs, as well as the
discontinuation of certain customer relationships.
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 income (expense) was
approximately ($5.1) million during the three months ended June 30, 2001
compared to approximately ($4.2) million and $0.7 million for the three months
ended March 31, 2001 and June 30, 2000, respectively. Interest income was
approximately $2.9 million during the three months ended June 30, 2001 compared
with approximately $3.8 million and $6.4 million for the three months ended
March 31, 2001 and June 30, 2000, respectively. This decrease is primarily
attributable to the various sales of our marketable securities during the three
months ended June 30, 2001. Interest expense was approximately $8.0 million
during the three months ended June 30, 2001 compared to approximately
$8.1 million and
17
<Page>
$5.7 million for the three months ended March 31, 2001 and June 30, 2000,
respectively. This increase from the three months ended June 30, 2000 is
primarily attributable to $2.7 million of interest that was capitalized during
the three months ended June 30, 2000.
CURRENCY EXCHANGE GAIN (LOSS)--NET. Currency exchange gain (loss), net, was
approximately ($8.2) million during the three months ended June 30, 2001
compared to approximately ($13.1) million and $3.8 million for the three months
ended March 31, 2001 and June 30, 2000, respectively. The 37% decrease in the
currency exchange loss, net from the three months ended March 31, 2001 is
primarily attributable to the strengthening of the U.S. dollar during the second
quarter of 2001 against most European currencies to a lesser extent than in the
first quarter of 2001. The increase in the currency exchange loss, net for the
second quarter of 2001 from a gain position during the second quarter of 2000,
is a result of the U.S. dollar strengthening against most European currencies
during the second quarter of 2001 while it weakened against such currencies
during the second quarter of 2000.
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM
Our loss before income tax benefit and extraordinary item was approximately
$59.4 million during the three months ended June 30, 2001 compared to
approximately $45.2 million and $12.8 million for the three months ended
March 31, 2001 and June 30, 2000, respectively. The increase in our loss is due
to the aforementioned changes in revenues and expenses.
INCOME TAX BENEFIT
For each of the 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 three
periods.
SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2000:
REVENUE
Revenues increased 82% from $108.8 million for the six months ended
June 30, 2000 to $197.6 million for the six months ended June 30, 2001. We
divide our revenues into two principal categories: voice services revenue and
data services revenue. Voice services revenues increased 33% from $95.6 million
for the six months ended June 30, 2000 to $127.6 million for the six months
ended June 30, 2001. Data services revenues increased 430% from $13.2 million
for the six months ended June 30, 2000 to $70.0 million for the six months ended
June 30, 2001.
Increased revenue from the prior year's six-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 market. During 2000 and into the first six months of 2001, we
have focused on developing a number of enhanced voice services and data
services, such as Internet access, value added Internet transport, a VISP
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 to facilitate distribution of our core services and
provide better end-user functionality to our customer's customers.
18
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VOICE SERVICES: Revenues from wholesale voice services and enhanced voice
services increased 33% from $95.6 million for the six months ended June 31, 2000
to $127.6 million for the six months ended June 30, 2001. Voice traffic volume
during the six months ended June 30, 2001 increased approximately 57% over the
six months ended June 30, 2000. The average revenue per minute during the six
months ended June 30, 2001 decreased approximately 15% from the six months ended
June 30, 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 six months ended June 30, 2000 to the
six months ended June 30, 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
was also due to the launch of new enhanced services.
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 508% from $8.5 million for
the six months ended June 30, 2000 to $51.7 million for the six months ended
June 30, 2001. This increase was primarily driven by increases in revenues from
bandwidth, infrastructure and VISP services. Non-recurring data revenues, or
one-time sales, such as duct, bandwidth IRU, and fiber sales were approximately
$18.3 million and $4.7 million during the six months ended June 30, 2001 and
2000, respectively. This increase is primarily the result of two sales of fiber
optic cable which resulted in revenue of $11.8 million during the first six
months of 2001. 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
Cost of services (exclusive of items shown separately) increased by 71% from
$113.0 million for the six months ended June 30, 2000 to $193.5 million for the
six months ended June 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, bandwidth
IRU, and fiber sales. The increase from the six months ended June 30, 2000 to
the six months ended June 30, 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. In addition, VISP termination costs were new during 2001. The voice
market suffered from extreme instability during the second quarter of 2001.
Unusually high traffic due to the reduced number of carriers and volatility
among suppliers we use to terminate traffic significantly increased our
termination costs.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses increased 188% from $16.8 million for the six months
ended June 30, 2000 to $48.4 million for the six months ended June 30, 2001.
This increase was primarily attributable to bad debt expense of $23.8 million
for the six months ended June 30, 2001 as compared to $1.2 million for the six
months ended June 30, 2000. We increased our provision due to concerns over the
economic viability of some of our customers, primarily in the voice services
segment, which have been negatively impacted by the recent economic slowdown. A
portion of the increase in selling, general, and administrative expenses related
to additional personnel costs, in particular an increase of our sales force,
information
19
<Page>
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 six
months ended June 30, 2000 to 24% in the six months ended June 30, 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 have improved from 14% for the six
months ended June 30, 2000 to 12% for the six months ended June 30, 2001.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses
increased from $13.4 million for the six months ended June 30, 2000 to
$29.6 million for the six months ended June 30, 2001. The increase was primarily
attributable to the completion and initial operation of the German fiber ring,
additional investments in metro rings, ducts, fiber, cables, electronics,
network equipment, and the build-out of data centers. Once again, the additional
investments are mainly attributable to growth of demand for our services and our
geographic expansion of the 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 six months ended June 30, 2001
reflected a loss of $44.3 million, compared with a loss of $21.0 million for the
six months ended June 30, 2000. This increase in our EBITDA loss is primarily
attributable to bad debt expense. In addition, our EBITDA margin declined from
(19)% for the six months ended June 30, 2000 to (22)% for the six months ended
June 30, 2001. This decline is primarily attributable to the increase in bad
debt expense and termination costs, as well as the discontinuation of certain
customer relationships.
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 increased from
$6.7 million for the six months ended June 30, 2000 to $9.4 million for the six
months ended June 30, 2001. Interest income decreased from $9.1 million for the
six months ended June 30, 2000 to $6.7 million for the six months ended
June 30, 2001. This decrease was primarily attributable to the various sales of
our marketable securities during the six months ended June 30, 2001. Interest
expense increased from $15.8 million for the six months ended June 30, 2000 to
$16.1 million for the six months ended June 30, 2001. This increase from the six
months ended June 30, 2000 was primarily attributable to $4.1 million of
interest that was capitalized during the six months ended June 30, 2000, offset
by the reduction in interest expense during 2001 as a result of the repayment of
certain debt facilities during the first six months of 2000.
CURRENCY EXCHANGE GAIN (LOSS)--NET. Currency exchange loss, net, increased
35% from $15.8 million for the six months ended June 30, 2000 to $21.3 million
for the six months ended June 30, 2001. During the first six months of 2001, the
U.S. dollar strengthened against most European currencies to a greater extent
than during the first six months of 2000, primarily due to the weakening of the
U.S. dollar during the second quarter of 2000 which led to a currency exchange
gain of $3.9 million during that period. This decrease is also affected by the
change in functional currency of
20
<Page>
the Luxembourg holding company that reduced the currency exchange loss, net,
reported in the unaudited statement of operations by $14.9 million for the six
months ended June 30, 2001 as described under the caption "--Liquidity and
Capital Resources."
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM
Our loss before income tax benefit and extraordinary item increased from
$57.0 million for the six months ended June 30, 2000 to $104.6 million for the
six months ended June 30, 2001 due to the aforementioned changes in revenues and
expenses.
INCOME TAX BENEFIT
For both 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.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
For the six months ended June 30, 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 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 selectively expand our networks and service offerings.
CASH FLOW INFORMATION
Net cash used in operating activities increased to $87.1 million for the six
months ended June 30, 2001 compared to $22.9 million for the six months ended
June 30, 2000. The increase was primarily derived from changes in receivables,
accounts payable and accrued liabilities.
Receivables, which includes accounts, unbilled and value-added tax, or VAT,
refunds receivable, increased by $85.3 million to $190.6 million for the six
months ended June 30, 2001 compared to an increase of $32.0 million for the six
months ended June 30, 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. We also expect to receive net VAT refunds of
approximately $40 million from various governmental institutions before
year-end.
Accounts payable and accrued liabilities increased by $50.9 million to
$189.9 million for the six months ended June 30, 2001 compared to an increase of
$33.3 million for the six months ended June 30, 2000. Accounts payable and
accrued liabilities increased during these periods due to the continued
expansion of the business.
We used $44.8 million in cash for net investing activities during the six
months ended June 30, 2001 compared to $92.3 million during the six months ended
June 30, 2000. We paid $153.0 million for property and equipment during the six
months ended June 30, 2001 compared to $111.7 million for the six months ended
June 30, 2000, in order to invest in fiber infrastructure and transmission
equipment.
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<Page>
The 2001 expenditures included 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. In addition, we sold
$98.7 million of available-for-sale securities during the first six months of
2001 to help fund operating costs and capital expenditures.
Net cash provided by financing activities was $13.1 million during the six
months ended June 30, 2001 compared to $590.2 million during the six months
ended June 30, 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 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
$72.0 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. As of June 30, 2001,
the remaining balance of restricted investments is sufficient to pay one
semi-annual interest payment on our long-term debt.
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.
We believe that our cash and marketable securities on hand and future
capacity sales on our network will provide sufficient funds for us to
selectively expand our business and to fund operating losses through 2002.
However, the amount of future capital requirements will depend on a number of
factors, including:
- the overall success of our business;
- any acquisitions or investments we make;
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<Page>
- the start-up of each additional segment of our network;
- the dates on which we further expand our network;
- whether our network build-out is on-time and on-budget;
- the types of services we may offer in the future;
- staffing levels;
- customer growth; and
- 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 or vendor financing
facilities, continue to delay or reduce 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 are derived from sales
and operations outside the United States and 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, 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 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 six months
ended June 30, 2001 was to decrease the currency exchange loss (net) and the net
loss reported in the unaudited statement of operations by approximately
$14.9 million and to increase the negative currency translation adjustment
component of other comprehensive loss reported in the statement of shareholders'
equity by approximately $14.9 million for the six months ended June 30, 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 in the future.
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<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because our outstanding debt at June 30, 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 June 30, 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 June 30, 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 June 30, 2001. The
information is presented in U.S. dollar equivalents, our reporting currency,
using the exchange rate at June 30, 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 June 30, 2001.
<Table>
<Caption>
EXPECTED MATURITY DATE 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
- ---------------------- -------- -------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
Notes payable:
Fixed rate (u)........ $ 72,034 $ 72,034 $29,174
Interest rate......... 13.25% 13.25%
Fixed rate ($)........ $160,000 $160,000 $64,800
Interest rate......... 13.25% 13.25%
Other long-term debt:
Fixed rate ($)........ $1,454 $753 $ 2,207 $ 2,207
Interest rate......... 9.7% 9.7%
</Table>
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. 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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<Page>
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 June 30, 2001, we issued 4,408 shares of
our common stock in exchange for warrants that were exercised.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the second quarter of 2001, certain matters were submitted to a vote
of security holders at the statutory annual meeting of shareholders of Carrier1
International S.A.
The Annual Meeting of Shareholders was held on June 12, 2001, in Luxembourg.
At the Annual Meeting, 29,029,769 voting shares were present. The table below
discloses the vote with respect to each proposal:
PROPOSAL I
To approve the statutory accounts of Carrier1 International for the year
ended December 31, 2000, and the reports of its statutory auditors, dated May 7,
2001 and of its Board of Directors on the statutory accounts, dated May 7, 2001.
<Table>
For: 28,956,015 Against: 71,062 Abstain: 2,962
</Table>
PROPOSAL II
To approve the application of the profit of US dollar 571,490 reported by
Carrier1 International for the year ended December 31, 2000 towards the
reduction of the loss carried forward from the previous period ended December
31, 1999 and to carry forward the balance of the loss to the next financial
year.
<Table>
For: 29,029,769 Against: none Abstain: none
</Table>
PROPOSAL III
To discharge the Board of Directors of Carrier1 International--pursuant to
Article 74 of the Luxembourg's Company Law--from the execution of their mandate
as directors for the year ended December 31, 2000.
<Table>
For: 29,029,769 Against: none Abstain: none
</Table>
PROPOSAL IV
To discharge the statutory auditors of Carrier1 International--pursuant to
Article 74 of Luxembourg's Company Law--from the execution of their mandate as
statutory auditors for the year ended December 31, 2000.
<Table>
For: 29,029,769 Against: none Abstain: none
</Table>
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<Page>
ITEM 5. OTHER INFORMATION
The Company announced the retirement of its President and Chief Executive
Officer, Stig Johansson. A search for a new CEO is nearing completion, and the
Company expects to announce the new CEO within 30 days of the date of this
filing. In the interim, executive duties will be assumed by senior officers of
the Company who will report to Victor Pelson, our non-executive Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.1 Consulting Agreement, dated as of May 16, 2001, by and among
Carrier1 International S.A. and Victor A. Pelson.
</Table>
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the fiscal quarter ended
June 30, 2001:
Form 8-K dated April 3, 2001, and filed with the Securities and Exchange
Commission on
April 5, 2001, regarding the filing of our Annual Report on Form 10-K for the
year ended
December 31, 2000.
Form 8-K dated May 14, 2001, and filed with the Securities and Exchange
Commission on
May 14, 2001, announcing the unaudited financial results for the quarter ended
March 31, 2001.
Form 8-K dated May 16, 2001, and filed with the Securities and Exchange
Commission on
May 16, 2001, announcing the appointment of Victor Pelson as Chairman of the
Board.
Form 8-K dated June 8, 2001, and filed with the Securities and Exchange
Commission on
June 8, 2001, regarding its first annual investor meeting and annual meeting of
shareholders to be held on June 12, 2001.
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<Page>
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.
<Table>
CARRIER1 INTERNATIONAL S.A.
BY: /S/ STIG JOHANSSON
-----------------------------------------
Stig Johansson
DIRECTOR, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 14, 2001
BY: /S/ ALEX SCHMID
-----------------------------------------
Alex Schmid
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
Date: August 14, 2001
</Table>
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