-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AO/Uw5g4xwMYCaRCwIt1qOCCWwup8GySTMboXLTXb2jrbjJaCgzlo9GAuosB/RxQ kY7RAhVKgPhW2oNvbJypbA== 0000912057-00-018688.txt : 20000420 0000912057-00-018688.hdr.sgml : 20000420 ACCESSION NUMBER: 0000912057-00-018688 CONFORMED SUBMISSION TYPE: F-1/A PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 20000419 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 360NETWORKS INC CENTRAL INDEX KEY: 0001084587 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] STATE OF INCORPORATION: V6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-95621 FILM NUMBER: 604366 BUSINESS ADDRESS: STREET 1: 1510 1066 WEST HASTINGS ST STREET 2: VANCOUVER CITY: BRITISH COLUMBIA STATE: A1 BUSINESS PHONE: 6046811991 MAIL ADDRESS: STREET 1: 1510-1066 WEST HASTINGS STREET CITY: VANCOUVER BC FORMER COMPANY: FORMER CONFORMED NAME: WORLDWIDE FIBER INC DATE OF NAME CHANGE: 19990419 F-1/A 1 F-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000 REGISTRATION NO. 333-95621 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ 360NETWORKS INC. (FORMERLY KNOWN AS WORLDWIDE FIBER INC.) (Exact name of registrant as specified in its charter) NOVA SCOTIA, CANADA 4813 NOT APPLICABLE (State or other jurisdiction (Primary Standard (I.R.S. Employer of Industrial Identification Number) incorporation or organization) Classification Code Number)
1500-1066 WEST HASTINGS STREET VANCOUVER, BRITISH COLUMBIA CANADA V6E 3X1 (604) 681-1994 (Address, including ZIP Code and telephone number, including area code, of registrant's principal executive offices) ------------------------------ CT CORPORATION SYSTEM 111 EIGHTH AVENUE, 13TH FLOOR NEW YORK, NEW YORK 10011 (212) 590-9200 (Name, address, including ZIP Code and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: ROGER ANDRUS, ESQ. STEVEN DELLA ROCCA, ESQ. CAHILL GORDON & REINDEL LATHAM & WATKINS 80 PINE STREET 885 THIRD AVENUE, SUITE 1000 NEW YORK, NEW YORK 10005 NEW YORK, NEW YORK 10022 U.S.A. U.S.A. (212) 701-3000 (212) 906-1200 CAMERON G. BELSHER, ESQ. J. MARK DESLAURIERS, ESQ. FARRIS, VAUGHAN, WILLS & MURPHY OSLER, HOSKIN & HARCOURT LLP 2600-700 WEST GEORGIA STREET 1 FIRST CANADIAN PLACE VANCOUVER, BRITISH COLUMBIA TORONTO, ONTARIO CANADA V7Y 1B3 CANADA M5X 1B8 (604) 684-9151 (416) 362-2111
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE(2)(3) Subordinate Voting Shares................................... $745,027,500 $196,687
(1) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended (the "Securities Act"). (2) Calculated pursuant to Rule 457(o) under the Securities Act. (3) $251,381 of which was previously paid. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION. DATED APRIL 18, 2000. 46,275,000 [LOGO] Subordinate Voting Shares ------------------------ This is an initial public offering of Subordinate Voting Shares of 360NETWORKS INC. We are offering 44,625,000 of our Subordinate Voting Shares to be sold in the offering. The selling shareholder identified in this prospectus is offering up to an additional 1,650,000 Subordinate Voting Shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling shareholder. Prior to this offering, there has been no public market for the Subordinate Voting Shares. We currently anticipate that the initial public offering price will be between $12.00 and $14.00 per share. Our Subordinate Voting Shares have been approved for listing on the Nasdaq National Market, subject to official notice of issuance, under the symbol "TSIX". The Toronto Stock Exchange has conditionally approved the listing of the Subordinate Voting Shares under the symbol "TSX". SEE "RISK FACTORS" ON PAGE 11 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING OUR SUBORDINATE VOTING SHARES. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Per Share Total ---------- -------- Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to 360NETWORKS INC............... $ $ Proceeds, before expenses, to selling shareholder........... $ $
To the extent that the underwriters sell more than 46,275,000 Subordinate Voting Shares, the underwriters have the option to purchase up to an additional 6,941,250 Subordinate Voting Shares from us, solely to cover over-allotments, at the initial public offering price less the underwriting discount. ------------------------ The underwriters expect to deliver the Subordinate Voting Shares against payment in New York, New York on , 2000. JOINT BOOK-RUNNING MANAGERS GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE ---------------- CREDIT SUISSE FIRST BOSTON TD SECURITIES BEAR, STEARNS & CO. INC. BMO NESBITT BURNS MORGAN STANLEY DEAN WITTER CHASE H&Q RBC DOMINION SECURITIES CORPORATION WARBURG DILLON READ LLC --------------------- Prospectus dated , 2000. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. WORLDWIDE FIBER INC. RECENTLY HAS BEEN RENAMED 360NETWORKS INC. TO REFLECT OUR GLOBAL FOCUS AND EVOLUTION FROM CONSTRUCTING NETWORKS TO OFFERING A RANGE OF NETWORK AND VALUE-ADDED SERVICES. REFERENCES IN THIS PROSPECTUS TO "360NETWORKS," "WE," "OUR" AND "US" REFER TO 360NETWORKS INC. (AND ITS PREDECESSOR) AND ALL OF ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE IT IS CLEAR THAT THOSE TERMS MEAN ONLY THE PARENT COMPANY. INDUSTRY AND MARKET DATA IN THIS PROSPECTUS ARE BASED ON OR DERIVED FROM SOURCES THAT WE BELIEVE ARE RELIABLE. THERE CAN BE NO ASSURANCE, HOWEVER, AS TO THE ACCURACY OF THE INDUSTRY OR MARKET DATA. THE COMPANY We are a leading independent, facilities-based provider of fiber optic communications network products and services. By the end of 2001, we expect our network to consist of approximately 56,300 route miles: - 24,100 route miles in North America (of which more than 12,200 route miles have been developed to date); - 10,600 route miles in Europe (of which more than 4,900 route miles have been developed to date); - a 7,600 route mile fully protected undersea cable between North America and Europe; and - a 14,000 route mile fully protected undersea cable between South America and North America. We intend to expand our network to provide connectivity on a global basis. Our network's design uses state-of-the-art optical technologies that we believe greatly reduce complexity and cost while allowing us to offer increased reliability and a wide range of products and services. We recently agreed, subject to execution of definitive agreements, to acquire colocation facilities or site rights in ten cities in North America comprising approximately 2.9 million square feet. We offer network services to meet our customers' demands and enable Internet services and intend to develop products and services that capitalize on the convergence of telecommunications and high-bandwidth applications and services. We believe that there is growing demand for fiber optic capacity and related network elements to transmit and service high-bandwidth data, voice and video. This growing demand is being accelerated by new applications and services and by improvements in "last mile" technology such as digital subscriber line and cable modems. In this changing market environment, we believe that we are in a favorable competitive position to satisfy this demand relative to other service providers due to our low-cost, seamless technologies and consistent network architecture. We have achieved a low-cost position by: - leveraging our construction skills; - co-developing and swapping along some corridors of our network; - using equity as payment for important elements such as bulk rights-of-way; and - using optical design and technologies that eliminate layers of equipment traditionally required to support legacy systems. Our current and targeted customers include new and incumbent telecommunications service providers, Internet service providers, application service providers, storage service providers and large organizations with enterprise network needs. We believe that these customers have a limited choice of independent service providers capable of offering high-capacity, reliable, secure and cost-effective services, including enabling Internet services, between major population centers in North America, Europe and South America. As a result, we believe that our targeted customers will 1 buy services from us rather than purchase them from another source or build these service capabilities themselves. To meet our customers' requirements, we offer a wide range of services on a scalable basis, including: - network services--optical channels, private line transmission, packet-based data services such as Internet protocol transport and Asynchronous Transfer Mode, and virtual voice trunking; and - network infrastructure--dark fiber and conduit for sale, grant of indefeasible right of use or lease and construction services supporting the development of our network. Through the colocation facilities that we have agreed to acquire and additional colocation facilities that we intend to acquire, we intend to provide additional network services such as Internet data centers, applications hosting, electronic commerce support and web hosting. We also intend to expand our business to include additional network services such as video transport, independent Internet access for transport and peering and management services to allow carriers to migrate from circuit-switched technologies to packet-based technologies. We expect to enable our customers to establish and maintain a strong competitive position in providing services to their end users. We believe that our independence, product design, seamless technology, consistent network architecture, simple billing systems and end-to-end international connectivity will enable us to gain a strong market position. BUSINESS STRATEGY To exploit the growing demand for bandwidth and enhanced network services, our strategy is to: - provide high-bandwidth connectivity between, and colocation facilities in, major global population centers; - develop and operate a technologically advanced, high-capacity, low-cost network; - extend the reach of our network through development, swaps and acquisitions of fiber and capacity; - expand our marketing capabilities; - increase, in collaboration with our customers, the number of products and services that we offer, including managed bandwidth and Internet enabling products and services; - capitalize on management experience and relationships; and - pursue additional strategic alliances in network services and technology. THE NETWORK Our 56,300 route mile network is scheduled to be completed by the end of 2001. We plan to further develop and expand our network footprint in response to customer demand. Our network consists of fiber optic assets and capacity that we have installed or acquired from other developers and carriers through swaps, purchases, leases, indefeasible rights of use or other contractual rights along diverse rights-of-way. - NORTH AMERICA. In North America, our network is expected to cover approximately 24,100 route miles, of which more than 12,200 route miles have been developed to date, encompassing both long-haul and intra-city route miles and providing connectivity among approximately 50 major population centers. - EUROPE. In Europe, our network is expected to cover approximately 10,600 long-haul route miles (assuming, with respect to 1,300 route miles, the exercise of an option that we have), of which more than 4,900 route miles have been developed to date, providing connectivity among approximately 35 major population centers. 2 - 360ATLANTIC UNDERSEA CABLE. Our 7,600 route mile undersea cable between North America and Europe will have the capacity to be a 1.92 terabits per second self-healing ring that will connect landing sites in Boston, Halifax, Dublin and Liverpool and to major gateway cities in Europe and North America, including London and New York. - 360AMERICAS UNDERSEA CABLE. Our planned 14,000 route mile undersea cable between South America and North America will have the capacity to be a 1.28 terabits per second self-healing ring that will be able to offer city-to-city connectivity between six major population centers in Brazil, Venezuela, Bermuda and the United States. - FUTURE EXPANSION. We intend to expand our planned network to more population centers through the addition of intercity and city ring capacity in North America, Europe and South America. We are also reviewing opportunities to expand the geographic reach of our network, including transpacific connectivity to Asia. In addition, we intend to extend our network to Buenos Aires through undersea and/or terrestrial routes. RECENT NETWORK EXPANSION EUROPE - KPNQWEST. We recently signed an agreement with KPNQwest to acquire indefeasible rights of use of fiber on its Southern European network, which is expected to be complete in the fourth quarter of 2001. - TELIA. We are swapping fiber on part of our North American network for fiber on significant parts of Telia's European network, which is expected to be complete in the fourth quarter of 2000. - TELEWEST. We have executed an agreement to develop with Telewest a multi-conduit network from London to Liverpool along diverse routes that pass through seven major population centers in England. We expect this network to be complete by the fourth quarter of 2000. - CARRIER1. We have an agreement with Carrier1 that provides us with wholesale capacity from London to 18 major European population centers. We also have options from Carrier1 to acquire dark fiber strands in Germany and/or wavelengths in France. SOUTH AMERICA - GLOBENET. In March 2000, we announced a definitive agreement to acquire GlobeNet Communications Group Limited, a Bermuda company, for Subordinate Voting Shares. GlobeNet is developing the 14,000 route mile undersea cable Atlantica-1, which we now call 360AMERICAS, between South America and North America. COLOCATION FACILITIES We have agreed, subject to execution of definitive agreements, to acquire colocation facilities or site rights in ten North American cities. The initial purchase price for these acquisitions is $176.5 million, of which $26.3 million is payable in our Subordinate Voting Shares valued at the inital public offering price. RECENT SIGNIFICANT BANDWIDTH TRANSACTIONS - KPNQWEST. We recently signed an agreement with KPNQwest to sell capacity on 360ATLANTIC between New York City and London, which we will begin to deliver in March 2001. - SHAW COMMUNICATIONS. We recently signed a contract with Shaw Communications Inc., under which Shaw will lease bandwidth on designated segments of our network between Edmonton and Toronto and either purchase dark fiber or acquire indefeasible rights of use on other network segments for $153 million. 3 - PSINET. We recently signed contracts with affiliates of PSINet to deliver high-speed bandwidth services on 360ATLANTIC from New York to London and to provide multiple dark fiber strands in eastern Canada and the northeast corridor of the United States. In addition, we have granted to affiliates of PSINet an indefeasible right of use for bandwidth capacity between Vancouver and Chicago. - GT GROUP. We recently signed an agreement with GT Group Telecom Services Corp. under which GT Group will lease bandwidth on designated segments of our North American network and either purchase dark fiber or acquire indefeasible rights of use on other network segments for approximately $30 million. MANAGEMENT, BOARD OF DIRECTORS AND STRATEGIC ADVISORY COMMITTEE - APPOINTMENT OF CHIEF EXECUTIVE OFFICER. Mr. Gregory Maffei joined us as Chief Executive Officer in January 2000. He was previously employed by Microsoft Corporation for seven years, most recently as Chief Financial Officer, where he was responsible for Microsoft's worldwide financial, corporate development and strategic investment initiatives. - APPOINTMENT OF ADDITIONAL DIRECTORS. The following persons have agreed to join our board of directors upon completion of this offering: - Kevin Compton, a general partner of Kleiner Perkins Caufield & Byers; - John Malone, Chairman of Liberty Media Corporation; and - John Stanton, Chairman and Chief Executive Officer of Western Wireless Corp. and VoiceStream Wireless Corp. - FORMATION OF STRATEGIC ADVISORY COMMITTEE. We recently formed a Strategic Advisory Committee to advise us on network technology directions, help us develop products and services to meet the requirements of our customers and capitalize on the convergence of telecommunications and high-bandwidth applications and services. The following persons have agreed to serve on that committee: - Michael Dell, Chairman and Chief Executive Officer of Dell Computer Corporation; - Terence Matthews, Chairman and Chief Executive Officer of Newbridge Networks Corporation; - Rupert Murdoch, the Chairman and Chief Executive Officer of News Corporation; - Dr. Nathan Myhrvold, Chief Technology Officer of Microsoft Corporation; - Anthony Naughtin, President and Chief Executive Officer of InterNAP Network Services Corporation; and - Denis O'Brien, Jr., Chairman of Esat Telecom Group, plc. STRATEGIC INVESTMENTS We will continue to pursue future investments, acquisitions or strategic alliances in businesses or assets that are related or complementary to our existing business. We have agreed to make a minority equity investment in TeraBeam Corporation, an emerging broadband services provider. STRATEGIC INVESTORS A number of private and strategic investors have purchased or agreed to purchase our equity in private transactions from Ledcor and us. Approximately $473 million of these purchases is subject to consummation of this offering. These investors include, most recently, affiliates of: - Comcast Corporation; - MSD Capital L.P., the private investment fund for Michael Dell; 4 - Liberty Media Corporation; - News Corporation; and - Shaw Communications Inc., each of which has agreed to purchase approximately $80.0 million of our shares. Other purchasers include affiliates of Oak Investment Partners, Denis O'Brien, Jr., Kleiner Perkins Caufield & Byers, Dr. Nathan Myhrvold, GT Group Telecom, Inc., InterNAP Network Services Corporation, divine interVentures, inc., RLM Holdings LLC and PSINet Inc. See "Relationships and Related Party Transactions--Irrevocable Rights to Buy." In addition, certain shareholders of GlobeNet, including Boston Ventures Limited Partnership V, Kelso Investment Associates VI and Providence Equity Partners III, are expected to purchase, in the aggregate, approximately $56.8 million of our shares. A prior private investment, aggregating $345 million, was made in September 1999 through the sale of newly issued equity to affiliates of: - Donaldson, Lufkin & Jenrette Securities Corporation; - Goldman, Sachs & Co.; - Providence Equity Partners Inc.; and - Tyco International Ltd. Ledcor is in discussions to, and may agree to, sell Subordinate Voting Shares to a limited number of additional private and strategic investors in transactions which are expected to close shortly after the closing of this offering. Those investors include certain financial institutions and strategic investors that may buy notes in our concurrent debt offerings. If all of these transactions are completed, Ledcor will sell approximately 23 million Subordinate Voting Shares for total consideration of approximately $250 million. We have entered into a letter of intent, in connection with a colocation and bandwidth cooperation arrangement, to exchange $100 million of our Subordinate Voting Shares at the initial public offering price for $100 million of common shares of a third party. This matter is subject to finalization and execution of definitive documentation. Since September 1999, Ledcor has sold or has agreed to sell to our strategic and private investors an aggregate of approximately 58.3 million Subordinate Voting Shares for cash consideration of approximately $608.5 million. The average price per share paid or agreed to be paid by these strategic and private investors is less than the initial public offering price. Each of these strategic investors has agreed not to dispose of or hedge any of their shares acquired in these private transactions during the period from the date of this prospectus continuing through 12 months after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and 360NETWORKS INC. See "Description of Capital Stock and Share Capital Reorganization" and "Shares Eligible for Future Sale." PRINCIPAL EXECUTIVE OFFICES Our principal executive offices are located at 1500-1066 West Hastings Street, Vancouver, British Columbia, Canada V6E 3X1, and our electronic mail address is info@360networks.com. Our main phone number is (604) 681-1994. 5 THE OFFERING Subordinate Voting Shares offered (a): By us...................................... 44,625,000 By the selling shareholder................. 1,650,000 Shares to be outstanding following the offering (a): Subordinate Voting Shares.................. 729,416,907 Multiple Voting Shares..................... 81,840,000 Total...................................... 811,256,907 Concurrent debt offerings.................... Concurrently with this offering, we are offering in transactions under Rule 144A and Regulation S of the Securities Act by a separate offering memorandum notes for aggregate proceeds of $700 million, such notes to be denominated in both dollars and euros. The closing of this offering is not conditioned on the closing of either of the debt offerings, and the closing of each debt offering is not conditioned on the closing of the other debt offering or this offering. We may withdraw or postpone the debt offerings and still consummate this offering. Use of proceeds.............................. We intend to use the net proceeds of this offering: - to further develop and light our network; - to develop new facilities to enable us to provide value added network services; - for investments, acquisitions or strategic alliances; and - to fund operating losses, for working capital and for general corporate purposes. Proposed listing symbols: Nasdaq National Market..................... TSIX The Toronto Stock Exchange................. TSX
- ------------------------ (a) Does not include (i) 6,941,250 Subordinate Voting Shares that will be sold by us if the underwriters' overallotment option is exercised in full and (ii) 52,501,680 Subordinate Voting Shares reserved for issuance pursuant to our stock option plan. * * * Except where otherwise indicated, this prospectus gives effect to a price of $13 per share for our Subordinate Voting Shares and does not give effect to the exercise of the underwriters' over-allotment option. 6 SUMMARY FINANCIAL DATA The summary historical financial data for the year ended March 31, 1996, the five months ended August 31, 1996, the year ended August 31, 1997 and the nine months ended May 31, 1998 of our predecessor, the telecommunications division of Ledcor Industries, are derived from the audited financial statements of the predecessor division, which have been audited by Deloitte & Touche LLP, independent auditors. Our summary consolidated historical financial data for the period from February 5, 1998 to December 31, 1998 and year ended December 31, 1999 are derived from our audited consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent auditors. The unaudited pro forma financial data as at and for the year ended December 31, 1999 are derived from our audited consolidated financial statements for the year ended December 31, 1999 and the audited consolidated financial statements of GlobeNet for the year ended December 31, 1999, audited by PricewaterhouseCoopers LLP, independent auditors, included elsewhere in this prospectus. The unaudited pro forma income statement for the year ended December 31, 1999 gives effect to the following transactions as if they occurred on January 1, 1999: - our acquisition of all outstanding stock of GlobeNet; - the interest expense on $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the interest expense on $500 million of senior notes issued in July 1999; and - the amortization of goodwill arising from the acquisition of the minority equity interests in certain of our subsidiaries. The unaudited pro forma as adjusted balance sheet data at December 31, 1999 gives effect to the following transactions as if they occurred on December 31, 1999: - the issuance of 44,625,000 Subordinate Voting Shares for net proceeds to us of approximately $548 million; - our acquisition of all outstanding stock of GlobeNet; - the issuance of $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the acquisition of the minority equity interests in certain of our subsidiaries and the related issuance of Series A Non-Voting Preferred Shares; - the conversion or exchange of our redeemable convertible preferred shares into Subordinate Voting Shares and our share capital reorganization; - the completion of the $565 million 360ATLANTIC credit facility, of which $175 million has been drawn; and - the Canadian telecommunications arrangement. Our consolidated financial statements, the divisional financial statements of the predecessor division and the consolidated financial statements of GlobeNet have been prepared in accordance with U.S. GAAP. The results of operations for the predecessor division are not comparable to our results of operations after the telecommunications division of Ledcor was reorganized. EBITDA presented in the following table consists of net income (loss) before interest expense, net of interest income, provision for income taxes, depreciation, stock-based compensation, 7 amortization of goodwill and income attributable to minority interest. EBITDA is presented because we believe that it is a useful indicator of our ability to meet debt service and capital expenditure requirements. It is not intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally acceptable accounting principles). EBITDA is not necessarily comparable to similarly titled measures for other companies and does not necessarily represent amounts of funds available for management's discretionary use. For purposes of calculating the ratio of earnings to fixed charges, earnings consists of earnings (loss) before equity income, provision for income taxes, income attributable to minority interest, amortization of goodwill and fixed charges. Fixed charges consists of interest expensed and capitalized, the portion of rental expense which we believe to be representative of interest (assumed to be one-third of rental expense) and pre-tax earnings required to cover the accretion on the redeemable convertible preferred shares. Pro forma loss for the year ended December 31, 1999 would have been insufficient to cover fixed charges by approximately $140 million. Capital expenditures represent actual cash expenditures incurred during the period and do not include acquisitions of assets for non-cash consideration. Route miles represent the number of miles spanned by fiber optic cable owned by us or in respect of which we have acquired capacity pursuant to swaps, leases, indefeasible rights of use or other contractual rights at the end of the period, calculated without including physically overlapping segments of cable. The following table presents summary consolidated financial data derived from our consolidated financial statements. You should read the following information along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes included elsewhere in this prospectus. 8 SUMMARY FINANCIAL DATA (Dollars in thousands except per share amounts)
360NETWORKS INC. ------------------------------------------------ FEBRUARY 5, YEAR PRO FORMA 1998 TO ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1999 1999 ------------ ------------- ------------- (unaudited) INCOME STATEMENT DATA: Revenue................................................ $ 164,319 $ 359,746 $ 386,094 Operating expenses: Costs................................................ 147,621 250,612 261,601 General and administrative........................... 2,274 21,846 40,534 Stock-based compensation............................. -- 7,116 11,323 Depreciation......................................... 464 2,998 4,852 Amortization of goodwill............................. -- -- 35,536 ----------- ------------ ------------ Total operating expenses............................... 150,359 282,572 353,846 ----------- ------------ ------------ Operating income....................................... 13,960 77,174 32,248 Interest expense, net.................................. 225 15,786 155,220 ----------- ------------ ------------ Income (loss) before income taxes, minority interest and equity accounted for investment.................. 13,735 61,388 (122,972) Provision for income taxes............................. 5,643 30,314 (28,849) ----------- ------------ ------------ 8,092 31,074 (94,123) Income attributable to minority interest and equity accounted for investment............................. 928 (7,434) (773) ----------- ------------ ------------ Net income (loss)...................................... $ 9,020 $ 23,640 $ (94,896) =========== ============ ============ Basic and fully diluted earnings (loss) per share...... $ 0.43 $ (0.03)(1) $ (0.16) Shares used to calculate basic and fully diluted earnings (loss) per share:........................... 20,964,178 327,313,808 617,783,263 OTHER FINANCIAL DATA (UNAUDITED): EBITDA................................................. $ 15,352 $ 87,288 Capital expenditures................................... 1,065 300,116 Ratio of earnings to fixed charges..................... 26.8x 1.7x STATEMENT OF CASH FLOWS DATA: Operating activities................................... $ (13,059) $ (97,077) Investing activities................................... 1,177 (321,283) Financing activities................................... 168,350 785,719 OPERATING DATA: Route miles............................................ 2,735 12,217
DECEMBER 31, 1999 ------------------------- PRO FORMA AS ACTUAL ADJUSTED ---------- ------------ (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 521,362 $1,750,981 Property and equipment--net................................. 77,009 119,713 Assets under construction................................... 300,403 398,465 Total assets................................................ 1,310,989 4,128,085 Total debt.................................................. 675,000 1,950,000 Redeemable convertible preferred shares..................... 349,827 -- Shareholders' equity........................................ 29,861 2,041,909
- -------------------------- (1) To compute basic and fully diluted loss per share, net income of $23,640,000 is reduced by a stock dividend of $5,000,000, the accretion on the Series A Non-Voting Preferred Shares of $6,465,000 and an amount of $22,070,000 which represents the fair value of the Series A Non-Voting Preferred Shares issued to the existing shareholders for no additional consideration as a result of anti-dilution provisions in the original subscription agreement, resulting in a net loss to holders of Subordinate Voting Shares and Multiple Voting Shares of $9,895,000. 9
PREDECESSOR DIVISION ------------------------------------------------------ FIVE MONTHS YEAR ENDED ENDED YEAR ENDED NINE MONTHS MARCH 31, AUGUST 31, AUGUST 31, ENDED 1996 1996 1997 MAY 31, 1998 ---------- ----------- ---------- -------------- INCOME STATEMENT DATA: Revenue................................ $ 3,824 $ 7,373 $58,008 $54,634 Operating expenses: Costs................................ 3,440 5,739 48,474 44,919 General and administrative........... 57 91 863 710 Depreciation......................... 24 15 112 317 ------- ------- ------- ------- Total operating expenses............... 3,521 5,845 49,449 45,946 ------- ------- ------- ------- Operating income....................... 303 1,528 8,559 8,688 Interest expense, net.................. -- 15 600 86 Equity income.......................... -- -- -- -- ------- ------- ------- ------- Earnings before income taxes........... 303 1,513 7,959 8,602 Income tax expense..................... 139 686 3,620 3,909 ------- ------- ------- ------- 164 827 4,339 4,693 Income attributable to minority interest............................. -- -- -- -- ------- ------- ------- ------- Net income............................. $ 164 $ 827 $ 4,339 $ 4,693 ======= ======= ======= ======= OTHER FINANCIAL DATA (UNAUDITED): EBITDA................................. $ 327 $ 1,543 $ 8,671 $ 9,005 Capital expenditures................... 72 181 1,119 6,828 Ratio of earnings to fixed charges..... 24.3x 45.5x 10.3x 17.7x STATEMENT OF CASH FLOWS DATA: Operating activities................... $ 666 $(3,078) $(3,921) $(2,502) Investing activities................... (72) (181) (1,119) (6,828) Financing activities................... (595) 3,259 5,040 9,330 OPERATING DATA: Route miles............................ -- -- 1,090 1,430 BALANCE SHEET DATA: Cash and cash equivalents.............. $ -- $ -- $ -- $ -- Fixed assets, net...................... -- 464 1,471 7,982 Total assets........................... -- 6,476 32,268 39,549 Total debt............................. -- 2,067 6,774 10,933 Redeemable convertible preferred shares............................... -- -- -- -- Shareholders' equity................... -- 1,473 5,825 8,870
10 RISK FACTORS You should carefully consider the risks described below before deciding whether to invest in our Subordinate Voting Shares. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us may also impair our business operations. If we do not successfully address any of the risks described below, there could be a material adverse effect on our business, financial condition or results of operations. As a result, the trading price of our Subordinate Voting Shares may decline and you may lose all or part of your investment. We cannot assure you that we will successfully address these risks. GENERAL BUSINESS LIMITED HISTORY OF OPERATIONS--GIVEN OUR LIMITED OPERATING HISTORY, YOU SHOULD CONSIDER OUR SHARES TO BE A HIGHLY SPECULATIVE INVESTMENT. You have very limited historical financial information upon which to base your evaluation of our performance and an investment in our Subordinate Voting Shares. We began operations as an independent company in May 1998 and have a limited operating history. Before that time we conducted business as the telecommunications division of Ledcor Industries. We believe that our financial results are not directly comparable to theirs. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in an early stage of development. RISKS ASSOCIATED WITH DEVELOPMENT AND EXPANSION OF OUR NETWORK--OUR INABILITY TO IMPLEMENT OUR BUSINESS STRATEGY AND MANAGE OUR GROWTH COULD IMPAIR OUR OPERATING RESULTS. Successful implementation of our business strategy depends on numerous factors beyond our control, including economic, competitive and other conditions and uncertainties, the ability to obtain licenses, permits, franchises and rights-of-way on reasonable terms and conditions and the ability to hire and retain qualified personnel. Adverse economic or competitive conditions or the failure to obtain the necessary authorizations or to hire and retain qualified personnel could prevent or delay the completion of all or part of our network or increase completion costs. In order to implement our proposed business strategy, we must accomplish the following in a timely manner at a reasonable cost to us and on acceptable conditions: - obtain continued access to capital markets; - design, engineer and operate fiber networks; - install fiber optic facilities, transmission equipment and related infrastructure; - acquire additional rights-of-way; - obtain required regulatory approvals; - swap, lease, purchase or obtain other contractual rights in additional fiber optic facilities; - attract and retain high-quality operating personnel and management; and - continue to implement and improve our operational, financial and accounting systems. In addition, construction of future networks entails significant risks, including: - management's ability to effectively control and manage these projects; - shortages of materials, equipment or skilled labor; 11 - unforeseen engineering, environmental or geological problems; and - work stoppages, weather interference, floods and unanticipated cost increases. We cannot assure you that the anticipated costs of our current and future projects will not be exceeded or that these projects will commence operations within the contemplated schedules, if at all. Our success will depend, to a significant degree, upon our ability to secure a market for our network capacity and obtain and maintain contractual and other relationships with telecommunications service providers, Internet service providers, application service providers, storage service providers and large organizations with enterprise network needs. If we are unable to enter into contracts, comply with the terms of contracts or maintain relationships with these constituencies, our operations would be materially and adversely affected. Some of our current contracts to supply fiber capacity allow the buyer or lessee to terminate the contracts and provide for liquidated damages if we do not supply the stated fiber capacity by a specified time. Terminating any of these contracts could adversely affect our operations. Additionally, we expect to significantly expand the range of services that we offer. This expansion includes providing various network services to carriers and other service providers. We may enter into joint ventures where we or our partners supply the venture with dark fiber and the appropriate optical transmission equipment by facilitating the involvement of third party suppliers, vendors and contractors. We cannot assure you that a market will develop for our new services, that implementing these services will be technically or economically feasible, that we can successfully develop or market them or that we can operate and maintain our new services profitably. In order to reach our operating and financial goals, we must substantially increase the current volume of voice, data, Internet and video transmission on our network. If we do not develop long-term commitments with new large-volume customers as well as maintain our relationships with current customers, we will be unable to increase traffic on our network, which would adversely affect our profitability. RISK OF NETWORK FAILURE--NETWORK DISRUPTIONS COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Our success will require that our network provide competitive reliability, capacity and security. Some of the risks to our network and infrastructure include: - physical damage; - power loss; - capacity limitations; - hardware and software defects; - excessive sustained or peak user demand; - breaches of security; and - disruptions beyond our control. These disruptions may cause interruptions in service or reduced capacity for customers, any of which could have an adverse effect on our ability to retain customers. The sale or lease of network services will require the addition of transmission equipment to our network. The network will use a combination of communications equipment, software, operating protocols and proprietary applications for the high speed transportation of large quantities of digital 12 signals among multiple locations. Given the complexity of our network, digital signals may become lost or distorted, which may cause significant losses to our customers. The network may also contain undetected design faults and software "bugs" that, despite our testing, may be discovered only after the network has been completed and is in use. The failure of any equipment or facility on our network could result in the interruption of customer service until we make necessary repairs or install replacement equipment and have an adverse impact on our revenues and our ability to secure customers in the future. We do not possess adequate insurance to guard against the losses we could incur as a result of the factors enumerated above. LIMITED EXPERIENCE--WE HAVE LITTLE EXPERIENCE IN THE OFFERING OF BANDWIDTH AND VALUE ADDED NETWORK SERVICES AND THIS COULD INCREASE OUR RISK OF FAILURE. We expect an increasing portion of our revenues to be derived through our offering of bandwidth and value added network services. We have limited experience offering these services. Presently, we derive substantially all of our revenues from the sale, grant of an indefeasible right of use or lease of dark fiber and conduit and construction services. See "Business--Customers" and "--Competition." PRICING PRESSURES--WE ANTICIPATE THAT PRICES FOR NETWORK SERVICES AND FIBER ASSETS WILL DECLINE. We anticipate that prices for our products and services specifically, and network transmission capacity in general, will continue to decline over the next several years, due primarily to the following: - price competition as various network providers complete construction of networks that will compete with our network; - installation by us and our competitors of fiber capacity in excess of actual demand; - recent technological advances that enable substantial increases in the transmission capacity of both new and existing fiber optic networks; and - strategic alliances or similar transactions, such as long distance capacity purchasing alliances, that increase our customers' purchasing power. NEED FOR RIGHTS-OF-WAY--A FAILURE TO OBTAIN OR MAINTAIN APPROPRIATE RIGHTS-OF-WAY COULD DELAY THE COMPLETION OF THE NETWORK AND INCREASE ITS COST. We cannot assure you that we will be successful in obtaining additional rights-of-way and other permits required to install underground conduit from parties such as railroads, utilities, highway authorities and governments and transit authorities. After we have obtained rights-of-way, we may not be able to maintain them. Some of our rights-of-way agreements may be short-term or revocable at will. Some rights-of-way may require regulatory filings or may be subject to legal challenge by third parties such as municipal governments, aboriginal citizens or land owners concerning rights-of-way granted for specific purposes. For example, WFI Urbanlink Ltd. ("Urbanlink"), the Canadian telecommunications common carrier which has granted IRUs to us of its fiber optic transmission facilities in Canada for sale on a resale basis, is seeking an order from the Canadian Radio-television and Telecommunications Commission to prescribe the terms and conditions of access to street crossings and other municipal properties in the city of Vancouver. In a related matter, the city of Vancouver has served the company that provides conduit to Urbanlink for certain of its facilities located in the city of Vancouver with a notice of termination for access to street crossings and other municipal property in the city. Failure on the part of Urbanlink to obtain the order requested in its application to the Canadian Radio-television and Telecommunications 13 Commission or a renegotiation of municipal access arrangements with the city of Vancouver by Urbanlink's conduit provider which results in an increase to the costs of municipal access could have a material adverse effect on the business of Urbanlink and, as a result, on our resale business in Canada. See "Regulation--Canada--CRTC Proceedings." In addition, in the United States, landholders who granted rights-of-way to some railroad companies in the past have filed class action lawsuits against communications carriers that received rights-of-way from railroad companies in order to develop their fiber optic networks. The rights-of-way challenged in these class action lawsuits are similar to some of the rights-of-way that we use to develop our network, including the rights-of-way granted to us in the agreements with Canadian National Railway Company and Illinois Central Railroad Company. Loss of substantial rights and permits or loss of the ability to use these rights-of-way or the failure to enter into or maintain required arrangements for the network could have a material adverse effect on our business, financial condition and results of operations, if, as a result, the completion of our network is delayed or becomes more costly. See "Business--Rights-of-way and Permitting." RISKS ASSOCIATED WITH JOINT VENTURES--OUR BUSINESS STRATEGY CONTEMPLATES INVESTMENTS IN JOINT VENTURES TO LEVERAGE OUR FIBER ASSETS. THESE INVESTMENTS MAY INVOLVE SIGNIFICANT RISKS AND OUR CAPITAL ASSETS MAY NOT BE RETURNED. We are continually evaluating potential joint ventures and strategic opportunities to expand our network, enhance our connectivity and add traffic to our network. Although, except as described in this prospectus, we do not have any definitive commitment or agreement concerning any material investment, strategic alliance or related effort, we may seek additional arrangements of this sort. Any investments, strategic alliances or related efforts are accompanied by risks such as: - the difficulty of identifying appropriate joint venture partners or opportunities; - the time our senior management must spend negotiating agreements and monitoring joint venture activities; - the possibility that we may not be able to reach agreement on definitive agreements, including for our proposed colocation acquisitions; - potential regulatory issues applicable to telecommunications businesses; - the investment of our capital or fiber assets and the loss of control over the return of this capital or assets; - the inability of management to capitalize on the growth opportunities presented by joint ventures; and - the insolvency of any joint venture partner. We cannot assure you that we would be successful in overcoming these risks or any other problems encountered with these joint ventures, strategic alliances or related efforts. RISKS ASSOCIATED WITH INTERNATIONAL MARKETS--WE WILL ENCOUNTER ADDITIONAL RISKS AS WE PURSUE INTERNATIONAL BUSINESS OPPORTUNITIES. Our strategy includes expanding our services to provide fiber optic networks and network services outside of North America. In particular, we have entered into an agreement for an undersea cable between North America and Europe called 360ATLANTIC. We have also agreed to acquire GlobeNet, which is constructing an undersea cable between South America and North America that we call 360AMERICAS. We also recently announced the expansion of our network into Europe. We 14 are still evaluating all of the risks associated with these new projects. The risks associated with 360ATLANTIC and 360AMERICAS include: - activities from our competitors which could limit the market share obtained by 360ATLANTIC and 360AMERICAS; - pricing pressures which could reduce profitability; - risk that there will be delay under our supply agreement as a result of the highly concentrated nature of the cable manufacturing and installation industry; and - inability to obtain sufficient pre-construction sales commitments and post-construction sales targets. Other risks associated with our international plans, including our expansion into Europe and South America, are: - regulatory limitations restricting or prohibiting us from providing our services; - additional regulatory requirements, tariffs, customs, duties and other trade barriers; - difficulties in staffing and managing foreign operations; - problems in collecting accounts receivable; - political risks; - fluctuations in the currency exchange and restrictions on the repatriation of earnings; - delays from customs brokers or government agencies; - potentially adverse tax consequences resulting from operating in multiple countries with different laws and regulations; and - an economic downturn in the countries in which we expect to do business. Furthermore, the international rates customers are charged are likely to decrease in the future for many reasons, including increased competition between existing carriers, increased competition with new carriers in the international markets and additional strategic alliances or joint ventures among large international carriers that facilitate targeted pricing and cost reductions. We cannot assure you that we will be successful in overcoming these risks or any other problems arising from operating in international markets. COMPETITION--OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD ADVERSELY AFFECT US. The telecommunications industry is extremely competitive, particularly concerning price and service. It is relatively common for telecommunications service providers to be both customers and competitors. This is a concept referred to as co-opetition. Therefore, we face competition and co-opetition from existing and planned telecommunications service providers and customers on each of our planned routes. Our competitors include: - interexchange carriers, including AT&T Corp., MCI WorldCom, Inc., Sprint Corporation (MCI WorldCom, Inc. and Sprint Corporation have recently entered into an agreement to merge), British Telecommunications plc, Deutsche Telekom AG, France Telecom S.A. and Qwest Communications International Inc.; - wholesale providers of terrestrial and undersea connectivity, including Williams Communications Group, Inc., Global Crossing Ltd., KPNQwest, N.V., Colt Telecom Group plc and Level 3 Communications, Inc.; 15 - incumbent local exchange carriers, which currently dominate their local telecommunications markets, including SBC Communications Inc. and BellSouth Corporation; - competitive local exchange carriers, including NEXTLINK Communications, Inc. and Metromedia Fiber Network, Inc.; and - companies capable of offering services similar to those provided by us, including communications service providers, cable television companies, electric utilities, microwave carriers, satellite carriers and wireless telephone operators. Some of our competitors have already made substantial long term investments in the construction of fiber optic networks and the acquisition of bandwidth. Some of these competitors have substantially greater resources and more experience than we do and could directly compete with us in marketing fiber assets or network services. In addition, some communications carriers and local cable companies have extensive networks in place that could be upgraded to fiber optic cable, as well as numerous personnel and substantial resources to begin construction to equip their networks. If communications carriers and local cable companies decide to equip their networks with fiber optic cable, they could become significant competitors of ours in a short period of time. Other companies may choose to compete with us in our current or planned markets, by selling or leasing fiber assets or bandwidth to our targeted customers. A significant increase in industry capacity or reduction in overall demand would adversely affect our ability to maintain or increase prices. Additional competition could materially and adversely affect our operations. See "Business--Competition." Future sources of competition for the 360AMERICAS cable include: - Americas-2, a new carriers' consortium cable system with a scheduled ready for service date in the first half of 2000 that will connect Brazil, Venezuela, Florida and the Caribbean; - South American Crossing, a new self-healing ring cable system being developed by Global Crossing Ltd. that will link coastal countries in South America to Global Crossing's planned Mid-Atlantic Crossing in St. Croix, U.S.V.I. and Global Crossing's planned Pan American Crossing in Ft. Amador, Panama; and - the SAM-I cable system, a self-healing ring cable system being developed by Telefonica Internacional S.A. and Tyco International Ltd. that will connect the United States, Guatemala, Brazil, Argentina, Chile, Peru and Colombia. DEPENDENCE ON THIRD PARTIES, INCLUDING SUPPLIERS--THE LOSS OF KEY SOURCES OF SUPPLY COULD ADVERSELY AFFECT US. We are dependent upon third party suppliers, including Pirelli Cables and Systems Inc., for fiber optic cable and a number of components and parts used in the network, including optical equipment. Recently, some companies have experienced a shortage of fiber optic cable. We cannot assure you that we will not experience such a shortage. We are also dependent on Nortel Networks, Newbridge Networks and Marconi plc for the transmission equipment we need to offer network services. We believe that there are alternative suppliers or alternative components for all of the components, including fiber optic cable and transmission equipment contained in the network or required to offer network services. However, any delay or extended interruption in the supply of fiber optic cable or any other key network components, changes in the pricing arrangements with our suppliers and manufacturers or delay in a transition to a replacement supplier's product into the network could disrupt our operations. If the disruption continued for an extended period of time, it could have a material adverse effect on our business, financial condition and results of operations. 16 In addition, we have contracted with Tyco Submarine Systems Ltd. as our primary contractor for our 360ATLANTIC undersea cable project. Alcatel Submarine Networks, Inc. is the primary contractor on the 360AMERICAS undersea cable project. We plan to continue to use third party contractors on various segments of the network. The failure of the contractors to complete their activities in a timely manner, within anticipated budgets and in accordance with our quality standards and performance criteria could have a material adverse effect on our business, financial condition and results of operations, if, as a result, the completion of our network is delayed or becomes more costly. RAPID TECHNOLOGICAL CHANGE--NEW TECHNOLOGIES COULD REDUCE THE DEMAND FOR FIBER OPTIC SYSTEMS. The telecommunications industry generally is subject to rapid and significant changes in technology that may adversely affect the continued use of fiber optic cable. Although we have been able to capitalize on some recent technological advances, such as the use of dense wave division multiplexing to greatly expand the capacity of our network at constant construction costs, we cannot assure you that the introduction of new products or the emergence of new technologies will not enable competitors to install competing systems at a lower per-circuit cost on routes currently targeted by us. Moreover, these potential competitors may be able to expand capacity on existing competitive systems, which could render our network and network services uncompetitive from a cost perspective. We cannot predict the likelihood of these changes and we cannot assure you that any technological changes will not materially and adversely affect our business and operating results. POTENTIAL CONFLICTS OF INTEREST WITH LEDCOR--WE ARE CONTROLLED BY LEDCOR AND RELY ON IT FOR PARTICULAR THINGS. ITS INTERESTS MAY CONFLICT WITH YOUR INTERESTS. As of the date of this prospectus, Ledcor holds shares in us which entitle Ledcor to approximately 90% of the votes attached to our shares and Ledcor has the ability to control our affairs and business. Ledcor also owns 66 2/3% of the voting shares of Urbanlink, which owns certain Canadian telecommunications facilities used by us. See "Relationships and Related Party Transactions--Transactions with Ledcor--Description of reorganization and related agreements." This will continue to be the case following the closing of the offering. It is possible that Ledcor's interests could conflict with your interests. In addition, Ledcor may have an interest in causing us or Urbanlink to pursue transactions that, in its judgment, enhance the value of its equity investment in us or in Urbanlink, even though these transactions may involve greater risks to you. There can be no assurance that any of these conflicts of interests will be resolved in your favor. In Canada, our network is comprised in part of indefeasible rights of use in fiber optic transmission facilities obtained from Urbanlink, as part of our Canadian telecommunications arrangement. Because Urbanlink is controlled by Ledcor, Urbanlink's interests could conflict with our interests as well as your own. In addition, because we have no control over Urbanlink's operations, there can be no assurance that Urbanlink will continue to supply us with fiber optic transmission facilities and services should we require these facilities and services from Urbanlink in the future. As part of our Canadian telecommunications arrangement, we entered into a number of contractual arrangements with Ledcor. See "Relationships and Related Party Transactions-- Transactions with Ledcor--Description of reorganization and related agreements." Ledcor has agreed not to compete with us in the business of developing or constructing fiber optic communications infrastructure for a period ending on the earlier of May 31, 2008 and six months after a change of control of 360NETWORKS INC. Ledcor has also agreed to grant to us a worldwide exclusive license for the use and other exploitation of the railplow technology. The license will cease to be exclusive six months after a change of control of 360NETWORKS INC. As a 17 result, if a change of control of 360NETWORKS INC. were to occur, Ledcor would be legally entitled to compete with us and to grant a license for the use and other exploitation of the railplow technology to competitors of ours. Either of these events could have a material adverse effect on our business, financial condition and results of operations. See "Relationships and Related Party Transactions--Transactions with Ledcor--Description of reorganization and related agreements." LEVERAGE NEGATIVE CASH FLOWS--GIVEN OUR NEGATIVE CASH FLOWS WHILE OUR NETWORK IS BEING BUILT, YOU SHOULD CONSIDER AN INVESTMENT IN OUR SUBORDINATE VOTING SHARES TO BE HIGHLY SPECULATIVE. Continued negative cash flow may restrict our ability to pursue our business strategy. In addition, if we cannot achieve profitability or positive cash flows from operating activities, we may not be able to meet our debt service obligations, including our obligations under our existing indebtedness, capital expenditure requirements or working capital needs. We intend to use most of the proceeds from the sale of these Subordinate Voting Shares to develop and construct our network and expand our network services business. Until the principal segments of the network are complete, we will spend more money building the network than we will earn from exploiting it. Accordingly, we expect to experience negative cash flows after capital expenditures during network development. We cannot assure you that the exploitation of our network, including the sale of our fiber and network services, will result in an adequate revenue base to meet our debt service obligations or that we will ever generate profitability or positive cash flow. SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR HIGH YIELD NOTES. We have substantial debt and debt service requirements. Our substantial indebtedness could have important consequences to you. For example, it could: - increase our vulnerability to general adverse economic and industry conditions; - limit our ability to fund future capital expenditures, working capital and other general corporate requirements; - require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our indebtedness, reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; - make it more difficult for us to make interest and principal payments on our other indebtedness, which would be a default under the indentures; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and - place us at a competitive disadvantage compared to our competitors that have less debt. See "Description of Indebtedness." We also intend to obtain other sources of financing for the construction of the network, including project financing for individual segments of our network. This project financing would also be secured by the assets being financed. The 18 following chart shows some important credit statistics as of the date or for the periods specified below:
AS OF DECEMBER 31, 1999 ----------------------------------------- PRO FORMA ACTUAL ADJUSTED(1) AS ADJUSTED(2) -------- ------------ --------------- (UNAUDITED) (DOLLARS IN MILLIONS) Total indebtedness.................................. $675 $675 $1,950 Shareholders' equity................................ $ 30 $380 $2,042 Debt to equity ratio................................ 22.5x 1.8x 1.0x
- ------------------------ (1) Adjusted to include our redeemable convertible preferred stock as part of shareholders' equity. (2) Gives pro forma effect and adjustment to: - the issuance of 44,625,000 Subordinate Voting Shares for net proceeds to us of approximately $548 million; - our acquisition of all outstanding stock of GlobeNet; - the issuance of $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the acquisition of the minority equity interests in certain of our subsidiaries and the related issuance of Series A Non-Voting Preferred Shares; - the conversion or exchange of our redeemable convertible preferred shares into Subordinate Voting Shares and our share capital reorganization; and - the completion of the $565 million 360ATLANTIC credit facility, of which $175 million has been drawn. The initial annual interest expense on the $700 million of senior notes to be issued in concurrent debt offerings is $98 million and on the $500 million 12% senior notes issued in July 1999 is $62 million. Pro forma loss for the year ended December 31, 1999 would have been insufficient to cover fixed charges by approximately $140 million. ADDITIONAL BORROWINGS REQUIRED--DESPITE OUR CURRENT DEBT LEVEL, WE AND OUR SUBSIDIARIES MAY INCUR SUBSTANTIALLY MORE DEBT. INCREASED DEBT COULD WORSEN THE RISKS DESCRIBED ABOVE, BUT FAILURE TO OBTAIN THE DEBT NEEDED COULD PREVENT THE COMPLETION OF THE NETWORK. If additional debt is incurred, the risks mentioned above that are associated with high leverage will increase. We expect to need significant amounts of additional capital to complete the development of our planned network and fulfill our long-term business strategies. The terms of our indentures generally permit us and our restricted subsidiaries to incur additional debt to finance the cost of designing and building or acquiring our network. The indentures also allow us to incur additional indebtedness for other purposes, subject to some limitations. In addition, the indentures permit us to create "unrestricted subsidiaries" that will be allowed to incur debt without regard to the limitations on debt incurrence contained in the indentures. Our ability to arrange financing and the cost of financing depend upon many factors, including: - general economic and capital markets conditions, and in particular the non-investment grade debt market; 19 - conditions in the telecommunications industry; - regulatory developments; - investor confidence and credit availability from banks or other lenders; - the success of our network; and - provisions of tax and securities laws that affect raising capital. Our inability to raise additional funds would have an adverse effect on our ability to complete the network. If we decide to raise additional funds through the incurrence of debt, we may become subject to additional or more restrictive financial covenants. In addition, we expect to incur additional debt that is secured by our assets and therefore those assets will be available to other creditors before they are available to you. We currently intend to issue $700 million of debt in the concurrent debt offerings. The closing of this offering is not conditioned on the closing of either of the debt offerings. If we do not issue that debt because of market conditions or because terms acceptable to us are not available, we will need to raise additional capital to complete our network and other items described under "Use of Proceeds." We may not be able to raise this capital or raise this capital on terms acceptable to us. A portion of our investment in 360ATLANTIC was funded from our recently completed private sale of our equity securities. The indebtedness to finance that project has been or will be incurred by our subsidiary without recourse to 360NETWORKS INC. We estimate that approximately $565 million of indebtedness will be required for the 360ATLANTIC project. 360ATLANTIC will be owned by one or more subsidiaries created for the purpose of owning the project. They will not hold any assets unrelated to 360ATLANTIC and these subsidiaries will not be restricted subsidiaries under the indentures. If we were to incur additional debt at the 360NETWORKS INC. level in order to contribute to the financing of 360ATLANTIC, however, it would further increase the risks associated with high leverage. ABILITY TO SERVICE DEBT--TO SERVICE OUR DEBT WE WILL REQUIRE SIGNIFICANT AMOUNTS OF CASH AND OUR ABILITY TO GENERATE SUFFICIENT CASH WILL DEPEND ON MANY FACTORS BEYOND OUR CONTROL. We cannot assure you that we will be successful in implementing our strategy or in realizing our anticipated financial results. You should be aware that our ability to repay or refinance our debt we incur will depend on our successful financial and operating performance and on our ability to successfully implement our business strategy. You should also be aware that our financial and operating performance depends upon a number of factors, many of which are beyond our control. These factors include: - our ability to complete network development on time and in a cost-effective manner; - the economic and competitive conditions in the telecommunications industry, including the demand for fiber-optic systems; - any construction or operating difficulties, increased operating costs or pricing pressures we may experience; - the passage of legislation or other regulatory developments that may adversely affect us; and - any material delays in implementing any strategic projects. We cannot assure you that our cash flow and capital resources will be sufficient to repay the notes and any other debt we may incur in the future, or that we will be successful in obtaining alternative financing. If we are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of our network, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations or comply 20 with our covenants, a default under our debt agreements would result. To avoid a default, we might need waivers from third parties, which might not be granted. HOLDING COMPANY STRUCTURE--WE WILL DEPEND ON THE CASH FLOW OF OUR SUBSIDIARIES TO SATISFY OUR OBLIGATIONS UNDER OUR INDEBTEDNESS. Our operating cash flow and our ability to service our indebtedness, including our notes, depends upon the operating cash flow of our subsidiaries and their payments to us in the form of loans, dividends or otherwise. Our subsidiaries are separate legal entities and have no obligation to pay any amounts due on the notes or to make any funds available for that purpose, whether by dividends, interest, loans, advances or other payments. In addition, our subsidiaries' payment of dividends and the making of loans, advances and other payments to us may be subject to regulatory and contractual restrictions. These restrictions include requirements to maintain minimum levels of working capital and other assets. Subsidiary payments are contingent upon earnings and various business and other considerations. As part of the Canadian telecommunications arrangement we placed certain operating assets in Urbanlink, which subsidiary we do not and cannot control. RESTRICTIONS IMPOSED BY TERMS OF OUR INDEBTEDNESS--WE MAY BE UNABLE TO REPAY OUR INDEBTEDNESS IF THERE IS AN EVENT OF DEFAULT. If an event of default occurs under any of our credit facilities or indentures, the lenders under the credit facilities and the holders of our notes could elect to declare all amounts outstanding under the credit facilities and the notes, along with accrued and unpaid interest, to be immediately due and payable. Our indentures limit, among other things, our ability to incur additional indebtedness, pay dividends and make certain other restricted payments, incur liens, enter into some transactions with affiliates and consummate asset sales and impose restrictions on our ability to merge or consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. In addition, credit facilities that we may enter into in the future may contain other and more restrictive covenants, including concerning debt incurrence and the making of capital expenditures and may require us to meet or maintain specified financial ratios and tests. Our ability to meet these financial ratios could be affected by events beyond our control, and no assurance can be given that we will be able to comply with these provisions. A breach of any of these covenants could result in a default under these credit facilities and/or the indentures. If we were unable to repay any of these amounts, the lenders could proceed against any collateral securing the indebtedness, which could include security interests in all of our future accounts receivable and inventory and other assets. If the lenders under potential credit facilities were to accelerate the payment of the indebtedness under these credit facilities, there would be no assurance that our assets at the time would be sufficient to repay in full the indebtedness and our other indebtedness, including the notes. USE OF PROCEEDS--OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THE OFFERING, AND THEREFORE INVESTORS WILL NOT HAVE THE OPPORTUNITY TO EVALUATE INFORMATION CONCERNING THE APPLICATION OF PROCEEDS. The net proceeds of this offering, together with the concurrent debt offerings we currently intend to consummate, are estimated to be approximately $1.2 billion after deducting the estimated underwriting discount and offering expenses. Management will retain broad discretion as to the use and allocation of those net proceeds. Accordingly, our investors will not have the opportunity to evaluate the economic, financial and other relevant information that we may consider in the application of the net proceeds. 21 TELECOMMUNICATIONS REGULATION EXTENSIVE REGULATION--REGULATORY MATTERS COULD IMPACT OUR ABILITY TO CONDUCT OUR BUSINESS. Existing and future governmental regulation may substantially affect the way in which we conduct business and the procedural and substantive regulatory requirements with which we must comply. These regulations may increase the cost of doing business or may restrict the way in which we offer products and services. There is no way to predict the future regulatory framework of our business. These regulations are summarized in more detail in the section entitled "Regulation." UNITED STATES Federal telecommunications law directly shapes the telecommunications market. Consequently, regulatory requirements and/or changes could adversely affect our operations by increasing our costs or restricting the way in which we offer products and services. Federal telecommunications law imposes special legal requirements on "common carriers" who engage in "interstate or foreign communication by wire or radio," and on "telecommunications carriers." The different ways we intend to offer fiber-optic supported services could trigger four alternative types of regulatory requirements: (1) non-communications services, (2) private carrier services, (3) telecommunications services or common carriage and (4) competitive local exchange carrier offerings. The law establishing these alternative regulatory requirements is often unclear, so it is impossible to predict in many instances how the Federal Communications Commission will classify our services. Risks associated with each type of offering are described below. NON-COMMUNICATIONS SERVICES The provision of dark fiber can be viewed as a non-communications service in that it is not a service, but rather the provision of a physical facility that is indistinguishable from other non-communications offerings such as the construction of an office building. Many providers of dark fiber are currently operating on the assumption that they are providing unregulated facilities. Nevertheless, the Federal Communications Commission had previously found that when an incumbent local exchange carrier provided dark fiber it was providing a common carrier service. A federal appeals court reversed and remanded this decision to the agency for further proceedings. The Federal Communications Commission's action in response to this remand could affect our position that dark fiber is not a communications service. PRIVATE CARRIER SERVICES Even if some of our offerings are treated as communications services, they could be viewed as a private carrier offering. Private carrier offerings typically entail the offering of telecommunications, but are provided to a limited class of users on the basis of individually negotiated terms and conditions that do not meet the definition of a telecommunications service under the Telecommunications Act of 1996. If our services are treated as private carriage, they are generally unregulated by the Federal Communications Commission, but would be subject to universal service payments based on the gross revenues from end users. See "Regulation--United States-- Federal--Telecommunications Services--Universal Service." Private carriers may also be subject to access charges if they interconnect with local exchange carriers. TELECOMMUNICATIONS SERVICES Some of our services, such as the provision of bandwidth capacity and lit fiber, may be treated as telecommunications services by the Federal Communications Commission. If any of our services are treated as telecommunications services, we could be subject to a number of new and potentially burdensome regulations. 22 The precise parameters of the definition of a telecommunications service are currently unclear. The Federal Communications Commission has held that telecommunications and common carrier services are essentially the same. Some railroad, power and telecommunications providers have asked the Federal Communications Commission to clarify the status of fiber providers. If the Federal Communications Commission decides that these companies are telecommunication carriers, we would be subject to certain regulatory requirements which may impose substantial administrative and other burdens on us. If any of our services are treated as telecommunications services, we may be subject to a number of new and potentially burdensome regulations. These general regulations include the obligation not to charge unreasonable rates or engage in unreasonable practices, the obligations not to unreasonably discriminate in our service offerings, the need to tariff our services (subject to the proceeding described below), the potential obligation to permit others to offer their services for resale under certain circumstances and the fact that third parties may file complaints against us at the Federal Communications Commission for violations of the Communications Act of 1934 or the Federal Communications Commission regulations. Certain statistical reporting requirements may also apply. Telecommunications carriers are also required to interconnect, either directly or indirectly, with the facilities of other telecommunications carriers and to ensure that they do not install network features, functions or capabilities that do not comply with Federal Communications Commission guidelines on accessibility by disabled persons and regulations promoting interconnectivity of networks. In addition, Federal Communications Commission rules require that telecommunications carriers contribute to universal service support mechanisms, the Telecommunications Relay Services fund, the number portability fund and the North American Numbering Plan Administrator fund. Also, the Communications Assistance for Law Enforcement Act requires telecommunications carriers to provide law enforcement officials with call-related information and reserved circuits. We cannot assure you that the cost of compliance with these various programs will not have a material adverse effect upon our results of operations and financial condition and our ability to meet our obligations. The continuation of tariff filing requirements for interstate domestic services provided by non-dominant carriers is in dispute. The Federal Communications Commission has ordered that all non-dominant carriers, the classification we would qualify for, may not file tariffs with the Federal Communications Commission for domestic service. The D.C. Circuit has stayed the effect of this decision. Filing tariffs can entail increased costs and may lead to intrusive regulation by the Federal Communications Commission, although to date the Federal Communications Commission has engaged in only minor regulation of non-dominant carriers. On the other hand, if tariffs are no longer required, telecommunications carriers will no longer be able to rely on the filing of tariffs with the Federal Communications Commission as a means of providing notice to customers of prices, terms and conditions on which they offer interstate services, since tariff provisions limit carriers' liability for defects in service and consequential damages from such defects. The Federal Communications Commission has ruled that non-dominant interexchange carriers must post on their Internet web site their rates, terms and conditions for all of their interstate, domestic services if they have an Internet web site. This ruling is to be effective when the decision to mandate de-tariffing takes place. In addition, if tariffs are eliminated, we may become subject to significantly increased liability risks, and there can be no assurance that the liabilities will not have a material adverse effect on our results of operations and financial conditions and our ability to meet our obligations. The Federal Communications Commission adopted rules which govern the use of customer proprietary network information by telecommunications carriers. These rules may impede our ability to effectively market integrated packages of services and to expand existing customers' use of our offerings. 23 COMPETITIVE LOCAL EXCHANGE CARRIER OFFERINGS It is also possible that some of our lit fiber or bandwidth capacity services could be viewed as the provision of local exchange service. See "Regulation--United States--Federal--Competitive Local Exchange Carrier Offerings." To the extent that any of our offerings are treated as competitive local exchange carrier services, we would also be subject to a number of interconnection obligations under the Telecommunications Act of 1996. We would be required to offer our services for resale at retail prices, provide number portability if technically feasible, provide dialing parity to competing providers and non-discriminatory access to telephone numbers, directory assistance, operator services and directory listings, provide access to poles, ducts, conduits and rights-of-way and establish reciprocal compensation arrangements for the transport and termination of telecommunications. Although competitive local exchange carrier interstate access charges are generally regulated as non-dominant carrier offerings and subject to minimal burdens, the Federal Communications Commission recently adopted a Notice of Proposed Rulemaking that asks whether it should regulate the terminating access charges of such providers. The Federal Communications Commission determined that Internet traffic is interstate in nature, not local, and has initiated a proceeding to determine appropriate carrier-to-carrier compensation. At the same time, the Federal Communications Commission declined to overturn a multitude of state decisions requiring incumbent local exchange carriers to pay competitive local exchange carriers compensation for delivering Internet traffic to Internet service providers. To the extent we are treated as a competitive local exchange carrier, this ruling would adversely affect the revenues that we might expect to receive from the carriage of Internet service provider-bound traffic. INTERNATIONAL FACILITIES We are required to obtain regulatory approval to construct and operate facilities used to provide international telecommunications services. If any of our services are treated as international telecommunications services, we may be required to obtain regulatory approvals and file tariffs to offer these international services. Although these facilities authorizations and tariffs are regulated on a streamlined basis subject to minimal regulation, there is a risk that the Federal Communications Commission may deny or place burdensome conditions on authorizations and tariff filings. OTHER FEDERAL COMMUNICATIONS REGULATIONS With limited exceptions, the current policy of the Federal Communications Commission prohibits incumbent local exchange carriers from lowering prices to certain customers without also lowering charges for the same service to all similarly situated customers in the same geographic area. The Federal Communications Commission, however, modified this constraint on incumbent local exchange carriers who have specified levels of competition from competing local exchange service providers and permit them to offer special rate packages to certain customers, as it has done in a few cases, and permit other forms of rate flexibility. The rules contemplate an increasing level of flexibility on a city-by-city basis as competitors have facilities in place to compete for local exchange services in those markets. Once such facilities attain 50% coverage the rules contemplate only minimal regulation of carrier access offerings. This added flexibility could have a material adverse effect on our ability to compete in providing facilities or services that compete with incumbent local exchange carriers interstate access services. The Telecommunications Act of 1996 currently requires Regional Bell Operating Companies to obtain Federal Communications Commission authorization prior to providing inter-local area and transport area telecommunications. Bell Atlantic received such authorization for New York in December 1999. It is anticipated that additional Regional Bell Operating Companies may receive authorization in some states to provide telecommunications during 2000. Such authority, if granted, 24 could increase competition from Regional Bell Operating Companies in providing fiber and fiber services, which could adversely affect our business operations. The Federal Communications Commission has the responsibility under the Telecommunications Act of 1996 to determine what elements of an incumbent local exchange carrier's network must be provided to competitors on an unbundled basis. In August 1999, the Federal Communications Commission required dark fiber to be offered as an unbundled element. In addition, the Federal Communications Commission had previously allowed state commissions to establish additional unbundling requirements, and some states have required that incumbent local exchange carriers unbundle dark fiber. The decisions by the Federal Communications Commission to require unbundling of incumbent local exchange carriers' dark fiber could increase the supply of dark fiber and decrease the demand for our dark fiber and thereby have an adverse effect on the results of our operations. The Federal Communications Commission recently instituted a proceeding that could impose obligations on telecommunication carriers' obligation to provide access to competitors or customers to their wiring located in multi-tenant residential and business buildings. It is unknown at this time how the Federal Communications Commission will rule in this proceeding so it is impossible to evaluate its impact on our operations. STATE REGULATION Each state in the United States, as well as the District of Columbia and U.S. territories, which are treated as states for the purpose of regulation of telecommunications services, has its own laws for regulating providers of some telecommunications-related services as "common carriers," as "public utilities," or under similar rubrics. We believe that the sale or lease of dark fiber facilities is not subject to this type of regulation in most jurisdictions in which we plan to construct facilities. However, our offering of transmission services, as distinct from dark fiber capacity, likely will be subject to regulation in each of these jurisdictions to the extent that these services are offered for intrastate use, and the regulation may have an adverse effect on the results of our operations. LOCAL REGULATION In addition to federal and state laws, local governments exercise legal authority that may affect our business. For example, some local governments retain the ability to license public rights-of-way, subject to the federal limitation that local authorities may not prohibit entities from entering telecommunications markets. Compliance with local requirements may delay entry and increase our costs of doing business. CANADA REGULATION UNDER THE TELECOMMUNICATIONS ACT (CANADA) REGULATION OF RESELLERS We offer network services to our customers in Canada through resale arrangements. Under these resale arrangements, we obtain the use of transmission facilities on a contractual basis from Urbanlink and then offer bandwidth services to our customers through the subsequent sale or lease, on a commercial basis, of these contracted facilities. As a reseller, we are not generally subject to the regulatory requirements of the Telecommunications Act (Canada). However, there can be no assurance that the regulation of resellers in Canada may not become more extensive in the future. In addition, while we believe that our operations as a reseller in Canada fully comply with Canadian law, there can be no assurance that a future determination of the Canadian Radio-television and Telecommunications Commission or events beyond our control will not result in a change in our status or affect our ability to offer services in Canada. 25 RESTRICTIONS ON FOREIGN OWNERSHIP Under the Canadian ownership provisions of the Telecommunications Act, a "telecommunications common carrier" is not eligible to operate in Canada unless it is owned and controlled by Canadians. Furthermore, no more than 20% of the members of the board of directors of a telecommunications common carrier may be non-Canadians, and no more than 20% of the voting shares of a telecommunications common carrier may be beneficially owned by non-Canadians. In addition, no more than 33 1/3% of the voting shares of a non-operating parent corporation of a telecommunications common carrier may be beneficially owned or controlled by non-Canadians and neither the telecommunications common carrier nor its parent may be otherwise controlled in fact by non-Canadians. Although we believe that our activities in Canada, including the Canadian telecommunications arrangement, comply with the foreign ownership provisions of the Telecommunications Act, there can be no assurance that a future Canadian Radio-television and Telecommunications Commission determination or events beyond our control will not result in our being required to comply with the ownership provisions of the Telecommunications Act. On October 1, 1998, the Canadian Radio-television and Telecommunications Commission issued Telecom Decision CRTC 98-17, which established a framework for competition in Canada's international telecommunications services market to coincide with the Government of Canada's decision to terminate the monopoly of Teleglobe Canada Inc. over telecommunications facilities linking Canada to overseas destinations. In that decision, the Canadian Radio-television and Telecommunications Commission determined that a party acquiring an indefeasible right of use interest in an international submarine cable would not necessarily fall within the definition of a telecommunications common carrier. As a result, acquirers of indefeasible rights of use in international submarine cables need not be Canadian owned and controlled. However, given the fact that the Canadian Radio-television and Telecommunications Commission's findings in Decision 98-17 were limited to indefeasible right of use interests held in international submarine cables, as well as the fact that indefeasible right of use arrangements can involve varying degrees of ownership and control over fiber facilities, there can be no assurance that holders of indefeasible rights of use acquired in domestic fiber facilities, including those obtained by us from Urbanlink, would be exempt from the Canadian ownership provisions contained in the Telecommunications Act. CONTRIBUTION The Canadian Radio-television and Telecommunications Commission is considering reform of the current contribution regime. The Canadian Radio-television and Telecommunications Commission's contribution regime was originally established in 1992 as a means of ensuring that rates for local residential telephone service remain affordable. Under the regime, providers of certain types of long distance voice and data services are required to pay a subsidy or "contribution" on each minute of traffic that is originated or terminated on local switched telephone networks or on cross-border or overseas access circuits. These contribution payments are pooled within each incumbent local exchange carriers' territory and are paid out to incumbent local exchange carriers and competitive local exchange carriers serving residential local customers, based on the number of residential network access services they serve and the level of the subsidy available in the rate band being served. On March 1, 1999, the Canadian Radio-television and Telecommunications Commission initiated a proceeding to consider possible reforms to the current contribution mechanism. In the public notice that initiated the proceeding, the Canadian Radio-television and Telecommunications Commission invited interested parties to submit proposals on other mechanisms which could be used to collect contribution. Although this public notice proceeding is not yet closed, some parties in the proceeding have advocated that the current contribution regime be converted to a revenue-based regime under which contribution would be 26 paid on a percentage of a telecommunications service provider's revenues (regardless of the types of services offered by the service provider), rather than on certain types of telecommunications traffic. We do not believe that the majority of our operations in Canada are subject to any requirement to pay contributions under the current contribution regime. However, given that the current contribution regime is under review by the Canadian Radio-television and Telecommunications Commission, there can be no assurance that we would be exempt from the requirement to pay contributions in the future, particularly if the Canadian Radio-television and Telecommunications Commission decides to adopt a revenue-based regime. EUROPE In Europe, in addition to those risk factors mentioned, there may be additional regulatory or legal factors or changes which could adversely affect our operations by increasing our costs or restricting the way in which we offer, or our ability to offer, products, services or dark fiber capacity. Major delays in the construction and establishment of submarine cables could occur due to delays in the granting of the environmental, planning and other permissions relating to land which are required in order to land such cables. We may be refused other requisite rights of way, or there may be delays in construction due to delays in the granting of such rights of way. Contrary to what is expected to be the case, in some or all European countries, an individual telecommunications license or other telecommunications authorization may be required in order for us to offer or control dark fiber, and there may consequently either be a delay in carrying out the construction of the projected dark fiber network, or, contrary to EC directive requirements, national authorities in particular states of the EU may refuse to grant a license for such activities. Concerning other planned services, including the offering of lit capacity and other telecommunications services, individual Member States of the European Union might refuse to grant a license, contrary to the requirement of EC directives, or may subject the grant of a license or other authorization to onerous conditions, including but not limited to investment requirements or commitments, guarantees or bonds, which make the supply of the projected services less profitable or not commercially viable. Regulatory intervention by the EC or Member State telecommunications or antitrust authorities could reduce the price level of local, national or international leased circuits/capacity to a level where it is less profitable or not commercially viable for the projected activities to be undertaken in specific countries or in the European Union. To the extent that we qualify in any individual Member State of the European Union as an operator with a right to interconnect pursuant to the EC Interconnection directive, we may be required to negotiate interconnection with other operators with a right to interconnect in that Member State or throughout the European Union. If we are required to obtain a license or authorization in any Member State of the European Union then we may be obliged to pay license or authorization fees which are high, or higher than anticipated, or we may be subject to statistical reporting requirements or other regulatory burdens pursuant to such licenses or authorizations. OTHER REGULATION We have, or upon consummation of our acquisition of GlobeNet will have, operations based in Canada and the United States, Brazil, Venezuela and Bermuda and anticipate operations in Europe 27 and other foreign jurisdictions. We are exposed to risks inherent in international operations, including the following: - general economic, social and political conditions; - the difficulty of enforcing agreements and collecting receivables through some foreign legal systems; - tax rates in some foreign countries may exceed those in Canada and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions; - required compliance with a variety of foreign laws and regulations; and - changes in Canadian laws and regulations relating to foreign trade and investment. CAPITAL MARKETS CURRENCY EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS Fluctuations in foreign currency exchange rates may affect our results of operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Changes in currency exchange rates may affect the relative prices at which we and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of items required in our operations. OUR SUBORDINATE VOTING SHARES HAVE NEVER BEEN PUBLICLY TRADED AND THEIR PRICE MAY BE VOLATILE Prior to the equity offering, you could not buy or sell our Subordinate Voting Shares publicly. For a discussion of the factors the underwriters will consider in determining the initial public offering price, see the section of this prospectus entitled "Underwriting." Although applications have been made to list our Subordinate Voting Shares on the Nasdaq National Market and The Toronto Stock Exchange, an active public market for our shares might not develop or be sustained after the equity offering. Moreover, even if such a market does develop, the market price of our shares may decline below the initial public offering price. The market price of our shares could be subject to significant fluctuations due to a variety of factors, including actual or anticipated fluctuations in our operating results and financial performance, announcements of technological innovations by our existing or future competitors or changes in financial estimates by securities analysts. Historically, the market price for securities of emerging companies in the communications industry have been highly volatile. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies and that often has been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our shares. Furthermore, following periods of volatility in the market price of a company's securities, stockholders of such a company have often instituted securities class action litigation against the company. Any such litigation against us could result in substantial costs and a diversion of management's attention and resources, which could adversely affect the conduct of our business. FUTURE SALES OF STOCK MAY ADVERSELY AFFECT OUR SHARE PRICE The market price of our Subordinate Voting Shares could drop in response to possible sales of a large number of shares in the market after the equity offering or to the perception that such sales could occur. As a result, we may be unable to raise additional capital through the sale of equity at prices acceptable to us. Following the equity offering, we will have approximately 729,000,000 Subordinate Voting Shares outstanding, or approximately 736,000,000 shares outstanding if the 28 underwriters exercise their over-allotment option in full. Of these shares, persons other than our "affiliates" (as this term is defined under the Securities Act and which includes Ledcor Inc.) may freely transfer the shares sold in the equity offering without restriction or further registration under the Securities Act. We, Ledcor Inc., our executive officers, directors and substantially all of our shareholders have agreed not to offer, sell, contract to sell, pledge or grant any option to purchase or otherwise dispose of their shares for the periods set forth herein under "Shares Eligible for Future Sale" without the prior written consent of Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and us, subject to limited exceptions. Sales of Subordinate Voting Shares at the termination of this period, or the anticipation of such sales could adversely affect the market price for the Subordinate Voting Shares. See the section of this prospectus entitled "Shares Eligible for Future Sale" for more information. We have entered into registration rights agreements with Mi-Tech Communications, LLC, Canadian National Railway Company, the investors in our private placement of redeemable convertible preferred shares, a consultant, our strategic investors and certain of our executive officers which in each case enables them to require us to register their shares and to include those shares in registrations of shares made by us in the future. We currently have no plan to file a registration statement for the sale of Subordinate Voting Shares held by any of these parties. All of the investors have agreed not to dispose of or hedge any shares for 12 months. We are contractually obligated to file one or more registration statements in the future on demand. See the section of this prospectus entitled "Share Capital Reorganization and Description of Capital Stock--Registration Rights" for more information. A THIRD PARTY MAY BE DETERRED FROM ACQUIRING US Our restated memorandum of association includes provisions that could delay, deter or prevent a future takeover or change in control of us. These provisions include the disproportionate voting rights of the Multiple Voting Shares (relative to the Subordinate Voting Shares) and the authorization of our board to issue, without stockholder approval, one or more series of Preferred Shares. These provisions may have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of us, even though such a change in ownership would be economically beneficial to us and our stockholders. See the section of this prospectus entitled "Share Capital Reorganization and Description of Capital Stock" for more information. WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends is limited by our debt instruments. See the section of this prospectus entitled "Dividend Policy" for more information. INVESTORS WHO PURCHASE SUBORDINATE VOTING SHARES IN THE OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION If you purchase our Subordinate Voting Shares in the offering, you will experience immediate and significant dilution in the tangible book value of the shares you purchase. This means that the price you pay will be significantly greater than the net tangible book value of the shares you acquire. This dilution is due to the fact that the effective cash cost to our existing shareholders of the shares they have purchased in the past is significantly less than the price at which our shares are being offered to the public in the offering. See "Dilution." 29 USE OF PROCEEDS The estimated net proceeds from the sale of our Subordinate Voting Shares are expected to be $548 million, net of underwriting discounts and other costs and expenses payable by us. We expect our aggregate net proceeds from the concurrent debt offerings to be $682 million. The closings of the Subordinate Voting Shares offering and the debt offerings are not contingent on each other. We expect to use the net proceeds from the offerings and funds from operations primarily: - to further develop and light our network; - to develop new facilities to enable us to provide value added network services such as colocation facilities and other communications services and products; - for future investments, acquisitions or strategic alliances in businesses or assets that are related or complementary to our existing business. However, we cannot assure you that we will successfully complete nor are we presently committed to make any such investments, acquisitions or strategic alliances; and - to fund operating losses, for working capital and for general corporate purposes. Following the consummation of our acquisition of GlobeNet, that company will have an obligation to offer to purchase any and all of its $300 million outstanding principal amount of senior notes. To the extent holders of the senior notes accept that offer, some of the net proceeds may be used to purchase those senior notes. We currently intend to allocate substantial proceeds to each of the foregoing uses. However, the precise allocation of funds among these uses will depend on future commercial, technological, regulatory and other developments which may affect our business, the competitive climate in which we operate and the emergence of future opportunities. Because of the number and variability of factors that determine our use of the net proceeds of this offering, we cannot assure you that our application of the net proceeds will not vary substantially from our current intentions. Pending these uses, we intend to invest the net proceeds of this offering in short-term U.S. investment grade and government securities. The closing of this offering is not conditioned on the closing of either of the debt offerings. If we do not issue that debt because of market conditions or because terms acceptable to us are not available, we will need to raise additional capital to complete our network and other items described in this section. See "Risk Factors--Additional Borrowings Required." Our 360ATLANTIC project, which has an estimated total cost of $865 million, will be paid for with borrowings under our $565 million credit facility and $300 million raised from private equity investors in September 1999. The 360ATLANTIC credit facility has been provided to a group of our subsidiaries and is non-recourse to us. We anticipate that GlobeNet's 360AMERICAS project, which has an estimated total cost of approximately $900 million, will be paid for with borrowings under GlobeNet's $400 million credit facility, the proceeds of GlobeNet's $300 million issuance of senior notes in July 1999 and GlobeNet's cash on hand. For more information about our anticipated funding sources and our uses of these funds, see the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 30 DIVIDEND POLICY We have never declared or paid any cash dividends on our shares. We intend to retain any future earnings to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends on our shares for the foreseeable future. In addition, the instruments governing our debt restrict the payment of cash dividends on our shares. DESCRIPTION OF OUR CAPITAL STOCK Concurrent with the closing of the offering, we will reorganize our share capital so that it will consist of the following classes of shares: - Subordinate Voting Shares; - Multiple Voting Shares; and - Preferred Shares, issuable in series. We will be authorized to issue 500 billion shares of each of the foregoing classes. On the closing of the offering, we will have 729,416,907 Subordinate Voting Shares issued and outstanding, 81,840,000 Multiple Voting Shares issued and outstanding and no Preferred Shares issued and outstanding. Our Subordinate Voting Shares and Multiple Voting Shares will be identical except that: - each Subordinate Voting Share entitles the holder to one vote and each Multiple Voting Share entitles the holder to ten votes; and - each Multiple Voting Share is convertible at the option of the holder into one Subordinate Voting Share. We have appointed HSBC Bank USA and Montreal Trust Company of Canada as the registrars and transfer agents for the Subordinate Voting Shares. For a description of our share capital reorganization which will occur immediately prior to closing and a more detailed description of the rights and attributes of our capital stock, see "Share Capital Reorganization and Description of Capital Stock." 31 EXCHANGE RATES Unless otherwise indicated, all references to "$" or dollars in this prospectus refer to United States dollars and all references to "Cdn.$" refer to Canadian dollars. As of April 14, 2000, the noon buying rate in New York City for cable transfers in Canadian dollars was U.S.$1.00 = Cdn.$1.4764. The following table sets forth, for each period presented, the high and low exchange rates, the average of the exchange rates on the last day of each month during the period indicated and the exchange rates at the end of the period indicated for one United States dollar, expressed in Canadian dollars, based on the noon buying rate in New York City for cable transfer payable in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- End of Period..................................... 1.4455 1.5295 1.4293 1.3706 1.3641 Average for the period............................ 1.4945 1.4940 1.3875 1.3560 1.3770 High for the period............................... 1.5470 1.5845 1.4413 1.3865 1.4267 Low for the period................................ 1.4420 1.4037 1.3338 1.3263 1.3270
DILUTION As of December 31, 1999, our consolidated net tangible book value was $357,489,000, or $0.53 per share. "Consolidated net tangible book value per share" represents the total amount of our consolidated tangible assets, reduced by the amount of total consolidated liabilities and divided by the number of shares outstanding. Tangible assets are defined as our consolidated assets, excluding intangible assets such as deferred financing costs. After giving effect to the acquisition of GlobeNet, the acquisition of the minority interests in certain of our subsidiaries, the issuance of additional shares derived from the anti-dilution provisions afforded to certain shareholders and the equity offering, after deducting underwriting discounts and commissions and estimated expenses, our net consolidated tangible book value at December 31, 1999 would have been $1,111,718,000 or $1.37 per share. This represents an immediate increase in consolidated net tangible book value of approximately $0.84 per share to the existing shareholders and an immediate dilution of $11.63 per share to new investors in the equity offering. Dilution per share represents the difference between the price per share to be paid by new investors and the net consolidated tangible book value per share immediately after the equity offering. The following table illustrates the per share dilution as of December 31, 1999. Assumed initial public offering price per share............ $13.00 Consolidated net tangible book value per share before the equity offering.......................................... $ 0.53 Consolidated increase per share attributable to new investors................................................ $ 0.84 Adjusted consolidated net tangible book value per share after the equity offering and other material transactions............................................. $ 1.37 ------ Consolidated net tangible book value dilution per share to new investors............................................ $11.63 ======
32 CAPITALIZATION The following table sets forth our consolidated cash and capitalization as of December 31, 1999 on an actual basis, as adjusted to give effect to: - the issuance of 44,625,000 Subordinate Voting Shares for net proceeds to us of approximately $548 million; - our acquisition of all outstanding stock of GlobeNet; - the issuance of $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the acquisition of the minority equity interests in certain of our subsidiaries and the related issuance of Series A Non-Voting Preferred Shares; - the conversion or exchange of our redeemable convertible preferred shares into Subordinate Voting Shares and our share capital reorganization; and - the completion of the $565 million 360ATLANTIC credit facility, of which $175 million has been drawn. This table should be read in conjunction with our consolidated financial statements, including the notes thereto, and the "Unaudited Pro Forma Condensed Consolidated Financial Data" and notes thereto included elsewhere in this prospectus.
DECEMBER 31, 1999 ------------------------ PRO FORMA AS ADJUSTED ACTUAL (UNAUDITED) ---------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 521,362 $1,750,981 ========== ========== Debt (including current portion): 12 1/2% senior notes due 2005............................. 175,000 175,000 12% senior notes due 2009................................. 500,000 500,000 360ATLANTIC credit facility............................... -- 175,000 GlobeNet 360AMERICAS secured credit facility.............. -- 100,000 GlobeNet 13% senior notes due 2007........................ -- 300,000 New notes................................................. -- 700,000 ---------- ---------- Total debt................................................ 675,000 1,950,000 ---------- ---------- Redeemable convertible preferred shares..................... $ 349,827 $ -- Shareholders' equity Subordinate Voting Shares(1).............................. -- 2,258,939 Multiple Voting Shares.................................... -- 45,232 Class A Non-Voting Shares................................. 236,436 -- Class B Subordinate Voting Shares......................... 10,455 -- Class C Multiple Voting Shares............................ 45,232 -- Other capital accounts.................................... (221,387) (196,191) Deficit................................................... (40,875) (66,071) ---------- ---------- 29,861 2,041,909 ---------- ---------- Total capitalization........................................ $1,054,688 $3,991,909 ========== ==========
- ------------------------ (1) Does not give effect to 52,501,680 Subordinate Voting Shares reserved for issuance upon exercise of options under our stock option plan and the exercise of 1,902,000 stock options and the issuance of 411,214 Subordinate Voting Shares to a consultant after December 31, 1999. 33 SELECTED FINANCIAL DATA The selected financial data presented below for the year ended March 31, 1996, the five months ended August 31, 1996, the year ended August 31, 1997 and the nine months ended May 31, 1998 of our predecessor, the telecommunications division of Ledcor Industries, are derived from the audited financial statements of the predecessor division, which have been audited by Deloitte & Touche LLP, independent auditors. Our selected historical financial data presented for the period from February 5, 1998 to December 31, 1998 and year ended December 31, 1999 are derived from our audited consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent auditors. The unaudited pro forma financial data as at and for the year ended December 31, 1999 are derived from our audited consolidated financial statements for the year ended December 31, 1999 and the audited consolidated financial statements of GlobeNet for the year ended December 31, 1999, audited by PricewaterhouseCoopers LLP, independent auditors, included elsewhere in this prospectus. The unaudited pro forma income statement for the year ended December 31, 1999 gives effect to the following transactions as if they occurred on January 1, 1999: - our acquisition of all outstanding stock of GlobeNet; - the interest expense on $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the interest expense on the $500 million of senior notes issued in July 1999; and - the amortization of goodwill arising from the acquisition of the minority equity interests in certain of our subsidiaries. The unaudited pro forma as adjusted balance sheet data at December 31, 1999 gives effect to the following transactions as if they occurred on December 31, 1999: - the issuance of 44,625,000 Subordinate Voting Shares for net proceeds to us of approximately $548 million; - our acquisition of all outstanding stock of GlobeNet for approximately $642 million of our Subordinate Voting Shares; - the issuance of $700 million of senior notes that we currently intend to issue in the concurrent debt offerings; - the acquisition of the minority equity interests in certain of our subsidiaries and the related issuance of Series A Non-Voting Preferred Shares; - the conversion or exchange of our redeemable convertible preferred shares into Subordinate Voting Shares and our share capital reorganization; - the completion of the $565 million 360ATLANTIC credit facility, of which $175 million has been drawn; and - the Canadian telecommunications arrangement. Our consolidated financial statements, the divisional financial statements of the predecessor division and the consolidated financial statements of GlobeNet have been prepared in accordance with U.S. GAAP. The results of operations for the predecessor division are not comparable to our results of operations after the telecommunications division of Ledcor was reorganized. 34 EBITDA presented in the following table consists of net income (loss) before interest expense, net of interest income, provision for income taxes, depreciation, stock-based compensation, amortization of goodwill and income attributable to minority interest. EBITDA is presented because we believe that it is a useful indicator of our ability to meet debt service and capital expenditure requirements. It is not intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally acceptable accounting principles). EBITDA is not necessarily comparable to similarly titled measures for other companies and does not necessarily represent amounts of funds available for management's discretionary use. For purposes of calculating the ratio of earnings to fixed charges, earnings consists of earnings (loss) before equity income, provision for income taxes, income attributable to minority interest, amortization of goodwill and fixed charges. Fixed charges consists of interest expensed and capitalized, the portion of rental expense which we believe to be representative of interest (assumed to be one-third of rental expense) and pre-tax earnings required to cover the accretion on the redeemable convertible preferred shares. Pro forma loss for the year ended December 31, 1999 would have been insufficient to cover fixed charges by approximately $140 million. Capital expenditures represent actual cash expenditures incurred during the period and do not include acquisitions of assets for non-cash consideration. Route miles represent the number of miles spanned by fiber optic cable owned by us or in respect of which we have acquired capacity pursuant to swaps, leases, IRUs or other contractual rights at the end of the period, calculated without including physically overlapping segments of cable. The following table presents selected consolidated financial data derived from our consolidated financial statements. You should read the following information along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes included elsewhere in this prospectus. 35 SELECTED FINANCIAL DATA (Dollars in thousands except per share amounts)
360NETWORKS INC -------------------------------------------------- FEBRUARY 5, YEAR PRO FORMA 1998 TO ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1999 1999 ------------ ------------- ------------- (UNAUDITED) INCOME STATEMENT DATA: Revenue............................................... $ 164,319 $ 359,746 $ 386,094 Operating expenses: Costs............................................... 147,621 250,612 261,601 General and administrative.......................... 2,274 21,846 40,534 Stock-based compensation............................ -- 7,116 11,323 Depreciation........................................ 464 2,998 4,852 Amortization of goodwill............................ -- -- 35,536 ----------- ------------ ------------ Total operating expenses.............................. 150,359 282,572 353,846 ----------- ------------ ------------ Operating income...................................... 13,960 77,174 32,248 Interest expense, net................................. 225 15,786 155,220 ----------- ------------ ------------ Income (loss) before income taxes, minority interest and equity accounted for investment................. 13,735 61,388 (122,972) Provision for income taxes............................ 5,643 30,314 (28,849) ----------- ------------ ------------ 8,092 31,074 (94,123) Income attributable to minority interest and equity accounted for investment............................ 928 (7,434) (773) ----------- ------------ ------------ Net income (loss)..................................... $ 9,020 $ 23,640 $ (94,896) =========== ============ ============ Basic and fully diluted earnings (loss) per share..... $ 0.43 $ (0.03)(1) $ (0.16) Shares used to calculate basic and fully diluted earnings (loss) per share........................... 20,964,178 327,313,808 617,783,263 OTHER FINANCIAL DATA (UNAUDITED): EBITDA................................................ $ 15,352 $ 87,288 Capital expenditures.................................. 1,065 300,116 Ratio of earnings to fixed charges.................... 26.8x 1.7x STATEMENT OF CASH FLOWS DATA: Operating activities.................................. $ (13,059) $ (97,077) Investing activities.................................. 1,177 (321,283) Financing activities.................................. 168,350 785,719 OPERATING DATA: Route miles........................................... 2,735 12,217
DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------ ------------------------ PRO FORMA ACTUAL ACTUAL AS ADJUSTED ------------------ ---------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................ $156,366 $ 521,362 $1,750,981 Property and equipment--net.............................. 4,014 77,009 119,713 Assets under construction................................ 11,461 300,403 398,465 Total assets............................................. 236,260 1,310,989 4,128,085 Total debt............................................... 175,000 675,000 1,950,000 Redeemable convertible preferred shares.................. -- 349,827 -- Shareholders' equity..................................... 18,261 29,861 2,041,909
- -------------------------- (1) To compute basic and fully diluted loss per share, net income of $23,640,000 is reduced by a stock dividend of $5,000,000, accretion on preferred shares of $6,465,000 and an amount of $22,070,000 which represents the fair value of the Series A Non-Voting Preferred Shares issued to the existing shareholders for no consideration as a result of anti-dilution provisions in the original subscription agreement, resulting in a net loss to holders of Subordinate Voting Shares and Multiple Voting Shares of $9,895,000. 36
PREDECESSOR DIVISION ---------------------------------------------------------- YEAR ENDED FIVE MONTHS YEAR ENDED NINE MONTHS MARCH 31, ENDED AUGUST 31, AUGUST 31, ENDED 1996 1996 1997 MAY 31, 1998 ---------- ----------------- ---------- ------------ INCOME STATEMENT DATA: Revenue.................................. $ 3,824 $ 7,373 $58,008 $54,634 Operating expenses: Costs.................................. 3,440 5,739 48,474 44,919 General and administrative............. 57 91 863 710 Depreciation........................... 24 15 112 317 Amortization of goodwill............... -- -- -- -- ------- ------- ------- ------- Total operating expenses................. 3,521 5,845 49,449 45,946 ------- ------- ------- ------- Operating income......................... 303 1,528 8,559 8,688 Interest expense, net.................... -- 15 600 86 Equity income............................ -- -- -- -- Earnings before income taxes............. 303 1,513 7,959 8,602 ------- ------- ------- ------- Income tax expense....................... 139 686 3,620 3,909 ------- ------- ------- ------- Income attributable to minority interest............................... -- -- -- -- ------- ------- ------- ------- Net income (loss)........................ $ 164 $ 827 $ 4,339 $ 4,693 ======= ======= ======= ======= OTHER FINANCIAL DATA (UNAUDITED): EBITDA................................... $ 327 $ 1,543 $ 8,671 $ 9,005 Capital expenditures..................... 72 181 1,119 6,828 Ratio of earnings to fixed charges....... 24.3x 45.5x 10.3x 17.7x STATEMENT OF CASH FLOWS DATA: Operating activities..................... $ 666 $(3,078) $(3,921) $(2,502) Investing activities..................... (72) (181) (1,119) (6,828) Financing activities..................... (595) 3,259 5,040 9,330 OPERATING DATA: Route miles.............................. -- -- 1,090 1,430 BALANCE SHEET DATA: Cash and cash equivalents................ $ -- $ -- $ -- $ -- Fixed assets, net........................ -- 464 1,471 7,982 Total assets............................. -- 6,476 32,268 39,549 Total debt............................... -- 2,067 6,774 10,933 Redeemable convertible preferred shares................................. -- -- -- -- Shareholders' equity..................... -- 1,473 5,825 8,870
37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read along with our Consolidated Financial Statements and the Divisional Financial Statements of the telecommunications division of Ledcor Industries, including the related notes, included elsewhere in this prospectus. GENERAL We were incorporated on February 5, 1998, but did not commence operations until May 31, 1998. As of May 31, 1998 we entered into a series of agreements, which we refer to as the reorganization, whereby Ledcor transferred to us the construction equipment, some fiber optic strands and some other assets of Ledcor Industries' telecommunications division. On September 27, 1999, we acquired additional fiber optic network assets from Ledcor. Recently, we completed the transfer to Urbanlink of certain Canadian telecommunications facilities. We own 51% of the participating equity shares and 33 1/3% of the voting shares of Urbanlink. Because these transactions were between entities under common control, the assets have been reflected in our financial statements using the carrying amounts recorded in Ledcor's accounts. We believe that the fair market values of the fiber assets we received and our equity investment in Urbanlink are significantly greater than their carrying amounts. We entered into two construction services agreements in which we agreed to fulfill Ledcor's fiber optic network construction commitments concerning some builds across Canada and the northern United States. In return, Ledcor paid us an amount equal to 115% of our costs. Our obligations under these agreements were substantially performed by January 1999. We also entered into a management services agreement and two employee services agreements with Ledcor. See "Relationships and Related Party Transactions--Transactions with Ledcor--Description of reorganization and related agreements." Prior to the reorganization, we were a shell company created for the purpose of continuing the business of Ledcor Industries' telecommunications division and did not have any operations or material assets. Accordingly, two sets of financial information are included in this prospectus. The Divisional Financial Statements of Ledcor Industries' telecommunications division prior to May 31, 1998 reflect the operations of our predecessor as a contractor and network developer. Our Consolidated Financial Statements for the period from the date of incorporation through December 31, 1998 primarily reflect our operating results due to the construction services agreements. Since January 1, 1999, the impact of the construction services agreements has not been significant on our consolidated financial statements. REVENUES AND COSTS Since December 31, 1998 our revenues have been primarily generated from the sale, lease or grant of indefeasible right of use ("IRU") of network infrastructure. We anticipate a significant amount of our future revenues will be derived from providing network services, including optical channels, private line transmission, virtual voice trunking and packet-based data services including Internet protocol ("IP") transport and Asynchronous Transfer Mode ("ATM"). We anticipate that, as we proceed with the development of our network, the percentage of revenues which we receive from network services will increase as a percentage of our total revenue and that by 2001 our network services will provide our largest percentage of revenue on a consolidated basis and be a significant source of income. Sales of network infrastructure include agreements in the form of construction contracts and co-developments. 38 Revenues from construction contracts to develop fiber optic systems are calculated on the percentage of completion basis using the cost-to-cost method over the life of the build. This method is used because we consider costs incurred to be the best available measure of progress of these contracts. We make provisions for all potential losses as soon as they become evident. We recognize revenue for co-development agreements on a percentage of completion basis. Following completion of a build, our retained fiber or conduit may be sold, granted through an IRU or leased to a third party. Lease revenues are recognized as earned over the life of the lease. In June 1999, the Financial Accounting Standards Board issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." The interpretation is effective for sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Under this interpretation, title must transfer to a lessee in order for a lease transaction to be accounted for as a sales-type lease. All future sales and grants of IRUs of dark fiber or capacity will be evaluated under the new interpretation. If we do not pass title on the integral equipment pursuant to the agreements related to future transactions involving dark fiber or capacity sales and/or IRUs, or if such transactions otherwise do not meet the criteria in FASB statement No. 66, we will recognize the transfer prices as revenue ratably over the terms of the applicable agreements, rather than when the applicable segments of our network are delivered to, and accepted by, the purchaser. Usually, the purchaser pays the entire cash price to us upon its acceptance. Therefore, although the application of the new interpretation may affect the times of recognition of revenue from dark fiber and capacity sales, we expect there will be no effect on our financial position or cash flows from this prospective change in accounting. Cost of sales of network infrastructure, particularly dark fiber and conduit, consist of direct costs such as the conduit, fiber optic cable, construction of regeneration facilities, sales and commissions and labor and an allocation of indirect costs such as rights-of-way ("ROW") environmental restoration, equipment costs, insurance and interest charges. Costs of sales of network services include only the direct costs of sales commissions and points-of-presence ("POP") space. Indirect costs of network services are included in general and administrative expenses and depreciation. ELIMINATION OF MINORITY INTERESTS We have recently acquired the minority interest in each of WFI-CN Fibre Inc. ("360-CN") and Worldwide Fiber IC LLC ("IC LLC") in a cash and share exchange transaction, as a result of which CN acquired 14,920,866 Subordinate Voting Shares (to be reduced to 12,307,692 shares based on an assumed initial public offering price of $13 per share). 360-CN is now a wholly owned subsidiary of Worldwide Fiber Networks Ltd., which is a wholly owned subsidary of ours, and IC LLC is now a wholly owned subsidiary of Worldwide Fiber IC Holdings, Inc., which is a wholly owned subsidiary of Worldwide Fiber Networks Ltd. Concurrent with the closing of the offering, we will acquire the remaining 25% minority interest in Worldwide Fiber (USA) Inc. ("360-USA") from Mi-Tech Communications, LLC ("Mi-Tech") in exchange for 24,000,000 Subordinate Voting Shares. Worldwide Fiber Networks Ltd. has 100% of the equity participation and 90% of the voting control of 360-USA, with the other 10% of voting control held by another subsidiary of ours, Worldwide Fiber Finance Ltd. 39 RESULTS OF OPERATIONS 360NETWORKS INC. YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 TO DECEMBER 31, 1998 (OPERATIONS COMMENCED MAY 31, 1998) REVENUE for the year ended December 31, 1999 was $359,746,000, versus $164,319,000 for the period from May 31, 1998 (commencement of operations) to December 31, 1998. Revenue in the current year was primarily derived from sales of conduit and fiber optic strands along segments in the Pacific Northwest, Northeast U.S. and eastern Canada. Revenues in the seven month period ended December 31, 1998 were primarily derived from the Construction Services Agreements with Ledcor. COSTS were $250,612,000 (70% of revenue) for the year ended December 31, 1999, versus $147,621,000 (90% of revenue) for the period from May 31, 1998 (commencement of operations) to December 31, 1998. GROSS PROFIT for the year ended December 31, 1999 was $109,134,000 (30% of revenue), versus $16,698,000 (10% of revenue) for the period from May 31, 1998 (commencement of operations) to December 31, 1998. The improvement in gross margin reflects our evolution from network construction to ownership and development of network infrastructure and services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $21,846,000 (6% of revenue) for the year ended December 31, 1999, versus $2,274,000 (1% of revenue) for the period from May 31, 1998 (commencement of operations) to December 31, 1998. In the current year we completed a majority of the tasks necessary to perform the transition from Ledcor's management information and accounting systems to our own. General and administrative expenses are expected to continue to increase as we develop our systems, hire additional personnel and implement our marketing and sales strategy. STOCK-BASED COMPENSATION EXPENSE for the year ended December 31, 1999 was $7,116,000 relating to stock options granted during the year. Additionally, $188,553,000 of deferred compensation will be amortized over the remaining vesting term of the stock options. INTEREST EXPENSE was $33,908,000 for the year ended December 31, 1999 and was principally due to the issue of senior notes in December 1998 and July 1999. Interest income totaled $18,122,000 and arose from the investment of the proceeds of the senior notes in short-term, investment grade securities. Interest expense and interest income for the period from May 31, 1998 (commencement of operations) to December 31, 1998 was $492,000 and $267,000, respectively. INCOME TAXES provided for the year ended December 31, 1999 totaled $30,314,000, versus $5,643,000 for the period from May 31, 1998 (commencement of operations) to December 31, 1998. These consist primarily of current taxes arising from our U.S. and Canadian operations. MINORITY INTEREST for the year ended December 31, 1999 totaled $7,434,000 and represents 25% of the net income of 360-USA, 360-CN and IC LLC. TELECOMMUNICATIONS DIVISION--LEDCOR INDUSTRIES NINE MONTHS ENDED MAY 31, 1998 REVENUES GENERATED FROM CONTRACTS for the nine months ended May 31, 1998 were $54,633,888. The revenues for this period were principally derived from development for Ledcor Industries. CONTRACT COSTS were $45,321,566 for the nine months ended May 31, 1998. Contract costs primarily represent the costs associated with engineering, designing, building and managing third- 40 party construction contracts. Contract costs as a percentage of revenue for the nine months ended May 31, 1998 were 83%. GENERAL AND ADMINISTRATIVE EXPENSES for the nine months ended May 31, 1998 were $710,240, representing 1% of revenues for the period. General and administrative expenses for the nine month period ended May 31, 1998 are primarily derived from overhead to accommodate progress on construction projects for Ledcor Industries and management of builds for third parties. INCOME TAX EXPENSE (RECOVERY) for the nine months ended May 31, 1998 represents a current expense of $5,509,000 and a recovery, on a deferred basis, of $1,600,000 using an effective tax rate of 45%. As a division, we would not in fact report taxes, but would have been consolidated within the tax return filed by Ledcor Industries. The difference between current tax expense and deferred tax recovery is due to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. TELECOMMUNICATIONS DIVISION--LEDCOR INDUSTRIES YEAR ENDED AUGUST 31, 1997 REVENUES GENERATED FROM CONTRACTS for the year ended August 31, 1997 were $58,007,652. The revenues for this period are principally derived from the commencement of building assets for Ledcor Industries and management of the Alaska Fiber Star build in Alaska. CONTRACT COSTS were $49,184,985 for the year ended August 31, 1997. Contract costs for this period are primarily derived from the costs associated with the engineering, design and building of a construction project for Ledcor Industries and management of the Alaska Fiber Star build in Alaska. Contract costs as a percentage of revenue for the year ended August 31, 1997 were 85%. Contract revenues and contract costs for the year ended August 31, 1997 increased significantly due to the business in which Ledcor Industries had entered into, which was the building of a construction project and selling of its components to third parties. This was a different business than the business previously conducted by the telecommunications division in which Ledcor Industries would construct and develop fiber optic systems on a contract basis for specific telecommunications clients. Since this was a new business for Ledcor Industries the gross margin compared to prior years is not comparable. GENERAL AND ADMINISTRATIVE EXPENSES for the year ended August 31, 1997 were $863,373, representing 2% of revenues for the period. The general and administrative expenses for this period are primarily comprised of the overhead necessary to accommodate the commencement of the Ledcor Industries project and management of the Alaska Fiber Star build in Alaska. INCOME TAX EXPENSE for the year ended August 31, 1997 represents a current expense of $338,000 and a deferred expense of $3,282,000 using an effective tax rate of 45%. As a division, we would have been included within the tax return filed by Ledcor Industries. The difference between current tax expense and deferred tax expense is due to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. LIQUIDITY AND CAPITAL RESOURCES We have an aggressive business plan to build out our network. By the end of 2001, our planned network will consist of approximately 56,300 route miles in North America, Europe and South America including an undersea cable between North America and Europe and an undersea cable between South America and North America. We intend to expand our network including network services to provide connectivity on a global basis. We offer network services to meet our customers' demands, enable Internet services and intend to develop products and services that capitalize on the convergence of telecommunications and high-bandwidth applications and services. 41 Building out the network will require a significant investment in the development of fiber and conduits held for sale, grant of IRU, or lease and the purchase of additional network infrastructure and equipment to establish transmission facilities. We estimate that the total cost to develop and light our network is approximately $4.8 billion. - We estimate that the total cost to complete and light our network of 24,100 route miles in North America will be $1.7 billion. - We estimate that the capital costs of completing and lighting our network of 10,600 route miles in Europe will be $360 million. - We estimate that the total cost of the 360ATLANTIC undersea cable project to be approximately $865 million. The majority of these costs are subject to fixed price contracts. - We estimate the total cost of the 360AMERICAS undersea cable project to be approximately $900 million. The majority of these costs are subject to fixed price contracts. - We estimate the total cost to acquire and develop existing and future colocation facilities in North America and Europe to be approximately $860 million. In order to finance the above costs of network development: - For North America, we have issued $675 million of senior notes and we plan to use some of the proceeds of this offering and concurrent debt offerings and cash from operations. - For Europe, we plan to use some of the proceeds of this offering, concurrent debt offerings and cash from operations. - For our 360ATLANTIC undersea cable project, we used a significant portion of the proceeds from our sale of our $345 million of redeemable convertible preferred shares in September 1999 and have also entered into a $565 million credit facility dedicated to the 360ATLANTIC undersea cable project, of which $175 million has been drawn. The 360ATLANTIC credit facility has been provided to a group of our subsidiaries and is non-recourse to us. - For our 360AMERICAS undersea cable project, we plan to issue Subordinate Voting Shares to acquire all of the outstanding shares of GlobeNet. We also plan to use the proceeds of GlobeNet's $300 million senior notes and GlobeNet's $400 million credit facility, of which $100 million has been drawn. The 360AMERICAS credit facility will be non-recourse to us. We are required to use GlobeNet's cash to fund the completion of this project. - For acquisition of the colocation facilities in North America that we have agreed, subject to execution of definitive agreements, to acquire, we plan to issue equity and use up to $150.2 million of our existing cash balances. We expect to use some of the proceeds of this offering and the concurrent debt offerings and cash from operations to further develop these facilities and to acquire and develop additional colocation facilities in North America and Europe. Our estimated capital expenditures for our current network development plans for the year ending December 31, 2000 are $2.8 billion, of which approximately $1.2 billion will be used for our terrestrial network in North America and Europe, approximately $500 million will be used for 360ATLANTIC, approximately $730 million will be used for 360AMERICAS and approximately $400 million will be used for the acquisition and development of colocation facilities. We anticipate that these funding sources will provide us with sufficient capital to complete our terrestrial and undersea networks and to implement our related network services strategy. However, because the cost of developing our network and implementing our network services strategy will depend on a variety of factors, many of which are beyond our control, including changes in the competitive environment of 42 our current and planned markets, we expect that our actual costs may vary materially from those currently budgeted. In the event that our actual costs exceed our current budget or we do not have the funds we anticipate, we have the ability to adjust the number or sequence of segments we develop. We anticipate that we will continue to experience negative cash flow (after capital expenditures) as we build out the network which is expected to be completed by the end of 2001. In addition to our planned network, we expect to pursue opportunities to expand geographically or enhance the services that we offer our customers. We will also seek to identify opportunities to develop new facilities which enable us to provide value added network services such as colocation services and other communications services and products. Accordingly, from time to time we may seek to raise additional capital in the debt and/or equity capital markets prior to completion of our planned network. We cannot assure you that we will be successful in raising the capital necessary for completion of the remainder of our planned network development, the implementation of our network services strategy, the 360ATLANTIC and 360AMERICAS projects or for other opportunities on a timely basis or on terms that are acceptable to us. We currently intend to offer $700 million of senior notes in the concurrent debt offerings. We may increase the aggregate amount of senior notes sold in such offerings. Any such increase would increase our cash and cash equivalents but would also increase our interest expense. The closing of this offering is not conditioned on the closing of either of the debt offerings. If we do not issue that debt because of market conditions or because terms acceptable to us are not available, we will need to raise additional capital to complete our network and other items described under "Use of Proceeds." We may not be able to raise this capital or raise this capital on terms acceptable to us. In addition, we have accepted an underwritten commitment from The Chase Manhattan Bank and an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation to provide up to $1.0 billion of financing under a senior credit facility. This commitment is subject to negotiation of definitive documentation and other closing and lending conditions. The amounts borrowed under this facility will be required to be used in compliance with restrictions contained under our indentures. There can be no assurance that this credit facility will be entered into in a timely fashion or at all. At December 31, 1999, we had working capital of $655 million, including $521 million in cash or cash equivalents. Cash used in operations during the year ended December 31, 1999 totaled $97 million. We cannot assure you that our cash flow and capital resources will be sufficient to repay the notes and any other debt we may incur in the future, or that we will be successful in obtaining alternative financing. If we are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of our network, sell some of our assets, obtain additional equity capital or refinance or restructure our debt. If we are unable to meet our debt service obligations or comply with our covenants, a default under our debt agreements would result. To avoid a default, we might need waivers from third parties, which might not be granted. See "Risk Factors--Leverage." ACCOUNTING PRONOUNCEMENTS We adopted the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) effective January 1, 1999. SOP 98-5 requires that all start-up costs be expensed and that the effect of adopting SOP 98-5 be reported as the cumulative effect of a change in accounting principle. The effect of adopting SOP 98-5 on our results of operations was immaterial. We adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, ("SOP98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal 43 Use" effective January 1, 1999 which requires that costs incurred for the development of internal use software be recorded as an asset and amortized over its useful life. The effect of adopting SOP 98-1 on our operations is not material. We adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement established accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts and for hedging activities. We do not expect the adoption of SFAS No. 133 to have a material impact on our consolidated financial statements. In June 1999, the Financial Accounting Standards Boards (FASB) issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." The interpretation is effective for sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Under this interpretation, title must transfer to a lessee in order for a lease transaction to be accounted for as a sales-type lease. After June 30, 1999, the effective date of FASB Interpretation No. 43, sales-type lease accounting will only be appropriate for dark fiber and capacity leases where title under the lease is transferred to the lessee or if the agreement was entered into after June 30, 1999. Transactions will be accounted for as operating leases where title is not transferred to the lessee. MARKET RISK DISCLOSURES INTEREST RATE RISK We have interest rate risk exposure related to our senior notes, which have a fixed interest rate. The notes will be subject to interest rate risk resulting from a future decrease in interest rates on obligations with comparable terms below the interest rate on the senior notes. We currently do not mitigate the risk of interest rate movements through the use of interest rate swaps or other derivative instruments. However, subsequent to the offering we may choose to manage our risk associated with interest rate movements through an appropriate balance of fixed and variable rate obligations. To maintain an effective balance of fixed and variable obligations, we may elect to enter into specific interest rate swaps or other derivative instruments as we deem necessary. The senior notes pay interest at fixed rates. The table below provides information about our senior notes.
EXPECTED MATURITY DATE -------------------------------------------------------------------------------------------- THERE- FAIR 2000 2001 2002 2003 2004 AFTER TOTAL VALUE -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) Senior Notes Due December 15, 2005................. $ -- $ -- $ -- $ -- $ -- $ 175.0 $175.0 $182.0 Fixed Rate............. 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% -- -- Due August 1, 2009..... -- -- -- -- -- $ 500.0 $500.0 $515.0 Fixed Rate............. 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% -- -- ----- ----- ----- ----- ----- ------- ------ ------ $ - $ -- $ -- $ -- $ -- $ 675.0 $675.0 $697.0 ===== ===== ===== ===== ===== ======= ====== ======
44 The senior notes are comprised of $175.0 million 12.5% notes due December 15, 2005 with interest paid semi-annually and $500.0 million 12.0% notes due August 1, 2009 with interest paid semi-annually. These senior notes have provisions which, in certain circumstances, permit or oblige us to redeem all or part of the notes before their redemption dates. FOREIGN CURRENCY RISK We presently do not utilize derivative or other financial instruments to hedge the risk associated with the movement in foreign currencies. However, management continually monitors fluctuations in these currencies and will consider the use of derivative financial instruments or employment of other investment alternatives if cash flows or investment returns so warrant. 45 BUSINESS We are a leading independent, facilities-based provider of fiber optic communications network products and services. By the end of 2001, we expect our network to consist of approximately 56,300 route miles in North America, Europe and South America, including an undersea cable between North America and Europe and an undersea cable between South America and North America. We recently agreed, subject to execution of definitive agreements, to aquire colocation facilities or site rights in ten cities in North America and site rights in five other North American cities comprising approximately 2.9 million square feet. We intend to expand our network to provide connectivity on a global basis. Our network's design uses state-of-the-art optical technologies that we believe greatly reduces complexity and cost while allowing us to offer increased reliability and a wide range of products and services. In addition, we offer network services to meet our customers' demands and enable Internet services and intend to develop products and services that capitalize on the convergence of telecommunications and high-bandwidth applications and services. Our network is scheduled to be completed by the end of 2001. Our network consists of fiber optic assets and capacity that we have installed or acquired from other developers and carriers through swaps, purchases, leases, IRUs or other contractual rights along diverse ROW. In North America, our network is expected to cover approximately 24,100 route miles, of which more than 12,200 route miles have been developed to date, encompassing both long-haul and intra-city route miles and providing connectivity among approximately 50 major population centers. In Europe, our network is expected to cover approximately 10,600 long-haul route miles (assuming, with respect to 1,300 route miles, the exercise of an option that we have), of which more than 4,900 route miles have been developed to date, providing connectivity among approximately 35 major population centers. Our 7,600 route mile fully protected undersea cable between North America and Europe will have the capacity to be a 1.92 terabits per second ("tbps"), self-healing ring that will connect landing sites in Boston, Halifax, Dublin and Liverpool and to major gateway cities in Europe and North America, including London and New York. Our planned 14,000 route mile fully protected undersea cable between South America and North America will have the capacity to be a 1.28 terabits per second, self-healing ring that will be able to offer city-to-city connectivity between 6 major population centers in Brazil, Venezuela, Bermuda and the United States. We intend to expand our planned network to more population centers through the addition of intercity and city ring capacity in North America, Europe and South America. We are also reviewing opportunities to expand the geographic reach of our network, including transpacific connectivity to Asia. In addition, we intend to extend our network to Buenos Aires through undersea and/or terrestrial routes. We believe that there is growing demand for fiber optic capacity and related network elements to transmit and service high-bandwidth data, voice and video. This growing demand is being accelerated by new applications and services and by improvements in "last mile" technology such as digital subscriber line ("DSL") and cable modems. In this changing market environment, we believe that we are in a favorable competitive position to satisfy this demand relative to other service providers due to our low-cost, seamless technology and consistent network operating architecture. We have achieved a low-cost position by: - leveraging our construction skills; - co-developing and swapping along some corridors of our network; - using equity as payment for important elements such as bulk rights-of-way; and - using optical design and technologies that eliminate layers of equipment traditionally required to support legacy systems. Our current and targeted customers include new and incumbent telecommunications service providers ("TSPs"), Internet service providers ("ISPs"), application service providers ("ASPs"), storage service providers ("SSPs") and large organizations ("LORGs") with enterprise network 46 needs. We believe that these customers have a limited choice of independent service providers capable of offering high-capacity, reliable, secure and cost-effective services, including enabling Internet services, between major population centers in North America, Europe and South America. As a result, we believe that our targeted customers will buy services from us rather than purchase them from another source or build these service capabilities themselves. To meet our customers' requirements, we offer a wide range of services on a scalable basis, including: - network services--optical channels, private line transmission, packet-based data services such as IP transport and ATM, and virtual voice trunking; and - network infrastructure--dark fiber and conduit for sale, grant of IRU or lease and construction services supporting the development of our network. Through the colocation facilities that we have agreed to acquire and additional colocation facilities that we intend to acquire we intend to provide additional network services such as Internet data centers, applications hosting, electronic commerce support and web hosting. We also intend to expand our business to include additional network services such as video transport services, independent Internet access for transport and peering and management services to allow carriers to migrate from circuit-switched technologies to packet-based technologies. We expect to enable our customers to establish and maintain a strong competitive position in providing services to their end users. We believe that our independence, product design, seamless technology, consistent network architecture, simple billing systems and end-to-end international connectivity will enable us to gain a strong market position. We plan to realize the value of the network through developing a broad range of managed bandwidth and Internet enabling products and services and the sale, grant of IRU, lease or swap of dark fiber and conduit. We are adding the necessary transmission equipment to enable us to provide bandwidth services and other value-added network services to carriers and other service providers along segments of our network. We intend to enhance the connectivity of the network and satisfy customer demand through purchases, leases and swaps of bandwidth and through joint ventures. MARKET OPPORTUNITY Our network is designed to provide our customers with secure, independent transmission facilities and sufficient capacity on a local, regional, national or international basis to accommodate their increasing demand and plans for expansion. According to The Yankee Group and other industry sources, growth in the high-bandwidth telecommunications industry is expected to continue due to a number of factors, which include: - INNOVATIONS AND ADVANCES IN TRANSMISSION TECHNOLOGY. Technological innovations continue to increase the capacity and speed of advanced fiber optic networks while decreasing the cost of transmission allowing for continued growth in Internet usage and increases in the number of network users. This increased capacity and speed has resulted in the development of bandwidth-intensive applications. Improvements in "last mile" technology, such as DSL, cable modems and fixed and 3G wireless access are contributing to the significant increase in the number of subscribers using such applications. In addition, the anticipated proliferation of wireless Internet and data technologies and devices such as 3G broadband technology are also expected to contribute to increases in demand for bandwidth. - INCREASING DEMAND FOR HIGH-BANDWIDTH APPLICATIONS, LARGELY DRIVEN BY THE INCREASE IN INTERNET TRAFFIC. There has been, and according to The Yankee Group there will continue to be a significant growth in demand for Internet, local loop data, video services and long distance. The increase in computer power and usage, as well as the continued demand for and development of faster Internet connection speeds, are driving significant increases in communications use for Internet and data services. 47 - DEREGULATION OF THE TELECOMMUNICATIONS INDUSTRY, WHICH HAS RESULTED IN A PROLIFERATION OF SERVICE PROVIDERS. The telecommunications industry continues to experience liberalization on a global basis. Our high-bandwidth platform allows both new entrants to compete in this market and existing service providers to expand into new markets. BUSINESS STRATEGY We believe that demand for high-bandwidth data transmission capacity from TSPs, ISPs, ASPs, SSPs and LORGs with enterprise network needs will increase substantially over the next several years. The key elements of our business strategy to exploit the growing demand for bandwidth and enhanced network services are to: PROVIDE HIGH-BANDWIDTH CONNECTIVITY BETWEEN, AND COLOCATION FACILITIES IN, MAJOR GLOBAL POPULATION CENTERS. The footprint of our network is designed with the input of our customers and, when complete, our combination of terrestrial and undersea fiber networks will allow us to offer our customers seamless and scalable connectivity between major population centers in North America, Europe and South America, areas in which bandwidth demand is high and is expected to grow rapidly. We intend to expand our planned network to more population centers through the addition of intercity and city ring capacity in North America, Europe and South America. We are also reviewing opportunities to expand the geographic reach of our network to have transpacific connectivity to Asia. In addition, we intend to extend our network to Buenos Aires through undersea and/or terrestrial routes. DEVELOP AND OPERATE A TECHNOLOGICALLY ADVANCED, HIGH-CAPACITY, LOW-COST NETWORK. Our network is designed with the most advanced commercially available technology to provide the highest levels of reliability, security and flexibility demanded by our customers. Generally, construction to add to our network is commenced only after we have pre-sold sufficient strands and conduit to cover approximately 50% of our anticipated cost of that segment, thereby reducing capital risk and creating a low-cost structure relative to our competitors. In some segments we may seek a co-developer to fund a portion of the project in exchange for receiving fiber or conduit assets. In appropriate circumstances, the strategic nature of a segment may cause us to retain a higher percentage of fiber and conduit, and associated costs, for our own account. We believe that our network will have a low-cost basis relative to other telecommunications carriers for the following reasons: - Sophisticated network architecture based on DWDM optics and packet switching reduces the complexity and the number of component systems that were previously required to deliver voice, Internet and data services. This simplified approach reduces our capital expenditures and operating expenses relating to billing support, program management and systems support. - The installation of multiple fibers per route mile and spare conduits reduces the per fiber mile cost to construct, operate and upgrade our network. - Some of our current ROW, licenses, permits and franchises are valuable assets that would be costly and difficult for others to procure or replicate in the future. - Where possible, our policy is to retain fiber assets for our own use along routes where we complete third-party construction. Our low-cost structure should allow us to remain price competitive with other providers of broadband communications infrastructure and Internet connectivity services while sustaining margins and providing customers a cost-effective alternative to constructing their own networks. EXTEND THE REACH OF OUR NETWORK THROUGH DEVELOPMENT, SWAPS AND ACQUISITIONS OF FIBER AND CAPACITY. We plan to continue to develop our network to extend its connectivity to major global population centers. For example, we have recently entered into a joint build agreement with 48 Telewest in the United Kingdom. Further, we intend to continue to explore strategic opportunities and the use of swaps of fiber and capacity to extend the reach of our network at a low incremental cost. Our recent agreements with Telia to expand our network footprint in Europe through a fiber swap and with GlobeNet to expand our connectivity with South America through a cable acquisition are examples of this strategy. EXPAND OUR MARKETING CAPABILITIES. We are focused on providing our network services to TSPs, ISPs, ASPs, SSPs and LORGs with enterprise network needs. In North America, our customer relationships are cultivated and maintained by our direct sales force and marketing staff. We intend to expand our European sales and marketing efforts by hiring additional managers and salespeople in new regional European sales offices by the end of the year. INCREASE, IN COLLABORATION WITH OUR CUSTOMERS, THE NUMBER OF PRODUCTS AND SERVICES THAT WE OFFER, INCLUDING MANAGED BANDWIDTH AND INTERNET ENABLING PRODUCTS AND SERVICES. We offer our customers managed bandwidth and Internet enabling products and services such as colocation facilities. We anticipate offering services such as Internet data centers, applications hosting, electronic commerce support and web hosting to meet our customers' evolving needs and capitalize on the expanding demand for new telecommunications products and services. We plan to develop an extensive range of innovative products and services which will use our state-of-the-art IP-based network infrastructure. CAPITALIZE ON MANAGEMENT EXPERIENCE AND RELATIONSHIPS. We have assembled and will continue to build a strong management team and board of directors with communications expertise and extensive experience in network design, construction, operations and sales. Members of our board of directors and our new Chief Executive Officer, Gregory Maffei, have extensive experience in initiating, pursuing and implementing strategic alliances in communications and technology industries. In addition, Michael Dell, Chairman and Chief Executive Officer of Dell Computer Corporation, Terence Matthews, Chairman and Chief Executive Officer of Newbridge Networks Corporation, Rupert Murdoch, Chairman and Chief Executive Officer of News Corporation, Dr. Nathan Myhrvold, Chief Technology Officer of Microsoft Corporation, Anthony Naughtin, President and Chief Executive Officer of InterNAP Network Services Corporation, and Denis O'Brien, Jr., Chairman of Esat Telecom Group, plc, each recently agreed to join our Strategic Advisory Committee, which will advise us on network technology directions, help us develop products and services to meet the requirements of our customers and capitalize on the convergence of telecommunications and high-bandwidth applications and services. PURSUE ADDITIONAL STRATEGIC ALLIANCES IN NETWORK SERVICES AND TECHNOLOGY. We will pursue additional strategic alliances with communications providers that have high-bandwidth needs and are willing to offer us long-term, high capacity commitments for traffic on our network. Such strategic alliances could also allow us to combine our capabilities with those of our strategic alliance partners and thereby offer our customers additional products and services. Our investment in TeraBeam Corporation, an emerging broadband services provider and the investment in us of divine interVentures, inc. are examples of this strategy. THE NETWORK Our network will cover approximately 56,300 route miles and will encompass long-haul and intra-city routes and an undersea cable between North America and Europe and an undersea cable between South America and North America. Our network consists of fiber optic assets and capacity that we have installed or acquired from other developers and carriers through swaps, purchases, leases, IRUs or other contractual rights along diverse ROW. We intend to expand our network including bandwidth and other Internet enhancing services to provide connectivity on a global basis to meet our customers' demands and in response to our needs for connectivity for our telecommunications business. 49 NORTH AMERICA In North America, our network is expected to cover approximately 24,100 route miles, encompassing both long-haul and intra-city route miles by the end of 2001. We intend to further develop, swap, lease, obtain IRUs in respect of, or purchase additional long-haul route miles and intra-city rings in North America. The footprint will consist of the following: - a North American long-haul fiber optic network including: (1) three primary east-west routes and (2) three primary north-south routes, running along the West Coast, the Mississippi River Valley and the East Coast. Our network in North America will serve approximately 50 major population centers; and - a series of intra-city networks in Toronto, Vancouver, Montreal, Ottawa and Calgary, in addition to the city ring currently under construction in Seattle. EUROPE In Europe, our network is currently expected to cover approximately 10,600 long-haul route miles (assuming, with respect to 1,300 route miles, the exercise of an option that we have) providing connectivity among approximately 35 major population centers by the end of 2001. The fiber we acquired via the KPNQwest, Telia, Telewest and Carrier1 transactions places our assets in ten European countries. The planned footprint will consist of eight rings connecting the following cities: - Liverpool, Manchester, Birmingham, Bristol, London, Cambridge and Sheffield; - London, Paris, Strasbourg, Frankfurt, Dusseldorf, Hamburg and Amsterdam; - Hamburg, Kolding and Copenhagen; - Copenhagen, Stockholm and Oslo; - Frankfurt, Stuttgart, Munich, Dresden, Berlin, Hamburg and Cologne; - Stuttgart, Zurich, Milan, Torino, Marseilles, Lyon, Geneva, Basel and Kehl; - Paris, Lyon, Toulouse and Bordeaux; and - Lyon, Marseilles, Barcelona, Valencia, Madrid, Bilbao, Bordeaux and Toulouse. These routes will be acquired through the following agreements: - KPNQWEST. In March 2000, we signed an agreement with KPNQwest Carrier Services B.V. ("KPNQwest"), under which we will purchase for a twenty-year period an IRU for approximately 4,500 route miles of multiple fiber strands on KPNQwest's Southern European network covering 25 population centers. The agreement contemplates that KPNQwest will deliver the fibers to us in segments and rings starting in the third quarter of 2000, with a final delivery date in the fourth quarter of 2001. In addition, KPNQwest will provide us with colocation and maintenance services. Also in March 2000, we signed an agreement with KPNQwest Atlantic Limited under which KPNQwest Atlantic will purchase for a twenty-year period an IRU for capacity on our network between New York City and London. We will deliver this capacity over a two-year period starting in March 2001. Each of these two agreements is subject to due diligence and other conditions that entitle either party to terminate the agreements without penalty prior to May 1, 2000. - TELIA. In December 1999, we signed a contract with Telia under which we will swap for a twenty-year period an IRU for multiple fiber strands on part of our North American network in exchange for an IRU for approximately 4,000 route miles of multiple fiber strands of Telia's European network covering Germany, France, the United Kingdom, the Netherlands, Denmark, Sweden and Norway. The contract contemplates that we will deliver fibers to Telia by the end of the first quarter of 2001 and Telia will deliver the fibers to us by the end of the fourth quarter of 2000. In addition, we will provide each other with colocation services, 50 regeneration sites, points of presence in main cities and operations and maintenance services. - TELEWEST. In December 1999, we signed a co-development agreement with Telewest to provide us with multiple conduits on an approximate 736 route mile ring network which will connect Liverpool to London via Manchester, Birmingham and Bristol and via Sheffield and Cambridge. In addition, we have an option to require Telewest to provide access to existing dark fiber on two diverse routes connecting Liverpool to London on a backup network with common regeneration sites if the co-development assets are not delivered on schedule. - CARRIER1. In December 1999, we signed a contract with Carrier1 enabling us to order wholesale capacity on their network connecting London to 18 major population centers beginning March 1, 2001. In addition, the contract provides us with the option to acquire dark fiber strands in Germany and/or wavelengths in France. UNDERSEA CABLES 360ATLANTIC. Our 7,600 route mile undersea cable between North America and Europe cable project will have the capacity to be a 1.92 tbps, self-healing ring that will connect landing sites in Boston, Halifax, Dublin and Liverpool and to major gateway cities in Europe and North America, including London and New York. In June 1999, we entered into a turnkey supply agreement with Tyco Submarine Systems Ltd. ("Tyco") whereby Tyco will serve as the primary contractor for 360ATLANTIC, taking responsibility for the design, construction, installation and testing of the cable. Tyco is a leading supplier of undersea communications systems and services to various projects around the world. 360ATLANTIC's self-healing ring design will have a capacity of 1.92 tbps on each segment using 4 fiber pair with state-of-the-art, 48-wavelength technology on each fiber pair. Tyco is required to complete and deliver our 360ATLANTIC undersea cable by the first quarter of 2001. 360AMERICAS. The planned 14,000 route mile undersea cable between South America and North America we will acquire with the acquisition of GlobeNet will have the capacity to be a 1.28 terabits per second, self-healing ring that will be able to offer city-to-city connectivity between 6 major population centers in Brazil, Venezuela, Bermuda and the United States. Alcatel Submarine Networks Inc. ("Alcatel") will serve as the primary contractor for 360AMERICAS on a turnkey basis, taking responsibility for the design, construction and installation of the cable. Alcatel is a global leader in the construction and installation of undersea fiber optic cables. Alcatel is expected to complete and deliver the undersea portion of the 360AMERICAS cable by the end of the second quarter of 2001. Among other conditions, the GlobeNet acquisition is subject to the approval by a majority in number representing at least 75% in value of each of two classes of GlobeNet shareholders present in person or by proxy and voting at a separate meeting of each such class. Holders of over 75% of each class of GlobeNet shares have entered into a voting agreement with GlobeNet and us to approve the acquisition. We expect that some of GlobeNet's shareholders will purchase up to $56.8 million of our Subordinate Voting Shares at the initial public offering price. FUTURE EXPANSION We believe that there may be opportunities in North America, Europe and South America to further develop our network. We intend to expand our planned network to more population centers through the addition of intercity and city ring capacity in North America, Europe and South America. We are also reviewing opportunities to expand the geographic reach of our network, including transpacific connectivity to Asia. 51 NETWORK DEVELOPMENT PLAN We expect to complete the development of our currently planned network in 2001. Although the following table summarizes our current plans for completing the terrestrial network, the segments, actual route miles, scheduled completion dates, major population centers connected and proposed participants/co-developers/swaps/joint ventures listed below may change due to market and other circumstances, some of which may be beyond our control: NORTH AMERICA
COMPLETED ROUTE MILES AS OF SCHEDULED ESTIMATED DECEMBER 31, COMPLETION MAJOR POPULATION SEGMENT ROUTE MILES 1999 DATE CENTERS CONNECTED - ------- ----------- --------------- ------------------ ------------------------------- LEDCOR BUILD: 5,068 5,068 Complete Vancouver, Edmonton, Calgary, Winnipeg, Minneapolis, Chicago, Toronto and Detroit CANADA BUILD: 2,050 1,243 Fourth Quarter Edmonton, Winnipeg and Toronto 2000 WEST COAST BUILD: 4,102 1,286 Fourth Quarter Edmonton, Vancouver, Seattle, 2000 Portland, Sacramento, Los Angeles, San Diego, Phoenix and San Antonio NORTHEAST BUILD: 3,314 1,611 Fourth Quarter New York, Boston, Buffalo, 2000 Albany, Detroit, Toronto, Montreal, Quebec City and Halifax EAST COAST BUILD: 4,784 2,601 First Quarter 2001 New York, Washington DC, Atlanta, Jacksonville, Memphis, Miami and New Orleans CENTRAL BUILD: 1,120 -- Fourth Quarter Chicago and New Orleans 2000 MID-AMERICA BUILD: 3,162 408 First Quarter 2001 Chicago, Denver, New Orleans, Omaha, Sacramento and Salt Lake City CITY RINGS: 511 -- Fourth Quarter Calgary, Montreal, Ottawa, 2000 Seattle, Toronto, Vancouver and Edmonton ------ ------ TOTAL ROUTE MILES 24,111 12,217 ====== ====== PROPOSED PARTICIPANT/ CO-DEVELOPER/SWAPS/JOINT SEGMENT VENTURES - ------- ------------------------------- LEDCOR BUILD: Call-Net, Bell Canada, AT&T Canada and Enron CANADA BUILD: Telus WEST COAST BUILD: Telus, Call-Net, FTV, GST, Level 3, Metromedia, NEXTLINK, Qwest, Williams Communications, Caprock, Enron and Telia NORTHEAST BUILD: AT&T Canada, Telus, CN, Level 3, Williams, Telia, Enron and Qwest EAST COAST BUILD: Metromedia, Qwest and Enron CENTRAL BUILD: Enron and Qwest MID-AMERICA BUILD: Pathnet, Telia, Enron and Adesta CITY RINGS: GST, Level 3, Metromedia, Qwest, NEXTLINK, GTE, McLeod and Global Crossing TOTAL ROUTE MILES
52 EUROPE
SCHEDULED PROPOSED PARTICIPANT/ ESTIMATED COMPLETION MAJOR POPULATION CO-DEVELOPER/SWAPS/JOINT SEGMENT ROUTE MILES DATE CENTERS CONNECTED VENTURES - ------- --------------- -------------- ------------------------------- ---------------------------- UK: 736 Third Quarter London, Liverpool and Telewest and Telia 2000 Manchester GERMANY: 2,755 Second Quarter Strasbourg, Frankfurt, Hamburg, Telia, Carrier1 and KPNQwest 2001 Munich, Dusseldorf and Stuttgart HOLLAND/FRANCE: 3,051 Second Quarter Amsterdam, Paris, Marseilles Telia and KPNQwest 2001 and Lyon SCANDINAVIA: 1,628 First Quarter Copenhagen, Stockholm and Oslo Telia 2001 SWITZERLAND: 708 First Quarter Zurich, Geneva and Basel KPNQwest 2001 SPAIN/FRANCE: 1,392 Fourth Quarter Barcelona, Valencia, KPNQwest 2001 Madrid, Bilbao, Toulouse and Bordeaux ITALY: 344 Second Quarter Milano and Torino KPNQwest 2001 --------------- TOTAL ROUTE MILES 10,614 ===============
UNDERSEA CABLES
SCHEDULED PROPOSED PARTICIPANT/ ESTIMATED COMPLETION MAJOR POPULATION CO-DEVELOPER/SWAPS/JOINT SEGMENT ROUTE MILES DATE CENTERS CONNECTED VENTURES - ------- --------------- -------------- ------------------------------- -------------------------- 360ATLANTIC 7,600 First Quarter Dublin, Liverpool, Boston and -- 2001 Halifax 360AMERICAS 14,000 Second Quarter United States, Brazil, -- 2001 Venezuela and Bermuda --------------- TOTAL ROUTE MILES 21,600 ===============
COLOCATION FACILITIES NORTH AMERICA We have agreed, subject to execution of definitive agreements, to acquire existing colocation facilities or site rights in ten cities totalling approximately 2.9 million square feet. These facilities are expected to be completed by the end of 2001. In addition to the initial purchase price of $176.5 million, of which $26.3 million is payable in our Subordinate Voting Shares valued at the initial offering price, we anticipate spending $400 million to complete the development of the facilities. Existing tenants include major ILECs, CLECs and ISPs. There can be no assurance that we will be successful in negotiating definitive agreements. EUROPE We are exploring opportunities to provide colocation facilities in Europe so that we will have arrangements in place in major European cities to develop and provision colocation facilities by the time we activate our network in Europe. PRODUCTS AND SERVICES We believe that our customers have a limited choice of independent service providers capable of offering high-capacity, reliable, secure and cost-effective services on a point-to-point basis between major population centers in North America, Europe and South America. To meet our 53 customers' requirements, we offer a wide range of services on a scalable basis, across an extensive geographic network, including: NETWORK SERVICES The services we offer include: OPTICAL CHANNELS. Dense wave division multiplexing ("DWDM") technology in our network allows us to sell a customer exclusive long-term use of a portion of the transmission capacity of a fiber optic strand rather than the entire strand. We expect to be able to derive up to 160 individual wavelength channels at either OC-48 or OC-192 per fiber pair. A purchaser of a wavelength may install its own switching and routing equipment and has the choice of installing its own protection equipment or use optical protection supplied as part of our service. We offer the following services: - transparent OC-48 and OC-192 under IRU or lease; - optical ring protection; and - linear routes available, with add/drop along routes available. PRIVATE LINE TRANSMISSION. We offer fixed amounts of point-to-point connectivity. Our service has an advantage due to a low price point and flexible commitment levels with higher reliability than is currently available on traditional multiplexed services. We will offer these services through the sale or lease of transparent connectivity up to OC-12. PACKET-BASED DATA SERVICES (IP TRANSPORT AND ATM). We offer customers variable capacity across our network to connect multiple service locations into a single "Virtual Network" specific for each customer. Specific packet-based services include ATM and IP transport. Our ATM service includes: - DS-3 to OC-48 interface rates; - all 5 classes of ATM service; and - switched virtual circuits available on customer premises. Our IP transport includes: - protocol supports including Private Network to Network Interface ("PNNI"), ATM and packet over synchronous optical network technology ("SONET"); - nodes in all major Internet-network access points; and - IP voice and modem transport and distribution, including virtual switching and compression. VIRTUAL VOICE TRUNKING. We offer customers voice trunking services that can be configured for sale as minutes of use. These services enable these customers to originate and terminate long distance telephone calls connecting to local exchange carriers ("LECs") with switched transport through our network. In addition, we will provide our customers service on an as needed basis with simple billing. The services we intend to offer include: - DS-1 to OC-3 structured services; - DS-0 switching and billing for usage; - transparent local interface; - SS7 signaling transport; and - advanced services, including compression. COLOCATION FACILITIES. We intend to offer customers access and interconnection to our network and services at various city points of presence along our network. We will provide them with a variety of term and space configurations ranging from secure cabinet rentals to longer term leases of cage space. 54 NETWORK INFRASTRUCTURE DARK FIBER AND CONDUIT FOR SALE OR GRANT OF IRUS. During the pre-development and development stages of the network, we generally enter into contracts with participants for the sale, lease or grant of IRUs for dark fiber or conduit along one or more segments of the network. A typical contract for sale currently provides for a sale price of $1,500 to $3,000 per fiber mile (depending on geography and number of strands bundled together in the sale) and requires a deposit upon execution of the contract. See "Risk Factors--Pricing Pressures." Upon completion of the build, the participant is usually entitled to a short period of time to test the system specifications and inspect the shelters and other facilities (generally 15 to 20 days) prior to paying the balance of the purchase price. In the case of a sale, title to the fiber or conduit passes to the participant. An IRU is a long-term right of use, usually of 10 to 20 years, with an option period for the user to renew at lower rates. At the end of an IRU title may be passed to the user. The present value of the initial contract term and extensions of an IRU usually equates to the comparable sale price per fiber mile, which amount is generally paid in full at commencement of the IRU. DARK FIBER AND CONDUIT FOR LEASE. We lease dark fiber or conduit for a term less than the period for which IRUs are typically granted. Leases are normally structured with monthly payments over the term of the lease. We generally realize a premium in lease pricing for bearing the risk that the lease will not be renewed for the balance of the life of the asset. CONSTRUCTION SERVICES SUPPORTING THE DEVELOPMENT OF OUR NETWORK. We are continuing to construct and maintain fiber optic networks for third parties on a contract basis. We focus on projects where we can retain fiber or conduit assets on routes that complement and reduce the costs of completing the network or where our construction services are connected to a sale of network capacity. CUSTOMERS We are focused on providing our services to TSPs, ISPs, ASPs, SSPs and LORGs with enterprise network needs. Typical targeted customers include a broad range of companies, such as: - long distance companies; - incumbent local exchange carriers; - competitive local exchange carriers; - multi-service operators; and - local multipoint distribution service providers. Customers typically buy or lease fiber optic capacity with which they develop their own communications networks or satisfy a need for redundant capacity. The network provides such customers with a low-cost alternative to building their own infrastructure or purchasing metered services from communications carriers. Our customers can buy or lease fiber optic capacity on a segmented basis or along our entire network. SALES AND MARKETING We are building a highly motivated and experienced direct sales force and customer care organization designed to capture new customers and to increase our volume of business with existing customers. Because our target customers are other TSPs, ISPs, ASPs, SSPs and LORGs with enterprise network needs, our sales and marketing departments are focused and small compared to competitors that have a broader retail strategy. Our direct sales organization consists of senior level management personnel, experienced sales representatives and sales engineers. Our sales force is made up of individuals with strong communications and technical backgrounds which allows us to meet the needs of our target customers. Direct sales tactics include direct contacts 55 with targeted ISPs and other potential corporate accounts by our sales representatives and engineering support. In addition to helping to generate initial sales, the sales engineer is responsible for ongoing technical support and identifying new revenue opportunities with existing customers. Our sales and marketing organization is segmented geographically between North America, Europe and undersea to ensure they are able to meet the specific needs of their target customers. We believe that the relationships established by our sales team and management result in interactive exchanges that help us to design and market our products in response to the needs of our potential customers. We believe that our new Chief Executive Officer brings additional valuable relationships and contacts in the computer services, Internet, media and financial communities in addition to traditional communications carriers that will allow us to more easily gain access to these markets. NORTH AMERICA Our North American sales and marketing organization is divided into two groups to meet the specific needs of our bandwidth customers and network infrastructure customers. NETWORK SERVICES. Our strategy is to target customers who have a need for network services in areas covered by those portions of our network on which we initially will be installing transmission equipment. We market a broad and technically advanced range of network products and services. Consequently, we are developing a dedicated sales and marketing team with the necessary technical expertise. We commenced marketing our network services in the second quarter of 1999 to targeted customers through a number of focused direct sales methods. Our experienced sales team will qualify potential customers from their personal contacts and direct sales efforts. In addition to our direct sales efforts, we identify highly qualified prospective network customers through our network infrastructure sales and marketing efforts. We also receive referenced introductions from our suppliers when network requirements are identified while they are making customer contacts in the process of doing their business. We recently granted affiliates of PSINet an indefeasible right of use for bandwidth capacity between Vancouver and Chicago, and have agreed to provide multiple dark fiber strands in eastern Canada and the northeast corridor of the United States. We recently signed a contract with Shaw Communications Inc. under which Shaw will lease bandwidth on designated segments of our network between Edmonton and Toronto, and either purchase dark fiber or acquire indefeasible rights of use on other network segments for $153 million. NETWORK INFRASTRUCTURE. Our strategy is to market to customers on a local, regional and national basis. We market participation in infrastructure segments of our network through personal contacts and relationships with prospective customers, which consist primarily of large telecommunications companies. We believe that we are known to most of our target customer group and that we have good relations with them. Our current targeted customer base is comprised of approximately 200 companies. Most of our marketing and sales team have prior industry experience with these companies, including MCI WorldCom, Inc. ("MCI WorldCom"), Sprint Corporation ("Sprint"), AT&T Corp. ("AT&T"), Qwest Communications International Inc. ("Qwest") and US West. In addition, as a result of our more than ten years of experience in constructing fiber optic networks, our management also has long-standing relationships in the telecommunications industry. We are also able to identify potential participant and co-development customers that initially approach us because of our reputation and experience in the design, construction and development of fiber optic facilities. EUROPE NETWORK SERVICES. Our strategy in Europe is to target customers by specific geographic regions who have a need for network services in areas covered by those portions of our network. In 56 Europe, we intend to build out separate sales and marketing organizations by region to enable us to address the specific market, product and regulatory needs of our customers. Initially, we intend to have regional offices in England, France, Germany and Scandinavia and will add additional offices as we expand our European network. Each sales and marketing managing director will report directly to our head of European sales and marketing who will be responsible for coordinating our European efforts with our North American and overseas teams. This structure will allow us to provide our customers seamless service from anywhere in Europe to anywhere in North America. We recently signed a contract with an affiliate of PSINet to deliver high-speed bandwidth services from New York to London. UNDERSEA CABLES Our cable projects have been designed to be responsive to potential customers' concerns, including the offer of diverse routes and landing sites, protected capacity on two separate cables, seamless city-to-city availability using our extensive backhaul terrestrial network and a firm, near-term delivery date. In North America we have teams segregated by service provision type and in Europe geographically by country. We are currently developing our sales organization in the United States, Europe and South America to market and distribute capacity on our cable. In addition to our direct sales efforts, we have received referenced introductions from our suppliers. Our pricing strategy is to offer capacity at the lowest cost in the market to our initial customers and reflects our belief that large buyers of capacity will seek significant discounts and flexible payment terms in order to contract for purchases prior to the ready-for-service date. We are offering a program which gives initial buyers of capacity the option to make additional purchases on system upgrades, at a cost which is a significant discount to current market prices. Similarly, our proposed pricing of ongoing operations and maintenance services reflects significant volume discounts and lower prices for upgrade capacity versus the flat unit pricing traditionally offered in the marketplace. NETWORK DESIGN AND INFRASTRUCTURE Our network utilizes state-of-the-art technologies based on DWDM optics and packet-switched routing. This approach greatly reduces the complexity and number of component systems that previously were required to deliver voice and data services. Our network has the following characteristics: ADVANCED FIBER OPTIC CABLE. Our network benefits from technologically advanced fiber optic cable, including Corning E-leaf and single mode fiber that allows us to expand our DWDM system to maximize the potential of DWDM technologies. DENSE WAVE DIVISION MULTIPLEXING. DWDM allows for increased network capacity through the transmission of multiple waves of light over a single fiber optic strand. Our DWDM optical system electronics are installed in shelters and POPs in carrier interconnect locations along the route. Each route includes several spans that are comprised of optical terminals at the ends of the span and a combination of optical line amplifiers, electrical signal regeneration and optical add/drop terminals to complete the path. Each system operates on a single fiber providing bi-directional transport of up to 160 channels of OC-192 (10 gbps) wavelengths. The current network plan calls for a minimum of four OC-48 channels per route, with four OC-192 channels installed in routes where we believe that there will be sufficient market demand. OPTICAL TECHNOLOGY. Our network's optical design will enable us to upgrade installed equipment or to add new equipment to any segment of the network. Our initial optical platform will have a capacity of 32 wavelengths at 2.5 gbps or 10 gbps expandable to 160 wavelengths. We will use optical ring protection devices where a customer requires redundant services. ATM CORE SWITCHING AND PROTECTION. In place of the SONET equipment used by older network architectures, we have chosen to use ATM as both the protection and the switching layers 57 to deliver services in addition to optical channels derived on the DWDM equipment. ATM core switching is a packet-based switching and transmission technology which sends various types of information, including voice, data and video, in fixed-size cells. We utilize advanced equipment by Marconi plc which enables packet-based networks to carry voice and data more efficiently and at a lower cost than traditional voice and data networks. The initial core switches have a throughput capacity of 40 gbps and network link speed of 2.5 gbps. The ATM packet elements use multiple optical channels connecting directly to the DWDM equipment providing meshed topology, a method of circuit protection that is more reliable than a simple ring topology. The use of the PNNI hierarchical routing protocol collects circuits into virtual paths and greatly reduces the number of channels that the ATM switch is required to restore in the event of an optical failure. This approach allows for the scalability and the restoration timeframes that are as good as, or better than, those of a traditional SONET-based architecture. Due to the nature of the ATM configuration, all of the circuits are fully protected and there are no single points of failure other than the customer connection port. This enables us to offer traditional as well as dedicated IP services with guaranteed availability in excess of 99.9% compared to the market standard of 99.7%. MULTI-SERVICE PLATFORM. Our multi-service operating systems allow voice, data and Internet services to be provided using a single ATM operating system. Most communications service providers in North America, South America and Europe use multiple platforms for the provision of different services, which create distinct networks and increased operating and capital costs for each service provided. NETWORK OPERATIONS CENTER The Network Operations Center ("NOC") is the human service connection between our customers and the technology that ultimately delivers their services. Pursuant to an agreement with Urbanlink, we have the services of a NOC in Vancouver 24x7. We will have redundant network services through Nortel until June 30, 2000. As a result of the GlobleNet acquisition, we will have an additional NOC in Bermuda that we intend to use to support the 360AMERICAS cable. We are in the process of building our NOC in Dublin, Ireland. Our Dublin NOC will be primarily responsible for European operations and will be on line in October 2000. Each NOC will serve as a back up to the other. In addition to the two main NOCs in Vancouver and Dublin, we are also designing support centers in Denver to maintain North American cable operations and the 360ATLANTIC cable. The NOCs allow us to provide the following services: - directing the repair efforts of cable restoration, optical and ATM system repairs and maintenance; - providing network management for the optical and ATM elements; - providing POP and customer record management; and - providing circuitry for customer and internal circuits. We are using a design based on IP technology that integrates all of the alarm and monitoring of the network elements into an adaptive fabric to satisfy our service level agreements. With this technology, access to the network management layer is not restricted to the physical NOC as full operations capabilities may be located at multiple locations. This allows us to extend particular management services to our customers in a secure and reliable way. NETWORK CONSTRUCTION The portions of our network constructed by us are designed to maximize expandability and flexibility. Generally, at least 144 fiber optic strands will be installed on major builds throughout the network. In high demand areas, 264 fibers or more may be installed in order to meet anticipated 58 demand as well as to enable us to swap fiber for fiber in other geographic areas both in the North American market and internationally. Our network installation process along railroad ROW combines traditional railroad activities and modern engineering and building techniques. Conduit and fiber on railroad ROW is generally installed with our patented railplow. The railplow reduces the time necessary to install network infrastructure on railroad ROW because it allows movement of construction crews on and off the tracks on short notice to allow trains to pass. As a result, we can construct networks on railroad ROW much more quickly and efficiently than our competitors who use traditional plow trains, which are not able to move on and off railroad tracks on short notice. Each of Ledcor and us currently owns 50% of the common shares of a holding company that owns the patent to the railplow and we have received a commitment that a royalty-free, exclusive worldwide license to use the railplow will be granted to us. In some circumstances, our ownership of this company would be subject to change and our license would become non-exclusive. For routes not using railroad ROW, we use tractor plows. Tractor plows are tractor-pulled plow vehicles equipped to plow trenches and install conduit. Tractor plows also may be used in some places along railroad ROW, depending on space, availability of track time and other factors. These tractor plows generally perform the same functions as railplows. Many of the skills developed in connection with the installation of fiber optic cable along railways are transferable to non-rail installations. If fiber or conduit must be laid across a bridge or through a tunnel, we typically place the conduit in a galvanized steel pipe that is attached to the side of the bridge or along the tunnel floor or wall. When necessary to install fiber or conduit under rivers or other obstructions, we use directional boring techniques to bore small tunnels underneath the river or obstruction and feed the conduit through the tunnel. After the conduit has been buried (or attached to a bridge or tunnel) and as a segment nears completion, the fiber optic cable is installed or "jetted" through the conduit. This is accomplished through the use of access boxes that are installed along the network at approximately four to five mile intervals. The access boxes also allow for the making of repairs, replacement of fiber and installation of additional fiber. The access boxes typically contain an additional loop of fiber optic cable to provide slack in the system to accommodate displacement, disruption or movement of the conduit as a result of digging or excavation activities, floods, earthquakes or other events. The presence of additional fiber optic cable reduces the risk that the cable will be cut or broken. We design and manufacture regeneration shelters that are installed along our network at an average of 45 mile intervals. These shelters are secure, climate-controlled structures with an individual compartment for each participant to install its optical transmission equipment and related electronics. The optical system electronics are installed in the shelter compartments described in the preceding paragraph. Each route includes several spans that use Optical Terminals at each end of the span and Optical Line Amplifiers, regeneration shelters and Optical Add/Drop between Optical Terminals. Each linear route includes a redundant system for reliability and maintenance. In the case of diverse parallel routes, one of the parallel routes will include a redundant system for additional reliability and system maintenance. RIGHTS-OF-WAY AND PERMITTING To implement our business plan successfully, we must obtain licenses and permits from third-party landowners and governmental authorities and complete particular regulatory filings to permit us to install conduit and fiber. ROW are generally non-exclusive. Where possible, we lease them under multi-year agreements with renewal options. ROW agreements and permits provide a contractual interest and do not create an interest in land. See "Risk Factors--Need for 59 Rights-of-Way." In the ordinary course of business each build requires us to either obtain, lease, cure (or condemn) ROW or design re-routes, on a daily basis. For example, to complete the Seattle-Portland segment of the West Coast Build we obtained ROW agreements and permits from more than 700 individual landowners and local authorities. Alternative ROW for some route miles must be identified, negotiated and obtained in the event that the original route cannot be secured. It is also possible to obtain ROW in bulk. The majority of the ROW for the Ledcor Industries construction project was obtained from two Canadian railways. In June 1999, we announced agreements with CN and IC which provide access to over 950 track miles in the United States and 2,900 track miles in Canada which we believe will substantially satisfy the ROW and permit requirements for the Central and Northeast Builds. We believe that these ROW will be valuable to us, particularly with the advantages of the railplow and the ROW's geographic location. The ROW obtained from each of CN and IC may be subject to legal challenge. See "Risk Factors--Need for Rights-of-Way." In Europe, all of our current and planned network assets have been acquired through purchases or swaps of North American fiber optic cable, so there has been no need thus far to obtain ROW in Europe. For 360ATLANTIC we have applied for licenses with the governing authorities in each of Ireland, Canada, the United Kingdom and the United States. The licenses have been granted in the United States, Ireland and the United Kingdom. One license for which we applied in Canada has been approved and a second license application in Canada is pending. We also applied for various permits and consents for 360ATLANTIC in Ireland, Canada, the United Kingdom and the United States. Approximately 45% of these permits and consents have been granted and the remaining 55% are pending. While there can be no assurance that the remaining licenses, permits and consents will be granted, we do not anticipate any problems at this time. SUPPLIERS The principal components of our network are fiber optic cable and conduit. For those portions of our network that we construct ourselves, we purchase such fiber optic cable and conduit from third-party suppliers. Fiber optic cable suppliers generally require three to six months lead time for large orders, while conduit is generally available on a spot basis from numerous suppliers. Although in the past we have purchased cable from a single supplier, there are a number of alternative suppliers from whom we regularly obtain quotes which are competitive on price, delivery and specifications. We currently purchase the optical components from a single vendor. A number of alternative suppliers have been identified from which it would be possible to purchase the optics required to complete a new system with only minor changes to the design of the NOC. With respect to the provision of ATM switches, we have adopted a dual supplier approach. COMPETITION The telecommunications industry is extremely competitive particularly concerning price and service. It is relatively common for TSPs to be both customers and competitors. This is a concept referred to as co-opetition. Therefore, we face competition and co-opetition from existing and planned TSPs and customers on each of our planned routes. We compete primarily on the basis of price, availability, transmission quality and reliability, customer service and the location of our systems. We believe that our competitive advantages in North America, Europe and South America will be our ability to enable our customers to establish and maintain a strong competitive position in providing services to their end users. We believe that independence, services designed for the wholesale market and simple billing systems will enable us to gain a significant position in this market niche. We believe that our competitive advantages in providing our undersea cable include 60 our ability to provide end-to-end connectivity between major North American, European and South American cities and attractive pricing of capacity by initial purchasers of capacity. There are currently several communications companies with long distance and city ring fiber optic networks and colocation facilities in North America, Europe, South America and Asia. In North America, these include companies such as Level 3 Communications, Inc. ("Level 3"), Qwest and Williams Communications Group, Inc. ("Williams"). In Europe, these include companies such as MCI WorldCom, Global Crossing Ltd. ("Global Crossing"), Global TeleSystems Europe B.V., Viatel Inc., KPNQwest N.V., Colt Telecom Group plc, Energis plc and Carrier 1 International S.A. In South America, these companies include IMPSAT Corporation and Telemar. We believe that other companies are planning networks that, if constructed, could employ advanced technology similar to that of our network. These competitors, as well as traditional carriers, including AT&T, MCI WorldCom, Sprint (MCI WorldCom and Sprint have recently entered into an agreement to merge) Deutsche Telekom AG, France Telecom S.A., British Telecommunications plc, Mannesmann AG and Cable & Wireless plc, may compete directly with us for customers. UNDERSEA CABLES 360ATLANTIC. The route addressed by 360ATLANTIC is currently served by several undersea cables. We anticipate that we will face competition primarily from new transatlantic cable systems, including: (i) AC-2, a transatlantic cable system which is being developed by Global Crossing; (ii) FLAG Atlantic, a 50/50 joint venture between Global Telesystems Inc. and Flag Telecom; (iii) Level 3's linear Yellow cable project; and (iv) Tyco International Ltd.'s proposed transatlantic cable project. Three of these systems, including 360ATLANTIC, will have fully protected ring designs. 360ATLANTIC will be the first of the new systems to be ready for commercial service, and will be competing for clients directly with the other two new ring systems. 360AMERICAS. We anticipate that we will face competition from the following cable systems, all of which are currently under construction: - Americas-2, a new carriers' consortium cable system with a scheduled ready for service date in the first half of 2000 that will connect Brazil, Venezuela, Florida and the Carribean; - South American Crossing, a new self-healing ring cable system being developed by Global Crossing Ltd. that will link coastal countries in South America to Global Crossing's planned Mid-Atlantic Crossing in St. Croix, U.S.V.I. and Global Crossing's planned Pan American Crossing in Ft. Amador, Panama; and - The SAm-I cable system, a self-healing ring cable system being developed by Telefonica Internacional S.A. and Tyco International Ltd. that will connect the United States, Guatemala, Brazil, Argentina, Chile, Peru and Colombia. EMPLOYEES As of December 31, 1999, we had approximately 1,000 full-time and seasonal employees. Depending upon the level of development or construction activity, we will increase or decrease our work force. Generally, non-management employees from Canada are covered by a collective bargaining agreement with the Christian Labor Association of Contractors, which expires on February 28, 2001 and is automatically renewable unless either party gives prior notice. We believe that our work force is highly capable and motivated and that our relations with our employees are good. In connection with the construction and maintenance of our fiber optic networks, we may use third-party contractors to meet excess demand and harness local construction knowledge, some of 61 whose employees may be represented by other unions or covered by collective bargaining agreements. PROPERTIES We have executive and administrative offices in Vancouver, British Columbia and Seattle, Washington. We also have administrative, sales, engineering and operations offices located in Vancouver, Denver and Toronto. In addition to the NOC located in Vancouver, British Columbia, we are building a NOC located in Dublin, Ireland, which is scheduled to be completed in November 2000. All of our offices are leased on a short-term basis except for our Toronto office, which we occupy under a lease expiring in 2009. We expect to open additional offices in multiple jurisdictions globally as required. LEGAL PROCEEDINGS From time to time, we may be a party to various legal proceedings arising in the ordinary course of our business. We are not party to any material legal proceedings. In July 1999, after issuing a Certificate of Public Convenience and Necessity ("CPCN") to Worldwide Fiber Networks, Inc. ("360-NI"), the California Public Utilities Commission ("CPUC") issued a "stop work" order which required us to submit an environmental assessment to comply with the California Environmental Quality Act. We complied with this order and submitted the required information. On January 6, 2000, the CPUC issued an order modifying the CPCN, authorizing the recommencement of construction and adopting a mitigated negative declaration imposing certain conditions on continued project construction. We have since recommenced construction in compliance with the terms of the CPUC order and do not expect that such compliance will have any material delaying effect on ongoing construction. The CPUC retained jurisdiction in further proceedings to determine the amount, if any, of civil penalties that may be imposed upon us for construction that occurred in California prior to the "stop work" order. This proceeding is ongoing, and we presently have no estimate of any fines or penalties that may be imposed. The maximum allowable penalty permitted by the California Public Utilities Code would be $3.6 million for the period between December 2, 1998 and July 6, 1999. PATENTS The patent for the railplow is owned by a company which is 50% owned by Ledcor and 50% owned by us. We have a non-exclusive license in North America for the use of the railplow. Ledcor has committed to cause a worldwide exclusive license to be granted to a subsidiary of ours. This license would cease to be exclusive after a change of control of 360NETWORKS INC. See "Relationships and Related Party Transactions--Transactions with Ledcor--Description of reorganization and related agreements--Railplow." As we develop value-added data services we intend, when appropriate, to seek patents and other intellectual property protection on an on-going basis. We currently do not have patentable rights with respect to any value-added data services, and we cannot assure you that we will in the future develop any such rights. 62 MANAGEMENT The following lists the persons who will be our officers and directors at the time of this offering:
NAME AGE POSITION - ---- -------- -------- OFFICERS Gregory Maffei......................... 39 President, Chief Executive Officer and Director Larry Olsen............................ 50 Vice Chairman, Chief Financial Officer and Director Ron Stevenson.......................... 47 Vice Chairman and Director Stephen Stow........................... 46 Managing Director, Asia Joel Allen............................. 50 Senior Vice President, Marine Capacity Sales Lionel Desmarais....................... 47 Senior Vice President, Network Construction David Love............................. 51 Senior Vice President, Network Operations William Sumner......................... 43 Senior Vice President, Carrier Services Bruce Tinney........................... 47 Senior Vice President, Infrastructure Sales Jerry Tharp............................ 65 President, 360-USA Stephen Baker.......................... 51 Vice President and Chief Technology Officer Ashwin Chitamun........................ 32 Vice President, European Network Development Jayne Hart............................. 39 Acting Vice President, Human Resources Michael Leitner........................ 32 Vice President, Corporate Development Scott Lyons............................ 45 Vice President, Marine Services Catherine McEachern.................... 45 Vice President and General Counsel William Walls.......................... 34 Vice President, Finance Vanessa Wittman........................ 33 Vice President, Corporate Development DIRECTORS David Lede (2)......................... 52 Chairman of the Board Clifford Lede.......................... 44 Vice Chairman and Director Glenn Creamer (2)...................... 37 Director Claude Mongeau (1)..................... 38 Director Andrew Rush (1)........................ 42 Director Gene Sykes (1)......................... 42 Director James Voelker (2)...................... 49 Director
- ------------------------ (1) Member of the audit committee. (2) Member of the compensation committee. Kevin Compton, a general partner in Kleiner Perkins Caufield & Byers, John Malone, Chairman of Liberty Media Corporation, and John Stanton, Chairman and Chief Executive of Western Wireless Corp. and VoiceStream Wireless Corp., have agreed to join our board of directors following completion of this offering. Mr. Compton has agreed to join our compensation committee following completion of this offering. GREGORY MAFFEI has served as Chief Executive Officer and a Director since January 2000 and President since March 2000. Prior to that, Mr. Maffei served as the Chief Financial Officer of Microsoft Corporation. Mr. Maffei joined Microsoft in 1993 and, prior to becoming Chief Financial Officer, served as Vice President, Corporate Development, and Treasurer. Mr. Maffei serves as non-executive Chairman of Expedia Inc. and as a director of Starbucks Corporation, Avenue A Inc. and Optical Networks, Inc. He has previously served on boards of telecommunications related companies including ServiceCo LLC (Road Runner), United Global Communications (UGC), SkyTel Corp. and Asia Global Crossing. LARRY OLSEN has served as Vice Chairman, Chief Financial Officer and a Director since our inception. Mr. Olsen previously acted as a consultant to Ledcor Industries in respect of its telecommunications division. Mr. Olsen is also a member of the Board and Executive Committee of 63 First Heritage Savings, a Canadian financial institution. Mr. Olsen was previously involved in several international business ventures throughout Asia, Australia and the Middle East. He has held the position of Managing Director, Chief Executive Officer and Executive Chairman of Crownhampton International Limited and Managing Director of Promet Petroleum. RON STEVENSON has served as our Vice Chairman since March 2000, a Director since our inception, was previously our President and is a Director of Ledcor Inc. Before joining us, Mr. Stevenson spent 28 years with Ledcor. From 1989 to 1998, Mr. Stevenson was Executive Vice President of Operations for Ledcor Industries' telecommunications and civil divisions and was responsible for construction and project development. STEPHEN STOW has served as Managing Director, Asia since March 2000 and was previously our Executive Vice President, Corporate Development and a Director of ours. Mr. Stow previously acted as a consultant to Ledcor Industries in respect of its telecommunications division. Mr. Stow previously served as a principal in various venture capital activities. From 1992 to 1995, Mr. Stow was Co-head and Director of Corporate Finance for National Westminster Bank's Asian investment banking operations. JOEL ALLEN has served as Senior Vice President, Marine Capacity Sales since March 2000 and previously served as Senior Vice President, Global Marketing and Sales since November 1999. Mr. Allen has over 24 years of international and domestic telecommunications experience. Prior to joining us, Mr. Allen was the President of AllenConsultants and GlobalNetworkPartners, international consultancy and cable development firms. He served as Executive Vice President, Sales and Marketing/Business Development with Bell Atlantic Network Systems (Bermuda), the exclusive representive for the FLAG Cable System sales. Previous to that, Mr. Allen held numerous management positions with telecommunications companies. LIONEL DESMARAIS has served as Senior Vice President, Network Construction since our inception. Before joining us, Mr. Desmarais spent 12 years with Ledcor. From 1993 to 1998, Mr. Desmarais was Vice President of Ledcor's telecommunications division and has been responsible for overseeing the successful execution of numerous long-distance fiber optic networks, including the construction project that we did for Ledcor and the Calgary-Edmonton network. DAVID LOVE has served as our Senior Vice President, Network Operations since September 1999. Mr. Love's involvement in the telecommunications industry, both domestic and international, spans over 28 years. Prior to joining us, Mr. Love managed large network deployments and multi-state network operations at US West. He has international experience with MediaOne International directing the design and network operations for broadband services using hybrid fiber coax technology in Belgium. WILLIAM SUMNER has served as Senior Vice President, Carrier Services since January 2000. Prior to joining us, Mr. Sumner was the Vice President, Operations for MediaOne from 1996 to 2000, the Senior National Account Manager for MCI Telecommunications Inc. (now MCI WorldCom Inc.) from 1991 to 1996 and a Director of MFS Inc., the first competitive local exchange carrier, from 1987 to 1990. BRUCE TINNEY has been our Senior Vice President, Infrastructure Sales since our inception. Before joining us, Mr. Tinney spent more than 22 years in the telecommunications industry in a variety of executive positions, including Director of Business Development for Qwest Communications from 1996 to 1998 and Vice President of Operations for Fanch Communications from 1991 to 1996. Before joining Fanch Communications Mr. Tinney spent over 15 years with Time Warner Communications in a number of leadership positions. JERRY THARP has overseen our U.S. operations as President of 360-USA since our inception. Mr. Tharp's involvement in the telecommunications industry spans over 40 years. Before joining us, Mr. Tharp was the Director of Business Development for Mi-Tech from 1996 to 1997 and the Vice 64 President, Construction and Engineering for Qwest Communications International Inc. from 1994 to 1996. From 1987 to 1994, Mr. Tharp held several positions with MCI WorldCom Inc. dealing with ROW, construction and engineering issues. His telecommunications career started with US West and its predecessor corporation, where he held numerous positions. STEPHEN BAKER has served as Vice President and Chief Technology Officer since April 1999. Before joining us, Mr. Baker held several senior positions from 1996 to 1999 with Call-Net Enterprises Inc., including Vice President, Strategic Technology in Canada. Before that time, Mr. Baker served for seven years as Chief Executive Officer and then Chief Technology Officer of Integrated Network Services Inc. ASHWIN CHITAMUN has served as Vice President, European Network Development since August 1999. Mr. Chitamun has held various positions in engineering, marketing and sales with Bell Canada, AT&T Canada and most recently with fONOROLA Inc. He has also consulted at the senior management level to Telus Communications. JAYNE HART joined us in March 2000 as Acting Vice President of Human Resources. She has 15 years of professional human resources experience in the telecommunications industry. Her responsibilities have included the development and implementation of staffing strategies, employee relations and recognition and incentive programs. MICHAEL LEITNER joined us as Vice President, Corporate Development in March 2000. Prior to that, Mr. Leitner was a Senior Director of Corporate Development for Microsoft Corporation. In this capacity, Mr. Leitner managed Microsoft's strategic partnerships, corporate investment strategy, acquisitions and alliances across all of Microsoft's business units and customer channels. Prior to joining Microsoft in 1998, Mr. Leitner was a Vice President in the Technology Mergers and Acquisitions group of Merrill Lynch. SCOTT LYONS has served as Vice President, Marine Services since our inception. From 1997 to 1998, Mr. Lyons was Vice President of Ledcor's marine division and was responsible for its creation and management. Before that time, Mr. Lyons was President of Aztech Enterprises from 1995 to 1997, President and Chief Operating Officer of Hard Suits Inc. from 1994 to 1995 and from 1990 to 1994 was Chief Operating Officer of Rockwater Limited, a subsidiary of Brown and Root specializing in marine construction. CATHERINE MCEACHERN joined us in June 1999 as General Counsel and was appointed Vice President and Corporate Secretary in September 1999. She graduated from Osgoode Hall Law School in 1977 and has practiced predominantly in the telecommunications area for the past ten years. She is a former partner in the law firm of Farris, Vaughan, Wills and Murphy. WILLIAM WALLS, our Vice President, Finance, has been with us since our inception. Before joining us, Mr. Walls was a principal in various venture capital activities and has been a Director or Chief Financial Officer of several Canadian and U.S. publicly listed companies, including Polymer Solutions, Inc. a producer of industrial paints, coatings and adhesives, and International Absorbents Inc., a manufacturer of industrial and consumer absorbent products. VANESSA WITTMAN recently joined us as Vice President, Corporate Development. Prior to that, Ms. Wittman was a Senior Director of Corporate Development for Microsoft Corporation, managing its international partnership, investment and acquisition efforts. Prior to joining Microsoft, Ms. Wittman was the Chief Financial Officer of Metricom, Inc. She has also served as a partner at Sterling Payot Company, a San Francisco venture capital firm, and was an Associate in Morgan Stanley's Global Media Corporate Finance Group. DAVID LEDE has served as Chairman of our board since our inception, was Chief Executive Officer from our inception until January 2000, has served as Chairman and Chief Executive Officer of Ledcor Inc. since 1983. Mr. Lede has been with Ledcor for 32 years, and, before becoming 65 Chairman and Chief Executive Officer of Ledcor Inc., held various management positions such as President, Vice President, Operations Manager and Superintendent. CLIFFORD LEDE has served as Vice Chairman since our inception, has been Vice Chairman and Chief Operating Officer of Ledcor Inc. since 1983 and has served as President of Ledcor Industries since 1983 and Chief Executive Officer since August 1999. Mr. Lede has been with Ledcor for 25 years. Clifford Lede and David Lede are brothers. GLENN CREAMER joined us as a Director in September 1999. Mr. Creamer is a Managing Director of Providence Equity Partners Inc. where he has served in that capacity since its inception in 1996. Mr. Creamer is also a General Partner of Providence Ventures L.P. Mr. Creamer is a Director of Carrier1 International, Celpage, Inc., Epoch Networks Inc., Hubco S.A. and Wireless One Network L.P. CLAUDE MONGEAU joined us as a Director in January 2000. Mr. Mongeau was recently named Senior Vice-President and Chief Financial Officer of CN. Prior to that appointment and since 1995, Mr. Mongeau was Vice-President, Strategic and Financial Planning of CN. ANDREW RUSH joined us as a Director in September 1999. Mr. Rush has been a Managing Director of DLJ Merchant Banking Partners, L.P. since January 1997. From 1992 to 1997 Mr. Rush was an officer of DLJ Merchant Banking Partners, L.P. and its predecessors. Mr. Rush currently serves as a member of the advisory board of Triax Midwest Associates, L.P. and as a member of the board of directors of Societe d'Ethanol de Synthese, Nextel Partners and American Tissue Inc. GENE SYKES joined us as a Director in March 2000. Mr. Sykes has been a Managing Director of Goldman, Sachs & Co. since 1992. Mr. Sykes has been Co-head of the High Technology Group at Goldman, Sachs & Co. since 1997 and is currently Co-head of Goldman, Sachs & Co.'s, worldwide technology investing activities. Mr. Sykes currently serves as a Director of Priceline WebHouse Club. JAMES VOELKER joined us as a Director in July 1999. Mr. Voelker's career in telecommunications spans over 20 years and includes experience in many different segments of the industry in a variety of executive positions. Before joining us, Mr. Voelker was most recently the President and a Director of NEXTLINK Communications Inc. He has also been Vice Chairman and Chief Executive Officer of US Signal Inc., a Director of Phoenix Network Inc. and Vice Chairman of ALTS, the industry Association of Local Telephone Service providers. Mr. Voelker currently serves as a Director of Comdisco, Inc. and Epoch Networks, Inc. STRATEGIC ADVISORY COMMITTEE Our Strategic Advisory Committee will advise us on network technology directions, help us develop products and services to meet the requirements of our customers and capitalize on the convergence of telecommunications and high-bandwidth applications and services. The following persons have agreed to join our Strategic Advisory Committee: Michael Dell Terence Matthews Rupert Murdoch Dr. Nathan Myhrvold Anthony Naughtin Denis O'Brien, Jr.
MICHAEL DELL has been Chairman and Chief Executive Officer of Dell Computer Corporation since May 1984. 66 TERENCE MATTHEWS founded Newbridge Networks Corporation in June 1986 and has served as Chairman and Chief Executive Officer since that time. RUPERT MURDOCH is the Chairman and Chief Executive Officer of News Corporation. DR. NATHAN MYHRVOLD is the Chief Technology Officer of Microsoft Corporation. ANTHONY NAUGHTIN founded InterNAP Network Services Corporation and has served as InterNAP's Chief Executive Officer since May 1996. DENIS O'BRIEN, JR., has been Chairman of Esat Telecom Group plc since its formation in 1996. ARRANGEMENTS WITH RESPECT TO DIRECTORS' NOMINATIONS Under the terms of a shareholders' agreement among shareholders holding more than 99% of our shares immediately prior to the completion of the offering, we agreed to set the maximum number of our board of directors at seventeen members and to nominate as directors: - one designee from each of our private equity investors, namely affiliates of Tyco International Ltd., Providence Equity Partners Inc., DLJ Merchant Banking Partners II L.P. ("DLJ") and GS Capital Partners III, L.P. ("GS Capital"), so long as, in each case, each investor continues to hold a prescribed number of our Subordinate Voting Shares; - Mr. Maffei together with two of his additional designees so long as he remains our Chief Executive Officer; and - the balance from designees of a subsidiary of Ledcor Inc. Under the terms of the shareholders' agreement, each shareholder other than DLJ and GS Capital also agreed to vote for the foregoing nominees other than the respective designees of DLJ and GS Capital in connection with their election to our board of directors. EMPLOYMENT AGREEMENT Mr. Maffei became our Chief Executive Officer effective January 18, 2000 pursuant to an employment agreement entered into on December 22, 1999. The employment agreement has a term ending on June 30, 2003, subject to annual extensions thereafter. Mr. Maffei will receive an initial salary of $150,000 per year and is entitled to participate in any executive bonus plan that we may adopt. If Mr. Maffei dies or becomes disabled during his employment, he will be entitled to receive a lump sum payment of $10 million. If Mr. Maffei's employment terminates otherwise than for cause, he will be entitled to receive a payment equal to three times his then base salary. BOARD COMMITTEES Upon the completion of the offering, our board of directors will have two standing committees: an Audit Committee and a Compensation Committee. All of the members of our Audit Committee will be persons who are not our officers or employees or officers or employees of any of our affiliates. The Audit Committee will select and engage, on our behalf, the independent public accountants to audit our annual financial statements, and will review and approve the planned scope of the annual audit. The Compensation Committee will establish remuneration levels for our senior officers and will perform such functions as provided under our stock option plan. COMPENSATION OF DIRECTORS The independent directors, other than those designated by our private equity investors, will each receive a grant of options to purchase 25,000 Subordinate Voting Shares at fair market value at the time of their appointment and an annual grant of an additional 10,000 options each year thereafter, all of which options will vest over two years. 67 EXECUTIVE COMPENSATION The following table sets forth the compensation that was paid by us during the fiscal year ending on December 31, 1999 and 1998, respectively, to our then Chief Executive Officer and the four individuals who were the most highly compensated executive officers during fiscal year 1999 (the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------ ------------------------------------------------ OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING COMPEN- STOCK OPTIONS LTIP ALL OTHER NAME AND PRINCIPAL SALARY BONUS SATION AWARDS GRANTED PAYOUTS COMPEN- POSITION YEAR(1) ($) ($) ($) ($) (#) ($) SATION - ------------------ -------- --------- --------- ------------ ---------- ------------ -------- --------- David Lede(2)........ 1999 -- -- -- -- 1,600,000 -- -- Chief Executive 1998 -- -- -- -- -- -- -- Officer Ron Stevenson........ 1999 157,312 350,000 7,619 -- 1,600,000 -- -- President 1998 78,045 59,417 13,722 -- -- -- -- Larry Olsen(3)....... 1999 136,054 350,000 -- -- 1,600,000 -- -- -- Vice Chairman & 1998 78,045 59,417 4,685 -- -- -- Chief Financial Officer Stephen Stow(4)...... 1999 136,054 235,000 -- -- 1,600,000 -- -- Executive Vice- 1998 78,045 59,417 2,677 -- -- -- -- President Lionel Desmarais..... 1999 133,307 235,000 4,422 -- 1,600,000 -- -- Senior Vice- 1998 70,281 48,193 8,668 -- -- -- -- President Directors and 1999 1,108,086 1,535,510 36,970 -- 11,520,000 -- -- Officers (as a 1998 413,260 253,655 48,728 -- -- -- -- Group).............
- -------------------------- (1) We commenced operations on May 31, 1998. (2) We paid Ledcor Cdn.$200,000 per month under the management services agreement which commenced on May 31, 1998. David Lede and Clifford Lede, our Vice-Chairman, do not receive remuneration from us for their services. (3) The amounts indicated represent fees paid to a company wholly owned and controlled by Mr. Olsen. (4) The amounts indicated represent fees paid to a company wholly owned and controlled by Mr. Stow and his spouse. 68 The following table sets forth particular information concerning options with respect to shares granted to the Named Executive Officers during the fiscal year ended December 31, 1999:
TITLE AND PERCENT OF NUMBER OF TOTAL SECURITIES OPTIONS/SAR'S UNEXERCISED UNDERLYING GRANTED TO OPTIONS AT OPTIONS/SAR'S EMPLOYEES IN EXERCISE OR DECEMBER 31, 1999 GRANTED FISCAL YEAR 1999 BASE PRICE (#) EXERCISABLE/ EXPIRATION NAME (#) (%) ($/SHARE) UNEXERCISABLE(1) DATE - ---- ------------- ---------------- ----------- ----------------- --------------- David Lede........... 1,600,000/nil 3.7 0.625 400,000/1,200,000 January 5, 2009 Ron Stevenson........ 1,600,000/nil 3.7 0.625 400,000/1,200,000 January 5, 2009 Stephen Stow......... 1,600,000/nil 3.7 0.625 400,000/1,200,000 January 5, 2009 Larry Olsen.......... 1,600,000/nil 3.7 0.625 400,000/1,200,000 January 5, 2009 Lionel Desmarais..... 1,600,000/nil 3.7 0.625 400,000/1,200,000 January 5, 2009
- -------------------------- (1) The options are exercisable in four equal annual installments commencing on June 30, 1999. STOCK OPTION PLAN Our 1998 Long Term Incentive and Share Award Plan (as amended) permits the grant of non-qualified stock options, incentive stock options, share appreciation rights, restricted shares, restricted share units, performance shares, performance units, dividend equivalents and other share-based awards to employees and directors of ours or of our affiliates and subsidiaries. Any other person who provides ongoing services to us or our affiliates is also eligible for an award under the plan. A maximum of 71,133,008 Subordinate Voting Shares may be subject to awards by us under the plan, and the maximum number of Subordinate Voting Shares for which options and share appreciation rights may be granted by us during a calendar year to any eligible person under the plan is 8,000,000. In addition, the aggregate number of Subordinate Voting Shares reserved for issuance to any one person must not exceed 5% of our issued and outstanding Subordinate Voting Shares. The number of Subordinate Voting Shares issued or reserved pursuant to the plan (or pursuant to outstanding awards) is subject to adjustment on account of share splits, share exchanges, mergers and other changes in the Subordinate Voting Shares, to prevent dilution or enlargement of a participant's rights under the plan. If any grants under the plan are cancelled, surrendered or otherwise terminated without a distribution of Subordinate Voting Shares, then those shares will again be available for further awards by us under the plan. ADMINISTRATION The plan is administered by the compensation committee of our board of directors, which may delegate its duties and powers to officers or managers of ours or of our affiliates and subsidiaries. Our compensation committee has the sole discretion to determine the eligible persons to whom awards may be granted under the plan, the type and number of awards to be granted, and to what extent an award may be settled in cash, Subordinate Voting Shares, property or other awards. OPTIONS The plan permits our compensation committee to grant rights to purchase Subordinate Voting Shares. The exercise price for each option granted under the plan is set by the compensation committee. Unless otherwise determined by our compensation committee, the term of each option will be ten years from the date of the grant and the option will become exercisable in four equal annual installments beginning on the first anniversary of the date of the grant. Incentive stock options may be granted to our employees and those of our subsidiaries, while non-qualified stock options may be issued to all eligible participants. Any incentive stock options 69 that are awarded by our compensation committees will comply in all respects with Section 422 of the U.S. Internal Revenue Code. SHARE APPRECIATION RIGHTS Our compensation committees may grant share appreciation rights independent of or in connection with an option. Each share appreciation right will entitle a participant upon exercise to an amount equal to the excess of (1) the fair market value on the exercise date of one Subordinate Voting Share over (2) the exercise price of the share appreciation right as determined by our compensation committees as of the date of grant of the share appreciation right. Payment will be made in Subordinate Voting Shares, cash or property, as specified in the award agreement or as determined by our compensation committee. RESTRICTED SHARES Restricted shares awarded by our compensation committees under the plan will be subject to restrictions on transferability and other restrictions. The restrictions will lapse as our compensation committee determines. If the employment of a holder of restricted shares is terminated during a restriction period, any Subordinate Voting Shares then subject to restrictions, and any accrued and unpaid dividends, or dividend equivalents, will be forfeited unless our compensation committee waives the forfeiture. Except to the extent restricted by the award agreement, holders of restricted shares will have the right to vote the restricted shares. RESTRICTED SHARES UNITS Our compensation committee may grant a right under the plan to receive Subordinate Voting Shares or cash at the end of a specified period. Our compensation committee may impose additional restrictions on the restricted share units. If employment of a participant is terminated, or upon failure to satisfy other conditions precedent to the delivery of cash or Subordinate Voting Shares under the grant, all restricted share units still subject to a restriction will be forfeited unless our compensation committee waives the forfeiture. PERFORMANCE SHARES AND PERFORMANCE UNITS The plan permits our compensation committee to make awards based on the attainment of performance objectives set by the committees for a performance period of one or more years. At the beginning of a performance period, our compensation committee will determine the range of Subordinate Voting Shares, in the case of performance shares, and the range of dollar values, in the case of performance units, which will be paid if the relevant measure of performance is met. DIVIDEND EQUIVALENTS Our compensation committee may grant dividend equivalents under the plan which give the participant the right to receive cash, Subordinate Voting Shares or other property equal in value to dividends paid with respect to a specified number of Subordinate Voting Shares. Dividend equivalents may be awarded by our compensation committee alone or in connection with another type of award and may be paid concurrently or on a deferred basis. OTHER SHARE BASED AWARDS The plan permits our compensation committee, subject to limitations under applicable law, to grant to eligible persons awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Subordinate Voting Shares as deemed by our compensation committee to be consistent with the purposes of the plan. 70 TRANSFERABILITY Unless otherwise determined by our compensation committee, subject to receipt of necessary regulatory approvals, awards granted under the plan are not transferable other than by will or by the laws of descent and distribution. CHANGE IN CONTROL In the event of a change of control (as defined in the plan), all outstanding awards then held by participants which have restrictions or limitations shall become fully exercisable at the time of the change of control, and all performance criteria and other conditions to the payment of awards will be deemed to be achieved and will be waived by us at the time of the change of control. AMENDMENT AND TERMINATION Upon receipt of necessary regulatory approvals, our board of directors may amend, alter, suspend, discontinue or terminate the plan in any respect, at any time, without the consent of holders of awards or our shareholders (except to the extent shareholder approval is required by Section 422 of the U.S. Internal Revenue Code), PROVIDED, HOWEVER, no amendment, alteration, suspension, discontinuation, or termination of the plan may materially and adversely affect the rights of a holder of an award and without his or her consent. OUTSTANDING OPTIONS TO PURCHASE SECURITIES The following describes, as of April 14, 2000, our outstanding options granted to our executive officers, directors, employees and others:
NUMBER OF EXERCISE PRICE SUBORDINATE PER SUBORDINATE VOTING SHARES VOTING SUBJECT TO OPTION SHARE(1) EXPIRY DATE ----------------- --------------- -------------------- Executive Officers (10 persons in total)................................. 11,360,000 $ 0.625 January 5, 2009 to April 1, 2009 160,000 $ 1.25 June 17, 2009 336,000 $ 5.00 January 24, 2010 336,000 initial public April 30, 2010 offering price Directors who are not also executive officers (Six persons in total)........ 2,290,000 $ 0.625 January 5, 2009 to June 16, 2009 Employees (611 persons in total)......... 16,812,880 $ 0.625 January 5, 2009 to June 16, 2009 8,150,400 $ 1.25 June 17, 2009 to November 30, 2009 5,864,500 $ 5.00 January 24, 2010 to March 17, 2010 3,576,300 initial public March 18, 2010 to offering price April 30, 2010 Employees of affiliates other than subsidiaries (61 persons in total)..... 1,120,000 $ 0.625 January 5, 2009 2,065,600 $ 1.25 June 17, 2009 290,000 $ 5.00 January 24, 2009 140,000 initial public April 30, 2010 offering price
- ------------------------ (1) The market value is not determinable as the Subordinate Voting Shares were not publicly traded at the date of grant. We believe the exercise price represents the fair value of the Subordinate Voting Shares at the date of grant. 71 PRINCIPAL AND SELLING SHAREHOLDER PRINCIPAL SHAREHOLDERS The following table describes the beneficial ownership of our Class C Multiple Voting Shares and Class B Subordinate Voting Shares as of April 14, 2000 by (i) each person or company known by us to own more than 10% of our Class C Multiple Voting Shares or Class B Subordinate Voting Shares, and (ii) all of our directors and officers as a group. As of April 14, 2000, there were 81,840,000 Class C Multiple Voting Shares and 57,629,600 Class B Subordinate Voting Shares outstanding. To calculate a shareholder's percentage of beneficial ownership, we must include in the numerator and denominator those shares underlying options beneficially owned by that shareholder. Options held by other shareholders, however, are disregarded in this calculation. Therefore, in both this table and the following table, the denominator used in calculating beneficial ownership among our shareholders may differ.
CLASS C MULTIPLE CLASS B SUBORDINATE VOTING SHARES(1) VOTING SHARES(1) --------------------------- --------------------------- NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE SHARES OF CLASS SHARES OF CLASS NAME OF BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIAL OWNER OWNED OWNED OWNED OWNED - --------------------------------------- ------------ ------------ ------------ ------------ Ten percent holders: Worldwide Fiber Holdings Ltd. (2).............................. 72,000,000 88% 54,303,200 94% All directors and officers as a group................................ 9,840,000 12% 3,326,400 6%
- ------------------------ (1) Concurrent with the closing of this offering, we will reorganize our share capital. Pursuant to this reorganization, (i) the Class C Multiple Voting Shares will be redesignated as Multiple Voting Shares and (ii) the Class B Subordinate Voting Shares will be converted into Class A Non-Voting Shares, which will be redesignated as Subordinate Voting Shares. See "Description of Capital Stock and Share Capital Reorganization." (2) Upon the completion of this offering and the transactions contemplated herein, Worldwide Fiber Holdings Ltd. and Ledcor Limited Partnership will beneficially own in the aggregate 72,000,000 Multiple Voting Shares and 308,988,774 Subordinate Voting Shares, or 88% and 42% of such class of shares, respectively. Worldwide Fiber Holdings Ltd. is an indirect, wholly owned subsidiary of Ledcor Inc. David and Clifford Lede own, in the aggregate, more than 50% of the outstanding shares of Ledcor Inc. The shares of Ledcor Inc. are not publicly traded in the United States or Canada. Larry Olsen, our Vice Chairman and Chief Financial Officer, and Madison Square Inc. (a corporation owned by the Stephen Stow (1995) Family Trust, of which Stephen Stow, our Managing Director, Asia, is one of the beneficiaries), ("Madison Square"), each presently has the irrevocable right to buy ("IRTB") from Worldwide Fiber Holdings Ltd. and Ledcor Limited Partnership 5% of our shares owned by such entities. The numbers in the tables above and below do not reflect this right. The IRTBs in respect of our shares are successors to IRTBs in respect of the assets of the telecommunications division of Ledcor Industries. The IRTBs were granted in respect of consultancy services provided to Ledcor Industries by Mr. Olsen and Mr. Stow through their respective consulting companies SELLING SHAREHOLDER The following table describes the ownership of our Class A Non-Voting Shares by our selling shareholder as of April 14, 2000 and as adjusted to reflect the sale of Class A Non-Voting Shares 72 by such selling shareholder in the offering. As of April 14, 2000 there were 395,770,480 Class A Non-Voting Shares outstanding and 77,781,511 Class A Non-Voting Shares issuable upon conversion of all outstanding Preferred Shares.
PERCENTAGE NUMBER OF BENEFICIALLY NUMBER OF SHARES OWNED NUMBER OF SHARES PERCENTAGE NAME OF BENEFICIALLY PRIOR SHARES BENEFICIALLY BENEFICIALLY SELLING OWNED PRIOR TO TO THE OFFERED IN OWNED AFTER THE OWNED AFTER THE SHAREHOLDER THE OFFERING(1) OFFERING THIS OFFERING OFFERING(2) OFFERING - --------------------- --------------- ------------ ------------- ---------------- ---------------- Ledcor Limited Partnership(3)..... 301,266,400 39% 1,650,000 264,136,637 32%
- ------------------------ (1) Concurrent with the closing of this offering, we will reorganize our share capital. Pursuant to this reorganization, the Class A Non-Voting Shares will be redesignated as Subordinate Voting Shares. See "Description of Capital Stock and Share Capital Reorganization." (2) Includes sale of approximately 35 million Subordinate Voting Shares issued in private placements to be consummated concurrently with the offering. (3) The general partner of Ledcor Limited Partnership is Ledcor Industries Limited, a wholly owned subsidiary of Ledcor. 73 RELATIONSHIPS AND RELATED PARTY TRANSACTIONS TRANSACTIONS WITH LEDCOR DESCRIPTION OF REORGANIZATION AND RELATED AGREEMENTS Effective May 31, 1998, we entered into a series of agreements with Ledcor to purchase the equipment, fiber optic strands and some other assets related to the business of Ledcor Industries' telecommunications division. As part of the reorganization, we also entered into the construction services agreements to complete a construction project for Ledcor. Effective August 31, 1998, Ledcor transferred to us their 50% interest in 360-USA and, in March 2000, 360-USA became our wholly owned subsidiary. The material agreements we entered into with Ledcor in connection with the reorganization are as follows: RAILPLOW. Effective May 31, 1998, the patent for the railplow which we use in connection with the construction of some portions of our network on railroad ROW were transferred to a subsidiary of Ledcor that we refer to as "Patent Co.," and we were concurrently granted a non-exclusive license for its use at our request. Effective December 1, 1998, one of our subsidiaries acquired 50% of the shares of Patent Co. Ledcor has agreed to cause Patent Co. to grant to us a royalty-free worldwide exclusive license for the use and other exploitation of the plow technology. The license will cease to be exclusive six months after a change of control of us. The shareholders agreement relating to Patent Co. provides that Ledcor and our subsidiary have the option to acquire the other party's shares of Patent Co. if the other party becomes insolvent, bankrupt or subject to a change of control. MANAGEMENT SERVICES AGREEMENT. We currently receive immaterial amounts of management staff, administrative and other support pursuant to a management services agreement with Ledcor. Under this agreement, prior to January 1, 2000 we reimbursed Ledcor for some of the related costs and paid a monthly fee of Cdn.$200,000. Beginning January 1, 2000, the Cdn. $200,000 monthly obligation was eliminated. This agreement is terminable at any time by either party. EMPLOYEE SERVICES AGREEMENTS. We were previously a party to two employee services agreements with Ledcor. Under these agreements, Ledcor provided us with personnel for the design, engineering, construction and installation of the network, and we reimbursed Ledcor for the direct costs of these personnel. These agreements have terminated. CONSTRUCTION SERVICES AGREEMENTS. We were previously party to construction services agreements with Ledcor under which we agreed to provide fiber optic network construction services to Ledcor and fulfill Ledcor's fiber optic network construction commitments for some builds. We also agreed to procure the requisite insurance necessary for these builds and perform all work in strict compliance with the appropriate contract and applicable laws. In addition, we agreed to indemnify Ledcor for particular losses, liabilities, damages and claims that may arise under the agreements. In return, Ledcor paid us an amount equal to costs incurred plus 15% of our total costs. Either party may terminate these agreements at any time. Our obligations under these agreements were complete by the end of January 1999. NON-COMPETE AGREEMENT. Ledcor has agreed not to compete with us in the business of developing or constructing fiber optic communications infrastructure for a period ending on the earlier of May 31, 2008 and six months after a change of control of us. SALE AND TRANSFER AGREEMENTS. We entered into a series of agreements that transferred equipment and other assets of Ledcor Industries' telecommunications division including a minimum of 12 strands of dark fiber along Ledcor Industries' project across Canada and the northeast United States. 74 PURCHASE OF SHARES OF 360-USA Effective August 31, 1998, each of Ledcor and Mi-Tech transferred their 50% interest in 360-NI to 360-USA, a newly incorporated Nevada corporation. In exchange, each of Ledcor and Mi-Tech acquired 50% of the common shares of 360-USA. At the same time, Ledcor exchanged with 360-USA a promissory note in the amount of $3,915,000 payable by 360-NI to Ledcor for a promissory note of the same face value payable by 360-USA to Ledcor. In addition, Mi-Tech exchanged with 360-USA a promissory note in the amount of $7,231,230 payable by 360-NI to Mi-Tech for a promissory note of the same face value payable by 360-USA to Mi-Tech. In a subsequent series of transfers, also effective August 31, 1998, Ledcor transferred to us their shares of 360-USA and the $3,915,000 promissory note payable by 360-USA to Ledcor. In exchange, we issued additional shares and a promissory note of the same face value to Ledcor. In March 2000, we agreed with Mi-Tech to acquire its remaining 25% interest in 360-USA for 24,000,000 Subordinate Voting Shares. ACQUISITION, CONSTRUCTION AND CONSTRUCTION MANAGEMENT OF FIBER OPTIC NETWORK ASSETS On September 27, 1999, we concluded a transaction with Ledcor whereby we acquired particular fiber optic network assets in consideration of the issue of 72,000,000 of our Class C Multiple Voting Shares. In addition, we assumed defined rights and obligations under build agreements with a third party, including obligations relating to the completion of those builds and particular support structure, maintenance, license and access and underlying rights obligations. On June 25, 1999, we concluded a transaction with Ledcor whereby Ledcor would complete an approximate 156-mile portion of the fiber optic build between Portland and Sacramento for approximately $23.7 million. Effective as of May 1, 1999, we concluded a transaction with Ledcor whereby personnel of Ledcor who were involved in the designing and planning of the 360ATLANTIC cable stations will oversee management and supervision of construction of these facilities for a fee of approximately $1.7 million. On August 4, 1999, we reached an agreement with Ledcor whereby Ledcor would construct communications shelters on various segments of our network builds for approximately $4.3 million. CANADIAN TELECOMMUNICATIONS ARRANGEMENT On April 17, 2000 we concluded a series of transactions to transfer our Canadian telecommunication transmission facilities and certain related facilities to Urbanlink. The assets were transferred at fair market value which was approximately $16 million. The consideration for the transfer was the non-voting participating shares described below. For accounting purposes the transfers were undertaken at carrying value which was approximately $6.4 million. The arrangement allows 360NETWORKS to issue voting, as opposed to non-voting, shares in connection with the offering and allows us to more easily expand our operations globally through acquisitions. A subsidiary of Ledcor owns 66 2/3% of the voting non-participating shares and 49% of the non-voting participating shares of the holding company which wholly owns Urbanlink, and we own 33 1/3% of the voting non-participating shares and 51% of the non-voting participating shares of that company. The share ownership of Ledcor, including the controlling interest owned by David and Clifford Lede, directors of 360NETWORKS, is described under "Principal and Selling Shareholder." To acquire its non-voting participating shares, a subsidiary of Ledcor contributed Subordinate Voting Shares of 360NETWORKS. Concurrent with the closing of the arrangement we entered into certain non-exclusive resale arrangements with Urbanlink, under which we will receive bandwidth capacity for resale purposes, a NOC Operating Agreement pursuant to which Urbanlink will operate the Vancouver NOC and a Shareholders Agreement with the subsidiary of Ledcor that requires us to purchase the shares of the holding company in the event of a change in the TELECOMMUNICATIONS ACT (Canada) 75 that eliminates the requirement that Canadian telecommunications carriers be owned and controlled by Canadians. Although the value of future transactions under these agreements cannot be ascertained now, the agreements have been negotiated to reflect fair market terms. We will contribute certain telecommunications assets under construction to Urbanlink in the future and a subsidiary of Ledcor will contribute additional Subordinate Voting Shares at values to be determined in the future. LEASES Ledcor leases our facilities in Toronto to us for approximately $881,000 per year under agreements that expire in 2009. BACKGROUND OF LEDCOR Ledcor, established in 1947, is among the largest diversified construction companies in Canada and has substantial experience as a construction contractor in the United States. Ledcor's core business activities, in addition to the activities of the telecommunications division, are pipeline and civil construction and diversified contracting, including major commercial and industrial buildings and industrial and mining projects. Ledcor reported revenues of more than Cdn.$900 million for the fiscal year ended August 31, 1999 from all activities, with significant contribution from the telecommunications division. Ledcor began designing, engineering and constructing buried long distance power generation and fiber optic telecommunications systems more than ten years ago and has installed fiber optic cable networks on a contract basis for numerous telecommunications companies, including Bell Canada, MTS Netcom Inc., AT&T, AT&T Canada, Alaska Fiber Star, FONOROLA Inc., Mi-Link Communications, LLC, Champlain Telephone Company and World Net Communications Inc. In 1996, Ledcor installed its first fiber optic cable as a developer between the cities of Edmonton and Calgary, Alberta. Ledcor sold fiber strands of this cable, on a "condominium" basis prior to construction, to FONOROLA, Sprint Canada and AT&T Canada. After the successful completion of this project, Ledcor began, as a developer, the first trans-Canadian fiber optic cable network. The foundation of Ledcor's success and growth over the last 52 years has been built on the strength of its dedicated people, ability to control costs and its conservative but entrepreneurial approach to business. Ledcor believes it has maintained an excellent reputation for the quality of its products and services in its markets and enjoys substantial repeat business from major customers. TRANSACTIONS WITH CANADIAN NATIONAL In March 2000, we acquired the minority interest of each of 360-CN and IC LLC, as a result of which we issued to CN Subordinate Voting Shares, subject to adjustment based on the number of Subordinate Voting Shares issued to certain other parties and based on the total value of Subordinate Voting Shares issued in this transaction (based on the initial public offering price) being not less than $100 million and not more than $160 million. Based upon the assumed initial public offering price of $13 per share the number of Subordinate Voting Shares issued to CN will equal 12,307,692. In addition, Claude Mongeau, a Senior Vice-President and the Chief Financial Officer of CN, recently became one of our directors. PURCHASE OF SHARES BY CHIEF EXECUTIVE OFFICER On December 22, 1999, Gregory Maffei purchased 52,160,000 of our Class A Non-Voting Shares and 9,840,000 of our Class C Multiple Voting Shares for $77.5 million, representing approximately 8% of our total equity diluted on a fully diluted basis. To facilitate the sale, we advanced an amount equal to the purchase price to Mr. Maffei under a limited recourse note 76 maturing on December 22, 2005. The note will mature, in whole or in part, as a result of the sale of our shares by Mr. Maffei or Mr. Maffei's ceasing to be employed by us. We have the right to repurchase certain of Mr. Maffei's shares at the original purchase price plus the pro rata amount of interest accrued on the note in the event Mr. Maffei's employment with us is terminated before June 30, 2003. In addition, Mr. Maffei has the right to require the repurchase of some or all of his shares by us or, at our option, Worldwide Fiber Holdings Ltd. IRREVOCABLE RIGHTS TO BUY Larry Olsen, our Vice Chairman and Chief Financial Officer, and Madison Square, each presently has the irrevocable right to acquire from Worldwide Fiber Holdings Ltd. and Ledcor Limited Partnership up to 5% of our shares owned by each and to participate pro rata in sales of shares made by those entities. Mr. Olsen and Madison Square have exercised their rights to participate in certain private equity sales to be made by Ledcor concurrently with the consummation of this offering. 77 DESCRIPTION OF CAPITAL STOCK AND SHARE CAPITAL REORGANIZATION Concurrent with the closing of the offering, we will reorganize our share capital so that it will consist of the following three classes of shares: - Subordinate Voting Shares, - Multiple Voting Shares, and - Preferred Shares, issuable in series, each with the rights and attributes described below: SUBORDINATE VOTING SHARES Our holders of Subordinate Voting Shares will be entitled to one vote per share at any meeting of our shareholders except meetings at which only shareholders of a specified class of shares (other than the Subordinate Voting Shares) are entitled to vote. Subject to the preference of any outstanding Preferred Shares, the holders of Subordinate Voting Shares will be entitled to participate equally with holders of Multiple Voting Shares in any dividends our board of directors declares out of funds legally available for the payment of dividends. If we are liquidated, dissolved or wound up, holders of Subordinate Voting Shares are entitled to share ratably with holders of Multiple Voting Shares in all assets remaining after payment of our liabilities and any liquidation preferences of any outstanding Preferred Shares. The Subordinate Voting Shares may not be subdivided, consolidated, reclassified or otherwise changed unless, at the same time, the Multiple Voting Shares are subdivided, consolidated, reclassified or otherwise changed equally, share-for-share, in the same proportion and in the same manner. MULTIPLE VOTING SHARES Holders of Multiple Voting Shares will be entitled to ten votes per share at any meeting of our shareholders except meetings at which only shareholders of a specified class of shares (other than the Multiple Voting Shares) are entitled to vote. Subject to the preference of any outstanding Preferred Shares, the holders of Multiple Voting Shares are entitled to participate equally with holders of Subordinate Voting Shares in any dividends our board of directors declares out of funds legally available for the payment of dividends. If we are liquidated, dissolved or wound up, holders of Multiple Voting Shares are entitled to share rateably with holders of Subordinate Voting Shares in all assets remaining after payment of our liabilities and any liquidation preferences of any outstanding Preferred Shares. Each Multiple Voting Shares is convertible at any time, at the option of the holder, into one Subordinate Voting Share. The Multiple Voting Shares may not be subdivided, consolidated, reclassified or otherwise changed unless, at the same time, the Subordinate Voting Shares are subdivided, consolidated, reclassified or otherwise changed equally, share-for-share, in the same proportion and in the same manner. NEW PREFERRED SHARES ISSUABLE IN SERIES On the closing of the offering, our board of directors will be authorized, without further action by the shareholders, to issue Preferred Shares in one or more series and to set the number of shares constituting any such series and the designation, rights, privileges, restrictions and conditions attaching to the shares of such series including dividend rights and rates, redemption provisions (including sinking fund provisions), rights of conversion or exchange, liquidation 78 preferences and voting rights, if any. The Preferred Shares as a class are entitled to priority over the Subordinate Voting Shares and Multiple Voting Shares if our Board of Directors decides to pay any dividends, and, if we are dissolved, liquidated or wound up, the Preferred Shares are entitled as a class to priority in respect of return of capital. Except as required by law or the provisions of any designated series of Preferred Shares, the holders of Preferred Shares as a class are not entitled to receive notice of, attend or vote at any meeting of our shareholders. TAKE-OVER BID PROTECTION Under applicable Canadian law, an offer to purchase Multiple Voting Shares would not necessarily require that an offer be made to purchase Subordinate Voting Shares. As a result, and to comply with policies adopted by Canadian securities regulatory authorities and The Toronto Stock Exchange, our holders of Multiple Voting Shares will enter into a transfer restriction agreement (the "Transfer Restriction Agreement") with respect to not less than 80% of the Multiple Voting Shares, effective upon the closing of this offering, with Montreal Trust Company of Canada, as trustee, and us in order to provide the holders of Subordinate Voting Shares with particular rights in the event of a "take-over bid" for Multiple Voting Shares under Canadian law. A "take-over bid", generally defined, is an offer to acquire outstanding equity or voting shares of a class, where, upon completion of the offer, the offeror would own more than 20% of the shares of the class. Under the Transfer Restriction Agreement, the parties will agree not to sell the Multiple Voting Shares owned by them, and which are subject to the Transfer Restriction Agreement, directly or indirectly, pursuant to a take-over bid, as defined by applicable securities legislation, under circumstances in which securities legislation would have required the same offer or follow up offer to be made to all holders of Subordinate Voting Shares if the sale had been of Subordinate Voting Shares rather than Multiple Voting Shares. One circumstance where securities legislation would not require the same offer to be made to all holders of Subordinate Voting Shares is if: (i) the purchase is made from not more than five persons; (ii) the bid is not made generally to holders of the Multiple Voting Shares; and (iii) the price does not exceed 115% of the market price of the Subordinate Voting Shares. The prohibition on sales of Multiple Voting Shares will not apply if an offer identical in all material respects is made concurrently to purchase Subordinate Voting Shares, which identical offer has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Multiple Voting Shares. Under the Transfer Restriction Agreement, the parties will also agree not to transfer any Multiple Voting Shares which are subject to the Transfer Restriction Agreement (other than a transfer to a pledgee, as security or to another party to the Transfer Restriction Agreement) unless the purchaser is or becomes a party to the Transfer Restriction Agreement. SHARE CAPITAL REORGANIZATION Our Memorandum of Association currently authorizes us to issue 100,000,000,000 Class A Non-Voting Shares, 100,000,000,000 Class B Subordinate Voting Shares, 100,000,000,000 Class C Multiple Voting Shares and 200,045,000,000 Preferred Shares divided into 100,000,000,000 Series A Non-Voting Preferred Shares, 100,000,000,000 Series B Subordinate Voting Preferred Shares and 45,000,000 Class C Redeemable Preferred Shares. Concurrent with the closing of the offering, the following share conversions and steps to reorganize our capital will occur resulting in the share capital structure described above: - the holders of our existing Class B Subordinate Voting Shares will cause the company to convert their shares into Class A Non-Voting Shares and all authorized but unissued Class B Subordinate Voting Shares will be cancelled, 79 - the Series A Non-Voting Preferred Shares will be converted into Class A Non-Voting Shares and all of the authorized but unissued Series A Non-Voting Preferred Shares, Series B Subordinate Voting Preferred Shares and Series C Redeemable Preferred Shares will be cancelled, - our existing Class A Non-Voting Shares will be redesignated as Subordinate Voting Shares and their share conditions shall be amended to provide the holders with one vote per share and otherwise attach those rights and attributes described above, - our existing Class C Multiple Voting Shares will be redesignated as Multiple Voting Shares and their share conditions will be amended to provide the holders with ten votes per share, and - a class consisting of 500,000,000,000 Preferred Shares, issuable in series, will be authorized and created. STRATEGIC INVESTORS Affiliates of Comcast Corporation, MSD Capital L.P., the private investment fund for Michael Dell, Liberty Media Corporation, News Corporation, Shaw Communications Inc., Oak Investment Partners, Denis O'Brien, Jr., Kleiner Perkins Caufield & Byers, Dr. Nathan Myhrvold, GT Group Telecom, Inc., InterNAP Network Services Corporation, divine interVentures, inc., RLM Holdings LLC and PSINet Inc. and certain shareholders of GlobeNet, including Boston Ventures Limited Partnership V, Kelso Investment Associates VI and Providence Equity Partners III, have purchased or agreed to purchase from Ledcor in private transactions an aggregate of approximately 58.3 million Subordinate Voting Shares for total cash consideration of approximately $608.5 million. The average price per share paid or agreed to be paid by these strategic and private investors is less than the initial public offering price. The purchasers of these Subordinate Voting Shares have agreed that they will not transfer their shares for 12 months. Ledcor is in discussions to, and may agree to, issue Subordinate Voting Shares to a limited number of additional private and strategic investors in transactions which are expected to close shortly after the closing of this offering. Those investors include certain financial institutions and strategic investors that may buy notes in our concurrent debt offerings. If all of these transactions are completed, Ledcor will sell approximately 23 million Subordinate Voting Shares for total consideration of approximately $250 million REGISTRATION RIGHTS Substantially all of our shareholders, with the exception of Worldwide Fiber Holdings Ltd., Ledcor Limited Partnership and MacKenzie Partners LLC, have registration rights, including demand and piggyback registration rights. These shareholders own an aggregate of 287,244,777 Subordinate Voting Shares. All of these shareholders have agreed not to dispose of or hedge any of their Subordinate Voting Shares during the period from the date of this prospectus continuing through the periods set forth herein. In addition, substantially all of our shareholders have agreed that they will not transfer their shares for at least 12 months. See "Shares Eligible for Future Sale." 80 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our Subordinate Voting Shares. Future sales of substantial amounts of our Subordinate Voting Shares in the public market could adversely affect prevailing market prices. Sales of substantial amounts of our Subordinate Voting Shares in the public market after any restrictions on sale lapse could adversely affect the prevailing market price of the Subordinate Voting Shares and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have 729,416,907 Subordinate Voting Shares outstanding and outstanding options to purchase 52,501,680 Subordinate Voting Shares, assuming no additional option or warrant grants or exercises after March 17, 2000. The great majority of the Subordinate Voting Shares sold in the offering will be subject to the lock-up agreements described below. We expect that the Subordinate Voting Shares sold in the offering, including any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining Subordinate Voting Shares outstanding and any Subordinate Voting Shares subject to outstanding options which are not issued pursuant to a registration statement are or will be "restricted securities" within the meaning of Rule 144. Restricted securities may be sold in the public market only if the sale is registered or if it qualifies for an exemption from registration, such as under Rule 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of the Subordinate Voting Shares. LOCK-UP AGREEMENTS Our directors, officers and various other shareholders, who together hold substantially all of our securities, have entered into lock-up agreements in connection with this offering. These lock-up agreements generally provide that the following holders will not offer, sell, contract to sell, grant any option to purchase or otherwise dispose of our Subordinate Voting Shares or any securities exercisable for or convertible into our Subordinate Voting Shares owned by them for the following periods after the date of this prospectus without the prior written consent of Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette Securites Corporation and 360NETWORKS: - Ledcor and Worldwide Fiber Holdings Ltd.--24 months; - our strategic investors, certain shareholders of GlobeNet (in connection with their strategic investment), Mr. Maffei, Madison Square, our directors, CN, Michels, and the consultant--12 months; and - our vice presidents--6 months. The lock-up agreements cover Subordinate Voting Shares, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701. RULE 144 In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of Subordinate Voting Shares then outstanding, which will equal approximately 7,294,169 shares immediately after this offering; and 81 - the average weekly trading volume of our Subordinate Voting Shares during the four calendar weeks preceding the sale, which we cannot determine at this time. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice requirements of Rule 144. RULE 701 Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to options granted prior to July 21, 1998, under a written compensatory plan or contract to resell such shares in reliance upon Rule 144, but without compliance with some restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 ninety days after effectiveness without complying with the holding period requirement and that non-affiliates may sell such shares in reliance on Rule 144 ninety days after effectiveness without complying with the holding period, public information, volume limitation or notice requirements of Rule 144. REGISTRATION RIGHTS We have granted various registration rights to some of our shareholders, which will enable these shareholders to cause us to register their shares for sale either in connection with the exercise of a demand registration right or, subject to particular cutbacks by managing underwriters, "piggyback" registration rights. For a summary of these rights, please refer to the section of this prospectus entitled "Share Capital Reorganization and Description of Capital Stock--Registration Rights." CANADIAN RESALE RESTRICTIONS The Subordinate Voting Shares outstanding immediately prior to the offering or issued pursuant to the exercise of options granted prior to the offering may not be sold or otherwise disposed of for value in Canada, except pursuant to either a prospectus, a discretionary exemption or a statutory exemption available only in specific limited circumstances, unless or until, among other things, we have been a reporting issuer for at least twelve months and disclosure to applicable Canadian securities regulatory authorities has been made. We have applied to applicable Canadian securities regulatory authorities to permit after six months sales of Subordinate Voting Shares issued upon exercise of options granted prior to the offering without the requirement that we be a reporting issuer for at least twelve months prior to such sales. We will become a reporting issuer in each of the provinces of Canada upon the filing of this prospectus with, and the issuance of a receipt therefor by, such Canadian securities regulatory authorities. In addition, sales of our shares in Canada by our control shareholders (generally, persons or companies who alone or in combination with others hold a sufficient number of securities to affect materially the control of the issuer) will be restricted. 82 REGULATION We do not believe our dark fiber offering is currently subject to extensive regulation that would have a material adverse effect on our business, financial condition, or operations. See "Risk Factors--Telecommunications Regulation--Extensive Regulation." However, we are part of an industry that is highly regulated by federal, state and local governments whose actions are often subject to regulatory, judicial, or legislative modification. In addition, to the extent that any bandwidth capacity and lit fiber offerings are treated as private carriage, telecommunications services or competitive local exchange carrier ("CLEC") offerings in the United States, additional federal and state regulation would apply to those offerings. Accordingly, there can be no assurance that regulations, current or future, will not have a material adverse effect on us. UNITED STATES FEDERAL U.S. Federal regulation has a significant impact on the telecommunications industry. Federal regulations have undergone major changes in the last four years as the result of the enactment of the Telecommunications Act of 1996 (the "1996 Act") on February 8, 1996. The 1996 Act is the most comprehensive reform of the U.S. telecommunications law since the Communications Act was enacted in 1934. For example, the 1996 Act imposes a number of interconnection and access requirements on telecommunications carriers and on all LECs, including incumbent local exchange carriers ("ILECs") and CLECs. The different ways we intend to offer fiber optic supported services could trigger four alternative types of regulatory requirements: (1) non-communications services, (2) private carrier services, (3) telecommunications services or common carriage and (4) CLEC offerings. The law establishing these alternative regulatory requirements is often unclear, so it is impossible to predict in many instances how the Federal Communications Commission ("FCC") will classify our services. Regulations associated with each type of offering are described below. NON-COMMUNICATIONS SERVICES The provision of dark fiber can be viewed as a non-communications service in that it is not a service, but rather the provision of a physical facility that is indistinguishable from other non-communications offerings such as constructing an office building. Many providers of dark fiber are currently operating on the assumption that they are providing unregulated facilities. Although the FCC attempted to regulate dark fiber as a common carrier service, this position was vacated by the U.S. Court of Appeals for the District of Columbia Circuit in 1994. The FCC has not addressed the issue since that time and, thus, we believe that dark fiber is not regulated as a common carrier service at this time. However, there is no assurance that the FCC, on remand, may not take the position again that dark fiber offerings are subject to common carrier regulation. PRIVATE CARRIER SERVICES Even if some of our offerings are treated as a communications service, they could be viewed as a private carrier offering. Private carrier offerings typically entail the offering of telecommunications, but are provided to a limited class of users on the basis of individually negotiated terms and conditions that do not meet the definition of a telecommunications service under the 1996 Act. If our services are treated as private carriage, they are generally unregulated by the FCC, but would be subject to universal service payments based on the gross revenues from end users. See "Regulation--United States--Federal--Telecommunications Services--Universal Service." Private carriers may also be subject to access charges if interconnected to LECs. 83 TELECOMMUNICATIONS SERVICES Some of our services, such as the provision of bandwidth capacity and lit fiber, may be treated as telecommunications services by the FCC. If some of our services are treated as telecommunications services a significant number of federal regulatory requirements will be applicable to those services. The law essentially defines telecommunications carriers to include entities offering telecommunications services for a fee directly to the public or to classes of users so as to be effectively available directly to the public, regardless of the facilities used. "Telecommunications" is defined as the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received. For the reasons stated above regarding our belief that we are not a common carrier, we also believe that we are not a telecommunications carrier concerning our dark fiber offerings. The FCC has ruled that the term "telecommunications carrier" is the same as the definition of common carrier and, therefore, a company providing fiber facilities on an individualized and selective basis, as we propose, is probably not a telecommunications carrier. A decision to this effect has been appealed to federal court. A decision on this appeal reversing or remanding the FCC's conclusion could require that our services be treated as common carriage. Some railroad, power and telecommunications associations--none of which are affiliated with us--have petitioned the FCC to clarify the status of fiber providers in this regard. The FCC's pending court remand, described above, might also address the application of these requirements to us. If the FCC decides that these companies are telecommunications carriers, we would be subject to some regulatory requirements which may impose substantial administrative and other burdens on us. If the FCC finds some of our services to be a telecommunications service, we may be regulated as a non-dominant common carrier. The FCC imposes regulations on common carriers such as the Regional Bell Operating Companies ("RBOCs") that have some degree of market power ("dominant carriers"). The FCC imposes less regulation on common carriers without market power ("non-dominant carriers"). Under the FCC's rules, we would be a non-dominant carrier and as such do not need authorization to provide domestic services and can file tariffs on one day's notice. The FCC requires common carriers to obtain an authorization to construct and operate telecommunication facilities and to provide or resell telecommunications services, between the United States and international points. GENERAL OBLIGATIONS OF ALL TELECOMMUNICATIONS CARRIERS. To the extent that any of our offerings are treated as telecommunications services, we would be subject to a number of general regulations at the federal level that apply to all telecommunications carriers, including the obligation not to charge unreasonable rates or engage in unreasonable practices, the obligation to not unreasonably discriminate in our service offerings, the need to tariff our services, the potential obligation to allow resale of our services in certain circumstances and the fact that third parties may file complaints against us at the FCC for violations of the Communications Act of 1934 or the FCC's regulations. Certain statistical reporting requirements may also apply. In addition, FCC rules require that telecommunications carriers contribute to universal service support mechanisms, the Telecommunications Relay Service fund, the number portability fund and the North American Number Plan Administrator fund. INTERCONNECTION OBLIGATIONS OF ALL TELECOMMUNICATIONS CARRIERS. All telecommunications carriers have the basic duty to interconnect, either directly or indirectly, with the facilities of other telecommunications carriers. This is the minimum level of interconnection required and is generally viewed to impose only minimal requirements as compared with the interconnection obligations imposed on incumbent local exchange carriers ("ILECs") and CLECs described in the next section. All telecommunications carriers must also ensure that they do not install network features, functions 84 or capabilities that do not comply with guidelines and standards established by the FCC to implement requirements to ensure accessibility for individuals with disabilities and to regulations designed to promote interconnectivity of networks. These regulations could be burdensome or expensive and could adversely affect us. The FCC adopted regulations recently that clarify these statutory requirements. If the FCC takes the position that some or all of our fiber offerings are subject to common carrier regulation, we nonetheless believe that we could provide facilities in the United States. To do so we would be obligated to obtain Section 214 authorization to provide fiber between Canada and the United States and to disclose, among other things, the extent to which we are owned or controlled by non-U.S. entities. However, FCC policy permits 100 percent direct or indirect non-U.S. investment in common carriers that do not hold radio licenses. Thus, we believe that we could obtain Section 214 authority to provide international common carrier services despite our foreign ownership. Nevertheless, compliance with these regulatory requirements may impose additional administrative and other burdens on us that could have a material adverse effect on our business, financial condition or operations. TARIFFS AND PRICING REQUIREMENTS. In October 1996, the FCC adopted an order in which it eliminated the requirements that non-dominant interstate interexchange carriers ("IXCs") maintain tariffs on file with the FCC for domestic interstate services. The order does not apply to the switched and special access services of the RBOCs or other LECs. The FCC order was issued pursuant to authority granted to the FCC in the 1996 Act to "forbear" from regulating any telecommunications services provider under particular circumstances. After a nine-month transition period, relationships between interstate carriers and their customers would be set by contract. At that point, long distance companies would be prohibited from filing tariffs with the FCC for interstate, domestic, interexchange services. Carriers have the option to immediately cease filing tariffs. Several parties filed notices for reconsideration of the FCC order and other parties have appealed the decision. On February 13, 1997, the United States Court of Appeals for the District of Columbia Circuit stayed the implementation of the FCC order pending its review of the order on its merits. Currently, that stay remains in effect and interstate long distance telephony companies are therefore still required to file tariffs. A requirement to file tariffs could lead to regulation of our offerings at the federal level, although the FCC's regulation of non-dominant carriers' tariff filings has been minimal to date. Competitive access providers do not have to file tariffs for their exchange access services, but may if they choose to do so. If the stay is lifted and the FCC order becomes effective, telecommunications carriers will no longer be able to rely on the filing of tariffs with the FCC as a means of providing notice to customers of prices, terms and conditions on which they offer their interstate services. The FCC has required that non-dominant IXCs post their rates, terms and conditions for all their interstate, domestic services on their Internet web sites if they have one; this rule is effective once its mandatory detariffing order takes effect. The obligation to provide non-discriminatory, just and reasonable prices remains unchanged under the Communications Act of 1934. Tariffs also allow a carrier to limit its liability to its customers, including in connection with service interruptions. If tariffs are eliminated, we may become subject to liability risks that we would have been able to limit through tariff filings, and there can be no assurance that potential liabilities will not have a material adverse effect on our results of operations and financial condition and ability to meet our obligations under the notes. In addition, we must obtain prior FCC authorization for installation and operation of international facilities and the provision (including resale) of international long distance services. We are considering whether to file tariffs for these services and would have to file tariffs to the extent our international services are treated as telecommunications services. There has been no proposal to detariff international services. 85 With limited exceptions, the current policy of the FCC for most interstate access services dictates that ILECs charge all customers the same price for the same service. Thus, the ILECs generally cannot lower prices to some customers without also lowering charges for the same service to all similarly situated customers in the same geographic area, including those whose telecommunications requirements would not justify the use of the lower prices. The FCC in 1999, however, modified this constraint on the ILECs when they face specified levels of competition, which permits them to offer special rate packages to some customers, as it has done in few cases, and other forms of rate flexibility. The rules contemplate an increasing level of flexibility on a city-by-city basis as competitors have facilities in place to compete for local exchange services in those markets. Once such facilities attain 50% coverage the rules contemplate only minimal regulation of carrier access offerings. CUSTOMER PROPRIETARY NETWORK INFORMATION. In February 1998, the FCC adopted rules implementing Section 222 of the Communications Act of 1934, which governs the use of customer proprietary network information by telecommunications carriers. Customer proprietary network information generally includes any information regarding a subscriber's use of a telecommunications service, where it is obtained by a carrier solely by virtue of the carrier-customer relationship. Customer proprietary network information does not include a subscriber's name, telephone number and address, if that information is published or accepted for publication in any directory format. Under the FCC's rules, a carrier may only use a customer's proprietary network information to market a service that is "necessary to, or used in," the provision of a service that the carrier already provides to the customer, unless it receives the customer's prior oral or written consent to use that information to market other services. The Court of Appeals for the Tenth Circuit recently invalidated the FCC's rules with respect to how a carrier must obtain customer authorization for the use of customer proprietary network information. The FCC is expected to further challenge this court decision. In addition, the FCC recently relaxed a number of the requirements it originally adopted, which gives some flexibility to carriers on how to comply with these rules. These rules, either as adopted or as modified, may impede our ability to effectively market integrated packages of services and to expand existing customers' use of our services. UNIVERSAL SERVICE. On May 8, 1997, the FCC released an order establishing a significantly expanded federal universal service subsidy regime. For example, the FCC established new subsidies for telecommunications and certain information services provided to qualifying schools and libraries and for services provided to rural health care providers. The FCC also expanded or revised the federal subsidies for local exchange telephony services provided to low-income consumers and consumers in high-cost areas. Providers of interstate telecommunications services, as well as certain other entities, such as private carriers offering excess capacity to end user customers, must pay for these programs. Our share of these federal subsidy funds would be calculated based on end-user revenues. The schools and libraries and rural health care support mechanisms are assessed against interstate, international and intrastate end-user revenues. Currently, the FCC is calculating assessments based on the prior year's revenues and has recently increased the size of the schools and libraries fund by 50 percent. Assuming that the FCC continues to calculate contributions based on the prior year's revenues, we believe that we will not be liable for subsidy payments in any material amount during 2000 because we had no significant end user revenues in 1999. With respect to subsequent years, however, we are currently unable to quantify the amount of subsidy payments that we will be required to make or the effect that these required payments will have on our financial condition. In the May 8th order, the FCC also announced that it would revise its rules for subsidizing service provided to consumers in high-cost areas. The FCC has recently adopted the cost model which it will use to determine the subsidies needed for high-cost areas. The FCC also established the mechanism which will be used starting January 1, 2000 to determine the level of high cost support non-rural carriers will receive. This decision is expected to increase the fund by only a modest amount. In addition, the Court of 86 Appeals for the Fifth Circuit recently affirmed the FCC's universal service program in large part, except that contributions must be based entirely on interstate and international services of interstate carriers (except for carriers providing predominately international services). This decision could substantially affect the level of contributions depending on the jurisdictional nature of the services provided by a carrier. Several petitions for administrative reconsideration of the original FCC order are pending. CALEA. We might incur significant expenses to assure that our networks comply with the requirements of CALEA. Under CALEA, telecommunications carriers are required to: (1) provide law enforcement officials with call content and call identifying information pursuant to a valid electronic surveillance warrant ("assistance capability requirements") and (2) reserve a sufficient number of circuits for use by law enforcement officials in executing court authorized electronic surveillance ("capability requirements"). To the extent that we provide facilities-based services, we may incur costs in meeting both of these requirements. In particular, regarding the assistance capability requirements, the government is only required to compensate carriers for the costs of making equipment installed or deployed before January 1, 1995 CALEA complaint. While the telecommunications industry is attempting to negotiate legislative and administrative changes to this reimbursement cut-off date, as it stands today, we will be financially responsible for ensuring that our post-1995 equipment is in compliance. Regarding the capacity requirements, the government will finance any necessary increases in capacity for equipment installed or deployed prior to September 8, 1998, and we are responsible for paying for any necessary increases in capacity for equipment installed or deployed after that date. WIRING IN MULTI-TENANT BUILDINGS. The FCC recently instituted a proceeding that could impose obligations on telecommunication carriers' obligation to provide access to competitors or customers to their wiring located in multi-tenant residential and business buildings. It is unknown at this time how the FCC will rule in this proceeding so it is impossible to evaluate its impact on our operations. COMPETITIVE LOCAL EXCHANGE CARRIERS OFFERINGS It is unclear whether we would be viewed as a CLEC with respect to the provision of some of our services. A CLEC is defined as a provider of telephone exchange service, which is an interconnected service of the character ordinarily furnished by a single exchange, covered by the local exchange charge, or comparable service provided through a system of switches, transmission equipment, or other facilities, or combination thereof, by which a subscriber can originate and terminate a telecommunications service. The full parameters of what carriers are classified as a CLEC have never been fully defined by the FCC. We do not intend to operate as a CLEC. However, the FCC may disagree with this position. If we are classified as a CLEC, obligations described below that are applicable to CLECs would apply. INTERCONNECTION OBLIGATIONS. The 1996 Act is intended to increase competition. The act opens the local services market by requiring ILECs and CLECs, including us to the extent we are treated as a common carrier providing local exchange service, to permit interconnection to their networks and establishing obligations with respect to: RECIPROCAL COMPENSATION. Requires all ILECs and CLECs to complete calls originated by competing carriers under reciprocal arrangements. The prices charged by ILECs for terminating calls originated on a CLEC's network must be based on a reasonable approximation of additional cost or through mutual exchange of traffic without explicit payment. RESALE. Requires all ILECs and CLECs to permit resale of their telecommunications services without unreasonable restrictions or conditions. In addition, ILECs are required to offer 87 all retail telecommunications services to other carriers for resale at discounted rates, based on the costs avoided by the ILEC in the offering. INTERCONNECTION. Requires all ILECs and CLECs to permit their competitors to interconnect with their facilities. Requires all ILECs to permit interconnection at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost (which may include a reasonable profit). At the option of the carrier seeking interconnection, collocation of the requesting carrier's equipment on the ILEC's premises must be offered, except where an ILEC can demonstrate space limitations or other technical impediments to collocation. UNBUNDLED ACCESS. Requires all ILECs to provide nondiscriminatory access to unbundled network elements (including network facilities, features, functions and capabilities) at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost (which may include a reasonable profit). In response to the Supreme Court's decision in AT&T V. IOWA UTILITIES BOARD that required the FCC to reconsider which elements should be unbundled, the FCC has adopted an order on remand that affirms its original decision in all significant respects. NUMBER PORTABILITY. Requires all ILECs and CLECs to permit users of telecommunications services to retain existing telephone numbers without impairment of quality, reliability or convenience when switching from one LEC to another. DIALING PARITY. Requires all ILECs and CLECs to provide nondiscriminatory access to telephone numbers, operator services, directory assistance and directory listing with no unreasonable dialing delays. They must also provide dialing parity for inter-local access and transport area ("LATA") services and for intra-LATA toll services. LECs are required to implement dialing parity for intra-LATA toll services during 1999. ACCESS TO ROW. Requires all ILECs and CLECs to permit competing carriers access to poles, ducts, conduits and ROW at reasonable and nondiscriminatory rates, terms and conditions. ILECs are required to negotiate in good faith with carriers requesting any or all of the above arrangements. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request binding arbitration of the disputed issues by the state regulatory commission. Where an agreement has not been reached, ILECs remain subject to interconnection obligations established by the FCC and state telecommunication regulatory commissions. In August 1996, the FCC released a decision (the "Interconnection Decision") establishing rules implementing the 1996 Act requirements that ILECs negotiate interconnection agreements and providing guidelines for review of these agreements by state public utilities commissions. On July 18, 1997, the Eighth Circuit vacated particular portions of the Interconnection Decision, including provisions establishing a pricing methodology and a procedure permitting new entrants to "pick and choose" among various provisions of existing interconnection agreements between ILECs and their competitors. On October 14, 1997, the Eighth Circuit issued a decision vacating additional FCC rules. The Supreme Court has reversed the Eighth Circuit's decision on the pricing and "pick and choose" rules. The Eighth Circuit recently issued its mandate to implement the Supreme Court's decision and established procedures for deciding the remaining issues on appeal that were not addressed by the Eighth Circuit or the Supreme Court. These regulations impose added obligations on potential competitors of the company that we would not have to comply with if we were not classified as a CLEC. To the extent that the FCC changes these regulations to be less burdensome, we could face added competition from these companies in the provision of our own services that could adversely affect us. To the extent that carriers may obtain low-priced 88 access to CLEC and ILEC networks, this could reduce the demand for our fiber services. Changes to these interconnection obligations that reduce the interconnection obligations of our competitors could also adversely affect our business. In addition, the FCC has the responsibility under the 1996 Act to determine what elements of an ILEC's network must be provided to competitors on an unbundled basis. In August 1999, the FCC required fiber to be offered as an unbundled element. In addition, the FCC had previously allowed state commissions to establish additional unbundling requirements, and some states have required that ILECs unbundle fiber. These decisions to unbundle fiber may decrease the demand for our offerings. OTHER FEDERAL COMMUNICATIONS REQUIREMENTS. CLECs are also subject to other FCC filing requirements. Compliance with these obligations, individually and in the aggregate, may cause us to incur substantial expenses. There can be no assurance that these expenses will not have a material adverse effect upon our results of operations and financial condition and our ability to meet our obligations under the notes. CLECs may, but are not required to, file tariffs for their interstate access services and these rates are regulated as previously described for non-dominant carriers. See "Regulation--United States--Federal--Telecommunications Services--Tariffs and Pricing Requirements." However, the FCC recently issued a Notice of Proposed Rulemaking asking whether it should regulate the terminating access changes of such providers. To the extent we provide interexchange telecommunications service, we are required to pay access charges to ILECs when we use the facilities of those companies to originate or terminate interexchange calls. The interstate access charges of ILECs are subject to extensive regulation by the FCC, while those of CLECs or non-CLECs are subject to a lesser degree of FCC regulation but remain subject to the requirement that all charges be just, reasonable and not unreasonably discriminatory. With limited exceptions, the current policy of the FCC for most interstate access services dictates that ILECs charge all customers the same price for the same service. Thus, the ILECs generally cannot lower prices to some customers without also lowering charges for the same service to all similarly situated customers in the same geographic area. The FCC recently, however, modified this constraint on the ILECs when specified levels of competition from local exchange providers occur and permitted them to offer special rate packages to some customers, as it has done in a few cases, permitted other forms of rate flexibility. The rules contemplate an increasing level of flexibility on a city-by-city basis as competitors have facilities in place to compete for local exchange services in those markets. Once such facilities attain 50% coverage the rules contemplate only minimal regulation of carrier access offerings. In two orders released on December 24, 1996 and May 16, 1997, the FCC made major changes in the interstate access charge structure. The FCC removed restrictions on ILECs' ability to lower access charges and relaxed the regulation of new switched access services in those markets where there are other providers of access services. The May 16th order increased the costs that price cap LECs recover through monthly, non-traffic sensitive access charges and decreased reliance on traffic-sensitive charges. In the May 16th order, the FCC also announced its plan to bring interstate access rate levels more in line with cost. The plan will include rules that may grant price cap LECs increased pricing flexibility if the ILEC demonstrates that it faces increased competition (or potential competition) in relevant markets. The manner in which the FCC implements this approach to lowering access charge levels could have a material adverse effect on our ability to compete in providing interstate access services. On appeal, the court upheld the FCC's May 16th order in a decision issued on August 19, 1998. Under the 1996 Act, RBOCs are currently prohibited from providing inter-LATA telecommunication services until they can demonstrate that they have opened their local markets to competition. Bell Atlantic in New York received such approval in December 1999. RBOCs are reported to have made substantial progress in achieving compliance with the requirements for such approvals and one or more RBOCs may receive inter-LATA approval in some states within the next 89 year. In anticipation of receiving inter-LATA approval, some RBOCs have made investment in fiber providers that compete with us, e.g., Qwest and Williams. If regulators grant widespread inter-LATA approvals, we could be adversely affected through added competition because of these regulatory approvals. RECIPROCAL COMPENSATION. All ILECs and CLECs must complete calls originated by other carriers under reciprocal compensation arrangements. That is, the LEC terminating a local call is entitled to payment from the LEC originating a call. Charges assessed by the ILECs for terminating calls originated on a CLEC's network must be based on a reasonable approximation of additional cost or through mutual exchange of traffic without explicit payment. The FCC determined that Internet traffic is interstate in nature, not local, and has initiated a proceeding to determine appropriate carrier-to-carrier compensation. At the same time, the FCC declined to overturn a multitude of state decisions requiring ILECs to pay CLECs compensation for delivering Internet traffic to ISPs. The FCC's decision is on appeal, and ILECs are expected to ask states or federal courts to reverse the existing state determinations. REGULATION OF CABLE The FCC has the responsibility under the Act Relating to the Landing and Operation of Submarine Cables in the United States, 47 U.S.C. SectionSection34-39 ("Cable Landing Act"), to issue licenses for the landing and operation of submarine cables in the United States. The FCC routinely grants cable landing licenses to applicants, similar to us, from WTO Member countries subject to U.S. State Department approval. However, applicants must disclose the extent to which they are owned or controlled by non-U.S. entities. Although the FCC retains the right to restrict foreign ownership of cable landing licenses that raise national security concerns, it has not yet done so. We already hold one submarine cable landing license and believe that the FCC is unlikely to restrict our ownership of additional cable landing licenses despite our foreign ownership. Nevertheless, there can be no assurance that the FCC would not deny, or condition, any application by us to provide common carrier services. No later than 90 days prior to construction of the cable, however, applicants for cable landing licenses must also provide ownership information with respect to the cable landing station. The FCC may restrict non-U.S. ownership of cable landing stations to protect the national security of the United States. The construction of new submarine cable systems is categorically excluded from environmental processing rules. STATE The 1996 Act prohibits state and local governments from enforcing any law, rule or legal requirement that prohibits or has the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. In addition, under current FCC policies, any dedicated transmission service or facility that is used more than 10% of the time for interstate or foreign communication is generally subject to FCC jurisdiction rather than state regulation. Despite these prohibitions and limitations, telecommunications services are subject to various state regulations. Among other things, the states may: - require the certification of TSPs, - regulate the rates of intrastate offerings and the terms and conditions of both intrastate and certain interstate service offerings and - adopt regulations necessary to preserve universal service, ensure the continued quality of communications services, safeguard the rights of consumers and protect public safety and welfare. Accordingly, state involvement in telecommunications services may be substantial. 90 In addition, state law may not recognize "private carriage" and, therefore, even if certain of our offerings are treated as "private carriage" at the federal level, they may be regulated as telecommunications or common carrier services at the state level. At present, we, through various subsidiaries, have tariffs on file with, and/or have obtained various certificates of operating authority from, approximately 25 states that were necessary under state laws to gain authorizations needed to operate as a carrier or to construct fiber facilities in those states, even though we do not operate as a common carrier. Those tariffs provide that prices, terms and conditions of an offering will be set based upon individual determinations for each customer. These tariffs may be subject to challenge, but usually are not challenged. None of our tariffs has been changed to date. Various state regulators may attempt to regulate our rates or practices, but, generally, state regulators do not actively regulate the offerings of non-dominant carriers such as us. The state regulatory environment varies substantially from state to state. For example, our pricing flexibility for products or services which are intrastate in nature may be limited by regulation in some jurisdictions. In addition, in arbitrating interconnection agreements under the 1996 Act between ILECs and their potential competitors, some state commissions have considered whether fiber should be an unbundled network element. The New York Public Service Commission determined that it would not require NYNEX Corporation to provide fiber as an unbundled network element. State commissions in Florida, Maryland, North Carolina and Virginia have either refused to require the ILECs to offer fiber to competitors or have stated that the issue would be addressed at a later time. On the other hand, state commissions in Illinois, Massachusetts, Arizona, Georgia, Minnesota, Ohio, Oregon and Tennessee have found fiber to be a network element and required the ILECs to offer it on an unbundled basis to CLECs. There can be no assurance that these requirements, and the associated pricing methodologies, where applicable will not reduce the demand for our offerings. LOCAL In addition to federal and state laws, local governments exercise legal authority that may affect our business. For example, some local governments retain the ability to license public ROW, subject, however, to the federal limitation that local authorities may not prohibit entities from entering the telecommunications market. Compliance with local requirements may delay and increase the costs of our use of public ROW. Accordingly, these requirements could impose substantial burdens on us. CANADA We offer bandwidth services to our customers in Canada through resale arrangements. Under these resale arrangements, we obtain the use of transmission facilities on a non-exclusive, contractual basis from Urbanlink and then offer bandwidth services to our customers through the subsequent sale or lease, on a commercial basis, of these contracted facilities. As a reseller, we are not generally subject to the regulatory requirements of the Telecommunications Act (Canada). However, there can be no assurance that the regulation of resellers in Canada may not become more extensive in the future. In addition, while we believe that our operations as a reseller in Canada fully comply with Canadian law, there can be no assurance that a future determination of the Canadian Radio-television and Telecommunications Commission or events beyond our control will not result in a change in our status or affect our ability to offer services in Canada. The CRTC is considering reform of the current contribution regime. The CRTC's contribution regime was originally established in 1992 as a means of ensuring that rates for local residential telephone service remain affordable. Under the regime, providers of certain types of long distance voice and data services are required to pay a subsidy or "contribution" on each minute of traffic that is originated or terminated on local switched telephone networks or on cross-border or 91 overseas access circuits. These contribution payments are pooled within each ILEC territory and are paid out to ILECs and CLECs serving residential local customers, based on the number of residential network access services they serve and the level of the subsidy available in the rate band being served. On March 1, 1999, the CRTC initiated a proceeding to consider possible reforms to the current contribution mechanism. In the public notice that initiated the proceeding, the CRTC invited interested parties to submit proposals on other mechanisms which could be used to collect contribution. Although this public notice proceeding is not yet closed, some parties in the proceeding have advocated that the current contribution regime should be converted into a revenue-based regime under which contribution would be paid on a percentage of a TSP's revenues (regardless of the types of services offered by the service provider), rather than on certain types of telecommunications traffic. We do not believe that the majority of our activities in Canada are subject to the requirement to pay contribution under the current contribution regime. However, given that the current contribution regime is under review by the CRTC, there can be no assurance that we would be exempt from the requirement to pay contribution in the future, particularly if the CRTC decides to adopt a revenue- based regime. RESTRICTIONS ON FOREIGN OWNERSHIP Under the Canadian ownership provisions of the Telecommunications Act,a "telecommunications common carrier" is not eligible to operate in Canada unless it is owned and controlled by Canadians. Furthermore, no more than 20% of the members of the board of directors of a telecommunications common carrier may be non-Canadian and no more than 20% of the voting shares of a telecommunications common carrier may be beneficially owned by non-Canadians. In addition, no more than 33 1/3% of the voting shares of a non-operating parent corporation of a telecommunications common carrier may be beneficially owned or controlled by non-Canadians and neither the telecommunications common carrier nor its parent may be otherwise controlled in fact by non-Canadians. Although we believe that our activities in Canada, including the Canadian telecommunications arrangement, comply with the foreign ownership provisions of the Telecommunications Act, there can be no assurance that a future Canadian Radio-television and Telecommunications Commission determination or events beyond our control will not result in our being required to comply with the ownership provisions of the Telecommunications Act. INTERNATIONAL TRAFFIC On October 1, 1998, the CRTC issued Telecom Decision CRTC 98-17 ("Decision 98-17") which established a framework for competition in Canada's international telecommunications services market to coincide with the Government of Canada's decision to terminate the monopoly of Teleglobe Canada Inc. over telecommunications facilities linking Canada to overseas destinations. In that decision, the CRTC determined that a party acquiring an IRU interest in an international submarine cable would not necessarily fall within the definition of a TCC. As a result, acquirers of IRUs in international submarine cables need not be Canadian-owned and controlled. We believe that this determination by the CRTC will create greater opportunities for foreign owned TSPs to purchase IRUs and other types of wholesale bandwidth capacity in the Canadian portion of our network. However, given the fact that the CRTC's findings in Decision 98-17 were limited to IRU interests held in international submarine cables, as well as the fact that IRU arrangements can involve various degrees of ownership and control over fiber facilities, there can be no assurance that holders of IRUs acquired in domestic fiber facilities, including those obtained by us from Urbanlink, would be exempt from the Canadian ownership provisions contained in the Telecommunications Act. 92 In addition to determining the status of IRUs under the Telecommunications Act, the CRTC made a determination in Decision 98-17 to eliminate Canada's "bypass" rules, which had prohibited the routing of Canada-Canada and Canada-overseas traffic through the United States. Effective October 1, 1998, TSPs and users in Canada may route basic telecommunications traffic which either originates or terminates in Canada through the United States. Given the fact that a decision to bypass Canadian network facilities may be based on a variety of factors, including, but not limited to, cost, technology, traffic patterns and the availability of suitable facilities, there is a risk that prospective customers for our bandwidth services in Canada may choose to purchase, lease or obtain IRUs in dark or lit fiber in the United States rather than in Canada. There can be no assurance that we will be able to attract and retain a sufficient number of customers for the Canadian portions of our bandwidth services in Canada, which could have a material adverse effect on our business, financial condition and results of operations. On September 18, 1998, the Stentor alliance announced that, while it will continue to coordinate national network management for the regionally based ILECs, it will cease other joint initiatives in national product development, marketing and other areas. We believe that the restructuring of the Stentor alliance, the launch by Bell Canada of its national telecommunications company, the merger of BC TELECOM Inc. and TELUS to create BCT.Telus and the merger of ILECs in Atlantic Canada to create Aliant will create increased opportunities for us in the Canadian carrier market as the ILECs expand beyond their traditional serving territories. CRTC PROCEEDINGS On March 19, 1999, Urbanlink's predecessor filed an application with the Canadian Radio-television and Telecommunications Commission seeking orders under the Telecommunications Act which would permit Urbanlink's predecessor to continue to have access to street crossings and other municipal properties in the City of Vancouver for the purpose of constructing, testing and operating Urbanlink's network facilities within that city. In an answer to that application, the City of Vancouver took the position that Urbanlink's predecessor was not eligible to apply to the Canadian Radio-television and Telecommunications Commission for relief under the Telecommunications Act. On the same day, the City filed an application with the Canadian Radio-television and Telecommunications Commission requesting orders which would permit some of the carriers that have obtained indefeasible rights of use from Urbanlink's predecessor to continue to construct, operate and maintain those facilities on a zero rate, interim basis until the Canadian Radio-television and Telecommunications Commission has made a determination on the appropriate terms, conditions and compensation that should be payable to the City for the use of municipal property. In a ruling issued on October 27, 1999, the Canadian Radio-television and Telecommunications Commission granted the City's request for an interim order directing each of the carriers that obtained indefeasible rights of use from Urbanlink's predecessor to pay the City $1.00 for the right to access the City's municipal property during the period of time before the Canadian Radio-television and Telecommunications Commission makes a determination for the appropriate terms, conditions and compensation that should be payable to the City for the use of municipal property. On December 3, 1999, the Canadian Radio-television and Telecommunications Commission issued a public notice which invited interested parties to comment on what the terms and conditions of access by Canadian carriers to municipal property in Vancouver should be for the purposes of constructing, maintaining and operating transmission lines. We anticipate that the Canadian Radio-television and Telecommunications Commission will render a decision on the March 19, 1999 application of Urbanlink's predecessor against the City at the same time that it renders a decision on the matters raised by its public notice proceeding. Failure to obtain the orders requested by Urbanlink's predecessor in its initial application to the Canadian Radio-television and Telecommunications Commission could result in increased costs to us which could have a material adverse effect on our business, financial condition and results of operations. 93 In a related matter, the City of Vancouver has served Telus, a conduit provider to Urbanlink, with notices to terminate, effective December 31, 2000, most existing agreements between Telus and the City for access to street crossings and other municipal property. The City has stated that this will allow an opportunity for meaningful negotiation based on the terms and conditions that the Canadian Radio-television and Telecommunications Commission ultimately prescribes for access to municipal property. We currently have IRUs in Urbanlink facilities that are placed in the Telus conduit in the City of Vancouver. The results of any such negotiations could lead to increased maintenance and operation charges to us by Urbanlink. If our continued access to this conduit is jeopardized, our ability to operate our Vancouver network may be impaired and our business could be adversely affected. EUROPEAN UNION Regulations of telecommunications in the European Union (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom) is subject to the requirements of European Union Law. Apart from general antitrust rules, the relevant European Union law mainly consists of directives adopted by the European Council and the European Commission (pursuant to the Treaty of Rome), which are addressed to, and are binding on, the member states of the European Union, and which require implementation in the national laws of those states. These directives are intended to establish harmonized core regulatory requirements across the European Union. They do not, however, cover every aspect of telecommunications regulation. In addition, in some cases they give a choice of different options to the member countries, or are limited to giving general principles, the detailed implementation of which must be established by the relevant national legislation. European Union law requires that many of the rules concerning licensing, interconnection, retail service and technical issues should have substantially the same effect in all member countries. However, due to the permitted discretion as to how EU rules are given effect within national boundaries, and/or due to ambiguity in the EU rules giving rise to different interpretations and/or due to failure by member states to properly implement such rules by the required deadline or correctly, there are often important differences in the applicable rules between member states. Private parties may, in reliance on European Union Directives, be able to bring actions in their national courts against national laws or regulations which fail to properly implement EU Directives but legal proceedings are costly and take a long time. The European Commission may bring actions in the European Court of Justice against the member states for failure to implement EU legislation properly, but such action may also take a long time, and the European Commission does not always take such action or only takes such action after a considerable delay. In consequence, for practical purposes, there may be significant differences between the rules applying in different member states, even where European Law is intended to introduce rules which are similar in effect. A Commission Directive known as the Full Competition Directive required all member states except those with express derogations (Greece, Ireland, Luxembourg, Portugal and Spain) to permit competition in all telecommunications services by removing restrictions on the provision of telecommunications services and telecommunications infrastructure by January 1, 1998. A directive known as the Licensing Directive establishes a framework for the granting of national authorizations and licenses "for the purpose of providing telecommunications services, including authorizations for the establishment and/or operation of telecommunications networks required for the provision of such services." We are advised that there is substantial support for the view that this directive, and/or other directives only enable member states to require telecommunications licenses, authorizations, or other forms of permission, to the extent that a telecommunications service is being provided and that absent such service, as in the case of the 94 mere construction or control of or provision of unlit optical fiber cables, no telecommunications license, authorization or other permission can be required under European Union law. However we are also advised not all member states may interpret the requirements of European Union law in this manner, and that for practical purposes it is therefore necessary to analyze national law and regulation in each case. When we are operating or in control of fiber which is functioning or "lit" we are advised that we may on the other hand, in any particular member state, be required, to apply for an individual license if we are deemed to be providing a public telecommunications network or publicly available voice telephony services, or that we may benefit from applying for such a license to gain the rights to numbers and to gain access to ROW in respect of land. Alternatively, in some countries, we may simply be required to comply with a notification or registration procedures. A directive known as the Interconnection Directive requires that in any member state where we eventually offer leased lines to user premises, or control access to network termination points identified by numbers in the national numbering plan, we will have the right to negotiate interconnection with any other operators and the obligation to negotiate such interconnection when so requested. In addition, to the extent that we offer "bearer capabilities," individual member states may give us the right (and, if so, the obligation) to negotiate interconnection with other operators. The Interconnection Directive also requires that to the extent that we are included by any member state in the class of operators with a right and obligation to interconnect as just described, then fixed network operators deemed by the member state regulator, to have "significant market power" (as defined in that directive) must offer us interconnection on standard, cost oriented, non-discriminatory and transparent terms. However, to the extent that we are not granted any interconnection rights in any member state, we will not be entitled to cost-oriented charges from such an operator, and may be required to pay tariffs which are significantly higher in most member states. The European Commission has recommended that cost-oriented interconnection charges which some fixed network operators with significant market power are required to apply, should be based on long run incremental costs, which is similar to TELRIC, the cost model used by the FCC in the US. However, in the absence of appropriate accounts or models of such rates, the Commission has published benchmark interconnection rates, above which national regulators should seek justification from the relevant fixed network operator. Each European Union member state in which we currently conduct our business has a different regulatory regime and such differences are expected to continue. In addition, in connection with the Telia agreement we will be operating a segment of our European network in Norway, which is not a member of the European Union and therefore not subject to the various rules and regulations governing European Union member states. Norway does however have its own regulatory regime to which our operations will be subject. 360AMERICAS Our planned 360AMERICAS undersea fiber optic cable facilities and telecommunications services, including backhaul services, may be subject to regulation in each jurisdiction where the 360AMERICAS cable and the BUS-1 undersea fiber optic cable system that connects Bermuda and the United States ("BUS-1") land. GlobeNet currently has in place all of the necessary licenses to land and provide services from the BUS-1 system. In order to implement fully the 360AMERICAS cable, it may be necessary for GlobeNet to obtain authority to land the cable and to offer telecommunications services, including backhaul, to our customers in each jurisdiction in which the cable lands. See "Risk Factors--Government Regulation." 95 UNITED STATES In the United States, the laws and regulations pertaining to undersea cable systems and telecommunications services are well developed and an established set of rules and procedures exist. GlobeNet has reviewed with Alcatel our various options with respect to the most optimal landing locations. On June 2, 1999, GlobeNet submitted a cable landing license application to the FCC seeking authority to land and operate the 360AMERICAS cable in Tuckerton, New Jersey (next to the landing stations for the BUS-1 system) and Boca Raton, Florida. On December 10, 1999, the FCC granted TeleBermuda International Limited ("TBI"), a wholly owned subsidiary of GlobeNet, a landing license for the 360AMERICAS cable. TBI's U.S. affiliate, TeleBermuda International L.L.C. ("TBI L.L.C."), was formed in May 1996 as a limited liability company under the laws of the State of Delaware. TBI L.L.C. holds the landing license for the BUS-1 system in the United States issued by the FCC, as well as certain ownership and leasehold rights with respect to BUS-1 system assets located in the United States. TBI L.L.C. is a wholly owned subsidiary of TBI. Previously, TBI held a 20% ownership interest in TBI L.L.C., and Elbac Cable Corporation ("Elbac") held the remaining 80% ownership interest. On October 29, 1999, the FCC issued a Memorandum Opinion and Order granting authority for TBI to acquire Elbac, including the 80% ownership interest held by Elbac in TBI L.L.C. This transaction was consummated on November 1, 1999, thus providing TBI with a 100% ownership interest in TBI L.L.C. TBI is authorized to operate in the United States as a common carrier pursuant to Section 214 of the Communications Act of 1934, as amended. This allows TBI to provide any telecommunications services, including backhaul services, to or from the United States via any means, including our current and future undersea fiber optic cable systems. BRAZIL AND VENEZUELA In countries such as Brazil and Venezuela with recently privatized telecommunications industries, many of the telecommunications laws and regulations are relatively new and still evolving. In both of these countries, there are no current statutes or regulations regarding the landing of undersea fiber optic cable facilities. Accordingly, authorities have been consulted with the appropriate regulatory authorities in Brazil (ANATEL) and Venezuela (CONATEL). Based on these consultations, GlobeNet believes that it is the first private undersea fiber optic cable operator to request governmental approval to land an international fiber optic cable system in either jurisdiction. These consultations have indicated to GlobeNet that the procompetitive effects of deregulation and the desire to attract foreign investment have created flexible regulatory environments in Brazil and Venezuela that are receptive to projects such as the 360AMERICAS cable. The need for new undersea fiber optic cable systems is particularly strong in these countries where former monopoly providers previously controlled access to and from the country through their ownership of international capacity on traditional consortium cable systems. Although competition in the provision of telecommunications services has begun to be introduced in both jurisdictions, the former monopoly carriers continue to control the existing inventory of available undersea fiber optic capacity that lands in each country. Accordingly, capacity remains scarce and very expensive. BRAZIL On March 2, 1999, GlobeNet submitted a request to ANATEL seeking authority to construct, land and operate the 360AMERICAS cable in Brazil. On October 13, 1999, in a response to this request, ANATEL indicated that the provision of submarine cable infrastructure does not constitute a 96 telecommunications service and therefore no ANATEL license is necessary to construct, own and operate the 360AMERICAS cable. Established regulations and procedures exist for obtaining telecommunications services licenses in Brazil. Our operating subsidiary in Brazil has received the necessary telecommunications services licenses from ANATEL to provide backhaul services in Brazil. It is GlobeNet's expectation that we will be able to sell or lease submarine cable fiber optic facilities to all entities with authority to provide telecommunication services in Brazil. Under the current regulatory regime in Brazil only Embratel and INTELIG have the appropriate authority to offer long-distance and international switched voice telephony services in Brazil. ANATEL is currently providing licenses on a routine basis for companies seeking to offer international private network services. It is not anticipated that regulatory authority will be required for carrier-to-carrier contracts or the offering of value-added services. Thus, today GlobeNet should be able to sell its facilities to the two public switched telephony licensees, all private line licensees and value-added service providers. The government of Brazil has announced that in January 2002, it will lift current restrictions on the number of licensees in Brazil who may provide switched voice telephony. At that time, GlobeNet should also be able to offer our facilities to new competitive switched voice telephony providers. VENEZUELA On March 16, 1999, GlobeNet submitted a letter to CONATEL seeking guidance on what licenses or permits from CONATEL may be necessary to land the 360AMERICAS cable in Venezuela. In response to this letter, CONATEL informed GlobeNet in writing that no authorization or permit from CONATEL is required to construct and land the 360AMERICAS cable in Venezuela. Based on advice provided by CONATEL, GlobeNet does not believe that any CONATEL permits or concessions are necessary to operate the cable or sell capacity on the cable. In order to provide backhaul services in Venezuela, GlobeNet must obtain a Private Network Concession, which is required under Venezuelan law to install and operate a telecommunications network for commercial purposes. GlobeNet shortly plans to submit an application to CONATEL for this license. Although GlobeNet cannot assure you that it will be granted this license, GlobeNet does not believe that it will not be successful in obtaining it. It is GlobeNet's expectation that it will be able to sell or lease submarine cable fiber optic facilities to all entities with authority to provide telecommunications and value added network services in Venezuela. Under the existing regulatory framework in Venezuela, only CANTV can offer international public switched telephony services in Venezuela. However, the Concession Agreement between the Republic of Venezuela and CANTV provides that in November 2000 the telecommunications market will be open for additional competition and the appropriate authority will be granted to a number of companies seeking to offer switched voice telephony services. Currently, CONATEL is issuing authority on a routine basis to companies seeking to offer international or domestic private network services. Thus, today GlobeNet can sell facilities to CANTV and private network and value added service providers. Additionally, in November 2000 GlobeNet will be able to sell facilities to newly licensed switched voice telephony providers. 97 DESCRIPTION OF INDEBTEDNESS NOTES OFFERED IN CONCURRENT DEBT OFFERINGS We expect the terms of the notes that we currently intend to issue in our concurrent debt offerings to be similar to the terms of our 1999 Notes as described below. The closing of this offering is not conditioned on the closing of either of the debt offerings. 1999 NOTES GENERAL. The 1999 Notes are senior obligations of ours, limited to $500 million in principal amount, and mature on August 1, 2009. The 1999 Notes, which were issued pursuant to the 1999 Indenture, accrue interest at a rate of 12% per annum. Interest is payable each August 1 and February 1, commencing on February 1, 2000. RANKING. The 1999 Notes rank senior in right of payment to any of our future subordinated indebtedness and PARI PASSU in right of payment with all of our senior indebtedness, including the 1998 Notes (see below). OPTIONAL REDEMPTION. The 1999 Notes are not redeemable prior to August 1, 2004. Thereafter, the 1999 Notes will be redeemable, in whole or in part, at our option, at the redemption prices set forth in the 1999 Indenture, plus accrued and unpaid interest to the applicable redemption date. Specifically, if redeemed during the 12-month period beginning on August 1 of the years set forth below, the redemption price will be that amount, expressed as a percentage of the principal amount of the 1999 Notes, listed below:
YEAR REDEMPTION PRICE - ---- ------------------ 2004..................................................... 106.000% 2005..................................................... 104.000% 2006..................................................... 102.000% 2007..................................................... 100.000%
In addition, (1) prior to August 1, 2002, we may redeem up to 35% of the sum of (a) the originally issued principal amount of the 1999 Notes and (b) any subsequent notes issued under the 1999 Indenture, at 112% of their principal amount, plus accrued and unpaid interest through the redemption date, with the net cash proceeds of one or more public equity offerings; PROVIDED, HOWEVER, that at least 65% of the sum of (a) the originally issued principal amount of the 1999 Notes and (b) any subsequent notes issued under the 1999 Indenture, remains outstanding after the occurrence of the redemption and (2) we may redeem the 1999 Notes at their face value if we become obligated to pay any additional amounts as a result of change in the laws or regulations of Canada or any Canadian taxing authority, or a change in any official position regarding their application or interpretation. CHANGE OF CONTROL. Upon the occurrence of a change of control, each holder of 1999 Notes will have the right to require us to repurchase all or any part of that holder's 1999 Notes at a purchase price in cash equal to 101% of their principal amount, plus accrued and unpaid interest to the date of purchase. COVENANTS. The 1999 Indenture contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: - borrow money; - pay dividends on stock or repurchase stock; - make investments; 98 - use assets as security in other transactions; and - sell certain assets or merge with or into other companies. EVENTS OF DEFAULT. The 1999 Indenture contains customary events of default, including: - defaults in the payment of principal, premium or interest; - defaults in the compliance with covenants contained in the 1999 Indenture; - cross defaults on more than $10 million of other indebtedness; - failure to pay more than $10 million of judgments that have not been stayed by appeal or otherwise; and - the bankruptcy of 360NETWORKS INC. or certain of its subsidiaries. 1998 NOTES GENERAL. The 1998 Notes are senior obligations of ours, limited to $175 million in principal amount and mature on December 15, 2005. The 1998 Notes, which were issued pursuant to the 1998 Indenture, accrue interest at a rate of 12 1/2% per annum. Interest is payable each June 15 and December 15, commencing on June 15, 1999. RANKING. The 1998 Notes rank senior in right of payment to any of our future subordinated indebtedness and PARI PASSU in right of payment with all of our senior indebtedness, including the 1999 Notes. OPTIONAL REDEMPTION. The 1998 Notes are not redeemable prior to December 31, 2003. Thereafter, the 1998 Notes will be redeemable, in whole or in part, at our option, at the redemption prices set forth in the 1998 Indenture, plus accrued and unpaid interest to the applicable redemption date. Specifically, if redeemed during the 12-month period beginning on December 31 of the years set forth below, the redemption price will be that amount, expressed as a percentage of the principal amount of the 1998 Notes, listed below:
YEAR REDEMPTION PRICE - ---- ------------------ 2003.................................................... 106.250% 2004.................................................... 100.000%
Despite the foregoing, however, we shall not be permitted to make an optional redemption until we consummate an offer with respect to the amount of cash generated by us which is not used for the provision of taxes, fixed charges, extraordinary losses or to repay secured indebtedness (the "Accumulated Excess Cash Flow Amount") existing at December 31, 2003 as described in "Excess Cash Flow Offer" below. In addition, (1) prior to December 15, 2001, we may redeem up to 35% of the originally issued principal amount of the 1998 Notes at 112.5% of their principal amount, plus accrued and unpaid interest through the redemption date, with the net cash proceeds of one or more public equity offerings; PROVIDED, HOWEVER, that at least 65% of the originally issued principal amount of the 1998 Notes remains outstanding after the occurrence of the redemption and (2) we may redeem the 1998 Notes at their face value if we become obligated to pay any additional amounts as a result of change in the laws or regulations of Canada or any Canadian taxing authority, or a change in any official position regarding their application or interpretation. CHANGE OF CONTROL. Upon the occurrence of a change of control, each holder of 1998 Notes will have the right to require us to repurchase all or any part of that holder's 1998 Notes at a 99 purchase price in cash equal to 101% of their principal amount, plus accrued and unpaid interest to the date of purchase. EXCESS CASH FLOW OFFER. If at the end of our fiscal quarter ended December 31, 2000 or any fiscal quarter ending on June 30 or December 31 thereafter, our Accumulated Excess Cash Flow Amount exceeds $10.0 million, we will be required to make an offer to all holders of 1998 Notes to purchase the maximum principal amount of 1998 Notes that may be purchased using that Accumulated Excess Cash Flow Amount at an offer price equal to 110% of the principal amount of the 1998 Notes, plus accrued and unpaid interest to the date of purchase, subject to a limitation that we are not obliged to repurchase more than 25% of the original principal amount of the 1998 Notes before December 31, 2003. COVENANTS. The 1998 Indenture contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: - borrow money; - pay dividends on stock or repurchase stock; - make investments; - use assets as security in other transactions; and - sell certain assets or merge with or into other companies. EVENTS OF DEFAULT. The 1998 Indenture contains customary events of default, including: - defaults in the payment of principal, premium or interest; - defaults in the compliance with covenants contained in the 1998 Indenture; - cross defaults on more than $10 million of other indebtedness; - failure to pay more than $10 million of judgments that have not been stayed by appeal or otherwise; and - the bankruptcy of 360NETWORKS INC. or certain of its subsidiaries. 360ATLANTIC CREDIT FACILITY In February 2000, a group of our subsidiaries entered into $565 million senior secured credit facilities arranged by Goldman Sachs Credit Partners L.P., DLJ Capital Funding, Inc., Credit Suisse First Boston and Export Development Corporation. This credit facility consists of a $365 million tranche A term loan facility, a $175 million tranche B term loan facility and a $25 million working capital revolving credit facility. Our subsidiaries have borrowed $175 million under this credit facility and will use these proceeds, as well as future proceeds, for the development, design, engineering, construction and installation of 360ATLANTIC. The indebtedness outstanding under this credit facility is guaranteed by four of our subsidiaries within the borrowing group and is secured by all of their capital stock and substantially all of the assets and property owned by our subsidiaries within the borrowing group. This credit facility is non-recourse to 360NETWORKS INC. The credit facility contains customary covenants which restrict and limit the ability of our subsidiaries within the borrowing group with respect to, among other things, incurring indebtedness, entering into merger or consolidation transactions, making certain restricted payments, creating liens on assets, making investments and entering into sale and leaseback transactions and transactions with affiliates. The credit facility also limits the ability of our 100 subsidiaries within the borrowing group to engage in activities unrelated to 360ATLANTIC. In addition, the credit facility also requires that our subsidiaries within the borrowing group comply with various financial covenants, including the receipt of a minimum amount of revenue derived from sales of capacity on 360ATLANTIC, maximum leverage ratios and a limit on capital expenditures. The credit facility also contains customary events of default, including the nonpayment of principal, interest, fees or other amounts, a cross-default with respect to other obligations of our subsidiaries within the borrowing group, failure to materially comply with certain covenants, conditions or provisions under the credit facility, the making of materially false or misleading representations or warranties, the occurrence of any default under material contracts related to 360ATLANTIC that could have a material adverse effect on our subsidiaries within the borrowing group, the failure to achieve the commercial operation date of 360ATLANTIC by a specified date, the occurrence of reorganization, bankruptcy, insolvency or similar proceedings or the occurrence of a change of control. Upon the occurrence and during the continuance of an event of default under the credit facility, all obligations under the credit facility could be deemed to be immediately due and payable. PROPOSED CREDIT FACILITY We have accepted an underwritten commitment from The Chase Manhattan Bank and an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation to provide up to $1.0 billion of financing under a senior credit facility. This commitment is subject to negotiation of definitive documentation and other closing and lending conditions. Amounts borrowed under this facility will be required to be used in compliance with restrictions contained under our indentures. There can be no assurance that this credit facility will be entered into in a timely fashion or at all. 101 MATERIAL UNITED STATES AND CANADIAN INCOME TAX CONSIDERATIONS In this section we summarize the material U.S. federal and Canadian federal income tax consequences of the ownership and disposition of Subordinate Voting Shares beneficially owned by individuals, corporations, trusts and estates which: - for purposes of the U.S. Internal Revenue Code of 1986, as amended through the date hereof (the "Code"), are U.S. persons and, for purposes of the Income Tax Act (Canada) (the "Income Tax Act") and the Canada-United States Income Tax Convention (1980), are residents of the United States and not resident in Canada; - hold Subordinate Voting Shares as capital assets for purposes of the Code and capital property for purposes of the Income Tax Act; - deal at arm's length with us for purposes of the Income Tax Act; and - do not and will not use or hold the Subordinate Voting Shares in carrying on a business in Canada. We will refer to persons who satisfy the above conditions as "Unconnected U.S. Shareholders." The tax consequences of an investment in Subordinate Voting Shares by persons who are not Unconnected U.S. Shareholders may differ materially from the tax consequences discussed in this section. The Income Tax Act contains rules relating to securities held by some financial institutions. We do not discuss these rules and holders that are financial institutions should consult their own tax advisors. This discussion is based upon the following, all as currently in effect: - the Income Tax Act and regulations under the Income Tax Act; - the Code and Treasury regulations under the Code; - the Canada-United States Income Tax Convention (1980); - the administrative policies and practices published by the Canadian Customs and Revenue Agency, formerly Revenue Canada; - all specific proposals to amend the Income Tax Act and the regulations under the Income Tax Act that have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of this registration statement; - the administrative policies published by the U.S. Internal Revenue Service; and - judicial decisions. All of the foregoing are subject to change either prospectively or retroactively. We do not take into account the tax laws of the various provinces or territories of Canada or the tax laws of the various state and local jurisdictions of the United States or foreign jurisdictions. THIS DISCUSSION SUMMARIZES THE MATERIAL U.S. FEDERAL AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS OF THE OWNERSHIP AND DISPOSITION OF SUBORDINATE VOTING SHARES. THIS DISCUSSION DOES NOT ADDRESS ALL POSSIBLE TAX CONSEQUENCES RELATING TO AN INVESTMENT IN SUBORDINATE VOTING SHARES. WE HAVE NOT TAKEN INTO ACCOUNT YOUR PARTICULAR CIRCUMSTANCES AND DO NOT ADDRESS CONSEQUENCES PECULIAR TO YOU IF YOU ARE SUBJECT TO SPECIAL PROVISIONS OF U.S. OR CANADIAN INCOME TAX LAW (INCLUDING, WITHOUT LIMITATION, DEALERS IN SECURITIES OR FOREIGN CURRENCY, TAX-EXEMPT ENTITIES, BANKS, INSURANCE COMPANIES OR OTHER FINANCIAL INSTITUTIONS, PERSONS THAT HOLD SUBORDINATE VOTING SHARES AS PART OF A "STRADDLE," "HEDGE" OR "CONVERSION TRANSACTION," AND UNCONNECTED U.S. SHAREHOLDERS THAT HAVE A "FUNCTIONAL CURRENCY" OTHER THAN 102 THE U.S. DOLLAR OR THAT OWN SUBORDINATE VOTING SHARES THROUGH A PARTNERSHIP OR OTHER PASS-THROUGH ENTITY). THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING SUBORDINATE VOTING SHARES IN THIS OFFERING. U.S. FEDERAL INCOME TAX CONSIDERATIONS Subject to the discussion below regarding Foreign Personal Holding Company Rules, Passive Foreign Investment Company Rules and Controlled Foreign Corporation Rules, this section summarizes U.S. federal income tax consequences of the ownership and disposition of Subordinate Voting Shares. As an Unconnected U.S. Shareholder, you generally will be required to include in income dividend distributions paid by us to the extent of our current or accumulated earnings and profits attributable to the distribution as computed based on U.S. income tax principles. The amount of any cash distribution paid in Canadian dollars will be equal to the U.S. dollar value of the Canadian dollars on the date of distribution based on the exchange rate on such date, regardless of whether the payment is in fact converted to U.S. dollars and without reduction for Canadian withholding tax. (For a discussion of Canadian withholding taxes applicable to dividends paid by us, see "Certain Canadian Federal Income Tax Considerations.") You will generally be entitled to a foreign tax credit or deduction in an amount equal to the Canadian tax withheld. To the extent distributions paid by us on the Subordinate Voting Shares exceed our current or accumulated earnings and profits, they will be treated first as a return of capital up to your adjusted tax basis in the shares and then as capital gain from the sale or exchange of the shares. Dividends paid by us generally will constitute foreign source dividend income and "passive income" for purposes of the foreign tax credit, which could reduce the amount of foreign tax credits available to you. The Code applies various limitations on the amount of foreign tax credits that may be available to a U.S. taxpayer. Because of the complexity of those limitations, you should consult your own tax advisor with respect to the availability of foreign tax credits. Dividends paid by us on the Subordinate Voting Shares generally will not be eligible for the "dividends received" deduction. If you sell the Subordinate Voting Shares, you generally will recognize gain or loss in an amount equal to the difference between the amount realized on the sale and your adjusted tax basis in the shares. Any such gain or loss will be long-term or short-term capital gain or loss, depending on whether the shares have been held by you for more than one year, and will generally be U.S. source gain or loss. Dividends paid by us on the Subordinate Voting Shares generally will not be subject to U.S. information reporting or the 31% backup withholding tax unless they are paid in the United States through a U.S. or U.S.-related paying agent, including a broker. If you furnish the paying agent with a duly completed and signed Form W-9, such dividends will not be subject to the backup withholding tax. You will be allowed a refund or a credit equal to any amount withheld under the U.S. backup withholding tax rules against your U.S. federal income tax liability, provided you furnish the required information to the Internal Revenue Service. FOREIGN PERSONAL HOLDING COMPANY RULES Special U.S. tax rules apply to a shareholder of a foreign personal holding company ("FPHC"). We would be classified as a FPHC in any taxable year if both of the following tests are satisfied: - five or fewer individuals who are U.S. citizens or residents own or are deemed to own more than 50% of the total voting power of all classes of our stock entitled to vote or the total value of our stock; and 103 - at least 60% of our gross income consists of "foreign personal holding company income," which generally includes passive income such as dividends, interest, gains from the sale or exchange of stock or securities, rents and royalties. We believe that we are not a FPHC, and we do not expect to become a FPHC as a result of the offering. However, we can not assure you that we will not qualify as a FPHC in the future. PASSIVE FOREIGN INVESTMENT COMPANY RULES The passive foreign investment company ("PFIC") provisions of the Code can have significant tax effects on Unconnected U.S. Shareholders. We could be classified as a PFIC if, after the application of certain "look through" rules, for any taxable year, either: - 75% or more of our gross income is "passive income," which includes interest, dividends and certain rents and royalties; or - the average quarterly percentage, by fair market value of our assets that produce or are held for the production of "passive income" is 50% or more of the fair market value of all our assets. To the extent we own at least 25% by value of the stock of another corporation, we are treated for purposes of the PFIC tests as owning our proportionate share of the assets of such corporation, and as receiving directly our proportionate share of the income of such corporation. Distributions which constitute "excess distributions" from a PFIC and dispositions of Subordinate Voting Shares of a PFIC are subject to the following special rules: (1) the excess distributions (generally any distributions received by an Unconnected U.S. Shareholder on the shares in any taxable year that are greater than 125% of the average annual distributions received by such Unconnected U.S. Shareholder in the three preceding taxable years, or the Unconnected U.S. Shareholder's holding period for the shares, if shorter) or gain would be allocated ratably over an Unconnected U.S. Shareholder's holding period for the shares, (2) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we are a PFIC would be treated as ordinary income in the current taxable year, and (3) the amount allocated to each of the other taxable years would be subject to the highest rate of tax on ordinary income in effect for that year and to an interest charge based on the value of the tax deferred during the period during which the shares are owned. Subject to specific limitations, Unconnected U.S. Shareholders who actually or constructively own marketable shares in a PFIC may make an election under section 1296 of the Code to mark those shares to market annually, rather than being subject to the above-described rules. Amounts included in or deducted from income under this mark-to-market election and actual gains and losses realized upon disposition, subject to specific limitations, will be treated as ordinary gains or losses. For this purpose, we believe that our shares will be treated as "marketable securities" within the meaning of Section 1296(e)(1) of the Code. We believe that we will not be a PFIC for the current fiscal year and we do not expect to become a PFIC in future years. Whether we are a PFIC in any year and the tax consequences relating to PFIC status will depend on the composition of our income and assets, including cash. You should be aware, however, that if we are or become a PFIC we may not be able or willing to satisfy record-keeping requirements that would enable you to make a "qualified electing fund" election. You should consult your tax advisor with respect to how the PFIC rules affect your tax situation. 104 CONTROLLED FOREIGN CORPORATION RULES If more than 50% of the voting power or total value of all classes of our shares is owned, directly or indirectly, by U.S. shareholders, each of which owns 10% or more of the total combined voting power of all classes of our shares, we could be treated as a controlled foreign corporation ("CFC") under Subpart F of the Code. This classification would require such 10% or greater shareholders to include in income their pro rata shares of our "Subpart F Income," as defined in the Code. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by an Unconnected U.S. Shareholder who is or was a 10% or greater shareholder at any time during the five year period ending with the sale or exchange will be ordinary dividend income to the extent of our earnings and profits attributable to the shares sold or exchanged. We believe that we are not a CFC and we will not become a CFC as a result of the offering. However, we can not assure you that we will not become a CFC in the future. CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS In this section, we summarize the material anticipated Canadian federal income tax considerations relevant to your purchase of Subordinate Voting Shares. Under the Income Tax Act, assuming you are an Unconnected U.S. Shareholder, and provided the Subordinate Voting Shares are listed on a prescribed stock exchange, which includes The Toronto Stock Exchange and Nasdaq, you will generally be exempt from Canadian tax on a capital gain realized on an actual or deemed disposition of the Subordinate Voting Shares unless you alone or together with persons with whom you did not deal at arm's length owned or had rights to acquire 25% or more of our issued shares of any class at any time during the five year period before the actual or deemed disposition. Dividends paid, credited or deemed to have been paid or credited on the Subordinate Voting Shares to Unconnected U.S. Shareholders will be subject to a Canadian withholding tax at a rate of 25% under the Income Tax Act. Under the Canada-United States Income Tax Convention (1980), the rate of withholding tax on dividends generally applicable to Unconnected U.S. Shareholders who beneficially own the dividends is reduced to 15%. In the case of Unconnected U.S. Shareholders that are corporations that beneficially own at least 10% of our voting shares, the rate of withholding tax on dividends generally is reduced to 5%. Canada does not currently impose any federal estate taxes or succession duties. However, if you die, there is generally a deemed disposition of the Subordinate Voting Shares held at that time for proceeds of disposition equal to the fair market value of the Subordinate Voting Shares immediately before the death. Capital gains realized on the deemed disposition, if any, will have the income tax consequences described above. 105 UNDERWRITING We, the selling shareholder and the underwriters for the offering (the "Underwriters") named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each Underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, TD Securities Inc., Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated, Chase Securities Inc., RBC Dominion Securities Inc. and Warburg Dillon Read LLC are the representatives of the Underwriters.
NUMBER OF UNDERWRITERS SHARES - ------------ ------------------ Goldman, Sachs & Co......................................... Donaldson, Lufkin & Jenrette Securities Corporation......... Credit Suisse First Boston Corporation...................... TD Securities Inc........................................... Bear, Stearns & Co. Inc..................................... BMO Nesbitt Burns Inc....................................... Morgan Stanley & Co. Incorporated........................... Chase Securities Inc........................................ RBC Dominion Securities Inc................................. Warburg Dillon Read LLC..................................... ----------- Total................................................. 46,275,000 ===========
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, TD Securities Inc., Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated, Chase Securities Inc., RBC Dominion Securities Inc. and Warburg Dillon Read LLC will, either directly or through their U.S. broker-dealer affiliates, offer the Subordinate Voting Shares in the U.S. Goldman, Sachs & Co. (through its Canadian dealer affiliate, Goldman Sachs Canada Inc.), Credit Suisse First Boston Corporation (through its Canadian dealer affiliate, Credit Suisse First Boston Securities Canada Inc.), TD Securities Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated (through its Canadian dealer affiliate, Morgan Stanley Canada Limited), RBC Dominion Securities Inc. and Warburg Dillon Read LLC (through its Canadian dealer affiliate, Bunting Warburg Dillon Read Inc.) will offer the Subordinate Voting Shares for sale in Canada. In addition, the Underwriters, through their international affiliates, will offer the Subordinate Voting Shares for sale outside of the United States and Canada. If the Underwriters sell more shares than the total number set forth in the table above, the Underwriters have an option to buy up to an additional 6,941,250 shares from us to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the Underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. 106 The following table shows the per share and total underwriting discounts and commissions to be paid to the Underwriters by us and the selling shareholder. Such amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares.
PAID BY 360NETWORKS INC. No Exercise Full Exercise ------------ ------------- Per share................................................... $ $ Total....................................................... $ $
Paid by selling shareholder No Exercise Full Exercise ------------ ------------- Per share................................................... $ $ Total....................................................... $ $
Shares sold by the Underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the Underwriters to securities dealers may be sold at a discount of up to $ per share from the initial price to the public. Any such securities dealers may resell any shares purchased from the Underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. The underwriting agreement provides that the obligations of the Underwriters to purchase the Subordinate Voting Shares listed above are subject to certain conditions set forth therein. The Underwriters are committed to purchase all of the Subordinate Voting Shares offered by this prospectus (other than those covered by the Underwriters' over-allotment option described below), if any are purchased. In the event of default by any Underwriter, the underwriting agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters may be increased or the underwriting agreement may be terminated. The obligations of the Underwriters under the underwriting agreement are several and may be terminated in their discretion on the basis of their assessment of the state of the financial markets and upon the occurrence of certain stated events. We, our officers, directors and substantially all of our shareholders have agreed with the Underwriters not to dispose of or hedge any of their Subordinate Voting Shares or securities convertible into or exchangeable for shares of Subordinate Voting Shares during the period from the date of this prospectus continuing through the periods set forth herein after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and 360NETWORKS. See "Shares Eligible for Future Sale". In connection with the offering, the Underwriters may purchase, over-allot or effect transactions on The Toronto Stock Exchange, on the Nasdaq National Market, in the over-the-counter market or otherwise, which stabilize or maintain the market price of the Subordinate Voting Shares at a level that might not otherwise prevail on the exchange. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Subordinate Voting Shares while the offering is in progress. In addition, in the U.S. the Underwriters also may impose a penalty bid. This occurs when a particular Underwriter repays to the Underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such Underwriter in stabilizing or short covering transactions. These activities by the Underwriters may stabilize, maintain or otherwise affect the market price of the Subordinate Voting Shares. As a result, the price of the Subordinate Voting Shares may be higher than the price that otherwise might 107 exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. Pursuant to policy statements issued by the Ontario Securities Commission and the Commission des valeurs mobilieres du Quebec, the Underwriters may not, throughout the period of distribution, bid for or purchase Subordinate Voting Shares. The foregoing restriction is subject to certain exceptions, on the condition that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in or raising the price of the Subordinate Voting Shares. Those exceptions include a bid or purchase permitted under the by-laws and rules of The Toronto Stock Exchange relating to market stabilization and passive market making activities and a bid or purchase made for or on behalf of a customer where the order was not solicited during the period of distribution. Subject to the foregoing, in connection with this offering and pursuant to the first-mentioned exception, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Subordinate Voting Shares at levels other than those which might otherwise prevail on the open market. Such transactions, if commenced, may be discontinued at any time. The Subordinate Voting Shares have been approved for listing on The Nasdaq National Market under the symbol "TSIX", subject to official notice of issuance. The Toronto Stock Exchange has conditionally approved the listing of the Subordinate Voting Shares under the symbol "TSX". Listing is subject to us fulfilling all of the requirements of The Toronto Stock Exchange on or before July 11, 2000, including the distribution of the Subordinate Voting Shares to a minimum number of public shareholders. Prior to the offering, there has been no public market for the Subordinate Voting Shares. Consequently, the initial public offering price has been determined through negotiations among us and Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the Underwriters. Among the factors considered in making such determination were the prevailing market conditions, our financial condition, our prospects and the prospects for our industry in general, our management and the market prices of securities for companies in businesses similar to ours. The Underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $3 million. We and the selling shareholder have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. At our request, the Underwriters have reserved, at the initial public offering price, approximately 5% of the Subordinate Voting Shares to be sold in this offering for sale to our directors and employees and directors and employees of our affiliates and certain other persons. The number of shares available for sale to the general public will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. On September 9, 1999, affiliates of each of Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette Securities Corporation invested in a private placement of our redeemable convertible preferred shares. These shares will be converted or exchanged into Subordinate Voting Shares concurrently with the closing of this offering. Pursuant to a purchase price adjustment provision in the purchase agreement governing the private placement, additional preferred shares were issued to such affiliates in February 2000 and March 2000, upon the issuance of Subordinate Voting Shares to CN and Michels, respectively, in exchange for its interests in certain of our subsidiaries. In December 1999, pursuant to that same purchase price adjustment provision, additional preferred shares were again issued to such affiliates concurrently with the purchase by Mr. Gregory Maffei, 108 our Chief Executive Officer, of our capital stock. In addition, under a shareholders agreement entered into in connection with the preferred share purchase, each such affiliate received the right to designate a member to our board of directors. For more information, please refer to the section entitled "Management." In addition, in connection with our $565 million 360ATLANTIC credit facility, affiliates of each of Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and Credit Suisse First Boston Corporation are acting as lead arrangers and affiliates of each of TD Securities Inc. and BMO Nesbitt Burns Inc. are acting as managing agents, for which they expect to receive customary fees and expense reimbursements. In addition, in connection with the GlobeNet acquisition, affiliates of each of TD Securities Inc. and Credit Suisse First Boston Corporation, shareholders of GlobeNet, will purchase our Subordinate Voting Shares concurrently with this offering and at the initial public offering price. TD Securities is also acting as GlobeNet's financial advisor in connection with the GlobeNet acquisition and will receive customary compensation for those services. An affiliate of Morgan Stanley & Co. Incorporated is currently providing financial valuation services to one of our subsidiaries, for which it will receive customary fees. Each of Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Chase Securities Inc., Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., RBC Dominion Securities Corporation and TD Securities (USA) Inc. is acting as an initial purchaser in connection with the concurrent debt offerings. Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc. have made a commitment to provide up to $1.0 billion to us under a credit facility. Those affiliates will receive customary financing fees in connection with such facility. Gene Sykes, a director of ours, is a Managing Director of Goldman, Sachs & Co., and Andrew Rush, a director of ours, is a Managing Director of DLJ Merchant Banking II, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation. In addition to the foregoing, from time to time the Underwriters or their affiliates may in the future engage in investment banking services with us, for which they will receive customary compensation. LEGAL MATTERS The validity of the Subordinate Voting Shares offered in this prospectus and certain legal matters concerning the Subordinate Voting Shares in connection with the offering will be passed upon for us by Cahill Gordon & Reindel, New York, New York (concerning matters of U.S. law), Farris, Vaughan, Wills & Murphy, Vancouver, British Columbia (concerning matters of Canadian law) and Stewart McKelvey Stirling Scales, Halifax, Nova Scotia (concerning matters of Nova Scotia law). Certain legal matters concerning the Subordinate Voting Shares in connection with the offering will be passed upon for the Underwriters by Latham & Watkins, New York, New York (concerning matters of U.S. law) and Osler, Hoskin & Harcourt LLP, Toronto, Ontario (concerning matters of Canadian law). EXPERTS We have included in this prospectus our audited consolidated financial statements for the year ended December 31, 1999 and period ended December 31, 1998 along with PricewaterhouseCoopers LLP's auditors' report on these financial statements. PricewaterhouseCoopers LLP, chartered accountants, Vancouver, British Columbia, issued the report as experts in auditing and accounting. 109 The divisional financial statements of the predecessor division as of May 31, 1998 and for each of the periods ended on May 31, 1998 and August 31, 1997 included in this prospectus, have been audited by Deloitte & Touche LLP, Edmonton, Alberta, as stated in their report contained in this prospectus. The audited consolidated financial statements of GlobeNet Communications Group Limited for the years ended December 31, 1999, 1998 and 1997 included in this prospectus, have been audited by PricewaterhouseCoopers LLP, chartered accountants, Toronto, Ontario, as stated in their report contained in this prospectus. ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS We are a corporation organized under the laws of Nova Scotia, Canada. A majority of our directors and officers, as well as certain experts named in this prospectus, reside principally in Canada. Because all or a substantial portion of our assets and the assets of these persons are located outside the United States, it may not be possible for you to effect service of process within the United States upon us or those persons. Furthermore it may not be possible for you to enforce against us or them in the United States, judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. Federal securities laws or other laws of the United States. We have been advised by Farris, Vaughan, Wills & Murphy, our Canadian counsel, that there is doubt as to the enforceability, in original actions in Canadian courts, of liabilities based upon the U.S. Federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. Federal securities laws. Therefore, it may not be possible to enforce those actions against us, our directors and officers or the experts named in this prospectus. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form F-1 under the Securities Act, and the rules and regulations promulgated thereunder, concerning the Subordinate Voting Shares offered by this prospectus. This prospectus, which forms a part of the registration statement, does not contain all of the information included in or annexed as exhibits or schedules to the registration statement. Any statement in this prospectus about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, the contract or document is deemed to modify the description contained in this prospectus. You must review the exhibits themselves for a complete description of the contract or document. You may review a copy of the registration statement, including exhibits and schedules filed with it, at the Commission's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. The Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. You may read and copy any reports, statements or other information that we file with the Commission at the addresses indicated above, and you may also access them electronically at the web site set forth above. These Commission filings are also available to the public from commercial document retrieval services. We are a "foreign private issuer" as defined in Rule 405 of the Securities Act. As a foreign private issuer, we are exempt from provisions of the Exchange Act which prescribe the furnishing 110 and content of proxy statements to shareholders and relating to short swing profits reporting and liability. Following consummation of the offering, we will be required to file reports and other information with the securities commission in all provinces of Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the Commission's electronic document gathering and retrieval system. COPIES OF ANY DOCUMENTS REFERRED TO IN THIS PROSPECTUS AND FILED WITH THE COMMISSION CAN BE OBTAINED WITHOUT CHARGE BY CONTACTING THE SECRETARY, C/O 360NETWORKS INC., 1500-1066 West Hastings Street, Vancouver, BC Canada V6E 3X1. Telephone number: (604) 681-1994. In order to obtain timely delivery of these documents you must request this information no later than five business days before the date on which you would like to receive the documents. 111 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) INDEX TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
PAGE ---- Pro Forma Consolidated Balance Sheet as at December 31, 1999...................................................... PF-2 Pro Forma Consolidated Income Statement for the year ended December 31, 1999......................................... PF-3 Notes to Pro Forma Financial Information.................... PF-4
PF-1 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) AS AT DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
PRO FORMA GLOBENET ---------------------------- COMMUNICATIONS ACQUISITION PRO FORMA 360NETWORKS INC. GROUP LIMITED ADJUSTMENTS COMBINED ADJUSTMENTS $ $ $ $ $ ----------------- ----------------- ------------ ---------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents....... 521,362 -- -- 521,362 548,119 4(i) -- 681,500 4(iii) Restricted cash -- 79,998 -- 79,998 -- Short term investments.......... 21,167 -- -- 21,167 -- Accounts receivable............. 35,351 3,878 -- 39,229 -- Unbilled revenue................ 115,661 -- -- 115,661 -- Inventory....................... 196,959 -- -- 196,959 Deferred tax asset.............. 8,838 -- -- 8,838 -- --------- -------- -------- --------- ---------- 899,338 83,876 -- 983,214 1,229,619 RESTRICTED CASH................. -- 448,399 -- 448,399 -- PROPERTY AND EQUIPMENT--NET..... 77,009 49,148 -- 126,157 (6,444)4(iv) ASSETS UNDER CONSTRUCTION....... 300,403 98,062 -- 398,465 DEFERRED TAX ASSET.............. 12,040 -- -- 12,040 -- DEFERRED FINANCING COSTS--NET... 22,199 24,743 (24,743)4(ii) 22,199 18,500 4(iii) OTHER........................... -- 1,104 -- 1,104 -- EQUITY ACCOUNTED FOR INVESTMENT...................... -- -- -- -- 6,444 4(iv) GOODWILL........................ -- -- 425,264 4(ii) 888,388 -- 306,924 4(v) 156,200 4(vi) --------- -------- -------- --------- ---------- 1,310,989 705,332 863,645 2,879,966 1,248,119 ========= ======== ======== ========= ========== LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities................... 191,178 57,296 -- 248,474 -- Deferred revenue................ 18,831 -- -- 18,831 -- Income taxes payable............ 34,343 -- -- 34,343 -- --------- -------- -------- --------- ---------- 244,352 57,296 -- 301,648 -- DEFERRED REVENUE................ -- 6,455 -- 6,455 -- DEFERRED TAX LIABILITY.......... 3,073 -- -- 3,073 -- SENIOR NOTES AND OTHER LONG TERM DEBT.......................... 675,000 400,000 -- 1,075,000 700,000 4(iii) --------- -------- -------- --------- ---------- 922,425 463,751 -- 1,386,176 700,000 MINORITY INTEREST............... 8,876 -- (8,876)4(v) -- -- REDEEMABLE CONVERTIBLE PREFERRED STOCK......................... 349,827 -- -- 349,827 (349,827)4(viii) SHAREHOLDERS' EQUITY Class A Non Voting Shares....... 236,436 -- 642,102 4(ii) 1,350,538 (1,350,538)4(ix) 312,000 4(v) 160,000 4(vi) Subordinate Voting Shares....... -- -- -- -- 548,119 4(i) 349,827 4(viii) 1,360,993 4(ix) Multiple Voting Shares.......... -- -- -- -- 45,232 4(ix) Class B Subordinate Voting Shares........................ 10,455 -- -- 10,455 (10,455)4(ix) Class C Multiple Voting Shares........................ 45,232 -- -- 45,232 (45,232)4(ix) Other capital accounts.......... (221,387) -- -- (221,387) 25,196 4(vii) GlobeNet share capital.......... -- 272,434 (272,434)4(ii) -- -- Deficit......................... (40,875) (30,853) 30,853 4(ii) (40,875) (25,196)4(vii) --------- -------- -------- --------- ---------- 29,861 241,581 872,521 1,143,963 897,946 --------- -------- -------- --------- ---------- 1,310,989 705,332 863,645 2,879,966 1,248,119 ========= ======== ======== ========= ========== PRO FORMA CONSOLIDATED BALANCE SHEET $ --------------------- ASSETS CURRENT ASSETS Cash and cash equivalents....... 1,750,981 Restricted cash 79,998 Short term investments.......... 21,167 Accounts receivable............. 39,229 Unbilled revenue................ 115,661 Inventory....................... 196,959 Deferred tax asset.............. 8,838 --------- 2,212,833 RESTRICTED CASH................. 448,399 PROPERTY AND EQUIPMENT--NET..... 119,713 ASSETS UNDER CONSTRUCTION....... 398,465 DEFERRED TAX ASSET.............. 12,040 DEFERRED FINANCING COSTS--NET... 40,699 OTHER........................... 1,104 EQUITY ACCOUNTED FOR INVESTMENT...................... 6,444 GOODWILL........................ 888,388 --------- 4,128,085 ========= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities................... 248,474 Deferred revenue................ 18,831 Income taxes payable............ 34,343 --------- 301,648 DEFERRED REVENUE................ 6,455 DEFERRED TAX LIABILITY.......... 3,073 SENIOR NOTES AND OTHER LONG TERM DEBT.......................... 1,775,000 --------- 2,086,176 MINORITY INTEREST............... -- REDEEMABLE CONVERTIBLE PREFERRED STOCK......................... -- SHAREHOLDERS' EQUITY Class A Non Voting Shares....... -- Subordinate Voting Shares....... 2,258,939 Multiple Voting Shares.......... 45,232 Class B Subordinate Voting Shares........................ -- Class C Multiple Voting Shares........................ -- Other capital accounts.......... (196,191) GlobeNet share capital.......... -- Deficit......................... (66,071) --------- 2,041,909 --------- 4,128,085 =========
PF-2 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) PRO FORMA CONSOLIDATED INCOME STATEMENT (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
PRO FORMA GLOBENET ------------------------- COMMUNICATIONS PRO FORMA 360NETWORKS INC. GROUP LIMITED ACQUISITION COMBINED ADJUSTMENTS $ $ ADJUSTMENTS $ $ ----------------- ----------------- ------------ ---------- ------------ Revenue....................... 359,746 26,348 -- 386,094 -- Costs......................... 250,612 10,989 -- 261,601 -- ------------ ------- ------- ------- ----------- Gross Profit.................. 109,134 15,359 -- 124,493 -- ------------ ------- ------- ------- ----------- Expenses General and administrative.... 21,846 15,104 -- 36,950 3,584 5(v) Stock-based compensation...... 7,116 4,207 -- 11,323 -- Depreciation.................. 2,998 1,854 -- 4,852 -- 17,011 5(i) Amortization of goodwill...... -- -- 18,525 5(ii) 35,536 -- ------------ ------- ------- ------- ----------- 31,960 21,165 35,536 88,661 3,584 ------------ ------- ------- ------- ----------- 77,174 (5,806) (35,536) 35,832 (3,584) Interest expense.............. 33,908 20,965 (1,310)5(i) 53,563 132,367 5(iii) Interest income............... 18,122 12,588 -- 30,710 -- ------------ ------- ------- ------- ----------- Income (loss) before income taxes, minority interest and equity accounted for investment.................. 61,388 (14,183) (34,226) 12,979 (135,951) (61,994)5(iv) Provision for income taxes.... 30,314 141 -- 30,455 2,690 5(v) ------------ ------- ------- ------- ----------- Income (loss) before minority interest and equity accounted for investment.... 31,074 (14,324) (34,226) (17,476) (76,647) Income attributable to minority interest and equity accounted for investment.... (7,434) (773) 7,434 5(ii (773) -- ------------ ------- ------- ------- ----------- Net income (loss) for the year........................ 23,640 (15,097) (26,792) (18,249) (76,647) ============ ======= ======= ======= =========== Basic and fully diluted loss per share................... $ (0.03) Weighted average number of shares used to compute basic and fully diluted loss per share....................... 327,313,808 5(vi) PRO FORMA CONSOLIDATED INCOME STATEMENT $ --------------------- Revenue....................... 386,094 Costs......................... 261,601 ------------ Gross Profit.................. 124,493 ------------ Expenses General and administrative.... 40,534 Stock-based compensation...... 11,323 Depreciation.................. 4,852 Amortization of goodwill...... 35,536 ------------ 92,245 ------------ 32,248 Interest expense.............. 185,930 Interest income............... 30,710 ------------ Income (loss) before income taxes, minority interest and equity accounted for investment.................. (122,972) Provision for income taxes.... (28,849) ------------ Income (loss) before minority interest and equity accounted for investment.... (94,123) Income attributable to minority interest and equity accounted for investment.... (773) ------------ Net income (loss) for the year........................ (94,896) ============ Basic and fully diluted loss per share................... $ (0.16) Weighted average number of shares used to compute basic and fully diluted loss per share....................... 617,783,263
PF-3 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1. NATURE AND PURPOSE OF PRO FORMA FINANCIAL INFORMATION The pro forma consolidated balance sheet of 360NETWORKS INC. (formerly Worldwide Fiber Inc.) (the "Company") as at December 31, 1999 assumes the following transactions occurred on December 31, 1999: (i) the issuance of 44,625,000 Subordinate Voting Shares in a public offering for cash consideration of $580,125,000, net of commissions of $29,006,250 and offering expenses of $3,000,000; (ii) the Company's acquisition of GlobeNet Communications Group Limited ("GlobeNet"); (iii) the issuance of $700,000,000 13.5% Notes ("Notes"); (iv) the Canadian telecommunications arrangement of certain assets; (v) the Company's acquisition of Michels' shares in WFI USA, (the "Michels minority interest acquisition") in exchange for Subordinate Voting Shares of the Company; (vi) the Company's acquisition of Canadian National Railway Company's ("CN") minority equity interest in WFI-CN Fibre Inc. and the Company's acquisition of Illinois Central Railroad Company's ("IC") minority equity interest in Worldwide Fiber LLC (collectively the "CN/IC minority interest acquisition") in exchange for Subordinate Voting Shares of the Company; (vii) the issuance of additional Series A Non-Voting Preferred Shares to the holders of Series A Non-Voting Preferred Shares made in connection with the issuance of shares to CN, IC and Michels; (viii) the conversion or exchange of Series A Non-Voting Preferred Shares into Subordinate Voting Shares and; (ix) the reorganization of the Company's share capital. The pro forma consolidated income statement of the Company for the year ended December 31, 1999 assumes that the following transactions occurred on January 1, 1999: (i) the Company's acquisition of GlobeNet; (ii) the elimination of minority interest earnings and amortization of goodwill as a result of the Michels and CN/IC minority interest acquisitions and (iii) the effect of the interest expense including amortization of deferred financing costs relating to the Notes and $500,000,000 12% senior notes issued July 28, 1999 (the "1999 Notes"). 2. BASIS OF PRESENTATION The unaudited pro forma consolidated balance sheet and consolidated income statement have been prepared by management in accordance with generally accepted accounting principles in the United States and the pro forma assumptions and adjustments described in notes 1, 4 and 5. The unaudited pro forma consolidated balance sheet and income statement as at and for the year ended December 31, 1999 are based on the audited historical consolidated financial statements of the Company for the year ended December 31, 1999 and audited historical consolidated financial statements of GlobeNet for the year ended December 31, 1999. The unaudited pro forma financial statements give effect to the acquisition by the Company of GlobeNet in a transaction to be accounted for as a purchase. The unaudited pro forma consolidated balance sheet is based on the individual balance sheets of the Company and GlobeNet, and has been prepared to reflect the acquisition by the Company of GlobeNet as of December 31, 1999. The unaudited proforma income statement is based on the individual statements of income of the Company and GlobeNet and combines the results of the operations for the year ended December 31, 1999 as if the acquisition occurred on January 1, 1999. PF-4 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. BASIS OF PRESENTATION (CONTINUED) The unaudited pro forma consolidated financial statements are not necessarily indicative of the results that actually would have resulted if the transactions reflected herein had been completed on the dates indicated or the results which may be obtained in the future. The unaudited pro forma consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of the Company, including the respective notes thereto, included elsewhere herein. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used in the preparation of the pro forma consolidated balance sheet and income statement include those disclosed in the consolidated financial statements of the Company. 4. PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (I) ISSUANCE OF SHARES IN A PUBLIC OFFERING This adjustment records the issuance of 44,625,000 Subordinate Voting Shares in a public offering for cash consideration of $49,392,499. This adjustment is recorded net of commissions of $29,006,250 and offering expenses of $3,000,000. (II) ACQUISITION OF GLOBENET The pro forma balance sheet has been prepared to reflect the Company's acquisition of GlobeNet in exchange for shares of the Company. This acquisition has been accounted for under the purchase method of accounting. Proforma adjustments and assumptions are made to reflect: - The issuance of 49,392,499 Subordinate Voting Shares assuming a purchase price of $642,102,492. - The elimination of GlobeNet's Shareholders' Equity of $241,581,000; - The assumption that GlobeNet's long term debt will not be repaid as a result of a change in control of GlobeNet; PF-5 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4. PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) - The allocation of the purchase price is as follows: Purchase price.............................................. $ 642,102 Less: book value of net assets acquired..................... 241,581 ------------ Excess of cost over book value of net assets acquired....... $ 400,521 ============ Allocation of excess of cost over book value of net assets acquired: Deferred financing costs.................................. $ (24,743) Goodwill.................................................. 425,264 ============ $ 400,521 ============
Goodwill will be amortized over 25 years. The purchase price allocation is preliminary subject to management's due diligence and the execution of definitive agreements, which may result in a different allocation than presented in these pro forma financial statements. This may result in a re-allocation of the excess of cost over the book value of net assets to pro forma inventory, property and equipment, assets under construction or long-term debt. (III) ISSUANCE OF $700,000,000 13.5% NOTES This adjustment records the issuance of $700,000,000 13.5% notes due 2010 (the "Notes") assuming the Notes were issued on December 31, 1999. Commissions of $17,500,000 and issuance expenses of $1,000,000 have been recorded as deferred financing costs which will be amortized over 10 years using the effective interest rate method. (IV) CANADIAN TELECOMMUNICATIONS ARRANGEMENT OF CERTAIN ASSETS This adjustment records the transfer of certain telecommunications facilities included in property & equipment to a company (the "transferee") owned 66 2/3% by a subsidiary of Ledcor and 33 1/3% by the Company. This transaction is recorded at the carrying value of the assets transferred of $6,444,000 as the transaction is between parties under common control. The Company's investment in the transferee is recorded using the equity basis of accounting. (V) MICHELS MINORITY INTEREST ACQUISITION This adjustment records the Company's acquisition of the shares in WFI USA in exchange for 24,000,000 Subordinate Voting Shares of the Company. This proforma adjustment assumes a purchase price of $312,000,000. The number of Subordinate Voting Shares to be issued will be PF-6 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4. PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) based on an initial public offering price which is assumed to be $13 per share. The allocation of the purchase price is as follows: Purchase price.............................................. $ 312,000 Less: book value of net assets acquired..................... 5,076 ------------ Excess of cost over book value of net assets acquired....... 306,924 ============ Allocation of excess of cost over book value of net assets acquired: Goodwill.................................................. 306,924 ============
Goodwill will be amortized over 25 years. The purchase price allocation is preliminary subject to a detailed assessment of the fair values of the underlying assets. This assessment may result in a re-allocation of the excess of cost over the book value of net assets to pro forma inventory, property and equipment and assets under construction. (VI) CN/IC MINORITY INTEREST ACQUISITION This adjustment records the Company's acquisition of the shares in WFI-CN Fibre Inc. and Worldwide Fiber LLC in exchange for 12,307,692 Subordinate Voting Shares of the Company. The pro forma adjustment assumes a purchase price of $160,000,000. The number of Subordinate Voting Shares to be issued will be based on an initial public offering price which is assumed to be $13 per share. The allocation of the purchase price is as follows: Purchase price.............................................. $160,000 Less: book value of net assets acquired..................... 3,800 -------- Excess of cost over book value of net assets acquired....... 156,200 ======== Allocation of excess of cost over book value of net assets acquired: Goodwill.................................................. 156,200 ========
Goodwill will be amortized over 25 years. The purchase price allocation is subject to a detailed assessment of the fair values of the underlying assets. This assessment may result in a re-allocation of the excess of cost over the book value of net assets to pro forma inventory, property and equipment and assets under construction. (VII) ISSUANCE OF SERIES A NON-VOTING PREFERRED SHARES This adjustment records the issuance of 9,771,190 Series A Non-Voting Preferred Shares to the holders of the Series A Non-Voting Preferred Shares in accordance with the purchase price adjustment provisions in the subscription agreements. This issuance is made in connection with the issuance of Subordinate Voting Shares to CN, IC and Michels. PF-7 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4. PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) (VIII) CONVERSION OR EXCHANGE OF SERIES A NON-VOTING PREFERRED SHARES INTO SUBORDINATE VOTING SHARES This adjustment records the conversion or exchange of all issued and outstanding Series A Non-Voting Preferred Shares into Subordinate Voting Shares. (IX) SHARE CAPITAL REORGANIZATION This adjustment records the reorganization of share capital as follows: - The conversion of all outstanding Class B Subordinate Voting Shares into Class A Non-Voting Shares - The redesignation of all outstanding Class A Non-Voting Shares to Subordinate Voting Shares - The redesignation of all outstanding Class C Multiple Voting Shares to Multiple Voting Shares. 5. PRO FORMA CONSOLIDATED INCOME STATEMENT ASSUMPTIONS AND ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 (I) ACQUISITION OF GLOBENET The pro forma income statement has been prepared to reflect the following adjustments and assumptions resulting from the acquisition of GlobeNet: - This elimination of the amortization of deferred financing costs of $1,310,000 related to GlobeNet's debt. - The amortization of goodwill of $17,011,000. - The assumption that GlobeNet's long term debt will not be repaid as a result of a change in control of GlobeNet. (II) MICHELS AND CN/IC MINORITY INTEREST ACQUISITIONS This adjustment records the amortization of goodwill from the acquisition of the minority equity interests of Michels and CN/IC and elimination of minority interest earnings assuming the acquisitions occurred on January 1, 1999. (III) INTEREST EXPENSE ON THE NOTES AND 1999 NOTES This adjustment records the interest expense, including amortization of deferred financing costs of $132,367,000 for the year ended December 31, 1999 assuming the Notes and the 1999 Notes were issued on January 1, 1999. Amortization of the deferred financing costs was computed based on the effective interest rate method. The Company would have capitalized a portion of interest PF-8 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5. PRO FORMA CONSOLIDATED INCOME STATEMENT ASSUMPTIONS AND ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED) expense related to the Notes and the 1999 Notes to the cost of the fiber optic network assets constructed in 1999, which is not reflected in these pro forma statements. (IV) INCOME TAXES This adjustment records an income tax recovery of $28,849,000 for 1999 using an effective tax rate of 45.6%. Management believes that, based on a number of factors, it is more likely than not that the deferred tax asset will be fully realized, such that no valuation allowance would be recorded. (V) CAPITAL TAXES This adjustment records estimated additional BC Corporation Capital taxes of $3,584,000 for 1999 and Federal Large Corporation taxes of $2,690,000 for 1999 resulting from the proforma adjustments in notes 4 and 5. (VI) PRO FORMA BASIC AND FULLY DILUTED LOSS PER SHARE The weighted average number of shares used to compute pro forma basic and fully diluted loss per share is determined as follows: Weighted average number of shares used to compute historical basic and fully diluted loss per share.................... 327,313,808 Issuance of shares in a public offering..................... 44,625,000 Purchase of GlobeNet........................................ 49,392,499 Purchase of Michels minority equity interest................ 24,000,000 Purchase of CN/IC minority equity interests................. 12,307,692 Issuance and conversion or exchange of Series A Non-Voting Preferred Shares.......................................... 160,722,502 Reciprocal shareholdings adjustment from the Canadian telecommunications arrangement transaction................ (578,238) ----------- 617,783,263 ===========
Pro forma loss available to common stockholders is computed as follows: Pro forma net loss........................................ $ (94,896) Stock dividend............................................ (5,000) ------------ Pro forma net loss available to common stockholders....... $ (99,896) ============
PF-9 INDEX TO FINANCIAL STATEMENTS
PAGE -------- 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1999 Auditors' Report............................................ F-2 Consolidated Balance Sheets................................. F-3 Consolidated Income Statements.............................. F-4 Consolidated Statements of Changes in Shareholders' Equity.................................................... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7 WORLDWIDE FIBER (USA), INC. AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 Report of Independent Accountants........................... F-28 Consolidated Income Statement............................... F-29 Consolidated Statement of Changes in Shareholders' Equity... F-30 Consolidated Statement of Cash Flows........................ F-31 Notes to Consolidated Financial Statements.................. F-32 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION Auditors' Report............................................ F-37 Divisional Balance Sheet.................................... F-38 Divisional Statements of Operations and Retained Earnings... F-39 Divisional Statements of Cash Flows......................... F-40 Notes to the Divisional Financial Statements................ F-41 GLOBENET COMMUNICATIONS GROUP LIMITED Auditors' Report............................................ F-48 Consolidated Balance Sheets................................. F-49 Consolidated Statements of Changes in Shareholders' Equity.................................................... F-50 Consolidated Statements of Operations....................... F-51 Consolidated Statements of Cash Flows....................... F-52 Notes to Consolidated Financial Statements.................. F-53
F-1 AUDITORS' REPORT TO THE DIRECTORS AND SHAREHOLDERS OF 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) We have audited the consolidated balance sheets of 360NETWORKS INC. (formerly Worldwide Fiber Inc.) as at December 31, 1999 and 1998 and the consolidated income statements and statements of changes in shareholders' equity and cash flows for the year ended December 31, 1999 and for the period from February 5, 1998 (date of incorporation) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1999 and 1998 and the results of its operations and its cash flows for the year ended December 31, 1999 and for the period from February 5, 1998 (date of incorporation) to December 31, 1998 in accordance with generally accepted accounting principles in the United States. On February 25, 2000 except for Note 16 which is as of March 20, 2000, we reported separately to the Directors of 360NETWORKS INC. on consolidated financial statements for the year ended December 31, 1999 and period from February 5, 1998 (date of incorporation) to December 31, 1998 prepared in accordance with generally accepted accounting principles in Canada. PricewaterhouseCoopers LLP Vancouver, Canada February 25, 2000 except for Note 15 which is as of March 20, 2000 F-2 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
1999 1998 ----------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 521,362 $ 156,366 Short term investments...................................... 21,167 -- Accounts receivable (note 4)................................ 35,351 3,272 Unbilled revenue (note 4)................................... 115,661 10,582 Inventory (note 4).......................................... 196,959 29,230 Due from parent-net (note 6)................................ -- 13,412 Deferred tax asset (note 11)................................ 8,838 -- ---------- ---------- 899,338 212,862 PROPERTY AND EQUIPMENT--NET (note 4)........................ 77,009 4,014 ASSETS UNDER CONSTRUCTION................................... 300,403 11,461 DEFERRED TAX ASSET (note 11)................................ 12,040 1,273 DEFERRED FINANCING COSTS--NET............................... 22,199 6,650 ---------- ---------- $1,310,989 $ 236,260 ========== ========== LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities (notes 4 and 6).... $ 191,178 $ 20,296 Deferred revenue............................................ 18,831 13,651 Income taxes payable........................................ 34,343 7,609 ---------- ---------- 244,352 41,556 DEFERRED TAX LIABILITY (note 11)............................ 3,073 -- SENIOR NOTES (note 7)....................................... 675,000 175,000 ---------- ---------- 922,425 216,556 MINORITY INTEREST........................................... 8,876 1,443 REDEEMABLE CONVERTIBLE PREFERRED STOCK Authorized: 100,000,000,000 Series A Non-Voting Redeemable Convertible Preferred Shares 100,000,000,000 Series B Subordinate Voting Redeemable Convertible Preferred Shares 45,000,000 Series C Redeemable Preferred Shares, no par value Issued and outstanding: 150,951,312 (1998--nil) Series A Non-Voting Redeemable Convertible Preferred Shares (including accretion of discount from redemption value of $6,465,000 and net of issuance costs of $1,638,000) (note 8).................. 349,827 -- SHAREHOLDERS' EQUITY Capital stock (note 9) Authorized: Unlimited number of Class A Non-Voting, Class B Subordinate Voting and Class C Multiple Voting Shares, no par value Issued and outstanding: 353,426,400 (1998--nil) Class A Non-Voting Shares....... 236,436 -- 82,629,600 (1998--80,004,800) Class B Subordinate Voting Shares................................................. 10,455 7,400 81,840,000 (1998--nil) Class C Multiple Voting Shares... 45,232 -- OTHER CAPITAL ACCOUNTS...................................... (221,387) 1,841 (DEFICIT) RETAINED EARNINGS................................. (40,875) 9,020 ---------- ---------- 29,861 18,261 ---------- ---------- $1,310,989 $ 236,260 ========== ========== COMMITMENTS (NOTE 14) SUBSEQUENT EVENTS (NOTE 15)
The accompanying notes are an integral part of these consolidated financial statements. F-3 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998. THE COMPANY'S OPERATIONS COMMENCED ON JUNE 1, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
1999 1998 ------------- ----------- REVENUE..................................................... $ 359,746 $ 164,319 COSTS....................................................... 250,612 147,621 ------------ ----------- GROSS PROFIT................................................ 109,134 16,698 ------------ ----------- EXPENSES Selling, general and administrative....................... 21,846 2,274 Stock-based compensation.................................. 7,116 -- Depreciation.............................................. 2,998 464 ------------ ----------- 31,960 2,738 ------------ ----------- 77,174 13,960 INTEREST EXPENSE............................................ 33,908 492 INTEREST INCOME............................................. 18,122 267 ------------ ----------- INCOME BEFORE EQUITY INCOME, INCOME TAXES AND MINORITY INTEREST.................................................. 61,388 13,735 EQUITY INCOME (NOTE 5)...................................... -- 928 ------------ ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 61,388 14,663 PROVISION FOR INCOME TAXES (NOTE 11)........................ Current................................................... 40,338 5,643 Deferred.................................................. (10,024) -- ------------ ----------- 30,314 5,643 31,074 9,020 MINORITY INTEREST........................................... 7,434 -- ------------ ----------- NET INCOME FOR THE PERIOD................................... $ 23,640 $ 9,020 ============ =========== BASIC AND FULLY DILUTED (LOSS) EARNINGS PER SHARE (NOTE 2).................................................. $ (0.03) $ 0.43 WEIGHTED AVERAGE NUMBER OF SHARES USED TO COMPUTE BASIC AND FULLY DILUTED (LOSS) EARNINGS PER SHARE................... 327,313,808 20,964,178
The accompanying notes are an integral part of these consolidated financial statements. F-4 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
CLASS B SUBORDINATE VOTING SHARES (FORMERLY CLASS A CLASS C MULTIPLE CLASS A NON-VOTING SHARES COMMON SHARES) VOTING SHARES --------------------------- --------------------------- --------------------- NUMBER OF NUMBER OF NUMBER OF SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------- ----------- --------------- --------- ---------- -------- BALANCE, FEBRUARY 5, 1998 -- $ -- -- $ -- -- $ -- Incorporation shares issued, February 5, 1998............................ 1,600 -- Issuance of shares for certain Ledcor assets with deferred tax asset (note 5)........................... 3,200 7,400 Issuance of shares for investments (note 5)........................... 80,000,000 -- Excess of proceeds over cost on fiber optic strands to be reacquired from parent company (note 1)............ Comprehensive income Net earnings for the period........ Accumulated other comprehensive income-foreign currency translation...................... Total comprehensive income........... ----------- -------- -------------- -------- ---------- ------- BALANCE, DECEMBER 31, 1998........... -- -- 80,004,800 7,400 -- -- Issuance of shares for certain Ledcor assets with deferred tax asset (note 1)........................... 319,995,200 25,019 Repurchase of Class B Subordinate Voting Shares in exchange for Class B Subordinate Voting Shares and (400,000,000) (32,419) Series C Redeemable Preferred Shares(note 9)................... 381,496,000 32,419 Issuance of shares for cash (note 9)........................... 2,400,000 5,832 Redemption of Series C Redeemable Preferred Shares and stock dividend (note 9)........................... Issuance of shares for certain Ledcor assets with deferred tax asset (note 1)........................... 72,000,000 5,872 Issuance of shares (note 9).......... 52,160,000 208,640 9,840,000 39,360 Conversion of Class B Subordinate Voting Shares to Class A Non-Voting Shares (note 9).................... 301,266,400 27,796 (301,266,400) (27,796) Accretion of Preferred Stock to redemption value................... Purchase price adjustment to Preferred Shares................... Employee option grants............... Amortization of deferred compensation expense............................ Comprehensive income................. Net income for the period.......... Accumulated other comprehensive income-foreign currency translation...................... Total comprehensive income........... ----------- -------- -------------- -------- ---------- ------- BALANCE, DECEMBER 31, 1999........... 353,426,400 $236,436 82,629,600 $ 10,455 81,840,000 $45,232 =========== ======== ============== ======== ========== ======= OTHER CAPITAL ACCOUNTS ------------------------------------------------------ ACCUMULATED ADDITIONAL OTHER (DEFICIT) TOTAL NOTE PAID IN DEFERRED COMPREHENSIVE RETAINED SHAREHOLDERS' RECEIVABLE CAPITAL COMPENSATION INCOME EARNINGS EQUITY ---------- ---------- ------------ ------------- --------- ------------- BALANCE, FEBRUARY 5, 1998 $ -- $ -- $ -- $ -- $ -- $ -- Incorporation shares issued, February 5, 1998............................ -- Issuance of shares for certain Ledcor assets with deferred tax asset (note 5)........................... 1,088 8,488 Issuance of shares for investments (note 5)........................... -- Excess of proceeds over cost on fiber optic strands to be reacquired from parent company (note 1)............ 1,154 1,154 Comprehensive income Net earnings for the period........ 9,020 Accumulated other comprehensive income-foreign currency translation...................... (401) Total comprehensive income........... 8,619 -------- -------- --------- ----- -------- -------- BALANCE, DECEMBER 31, 1998........... -- 2,242 -- (401) 9,020 18,261 Issuance of shares for certain Ledcor assets with deferred tax asset (note 1)........................... 25,019 Repurchase of Class B Subordinate Voting Shares in exchange for Class B Subordinate Voting Shares and (32,419) Series C Redeemable Preferred Shares(note 9)................... 32,419 Issuance of shares for cash (note 9)........................... (2,832) 3,000 Redemption of Series C Redeemable Preferred Shares and stock dividend (note 9)........................... (45,000) (45,000) Issuance of shares for certain Ledcor assets with deferred tax asset (note 1)........................... (2,242) 3,630 Issuance of shares (note 9).......... (77,500) (170,500) -- Conversion of Class B Subordinate Voting Shares to Class A Non-Voting Shares (note 9).................... -- Accretion of Preferred Stock to redemption value................... (6,465) (6,465) Purchase price adjustment to Preferred Shares................... 22,070 (22,070) -- Employee option grants............... 22,337 (22,337) -- Amortization of deferred compensation expense............................ 7,116 7,116 Comprehensive income................. Net income for the period.......... 23,640 Accumulated other comprehensive income-foreign currency translation...................... 660 Total comprehensive income........... 24,300 -------- -------- --------- ----- -------- -------- BALANCE, DECEMBER 31, 1999........... $(77,500) $ 44,407 $(188,553) $ 259 $(40,875) $ 29,861 ======== ======== ========= ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
1999 1998 --------- --------- CASH FLOWS USED IN OPERATING ACTIVITIES Net income for the year..................................... $ 23,640 $ 9,020 Adjustments to reconcile net income to net cash used for operating activities Depreciation.............................................. 2,998 464 Amortization of deferred financing costs.................. 1,732 -- Equity income............................................. -- (928) Stock-based compensation.................................. 7,116 -- Changes in operating working capital items Accounts receivable....................................... (31,887) (196) Unbilled revenue.......................................... (103,597) (992) Inventory................................................. (164,713) (5,517) Due from parent........................................... 13,841 (16,230) Accounts payable and accrued liabilities.................. 151,420 2,904 Deferred revenue.......................................... (14,008) 13,708 Income taxes payable...................................... 26,405 6,491 Advances to WFI USA....................................... -- (21,783) Deferred income taxes..................................... (10,024) -- --------- -------- (97,077) (13,059) --------- -------- CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES Additions to assets under construction...................... (283,598) -- Additions to property and equipment......................... (16,518) (1,065) Purchase of short-term investments.......................... (21,167) -- Cash acquired on acquisition of WFI USA..................... -- 2,242 --------- -------- (321,283) 1,177 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of capital stock..................... 348,000 -- Proceeds from issuance of notes............................. 500,000 175,000 Deferred financing costs.................................... (17,281) (6,650) Redemption of Series C Redeemable Preferred Shares.......... (45,000) -- --------- -------- 785,719 168,350 --------- -------- Effect of exchange rate changes on cash..................... (2,363) (102) --------- -------- Net increase in cash and cash equivalents................... 364,996 156,366 --------- -------- Cash and cash equivalents, beginning of period.............. 156,366 -- --------- -------- Cash and cash equivalents, end of period.................... $ 521,362 $156,366 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1. THE COMPANY 360NETWORKS INC. (formerly Worldwide Fiber Inc.) (the "Company") was incorporated on February 5, 1998 and is indirectly a subsidiary of Ledcor Inc. On May 31, 1998 the Company began its operations after certain assets of the Telecommunications Division ("Division") of Ledcor Industries Limited ("Ledcor"), a Ledcor Inc. subsidiary were transferred to the Company. Prior to May 31, 1998, the operations were carried out by the Division. The Company's operations consist of designing, engineering, constructing and installing terrestrial and marine fiber optic systems for sale or lease to third parties or for its own use. For the period ended December 31, 1998, the Company's revenues related primarily to the Construction Services Agreements with Ledcor (see note 1(b)). For the year ended December 31, 1999, the Company's revenue is derived primarily from the construction of fibre optic network assets for telecommunications companies in North America. TRANSACTIONS WITH LEDCOR AND ITS AFFILIATES a) On May 31, 1998, the Company entered into undertaking agreements whereby certain fiber optic network assets, located in Canada and the U.S. would be transferred to the Company by Ledcor in exchange for 319,995,200 Class A Non-Voting Shares. The Company constructed these assets for Ledcor under the Construction Services Agreements noted below. Construction of the assets was substantially complete at December 31, 1998 and the Company completed the exchange on March 31, 1999. This transaction was accounted for using the carrying values reported in the accounts of Ledcor as a transaction between a parent and a wholly owned subsidiary and accordingly, the fixed assets acquired by the Company are recorded at the carrying amount of the assets in the accounts of Ledcor. The cost of property and equipment acquired at March 31, 1999 amounted to $21,883,000. As a result of the transaction, the Company also received a deferred tax benefit of $3,136,000 which is reflected as a deferred tax asset. On May 28, 1999, the Company entered into an agreement with affiliates of Ledcor, whereby the Company would acquire certain fiber optic network assets. Closing occurred on September 27, 1999. As consideration, the Company issued 72,000,000 Class C Multiple Voting Shares to affiliates of Ledcor. In addition, the Company assumed certain rights and obligations under build agreements with a third party including obligations relating to the completion of those builds and certain support structure, maintenance, license and access, and underlying rights obligations. The cost of the property and equipment acquired amounted to $25,289,000, the cost of the assets in the accounts of Ledcor. The Company also received a deferred tax benefit of $3,341,000, as a result of a higher tax cost versus accounting cost of fixed assets. The Company also recorded deferred revenue of $25,000,000 relating to a build commitment assumed from Ledcor. b) Construction Services Agreements entered into May 31, 1998, to provide construction services to Ledcor to complete various projects including completion of the fiber optic network assets to be transferred to the Company. As the Company is required to obtain the fiber optic F-7 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) network assets from Ledcor, the revenues and costs associated with this portion of the agreement have not been reflected in the income statement for the period ended December 31, 1998. The costs to construct the network were reflected on completion of construction and the issuance of the shares. As at December 31, 1998, the Company had billed Ledcor $18,138,000 for the services related to construction of the fiber optic network assets which exceeds their costs by $2,099,000. This excess, net of income taxes of $945,000, had been excluded from the consolidated income statement and had been reported as additional paid in capital. c) A Management Services Agreement was entered into May 31, 1998 whereby Ledcor provides the Company with management staff, administrative and other support services. The Company reimburses Ledcor for direct costs and pays Cdn. $200,000 per month for the Company's share of corporate overheads. d) Employee Services Agreements were entered into May 31, 1998 whereby the Company obtains the services of certain employees from Ledcor on a cost reimbursement basis. e) The Company has entered into an agreement with Ledcor, whereby personnel of Ledcor who were involved in the designing and planning of the transatlantic 360ATLANTIC cable stations will oversee management and supervision of construction of these facilities for a fee to Ledcor of approximately $1,700,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States and include the accounts of the Company, its wholly owned subsidiaries and its 75% interests in Worldwide Fiber (USA), Inc. ("WFI USA"), WFI-CN Fiber Inc. and Worldwide Fiber IC LLC. All significant intercompany transactions and balances have been eliminated on consolidation. For investments where the Company exercises significant influence, the investment is accounted for using the equity method. On December 31, 1998, the Company increased its interest in WFI USA from 50% to 75% (note 5). The 1998 consolidated income statement and statement of cash flows accounted for the Company's initial 50% interest in WFI USA using the equity method for the period May 31, 1998 to December 31, 1998. The Company's consolidated balance sheets include WFI USA's assets and liabilities, and minority interest therein. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the period reported. Actual results could differ from those estimates. F-8 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash on deposit and highly liquid short-term interest bearing securities with maturity at the date of purchase of three months or less. SHORT TERM INVESTMENTS Short term investments consist of highly liquid short term interest bearing securities with maturities at the date of purchase greater than three months. Interest earned is recognized immediately in the income statement. PROPERTY AND EQUIPMENT Fiber optic network assets constructed for the Company's own use are recorded as property and equipment when the asset is fully constructed. Fiber optic network assets, construction equipment and other property and equipment are recorded at cost. Property and equipment are depreciated using the following rates and methods: (a) Fiber optic network assets--straight-line method over 25 years. (b) Equipment--hourly usage rates, estimated to depreciate the equipment over the estimated useful lives of the equipment. ASSETS UNDER CONSTRUCTION Assets under construction include fiber optic network assets constructed for the Company's own use and include direct expenditures of materials and labour, indirect costs attributable to the projects and interest. LONG-LIVED ASSETS The company reviews the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated to be generated during the remaining life of the asset to the net carrying value of the asset. INVENTORY Inventory consists of fiber optic network assets to be sold or leased under sales-type leases, construction supplies and small tools. Fiber optic network assets are recorded at the lower of cost and market. Cost includes direct materials and subcontractor charges, labour, and interest (see "capitalization of interest") determined on an average cost basis. Construction supplies and small tools inventory are recorded at the lower of cost and replacement value. F-9 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) REVENUE RECOGNITION Revenue for services provided to Ledcor for construction projects is recognized in the period the construction services are performed based on the costs incurred. Revenue and income from construction contracts to develop fiber optic network assets are determined on the percentage-of-completion basis using the cost-to-cost method. Provision is made for all anticipated losses as soon as they become evident. Claims for additional contract compensation are not recognized until resolved. UNBILLED REVENUE Revenue recognized using the percentage-of-completion basis (see "Revenue recognition") less billings to date is recorded as unbilled revenue. Unbilled revenue classified as current represent billings expected to be collected within the following fiscal year. Billings are rendered on the achievement of certain construction milestones. CAPITALIZATION OF INTEREST Interest is capitalized as part of the cost of constructing fiber optic network assets. Interest capitalized during the construction period is computed by determining the average accumulated expenditures for each interim capitalization period and applying the interest rate related to the specific borrowings associated with each construction project. The total interest capitalized in the year ended December 31, 1999 was $17,467,000 (December 31, 1998--$Nil). DEFERRED FINANCING COSTS Costs incurred in connection with obtaining the senior notes financing are deferred and amortized, using the effective interest method, to interest expense over the term of the senior notes. DEFERRED REVENUE Cash received from customers pursuant to contracts where construction has not commenced is recorded as deferred revenue. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The functional currency of the Company's operations located in countries other than the U.S. is generally the domestic currency. The consolidated financial statements are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and weighted-average exchange rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in shareholders' equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated income statement. F-10 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) COMPREHENSIVE INCOME Comprehensive income consists of currency translation adjustments and net income. INCOME TAXES Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current period and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance, where, based on available evidence, the probability of realization of the deferred tax asset does not meet a more likely than not criteria. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments, consisting of cash and cash equivalents, short-term investments, accounts receivable, unbilled revenue, due from parent, accounts payable and accrued liabilities, and income taxes payable approximate their carrying values due to their short-term nature. As at December 31, 1999, the fair value of the $500,000,000 12% Senior Notes was $515,000,000 and the fair value of the $175,000,000 12.5% Senior Notes ("1998 Notes") was $182,000,000. The fair value of the 1998 Notes at December 31, 1998 approximated its carrying value. Fair value is based on a quoted market price. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares (including Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares) outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and redeemable convertible preferred shares, in the weighted average number of common shares outstanding for a period, if dilutive. The following table sets forth the computation of (loss) earnings per share:
1999 1998 $ $ ------------- ----------- Net income...................................... 23,640 9,020 Less: Stock dividend................................ 5,000 -- Preferred stock accretion..................... 6,465 -- Purchase price adjustment to preferred shares...................................... 22,070 -- ============ =========== Net (loss) income available to common stockholders.................................. (9,895) 9,020 ============ ===========
F-11 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) The Redeemable Convertible Preferred Shares and stock options are not included in the computation of fully diluted earnings per share as their effect is anti-dilutive. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial statements. In June 1999, the Financial Accounting Standards Boards (FASB) issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." The interpretation is effective for sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Under this interpretation, title must transfer to a lessee in order for a lease transaction to be accounted for as a sales-type lease. The accounting for indefeasible rights of use of fiber optic network assets is evolving and currently being considered by accounting standard setters in the U.S. These changes may have a significant effect on the Company, however it is not possible to determine the consequences of such changes until further accounting guidance has been developed. COMPARATIVE FINANCIAL INFORMATION Certain prior year amounts have been reclassified to conform to the current year presentation. 3. SUPPLEMENTAL CASH FLOW INFORMATION
1999 1998 $ $ -------- -------- Cash paid for income taxes................................ 13,944 -- Cash paid for interest.................................... 21,391 -- Supplemental non-cash investing and financing activities: Issuance of common shares for Certain Ledcor assets................................. 47,172 8,488 Deferred revenue...................................... 25,000 -- Additional 25% investment in WFI USA in exchange for surrender of note receivable........................ -- 3,915 Series C Redeemable Preferred stock dividend............ 5,000 -- Accretion of Preferred Stock to redemption value........ 6,465 --
F-12 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4. BALANCE SHEET COMPONENTS
1999 1998 $ $ -------- -------- Accounts receivable Trade accounts receivable............................... 34,736 3,107 Interest receivable and other........................... 615 165 ------- ------ 35,351 3,272 ======= ====== Unbilled revenue Revenue earned on uncompleted contracts................. 333,116 22,236 Less: Billings to date.................................. 217,455 11,654 ------- ------ 115,661 10,582 ======= ======
Inventory Fiber optic network assets.............................. 188,013 28,085 Construction supplies and small tools................... 8,946 1,145 ------- ------ 196,959 29,230 ======= ====== Property and equipment Land.................................................... 5,891 -- Fiber optic network assets.............................. 64,079 -- Equipment............................................... 10,501 4,478 ------- ------ 80,471 4,478 Less: Accumulated depreciation.......................... 3,462 464 ------- ------ Property and equipment--net............................... 77,009 4,014 ======= ======
Accounts payable and accrued liabilities Subcontractor and supplier costs........................ 100,461 13,468 Subcontractor holdbacks payable......................... 25,676 4,843 Other accrued liabilities............................... 36,474 1,493 Interest payable........................................ 28,567 492 ------- ------ 191,178 20,296 ======= ======
5. ACQUISITIONS TELECOMMUNICATIONS DIVISION ASSETS Effective May 31, 1998, the Company entered into a series of agreements whereby equipment, fiber optic network assets and other assets related to the business of the Telecommunications Division of Ledcor were transferred to the Company. In addition, the Company was granted a license to use Ledcor's patented rail plow technology. This license agreement was for an initial term F-13 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) of ten years, renewable annually upon completion of the initial term. As part of this transaction, Ledcor retained all existing construction contracts related to the business. This transaction was between entities under common control and has been accounted for using the carrying amounts recorded in Ledcor's accounts. The tax basis of substantially all the Canadian assets transferred to the Company was Ledcor's carrying values whereas the tax basis of the U.S. assets transferred was their fair value. The deferred tax balances were adjusted for the change in the tax basis of the U.S. assets with the adjustment being reflected as additional paid in capital. As consideration for the transaction, the Company issued 3,200 Class A Common Shares to Ledcor. The assets transferred and consideration given, in connection with this transaction, were as follows:
$ Assets Construction equipment.................................... 2,830 Fiber optic network assets................................ 4,424 Deferred income taxes..................................... 1,088 Other..................................................... 146 ----- 8,488 ===== Consideration given Class A common Shares and additional paid in capital...... 8,488 =====
LEDCOM HOLDINGS LTD. On December 1, 1998 the Company acquired 50 Class A common Shares representing a 50% interest of Ledcom Holdings Ltd. ("Ledcom") from Worldwide Fiber Holdings Ltd. ("WFHL"), the Company's parent. As consideration, the Company issued 32,000,000 Class A Non-Voting Shares. Ledcom holds the patent to Ledcor's rail plow technology, and in conjunction with this acquisition Ledcor has committed to grant to the Company a worldwide exclusive license for the use of the rail plow technology. The license will become non-exclusive six months after a change of control of the Company. This transaction was between entities under common control and has been accounted for using the carrying value of the investment recorded in WFHL's accounts which was $nil. INVESTMENT IN WFI USA On August 31, 1998, the Company purchased Ledcor's 50% interest in, and a promissory note of $3,915,000 from WFI USA, in exchange for 48,000,000 Class A Non-Voting Shares of the Company and the issuance of a promissory note by the Company. WFI USA was a joint venture with Mi-Tech Communications LLC ("Mi-Tech") which held the remaining 50% interest in WFI USA. WFI USA's operations consist primarily of developing fiber optic network assets in the United States. As this transaction was between entities under common control, it was accounted for in a manner similar to a pooling of interests. These financial statements reflect the equity interest in the F-14 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) income of WFI USA from May 31, 1998 to December 31, 1998 in the amount of $928,000. Prior to May 31, 1998, the equity interest was reported as part of the Telecommunications Division of Ledcor. On December 31, 1998 the Company increased its interest in WFI USA to 75% by surrendering its note receivable from WFI USA of $3,915,000 for 100 non-voting common shares and 100 Class A Voting Preferred Shares of WFI USA. The acquisition has been accounted for using the purchase method effective December 31, 1998. The purchase price of the additional 25% has been allocated to assets and liabilities based on their fair values. As a result, the net assets acquired were as follows:
$ Current assets.............................................. 3,742 Inventory................................................... 6,048 Fiber optic network assets.................................. 1,795 Current liabilities......................................... 10,052
On December 31, 1998, the Company entered into a Shareholders' Agreement ("Agreement") with Ledcor, Mi-Tech and Michels Pipeline Construction, Inc. ("Michels") (an affiliate of Mi-Tech). Pursuant to this agreement, Mi-Tech will have the option to convert all of its 25% interest in WFI USA into Shares of the Company should the Company complete a public offering of Shares with an aggregate value of at least $20,000,000 or there is a change of control of WFI USA. In connection with the conversion, Mi-Tech will be granted certain registration rights in accordance with the Agreement. In addition, after the tenth anniversary of this agreement, Mi-Tech has the option to require WFI USA to purchase all of the Shares owned by Mi-Tech and its affiliates at fair market value. If Mi-Tech exercises this option, the Company can elect to sell all the Shares or assets of WFI USA in which case it will not be required to purchase Mi-Tech's Shares in WFI USA. In the event of a proposed sale of the Shares of WFI USA held by the Company, Mi-Tech will have certain tag-along rights. Also as part of the Agreement the Company: a) Agreed not to participate in any projects or business nor provide advice or assistance to any business which undertakes projects within WFI USA's scope of business, as defined in the Agreement, for a period of four years from the date of the Agreement. b) Is restricted from selling, transferring, encumbering or divesting its ownership or control of WFI USA. c) WFI USA has an option to purchase from Mi-Tech 24 fiber optic strands along certain existing routes owned by Mi-Tech and its affiliates at fair market value. F-15 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 6. DUE FROM PARENT The amounts due to and from parent are non-interest bearing, have no stated terms of repayment and are due on demand. Contract amounts billed to parent and costs charged by parent exceed revenues and costs as reported in the income statement, for the period ended December 31, 1998, due to fiber optic network assets to be transferred to the Company as described in note 1(b). The balance as at December 31, 1999 of $7,297,000, is included in accounts payable. 7. SENIOR NOTES On July 28, 1999 the Company issued $500,000,000 12% senior notes (the "Notes"). The Notes are unsecured obligations of the Company bearing interest at 12% payable semi-annually. The Notes are due August 1, 2009 and may be redeemed by the Company on or after August 1, 2004 at certain specified redemption prices ranging up to 106.00%. Up to 35% of the Notes may be redeemed by the Company prior to August 1, 2002 at a redemption price of 112% of the principal amount with the net proceeds from certain sales of the Company's common stock. If a change in control occurs, as defined in the Notes indentures, the holders of the Notes can require the Company to repurchase all or part of the Notes at 101% of the principal amount. Where excess proceeds from certain asset sales, as defined in the Notes indentures, exceeds $10,000,000 the Company is required to make an offer to repurchase the maximum amount of Notes that can be repurchased with such excess proceeds at an offer price equal to 100% of the principal amount. On December 23, 1998, the Company issued $175,000,000 12.5% senior notes (the "1998 Notes"). The 1998 Notes are unsecured obligations of the Company bearing interest at 12.5% payable semi-annually. The 1998 Notes are due December 15, 2005 and may be redeemed by the Company on or after December 31, 2003 at certain specified redemption prices ranging up to 106.25% of the principal amount. Up to 35% of the 1998 Notes may be redeemed by the Company prior to December 15, 2001, at a redemption price of 112.5% of the principal amount with the net proceeds from certain sales of the company's common equity to the public. If a change of control occurs, as defined in the 1998 Notes Indenture, the holders of the 1998 Notes can require the Company to repurchase all or part of the 1998 Notes at 101% of the principal amount. If at the end of December 31, 2000 and semi-annually thereafter, the Company's Accumulated Excess Cash Flow, as defined in the 1998 Notes Indenture, exceeds $10,000,000, the Company is required to make an offer to repurchase the maximum principal amounts of 1998 Notes that may be purchased by such Accumulated Excess Cash Flow Amount at an offer price equal to 110% of the principal amount of the 1998 Notes. Under this Excess Cash Flow provision, the Company is not required to repurchase more than 25% of the original principal amount of the 1998 Notes prior to December 31, 2003. The Notes and 1998 Notes contain certain covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue certain preferred stock, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with F-16 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK On September 9, 1999 the Company authorized various classes of preferred shares. SERIES A NON-VOTING CONVERTIBLE PREFERRED SHARES On September 9, 1999, the Company issued 141,868,928 Series A Non-Voting Convertible Preferred Shares ("Series A Preferred Shares") for $345,000,000. On December 22, 1999, the Company issued an additional 9,082,384 Series A Preferred Shares to the holders of such shares pursuant to the terms of their original purchase agreement dated September 7, 1999. The Series A Preferred Shares are entitled to dividends on an equivalent basis to the Class A Non-Voting Shares into which the Series A Preferred Shares can be converted. The Series A Preferred Shares rank senior to all classes of capital stock upon liquidation, dissolution and wind-up and are junior in right of payment of all indebtedness of the Company and its subsidiaries. The Series A Preferred Shares have a mandatory redemption on November 2, 2009 at a liquidation value consisting of the original purchase price of $2.43 per share plus an adjustment equal to 6% per annum of the purchase price, plus declared and unpaid dividends and the excess of the market value of the Class A Non-Voting Shares over the liquidation value. Upon a qualified underwritten public offering of at least $150,000,000 with a share price of at least 300% of the purchase price of the Series A Preferred Shares, each Series A Preferred Share may, at the option of the Company, be converted into Class A Non-Voting Shares at a ratio equal to one plus 6% per annum. If a qualified underwritten public offering occurs by September 9, 2000 the conversion will be on a one for one basis. The Series A Preferred Shares may be converted by the holders into Class A Non-Voting Shares, at any time, on the same basis as the Company's conversion right and may be converted into Series B Non-Voting Convertible Preferred Shares on a one for one basis. In addition, the holders of the Series A Preferred Shares have anti-dilution protection. SERIES B SUBORDINATE VOTING CONVERTIBLE PREFERRED SHARES The Series B Subordinate Voting Convertible Preferred Shares ("Series B Preferred Shares) are entitled to dividends on an equivalent basis to any dividends declared or paid on Class B Subordinate Voting Shares into which the Series B Preferred Shares can be converted. The Series B Preferred Shares rank senior to all classes of capital stock upon liquidation, dissolution and wind-up and are junior in right of payment of all indebtedness of the Company and its subsidiaries. The Series B Preferred Shares are entitled to one vote per share. The Series B Preferred Shares are mandatorily redeemable on November 2, 2009 at a liquidation value of $2.43 per share plus an adjustment equal to 6% per annum of the purchase F-17 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) price, plus declared and unpaid dividends and the excess of the market value of the Class B Subordinate Voting Shares over the liquidation value. Upon a qualified underwritten public offering of at least $150,000,000 with a share price of at least 300% of the purchase price of the Series B Preferred Shares, each Series B Preferred Share, may at the option of the Company, be converted into Class B Subordinate Voting Shares at a ratio equal to one plus 6% per annum. If a qualified underwritten public offering occurs by September 9, 2000 the conversion will be on a one for one basis. The Series B Preferred Shares may be converted into Class B Subordinate Voting Shares, at any time on the same basis as the Company's conversion right and may be converted into Series A Preferred Shares on a one for one basis. In addition, the holders of the Series B Preferred Shares have anti-dilution protection SERIES C REDEEMABLE PREFERRED SHARES On September 9, 1999, 80,000,000 Series C Redeemable Preferred Shares ("Series C Preferred Shares") were issued pursuant to a stock dividend and 640,000,000 Series C Preferred Shares were issued pursuant to a share re-organization. Subsequently, the Company repurchased the 720,000,000 issued Series C Preferred Shares for $45,000,000 (note 9). The holders of Series C Preferred Shares are not entitled to dividends or voting rights and may redeem the Series C Preferred Shares at $1 per share after November 2, 2009. 9. CAPITAL STOCK On September 9, 1999 the Company authorized various classes of capital stock (see "Share capital transactions"). The holders of the Class A Non-Voting Shares, Class B Subordinate Voting Shares, and Class C Multiple Voting Shares participate equally in dividends declared subject to any preference priority on other classes of shares. The holders of the Class A Non-Voting Shares are not entitled to voting rights. The holders of Class B Subordinate Voting Shares are entitled to one vote per share, and the holders of Class C Multiple Voting Shares are entitled to 20 votes per share. In the event of liquidation, dissolution, or wind-up of the Company, any payment or distribution of assets will be paid or distributed equally share for share to the holders of the three classes of capital stock. The holders of Class A Non-Voting Shares are entitled to convert their Shares to Class B Subordinate Voting Shares on a one for one basis. The holders of Class B Subordinate Voting Shares are entitled to convert their Shares to Class A Non-Voting Shares on a one for one basis at any time prior to September 9, 2000 and into Series A Preferred Shares on a one for one basis. The holders of Class C Multiple Voting Shares are entitled to convert their Shares into Class A Non-Voting Shares or Class B Subordinate Voting Shares on a one for one basis. F-18 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) SHARE CAPITAL TRANSACTIONS On September 9, 1999, the Company amended its share capital by re-designating 400,000,000 Class A Voting Shares to Class B Subordinate Voting Shares, cancelling its remaining classes of Shares and creating Class A Non-Voting Shares, Class C Multiple Voting Shares, Series A and B Convertible Preferred Shares and Series C Redeemable Preferred Shares. Subsequently, the Company declared a stock dividend of 80,000,000 Series C Redeemable Preferred Shares for $5,000,000. Concurrently, the Company repurchased the 400,000,000 outstanding Class B Subordinate Voting Shares from its parent in exchange for the issuance of 381,496,000 Class B Subordinate Voting Shares and 640,000,000 Series C Redeemable Preferred Shares. The Company then redeemed the 720,000,000 outstanding Series C Redeemable Preferred Shares for $45,000,000 cash resulting in a charge to retained earnings of $40,000,000. On August 31, 1999 the Company issued 2,400,000 Class B Subordinate Voting Shares for $3,000,000. On November 24, 1999, a shareholder converted 301,266,400 Class B Subordinate Voting Shares into 301,266,400 Class A Non-Voting Shares. On December 22, 1999, the Company issued 52,160,000 Class A Non-Voting Shares and 9,840,000 Class C Multiple Voting Shares under an employment agreement to an executive officer for $77,500,000. The Company also received a promissory note of $77,500,000 from the executive officer. On November 24, 1999, the Board of Directors approved an eight-for-one share split of all classes of the Company's stock. All share amounts in 1998 and 1999 have been presented on a post stock split basis. 10. STOCK BASED COMPENSATION STOCK OPTION PLAN The Company has a Long Term Incentive and Share Award Plan that permits the grant of non-qualified stock options, incentive stock options, share appreciation rights, restricted shares, restricted share units, performance shares, performance units, dividend equivalents and other share-based awards to employees and directors. A maximum of 7,133,008 Class A Non-Voting shares may be subject to awards under the plan, which generally have a vesting period of four years. The stock options have terms expiring on or before November 15, 2009. F-19 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) Stock option transactions during 1999 were as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE $ ----------- --------- Balance--December 31, 1998.......................... -- -- Options granted................................... 43,412,480 0.77 Options cancelled................................. -- -- Options exercised................................. -- -- ---------- ----- Balance--December 31, 1999.......................... 43,412,480 0.77 ========== =====
The weighted average fair value of options granted in 1999 was $1.29. The following table summarizes information about stock options outstanding at December 31, 1999:
WEIGHTED AVERAGE OPTIONS NUMBER OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE AT EXERCISE PRICE$ AT DECEMBER 31, 1999 LIFE (YEARS) DECEMBER 31, 1999 - --------------------- --------------------- --------------------- ------------------- 0.63 33,786,880 9.0 8,822,080 1.25 9,625,600 9.5 -- - --------------------- --------------------- --------------------- ------------------- 0.63-1.25 43,412,480 9.2 8,822,080 Net income for the year..................................... $23,640 Additional compensation expense............................. (1,425) ------- Pro forma net income for the year........................... 22,215 ======= Pro forma basic and fully diluted loss per share............ $ .04
F-20 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) The pro forma compensation expense is estimated using the Black Scholes option-pricing model assuming no dividend yield and the following weighted average assumptions for options granted during the year ended December 31, 1999: Expected volatility (private company)....................... 0.0% Risk free interest rate..................................... 5.2% Expected life (in years).................................... 4.0
RESTRICTED STOCK AND OTHER STOCK ISSUANCES During the year, the Company issued stock to certain directors and officers of the Company. To the extent that these stock issuances are considered to be below fair value, stock based compensation is recognized and amortized over the appropriate periods. The Company recognized $176,164,000 of deferred stock-based compensation related to stock issued to these officers and directors in 1999 of which $2,832,000 was expensed in the year. The shares issued to the executive officer are subject to a repurchase by the Company at the lesser of fair market value of the shares and the original purchase price of the shares plus interest. The restriction lapsed with respect to 15,500,000 shares immediately on commencement of employment and lapses for 12,400,000 shares in 2000, 13,639,968 shares in 2001 and 2002 and the remainder in 2003. Under certain conditions, the executive officer may put back a certain number of shares to the Company, or at the option of the Company to Worldwide Fiber Holdings Ltd., at fair market value to repay the promissory note. Deferred compensation related to these shares will be amortized over the periods covered by the repurchase restriction. 11. INCOME TAXES INCOME BEFORE EQUITY INCOME, INCOME TAXES AND MINORITY INTEREST. The components of income before equity income, income taxes and minority interest are as follows:
1999 1998 $ $ -------- -------- Canadian.................................................... 46,881 5,683 U.S......................................................... 14,507 8,052 ------ ------ 61,388 13,735 ====== ======
F-21 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) CURRENT INCOME TAXES The provision for current income taxes consists of the following:
1999 1998 $ $ -------- -------- Canadian.................................................... 25,742 2,599 U.S. federal................................................ 11,775 2,563 U.S. state and local........................................ 2,821 481 ------ ----- 40,338 5,643 ====== =====
The provision for income taxes differs from the amount computed by applying the statutory income tax rate to net income before taxes as follows:
1999 1998 % % -------- -------- Canadian statutory rate..................................... 45.6 45.6 Foreign tax at other than Canadian statutory rate........... (5.0) (4.5) Stock based compensation.................................... 5.8 -- Investment income........................................... 1.6 -- Other....................................................... 1.3 -- ---- ---- 49.3 41.1 ==== ====
F-22 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) DEFERRED INCOME TAXES Significant components of the Company's deferred tax asset and liability are as follows:
1999 1998 $ $ -------------- -------------- DEFERRED TAX ASSET Expenses not deductible in current period......... 8,838 -- Tax loss carryforwards............................ 4,259 -- Property and equipment............................ 7,596 1,088 Other............................................. 185 185 ------ ------ 20,878 1,273 Valuation allowance............................... -- -- ------ ------ NET DEFERRED TAX ASSET............................ 20,878 1,273 ====== ====== DEFERRED TAX LIABILITY Property and equipment............................ 1,760 -- Financing costs................................... 1,313 -- ------ ------ 3,073 -- ====== ======
Management believes that, based on a number of factors, it is more likely than not that the deferred tax asset will be fully utilized, such that no valuation allowance has been recorded. 12. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable, unbilled revenue and due from parent which are not collateralized. The Company limits its exposure to credit loss by placing its cash and cash equivalents and short-term investments with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable and unbilled revenue are considered to be limited due to the credit quality of the customers comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers' financial condition to determine the need for an allowance for doubtful accounts. The Company has not experienced significant credit losses to date. Accounts receivable was comprised of 22 customers at December 31, 1999 and 12 customers at December 31, 1998. The concentration of credit risk relating to the amount due from the parent is considered limited due to the credit quality of the Company's parent. The Company's three largest customers represented 22%, 15% and 10% of the Company's total revenue for 1999. As described in Note 1, substantially all of the Company's revenues during the period ended December 31, 1998 were earned from construction services provided to Ledcor. F-23 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 13. SEGMENTED INFORMATION The Company operates within a single operating segment being the construction and installation of fiber optic network assets. These fiber optic network assets are being constructed in Canada, the U.S. and Europe including a transatlantic link. A significant portion of the transatlantic link will be owned by a subsidiary in Barbados. Revenues, property and equipment, assets under construction, and deferred financing costs are located as follows:
PROPERTY AND DEFERRED EQUIPMENT-- ASSETS UNDER FINANCING REVENUES NET CONSTRUCTION COSTS--NET ------------------- ------------------- ------------------- ------------------- 1999 1998 1999 1998 1999 1998 1999 1998 $ $ $ $ $ $ $ $ -------- -------- -------- -------- -------- -------- -------- -------- Canada................. 170,705 84,534 38,206 3,794 46,683 4,424 22,199 6,650 U.S.................... 189,041 79,785 33,669 220 53,221 7,037 -- -- Barbados............... -- -- -- -- 169,648 -- -- Europe................. -- -- 5,134 -- 30,851 -- -- ------- ------- ------ ----- ------- ------ ------ ----- 359,746 164,319 77,009 4,014 300,403 11,461 22,199 6,650 ======= ======= ====== ===== ======= ====== ====== =====
The revenues are based on the location of the construction activities. 14. COMMITMENTS NETWORK DEVELOPMENTS The Company has, in the normal course of business, entered into agreements to provide construction services and fiber optic network assets to third parties in Canada and the United States. RIGHT OF WAY ACCESS AGREEMENTS The Company has, in the normal course of business, entered into various agreements to secure the rights of ways along its network routes. In general, most agreements have an option renewal clause stating that grantors cannot unjustly withhold their acceptance of a renewal. Future minimum payments on significant rights of ways are as follows: 2000........................................................ $25,051 2001........................................................ $17,051 2002........................................................ $17,051
F-24 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) OPERATING LEASES The Company leases certain facilities and equipment used in its operations under operating leases. Future minimum lease payments under these lease agreements at December 31, 1999 are as follows: 2000........................................................ $7,489 2001........................................................ $6,244 2002........................................................ $3,349 2003........................................................ $1,153 2004........................................................ $ 671
The Company pays Ledcor approximately $825,000 per year in connection with its lease of the Toronto facilities. The lease expires in 2009. SUPPLY AGREEMENTS On June 18, 1999, a subsidiary of the Company entered into a supply agreement, with Tyco Submarine Systems Ltd. ("Tyco") whereby Tyco will serve as the primary contractor for the Company's trans-Atlantic cable project called "360ATLANTIC". The initial contract price is approximately $607 million. The Company paid $214 million in the year ended December 31, 1999 on this contract. (1998--$NIL) The Company has placed purchase orders of $27 million with suppliers of bandwidth equipment. CN/IC AGREEMENTS On May 28, 1999, the Company entered into agreements with Canadian National Railway Company ("CN") and Illinois Central Railroad Company ("IC") to license rights-of-way along certain of their respective rail transportation systems (the "Routes"). In connection with these license agreements, the Company formed subsidiary companies with CN (WFI-CN Fibre Inc.) and IC (Worldwide Fiber LLC) (the Company having a 75% interest and CN or IC having the remaining 25% interest) for the purpose of licensing the rights-of-way from CN and IC and developing the projects along the Routes. 15. SUBSEQUENT EVENTS SHARE CAPITAL REORGANIZATION Concurrent with the closing of a public offering, the Company will reorganize the share capital as follows: the holders of existing Class B Subordinate Voting Shares will convert or exchange their shares into Class A Non-Voting Shares and all authorized but unissued Class B Subordinate Voting Shares will be cancelled; the Series A Non-Voting Preferred Shares will be converted or exchanged into our Class A Non-Voting Shares and all of the authorized but unissued Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares will be cancelled; the existing F-25 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) Class A Non-Voting Shares will be redesignated as Subordinate Voting Shares and the terms shall be amended to provide the holders with one vote per share; the existing Class C Multiple Voting Shares will be amended to provide the holders with 10 votes per share and the Class C Multiple Voting Shares will be redesignated as Multiple Voting Shares; and a class of unlimited Preferred Shares, issuable in series will be created. GLOBENET ACQUISITION The Company has entered into a definitive agreement to acquire 100% of the outstanding shares of GlobeNet Communications Group Limited in exchange for approximately $640 million worth of newly created Subordinate Voting Shares. The number of Subordinate Voting Shares to be issued by the Company will be based on an initial public offering price. ACQUISITION OF REMAINING 25% OF WFI-USA The Company has entered into a commitment with Mi-Tech to acquire its 25% interest in WFI-USA in exchange for $312 million worth of Class A Non-Voting Shares of the Company. The number of shares to be issued by the Company will be determined based on an initial public offering price. CN/IC On March 6, 2000, the Company entered into an agreement with CN and IC to acquire their respective 25% interests in WFI-CN Fibre Inc. and Worldwide Fiber IC LLC in exchange for $160 million worth of Class A Non-Voting Shares of the Company. The number of Class A Non-Voting Shares to be issued by the Company will be based on an initial public offering price. Pursuant to this agreement, payment terms for right-of-way fees were amended requiring the right-of-way fees to be paid over a three year term. CANADIAN TELECOMMUNICATIONS ARRANGEMENT The Company has entered into an arrangement to transfer certain Canadian telecommunications equipment and related facilities to a subsidiary of Ledcor which will be held 66 2/3% by Ledcor and 33 1/3% by the Company in exchange for 51% of the non-voting participating shares of the subsidiary. ACQUISITION OF COLOCATION FACILITIES The Company has agreed, subject to execution of definitive agreements to acquire colocation facilities in a number of North American cities. The aggregate purchase price for these acquisitions is $156 million payable in a combination of cash and newly created Subordinate Voting Shares. 360ATLANTIC CREDIT FACILITY The Company has entered into a credit agreement with certain lenders pursuant to which the lenders have provided a credit facility totalling U.S. $565,000,000. F-26 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) SHARE SPLIT On March 20, 2000, the Board of Directors approved a two-for-one share split of all classes of the Company's stock. All share amounts in 1998 and 1999 have been presented on a post-stock split basis. SHARE ISSUANCES Subsequent to December 31, 1999, the Company issued 411,214 Class A Non-Voting Shares to a consultant of the Company. In addition, the Company will issue additional Series A Preferred Shares in connection with the purchase price adjustment provisions of a subscription agreement. NAME CHANGE On March 14, 2000, the Company changed its name from Worldwide Fiber Inc. to 360NETWORKS INC. F-27 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Shareholders of Worldwide Fiber (USA), Inc. In our opinion, the accompanying consolidated income statement and statements of changes in shareholders' equity and of cash flows present fairly, in all material respects, the results of operations of Worldwide Fiber (USA), Inc. and its subsidiaries and their cash flows for the period from February 11, 1998 to December 31, 1998, in conformity with generally accepted accounting principles in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Vancouver, Canada March 12, 1999 F-28 WORLDWIDE FIBER (USA), INC. CONSOLIDATED INCOME STATEMENT FOR THE PERIOD FROM FEBRUARY 11, 1998 TO DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) REVENUE..................................................... $21,071 COSTS....................................................... 16,533 ------- GROSS PROFIT................................................ 4,538 EXPENSES General and administrative................................ 1,683 ------- 2,855 INTEREST EXPENSE............................................ 72 INTEREST INCOME............................................. 53 ------- INCOME BEFORE INCOME TAXES.................................. 2,836 PROVISION FOR INCOME TAXES.................................. 980 ------- NET INCOME FOR THE PERIOD................................... $ 1,856 ======= COMMITMENTS (note 10)
The accompanying notes are an integral part of these consolidated financial statements. F-29 WORLDWIDE FIBER (USA), INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM FEBRUARY 11, 1998 TO DECEMBER 31, 1998. (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
CLASS A NONVOTING VOTING COMMON PREFERRED SHARES RETAINED SHARES NUMBER NUMBER AMOUNT EARNINGS TOTAL --------------- ---------- -------- --------- -------- Balance--beginning of period..... Issuance of Shares to acquire Worldwide Fiber Networks, Inc. (note 1)....................... 100 100 -- -- -- Issuance of Shares for extinguishment of note payable (note 1)....................... 100 100 3,915 -- 3,915 Net income for the period........ -- -- -- 1,856 1,856 --- --- ------ ------ ------ Balance--end of period........... 200 200 $3,915 $1,856 $5,771 === === ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-30 WORLDWIDE FIBER (USA), INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM FEBRUARY 11, 1998 TO DECEMBER 31, 1998. (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income for the period................................... $ 1,856 Changes in non-cash working capital items Accounts receivable....................................... (3,090) Unbilled revenue.......................................... (9,634) Inventory................................................. (23,835) Accounts payable.......................................... 17,445 Income taxes payable...................................... 980 Due to parent............................................. 21,783 -------- 5,505 -------- CASH FLOWS USED IN INVESTING ACTIVITIES Fixed asset additions....................................... (7,178) -------- CASH FLOWS FROM FINANCING ACTIVITIES Due to parent............................................... 3,915 -------- NET INCREASE IN CASH AND CASH EQUIVALENTS, BEING CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 2,242 ========
The accompanying notes are an integral part of these consolidated financial statements. F-31 WORLDWIDE FIBER (USA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1. THE COMPANY Worldwide Fiber (USA), Inc. (the "Company"), was incorporated on August 7, 1998. The Company was inactive until August 31, 1998. On August 31, 1998, the Company acquired 100% of the ownership interest of Worldwide Fiber Networks, Inc. ("WFNI") from its two members, Ledcor Industries Limited ("Ledcor") and Mi-Tech Communications, LLC ("Mi-Tech"), in exchange for 100 non-voting common Shares and 100 Class A voting preferred Shares of the Company. The acquisition was accounted for in a manner similar to a pooling of interests on the basis that the ownership interests before and after the acquisition remained the same. Accordingly, the financial statements presented include the results of operations of the Company and WFNI from February 11, 1998, the date that WFNI was organized. On December 31, 1998, the Company issued 100 Shares of non-voting common Shares and 100 Class A voting preferred Shares as consideration for the settlement of indebtedness owed to Worldwide Fiber Inc. ("WFI" or "parent") of $3,915,000 increasing WFI's interest from 50% to 75%. The Company has entered into a shareholders' agreement among WFI, Ledcor, Mi-Tech and Michels Pipeline Construction Inc. (an affiliate of Mi-Tech) whereby: (i) Any sale, transfer, assignment or encumbrance or divestment of any interest in or control of the Company to a third party is restricted. In the event of a proposed sale of the Shares of the Company held by WFI, Mi-Tech will have certain tag-along rights. If there is a change of control of the Company, Mi-Tech has the option to require the Company to purchase all of the Shares owned by Mi-Tech or its affiliates at the fair market value of such Shares. In addition, after the tenth anniversary of this agreement Mi-Tech has the option to require the Company to purchase all of the Shares owned by Mi-Tech and its affiliates at fair market value. If Mi-Tech exercises this option, WFI can elect to sell all of the Shares or assets of the Company to a third party in which case WFI will not be required to purchase Mi-Tech's Shares. (ii) The Company has an option to purchase from Mi-Tech, 24 fiber optic strands along certain existing routes owned by Mi-Tech and its affiliates at fair value. The Company also has an option to purchase from WFI and its affiliates indefeasible rights of use for 24 fiber optic strands from its Chicago-New Orleans route if and when built, at fair value. These options expire one year after the strands are available. (iii) If WFI were to issue Shares in a public offering having an aggregate value of at least $20,000,000, Mi-Tech has the option to convert all of the Shares of the Company held by Mi-Tech and its affiliates into the class and series of Shares being offered to the public. The Company's operations consist of developing, engineering, constructing, installing and maintaining fiber optic network assets. The Company's primary customers are telecommunications carriers and fiber optic systems developers located in the U.S. F-32 WORLDWIDE FIBER (USA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. The Company's financial statements have been prepared for inclusion within the Offering Memorandum prepared by WFI for the offer of Senior Notes in the amount of $250,000,000. The consolidated balance sheet of the Company as at December 31, 1998 has been excluded as WFI's most recent audited consolidated balance sheet includes the assets and liabilities of the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the period reported. Actual results could differ from those estimates. INCOME TAXES Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current period and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance, where, based on available evidence, the probability of realization of the deferred tax asset, does not meet a more likely than not criteria. REVENUE RECOGNITION Revenue and income from construction contracts to develop fiber optic network assets, are determined on the percentage-of-completion basis using the cost-to-cost method. Provision is made for all anticipated losses as soon as they become evident. Claims for additional contract compensation are not recognized until resolved. FOREIGN CURRENCY TRANSACTIONS The Company uses the U.S. dollar as its functional currency. Gains or losses from foreign currency transactions are included in the consolidated income statement. F-33 WORLDWIDE FIBER (USA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 3. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes.................................. $ -- Cash paid for interest...................................... -- Supplemental noncash investing and financing activities Issuance of Shares: To acquire Worldwide Fiber Networks Inc................. -- In exchange for surrender of note payable to WFI........ 3,915
4. SHARE CAPITAL A) PREFERRED SHARES AUTHORIZED The Company is authorized to issue 125,000 preferred Shares without par value; 25,000 Class A voting preferred Shares, and 100,000 Class B non-voting preferred Shares. As of December 31, 1998 there were 200 Class A voting preferred Shares issued. VOTING The holders of Class A preferred Shares are entitled to attend shareholder meetings and to one vote for each share held. The holders of Class A preferred Shares have no other rights, preferences or privileges. The holders of Class B preferred Shares are not entitled to vote or attend shareholder meetings. DIVIDENDS The holders of Class B preferred Shares are entitled to receive a dividend when declared by the Board of Directors, payable in preference to the dividends payable on any other class of Shares. RETURN OF CAPITAL In the event the Company is liquidated, dissolved or wound up, the holders of Class B preferred Shares shall be entitled to such rights as expressed in the resolution for the issue of such Class B Shares, adopted by the Board of Directors. REDEMPTION AND RETRACTION The Company may redeem or purchase Class B preferred Shares at such time and such price, as expressed in the resolution for the issue of Class B preferred Shares adopted by the Board of Directors. B) COMMON SHARES The Company is authorized to issue 25,000 non-voting common Shares, without par value. As at December 31, 1998, there were 200 non-voting common Shares issued. F-34 WORLDWIDE FIBER (USA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5. PROVISION FOR INCOME TAXES The provision for current income taxes attributable to net income consists of the following: U.S. federal................................................ $953 U.S. state and local........................................ 27 ---- $980 ====
The Company's statutory rate of 34% is not materially different to its effective rate of 34.6%. 6. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable and unbilled revenue. Accounts receivable are not collateralized. The Company limits its exposure to credit loss by placing its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable and unbilled revenue are considered to be limited due to the credit quality of the customers comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers' financial condition to determine the need for an allowance for doubtful accounts. The Company has not experienced significant credit losses to date. At December 31, 1998 seven customers accounted for the entire accounts receivable and unbilled revenue balances. 7. REVENUE AND SIGNIFICANT CUSTOMERS During the period ended December 31, 1998, the Company's revenue from its three largest customers represented individually 35%, 30% and 13% of total revenue. 8. RELATED PARTY TRANSACTIONS The Company reimburses Ledcor and Mi-Tech for expenses incurred on the Company's behalf. For the period ended December 31, 1998 the amount of these transactions with Ledcor and Mi-Tech was $1,469,000 and $1,401,000 respectively. As at December 31, 1998 accounts payable includes $478,000 owed to Ledcor and $524,000 owed to Mi-Tech. 9. SEGMENTED INFORMATION The Company operates within a single operating segment being the construction and installation of fiber optic network assets in the United States. All revenues are earned from U.S. sources and all long-lived assets are located in the U.S. 10. COMMITMENTS NETWORK DEVELOPMENTS The Company has, in the normal course of business, entered into agreements to provide construction services and fiber optic network assets to third parties in Canada and the United States. F-35 WORLDWIDE FIBER (USA), INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) RIGHT OF WAY ACCESS AGREEMENTS The Company has entered into various agreements during the year to secure the rights of ways along its network routes. In general, most agreements have an option renewal clause stating that grantors cannot unjustly withhold their acceptance of a renewal. OPERATING LEASES The Company leases certain facilities and equipment used in its operations under operating leases. Future minimum lease payments under these lease agreements at December 31, 1998 are as follows: 1999........................................................ $205 2000........................................................ 83 2001........................................................ 50 2002........................................................ 34 2003 and thereafter......................................... --
F-36 AUDITORS' REPORT To the Directors of Ledcor Industries Limited We have audited the divisional balance sheet of Ledcor Industries Limited-- Telecommunications Division as at May 31, 1998 and the divisional statements of operations and retained earnings and cash flows for the nine months ended May 31, 1998 and year ended August 31, 1997. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these divisional financial statements present fairly, in all material respects, the financial position of the Division as at May 31, 1998 and the results of its operations and cash flows for the periods ended May 31, 1998 and August 31, 1997 in accordance with generally accepted accounting principles in the United States. Deloitte & Touche LLP Edmonton, Canada November 30, 1998 F-37 LEDCOR INDUSTRIES LIMITED-- TELECOMMUNICATIONS DIVISION DIVISIONAL BALANCE SHEET (ALL FIGURES ARE IN U.S. DOLLARS)
MAY 31, 1998 ------------- ASSETS CURRENT Trade accounts receivable (Note 4).......................... $ 5,538,543 Accounts receivable holdbacks (Note 4)...................... 4,474,731 Unbilled revenue (Note 5)................................... 5,842,845 Inventory................................................... 15,710,561 ----------- 31,566,680 FIXED ASSETS (Note 6)....................................... 7,982,103 ----------- $39,548,783 =========== LIABILITIES CURRENT Trade accounts payable...................................... $ 3,148,456 Accrued payroll............................................. 3,431,709 Accrued liabilities......................................... 587,750 Accounts payable holdbacks.................................. 4,412,221 Income taxes payable........................................ 5,509,000 ----------- 17,089,136 DEFERRED TAX LIABILITIES (Note 7)........................... 2,657,000 INTER-DIVISIONAL ACCOUNT (Note 8)........................... 10,932,703 ----------- 30,678,839 ----------- COMMITMENTS (Note 9) DIVISIONAL EQUITY Cumulative foreign exchange (loss) gain..................... (1,641,049) Divisional retained earnings................................ 10,510,993 ----------- 8,869,944 ----------- $39,548,783 ===========
See accompanying notes to the divisional financial statements. F-38 LEDCOR INDUSTRIES LIMITED TELECOMMUNICATIONS DIVISION DIVISIONAL STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ALL FIGURES ARE IN U.S. DOLLARS)
NINE MONTHS ENDED MAY 31, YEAR ENDED 1998 AUGUST 31, 1997 --------------- ---------------- Revenue generated from contracts......................... $54,633,888 $58,007,652 Contract costs........................................... 45,321,566 49,184,985 ----------- ----------- Gross margin............................................. 9,312,322 8,822,667 General and administrative expenses...................... 710,240 863,373 ----------- ----------- Net divisional income for the period, before taxes....... 8,602,082 7,959,294 Income tax expense (recovery) Current.................................................. 5,509,000 338,000 Deferred................................................. (1,600,000) 3,282,000 ----------- ----------- Net divisional income for the period..................... 4,693,082 4,339,294 DIVISIONAL RETAINED EARNINGS, BEGINNING OF PERIOD........ 5,817,911 1,478,617 ----------- ----------- DIVISIONAL RETAINED EARNINGS, END OF PERIOD.............. $10,510,993 $ 5,817,911 =========== ===========
See accompanying notes to the divisional financial statements. F-39 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION DIVISIONAL STATEMENTS OF CASH FLOWS (ALL FIGURES ARE IN U.S. DOLLARS)
NINE MONTHS YEAR ENDED ENDED MAY 31, AUGUST 31, 1998 1997 ------------- ------------ OPERATING ACTIVITIES Net divisional income for the period........................ $ 4,693,082 $ 4,339,294 Adjustments to reconcile net divisional income to net cash provided by operating activities Depreciation and amortization............................. 316,597 111,791 Deferred taxes............................................ (1,600,000) 3,282,000 Foreign exchange (gain) loss.............................. (169,000) (68,000) Changes in assets and liabilities Decrease (increase) in accounts receivable................ 12,963,167 (17,656,537) Increase in accounts receivable holdbacks................. (1,028,160) (3,292,919) Decrease (increase) in unbilled revenue................... (2,234,835) 1,405,418 Increase in inventory..................................... (10,470,309) (5,240,252) Increase (decrease) in accounts payable................... (9,707,407) 11,136,272 Increase in accrued payroll............................... 2,422,918 1,008,791 (Decrease) increase in accrued liabilities................ (366,612) 954,362 Increase in accounts payable holdbacks.................... 4,325,959 86,262 Change in cumulative foreign exchange (loss) gain........... (1,647,737) 12,655 ------------ ------------ Net cash provided (used) by operating activities.......... (2,502,337) (3,920,863) ------------ ------------ INVESTING ACTIVITIES Purchase of construction equipment and other................ (2,403,827) (1,119,183) Fiber optic strands under construction...................... (4,423,830) -- ------------ ------------ Net cash used by investing activities....................... (6,827,657) (1,119,183) ------------ ------------ FINANCING ACTIVITIES Increase in income taxes payable............................ 5,171,000 333,000 Net advances to (from) the division......................... 4,158,994 4,707,046 ------------ ------------ Net cash provided (used) by financing activities............ 9,329,994 5,040,046 ------------ ------------ NET CHANGE IN CASH, END OF PERIOD........................... $ -- $ -- ============ ============ Additional amounts paid by the Company and allocated to the Division Interest.................................................... $ 115,311 $ 677,715 Rent........................................................ 1,198,360 497,265 Income taxes................................................ 338,000 5,000 ------------ ------------ $ 1,651,671 $ 1,179,980 ============ ============
See accompanying notes to the divisional financial statements. F-40 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (ALL FIGURES ARE IN U.S. DOLLARS) 1. DESCRIPTION OF BUSINESS The Telecommunications Division (the "Division") is a division of Ledcor Industries Limited ("LIL") which, in turn, is a wholly-owned subsidiary of Ledcor Inc. The Division is in the business of providing long-haul fiber optic systems, including planning, design, construction and maintenance to telecommunications clients. The Division headquarters are in Vancouver, Canada and its principal geographic areas of operation for these fiber optic systems are Canada and the United States. The accompanying divisional financial statements include the assets, liabilities, revenues and expenses of the Division. Since the Division has been operating as a fully integrated part of the Company, all construction equipment owned by LIL, but used in the Division's operations, was identified by LIL's management and allocated to the Division. In addition, certain assets, liabilities, revenues and expenses have been recorded by the Division using management's best estimates (Note 3). The divisional financial statements have been prepared from the divisional records maintained by LIL and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Division had been operated as a stand-alone company. The Division does not hold any cash or cash equivalents. LIL uses central bank accounts to deposit receipts and make payments on behalf of the Division. These transactions are reflected in the inter-divisional account (Note 8). On May 31, 1998, LIL transferred the net assets (at book value) and the operations of the Division to Worldwide Fiber Inc. (indirectly a wholly-owned subsidiary of Ledcor Inc.). 2. ACCOUNTING POLICIES A) BASIS OF ACCOUNTING These divisional financial statements have been prepared in accordance with accounting principles generally accepted in the United States. B) ACCOUNTING FOR CONTRACTS Revenue and income from construction contracts to develop fiber optic systems are determined on the percentage of completion basis using the cost-to-cost method. Due to the risks inherent in these contracts, management makes a provision for risk using their best estimate. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Provision is made for all anticipated losses as soon as they become evident. Claims for additional contract compensation are not recognized until resolved. C) UNBILLED REVENUE Unbilled revenue comprises costs incurred and margin in excess of billings and advance deposits, representing unperformed work, on uncompleted contracts. D) INVENTORY Inventory consists of fiber optic strands under construction and is valued at the lower of cost or market. Cost is determined using the full absorption method whereby the fiber optic strands have been allocated their proportionate share of materials, labour and overhead incurred. F-41 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) E) FIXED ASSETS Construction equipment, fiber optic strands and other assets are recorded at cost. Fixed assets are depreciated using the following rates and methods: - Construction equipment--hourly usage rates, estimated to depreciate the equipment, over estimated useful lives, ranging from three to five years. - Fiber optic strands, under construction--depreciation, at appropriate rates, will be provided for when the related fiber optic systems are in use. - Other assets-straight--line method over the estimated useful lives of the assets, ranging from three to five years. F) INCOME TAXES These are the financial statements of a Division, and not of a taxable legal entity. However, these financial statements present income taxes as if the Division was a stand-alone taxable legal entity. Current and deferred income taxes have been determined by applying the asset and liability method. The asset and liability method of accounting for income taxes recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. G) TRANSLATION OF FOREIGN CURRENCY The functional currency of the Division is the Canadian dollar. The financial statements are translated into United States dollars using the period end exchange rate for assets and liabilities and weighted average exchange rates for the period for revenues and expenses. Translation gains and losses are deferred and included in divisional equity. Net gains and losses resulting from foreign exchange transactions are included in the statement of operations. 3. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the divisional financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Unbilled revenue, inventory, fiber optic strands capitalized, and revenue have all been calculated using management's best estimates. Total estimated costs is a component of the percentage of completion calculation which determines revenue recognized, unbilled revenue, inventory and fiber optic strands capitalized. However, there may be unforeseen conditions which could include weather patterns, the continuing deterioration of the Canadian dollar, and the outcome of ongoing negotiations. Such conditions could substantially change the values of the above mentioned items reflected in these financial statements. The impact of these unforeseen conditions cannot be estimated by management as at May 31, 1998. F-42 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) Corporate expenses are allocated from LIL to the Division based on a percentage of the Division's revenue. Management is of the opinion that this allocation percentage is reasonable since all divisions fully absorb LIL's corporate expenses. Management regularly reviews this allocation basis and considers the amounts allocated to fairly represent actual corporate expenses incurred, on behalf of the Division, for the periods reported on. Because the Division is fully integrated, management is unable to estimate the actual corporate expenses that would have been incurred if the Division had operated on a stand-alone basis. Interest is allocated from LIL by charging a floating rate of prime plus 1% on the net cash position of the Division's projects at the end of each month. Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost", requires that interest be capitalized as part of the historical cost of constructing assets held for sale or lease. Management has capitalized interest by capitalizing the portion of interest costs incurred to date which relates to inventory and capital assets. The Division has no additional debt accruing interest which should be capitalized. In addition, LIL has no additional debt which would result in significant interest being allocated and capitalized. 4. TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE HOLDBACKS Trade accounts receivable are presented net of the allowance for doubtful accounts (which was nil for all years reported on since the Division has not experienced any bad debts). Accounts receivable holdbacks represent amounts billed but not yet paid under retainage provisions in the project contracts. These provisions state that holdbacks will be collected upon substantial completion of the projects. 5. UNBILLED REVENUE Costs and billings on uncompleted contracts included in the divisional financial statements are as follows:
MAY 31, 1998 ------------- Costs incurred on uncompleted contracts..................... $45,321,566 Margin...................................................... 9,312,322 Customer advance deposits applied against contracts......... (25,259,100) Less billings to date....................................... (23,531,943) ----------- $ 5,842,845 ===========
F-43 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 6. FIXED ASSETS
MAY 31, 1998 ------------- Construction equipment...................................... $3,796,102 Fiber optic strands, under construction..................... 4,423,830 Other....................................................... 529,456 ---------- 8,749,388 Less accumulated depreciation............................... 767,285 ---------- $7,982,103 ==========
7. DEFERRED TAX LIABILITIES The components of the deferred tax liabilities are as follows:
MAY 31, 1998 ------------- Deferred tax assets Accounts payable holdback................................... $1,986,000 Loss carryforward........................................... -- ---------- Gross deferred tax assets................................... 1,986,000 ---------- Deferred tax liabilities Accounts receivable holdback................................ 2,014,000 Unbilled revenue............................................ 2,629,000 Inter-divisional account loss carryforward.................. -- ---------- Gross deferred tax liabilities.............................. 4,643,000 ---------- $2,657,000 ==========
Reconciliation of deferred tax liabilities:
MAY 31, 1998 ------------- Deferred tax liabilities, beginning of period............... $4,426,000 Deferred tax (recovery) expense............................. (1,600,000) Foreign exchange gain....................................... (169,000) ---------- Deferred tax liabilities, end of period..................... $2,657,000 ==========
The Division's provision for deferred taxes approximates the amounts computed by applying the Canadian and United States statutory rates to income before taxes. There are no permanent differences or other reconciling items that would result in an effective tax rate which is different from the statutory rates applied. 8. INTERDIVISIONAL ACCOUNT This account comprises the balance due to other divisions in connection with working capital advances. The balance due has no repayment terms and interest is allocated, from LIL, on the basis as described in Note 3. F-44 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 9. COMMITMENTS A) FIBER OPTIC CONSTRUCTION PROJECT In 1996, the Division commenced construction of a Canadian-U.S. fiber optic telecommunications system (the Canadian FOTS) that is scheduled for completion in early 1999. B) FONOROLA CONTRACT In a variety of contracts, commencing in April, 1997, the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. C) BELL CANADA CONTRACT In February, 1998, the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. D) METRONET CONTRACT Subsequent to period end (September, 1998), the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. E) LEASE COMMITMENTS The Division is committed under non-cancellable leases for equipment for the period ending April, 1999 in the amount of $826,271. The Division has an option to withdraw from all leases in April, 1999 and therefore has no commitments beyond that date. Lease expenses were the following: Nine months ending May 31, 1998............................. $1,198,360
10. SIGNIFICANT CONCENTRATION OF CREDIT AND SUPPLY RISK The following customers/supplier have accounted individually for 10% or more of the Division's total revenues/contract costs in one or more periods, as follows:
YEAR ENDED AUGUST NINE MONTHS ENDED 31, MAY 31, 1998 1997 ----------------- ----------------- Customers fONOROLA............................................... 62% 64% Bell Canada............................................ 28% -- Alaska Filter Star..................................... -- 25% Sprint Canada.......................................... -- -- AT&T Canada............................................ -- -- Supplier Pirelli Cables......................................... 13% 27%
F-45 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) The Division also had significant accounts receivable from FONOROLAwhich accounted for the following percentages of trade accounts receivable:
MAY 31, 1998 ------------- FONOROLA.................................................... 39%
The Division is receiving cash from this customer on a consistent basis and management expects to collect on all other accounts receivables. Therefore no provision for bad debts has been recorded for the reported periods. Based on this significant customer's creditworthiness, the Division has not required it to provide collateral against these receivables. There were no significant accounts payable to significant suppliers at the balance sheet dates. However, since significant purchases are made from Pirelli Cables, should this supplier fail to honor its contract and the Division was not able to find a substitute supplier, the Division would not be able to meet its commitments to complete the construction of the Canadian FOTS, as noted in 9(a). 11. FINANCIAL INSTRUMENTS Financial instruments consist of recorded accounts receivables (and other like accounts) which will result in future cash receipts, as well as accounts payables, (and other like accounts) that will result in future cash outlays. The carrying values of the financial instruments of the Division as at May 31, 1998 were approximately equal to their estimated fair market values at these dates, due to the short-term nature of these instruments. Subjective judgment and uncertainties arise in the determination of estimated fair market values. Accordingly, the aggregate fair value should not be interpreted as being realizable in an immediate settlement of the instruments. 12. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION The Division currently operates in one industry segment (fiber optic installations) and in two geographic segments (the Canadian FOTS is being constructed in Canada and the U.S.). Revenue and total identifiable assets for these geographic segments is as follows:
CANADA U.S. --------------------------------- --------------------------------- REVENUE AMOUNT PERCENTAGE OF TOTAL AMOUNT PERCENTAGE OF TOTAL - ------- ----------- ------------------- ----------- ------------------- May 31, 1998................ $35,826,795 66% $18,807,093 34% August 31, 1997............. $42,611,672 73% $15,395,980 27%
CANADA U.S. --------------------------------- --------------------------------- TOTAL IDENTIFIABLE ASSETS AMOUNT PERCENTAGE OF TOTAL AMOUNT PERCENTAGE OF TOTAL - ------------------------- ----------- ------------------- ----------- ------------------- May 31, 1998................ $29,204,452 71% $11,928,580 29%
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after, January 1, F-46 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 2000 and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Division's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Division, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 14. SUBSEQUENT EVENTS A) AGREEMENTS WITH WFI Effective May 31 1998, LIL entered into a series of agreements to sell the equipment, fiber optic strands and certain other assets related to the business of Worldwide Fiber Inc. (an indirect wholly-owned subsidiary of Ledcor Inc.) ("WFI"). In addition, WFI was granted a licence by LIL to use certain processes related to the business. This licence agreement is for an initial term of ten years and will be renewable annually upon completion of the initial term. As part of this transaction, LIL retained all existing construction contracts related to the business. This transaction was between entities under common control and has been accounted for using the carrying amounts recorded in LIL's accounts. As consideration for the transaction, LIL was issued 200 Class A Shares by WFI. B) DISPOSITION OF FIBER ASSETS As part of these agreements WFI undertook to purchase from LIL certain fiber optic system assets, located in both Canada and the U.S., which were not completed at May 31, 1998. These assets will be purchased by WFI upon their completion, which is estimated to be late 1998 or early 1999. As consideration, WFI will issue a total of 19,999,700 Class A common Shares to LIL. These transactions are between entities under common control and, will be accounted for at their original construction costs. C) CONSTRUCTION SERVICES WFI has agreed to provide construction services to LIL to complete certain construction contracts for fiber optic strands and related facilities to third party customers. F-47 AUDITORS' REPORT TO THE DIRECTORS AND SHAREHOLDERS OF GLOBENET COMMUNICATIONS GROUP LIMITED We have audited the accompanying consolidated balance sheets of GlobeNet Communications Group Limited as of December 31, 1999 and 1998 and the related consolidated statements of shareholders' equity, operations and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GlobeNet Communications Group Limited at December 31, 1999 and 1998 and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with accounting principles generally accepted in the United States. PricewaterhouseCoopers LLP CHARTERED ACCOUNTANTS Toronto, Canada February 16, 2000 F-48 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 $ $ --------- -------- ASSETS CURRENT ASSETS Cash........................................................ -- 3,030 Restricted cash (note 3).................................... 79,998 -- Accounts receivable (net of allowance of $224; 1998--$80)... 2,096 1,847 Other receivables........................................... 150 718 Due from related party (note 4)............................. -- 1,363 Prepaid expenses and deposits............................... 1,632 338 -------- -------- 83,876 7,296 Restricted cash (note 3).................................... 448,399 -- Fixed assets (note 5)....................................... 49,148 26,182 Construction in progress (note 6)........................... 98,062 -- Other assets (note 7)....................................... 25,847 1,411 Equity accounted for investments............................ -- 21,371 -------- -------- 705,332 56,260 -------- -------- LIABILITIES CURRENT LIABILITIES Accounts payable (note 8)................................... 36,179 3,871 Accrued liabilities (note 8)................................ 21,117 4,971 Current portion of long-term debt (note 9).................. -- 3,000 -------- -------- 57,296 11,842 LONG-TERM DEBT (note 9)..................................... 400,000 35,019 DEFERRED REVENUE (note 10).................................. 6,455 2,695 -------- -------- 463,751 49,556 -------- -------- SHAREHOLDERS' EQUITY SHARE CAPITAL (notes 12 and 13) Class A shares, 100 shares authorized, par value $1.50 each nil (1998--100) shares issued and outstanding................. -- -- Class B shares, 2,000 shares authorized, par value $1.50 each 1,000 (1998--nil) shares issued and outstanding................. 2 -- Common shares, 24,000,000 authorized, par value $1.50 each 17,043,900 (1998--3,515,927) shares issued and outstanding............................................... 25,566 5,274 ADDITIONAL PAID-IN CAPITAL.................................. 246,866 16,377 DEFICIT..................................................... (30,853) (14,947) -------- -------- 241,581 6,704 -------- -------- 705,332 56,260 ======== ======== COMMITMENTS (note 16)
The accompanying notes are an integral part of these consolidated financial statements. F-49 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PAR PAR TOTAL VALUE OF VALUE OF ADDITIONAL SHARE- CLASS A CLASS B CLASS B COMMON COMMON PAID-IN HOLDERS' SHARES SHARES SHARES SHARES SHARE CAPITAL DEFICIT EQUITY ---------- ---------- ---------- ----------- ----------- ------------- -------- ---------- December 31, 1996....... -- -- $-- 3,487,916 $ 5,232 $ 16,200 $ (4,707) $ 16,725 Shares options exercised............. -- -- -- 28,011 42 42 -- 84 Share options issued.... -- -- -- -- -- 135 -- 135 Shares issued........... 100 -- -- -- -- -- -- -- Net loss for the year... -- -- -- -- -- -- (5,296) (5,296) ---- ----- --- ---------- -------- -------- -------- -------- December 31, 1997....... 100 -- -- 3,515,927 5,274 16,377 (10,003) 11,648 Net loss for the year... -- -- -- -- -- -- (4,944) (4,944) ---- ----- --- ---------- -------- -------- -------- -------- December 31, 1998....... 100 -- -- 3,515,927 5,274 16,377 (14,947) 6,704 Compensatory share options............... -- -- -- -- -- 8,758 -- 8,758 Deferred compensation... -- -- -- -- -- (4,551) -- (4,551) Share options exercised............. -- -- -- 129,041 194 754 -- 948 Shares issued in private equity financing...... -- -- -- 13,263,646 19,895 250,683 -- 270,578 Share issue costs....... -- -- -- -- -- (11,665) -- (11,665) Shares issued........... -- 1,000 2 -- -- -- -- 2 Shares issued on conversion of subordinated debt and exercise of warrants.............. -- -- -- 1,635,286 2,453 14,860 -- 17,313 Shares purchased and cancelled............. (100) -- -- (1,500,000) (2,250) (28,350) -- (30,600) Net loss for the year... -- -- -- -- -- -- (15,906) (15,906) ---- ----- --- ---------- -------- -------- -------- -------- December 31, 1999....... -- 1,000 $ 2 17,043,900 $ 25,566 $246,866 $(30,853) $241,581 ==== ===== === ========== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-50 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 1997 $ $ $ -------- -------- -------- REVENUES Telecommunications services................................. 26,033 24,940 4,962 IRU capacity (note 10)...................................... 315 1,784 -- ------- ------ ------ 26,348 26,724 4,962 ------- ------ ------ EXPENSES Carrier charges............................................. 10,989 15,129 3,559 Cost of IRU capacity........................................ -- 547 -- General and administrative expenses (notes 4 and 15)........ 19,311 9,328 4,961 Amortization of fixed assets................................ 1,854 1,502 429 ------- ------ ------ 32,154 26,506 8,949 ------- ------ ------ OPERATING LOSS.............................................. (5,806) 218 (3,987) Interest on long-term debt.................................. 20,427 3,863 1,055 Accrued contingent interest (note 9)........................ 538 960 382 Interest income............................................. (12,588) (170) (193) ------- ------ ------ LOSS BEFORE INCOME TAXES, MINORITY INTEREST, EQUITY ACCOUNTED FOR INVESTMENTS AND EXTRAORDINARY ITEM.......... (14,183) (4,435) (5,231) Provision for income taxes.................................. (141) (36) (53) ------- ------ ------ LOSS BEFORE MINORITY INTEREST, EQUITY ACCOUNTED FOR INVESTMENTS AND EXTRAORDINARY ITEM........................ (14,324) (4,471) (5,284) Minority interest (note 11)................................. -- 204 249 Loss from equity accounted for investments (note 11)........ (773) (677) (261) ------- ------ ------ LOSS BEFORE EXTRAORDINARY ITEM.............................. (15,097) (4,944) (5,296) Extraordinary loss relating to extinguishment of debt (note 9)........................................................ (809) -- -- ------- ------ ------ NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR................ (15,906) (4,944) (5,296) ------- ------ ------ BASIC AND FULLY DILUTED LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM........................................ (1.52) (1.41) (1.52) ------- ------ ------ BASIC AND FULLY DILUTED LOSS PER COMMON SHARE RELATING TO THE EXTRAORDINARY LOSS FROM THE EXTINGUISHMENT OF DEBT.... (0.08) -- -- ------- ------ ------ BASIC AND FULLY DILUTED LOSS PER COMMON SHARE (note 14)..... (1.60) (1.41) (1.52) ------- ------ ------
The accompanying notes are an integral part of these consolidated financial statements. F-51 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 1997 --------- -------- -------- $ $ $ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year....................................... (15,906) (4,944) (5,296) Items not involving cash Amortization of fixed assets.............................. 1,854 1,502 429 Write-down of other assets................................ -- 201 -- Amortization of other assets.............................. 1,949 321 305 Extraordinary loss-extinguishment of debt................. 809 -- -- Minority interest......................................... -- (204) (249) Loss from equity accounted for investments................ 773 677 261 Accrued contingent interest............................... 538 960 382 Gain on granting of indefeasible rights of use and loss on sale of capital assets.................................. -- (970) -- Compensatory share options................................ 4,207 -- -- Net change in non-cash operating items Accounts receivable....................................... (249) (577) (1,270) Other receivables......................................... 568 970 (1,688) Note receivable........................................... (32) -- -- Prepaid expenses and deposits............................. (1,294) (138) 32 Accounts payable.......................................... 1,265 (6,369) 9,669 Accrued liabilities....................................... 13,778 3,908 959 Deferred revenue.......................................... 3,760 1,174 1,521 Recoverable duties........................................ -- -- 392 --------- ------- -------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............. 12,020 (3,489) 5,447 --------- ------- -------- FINANCING ACTIVITIES Issuance of common shares................................... 259,861 -- 84 Purchase and cancellation of common shares, net of fees..... (30,600) -- -- Proceeds from issuance of long-term debt.................... 400,500 9,350 29,740 Repayment of long-term debt................................. (23,677) (2,413) -- Deferred financing costs.................................... (26,514) -- (1,472) Other assets................................................ (653) -- -- Loans provided by minority shareholders..................... -- -- 807 --------- ------- -------- CASH PROVIDED BY FINANCING ACTIVITIES....................... 578,917 6,937 29,159 --------- ------- -------- INVESTING ACTIVITIES Restricted cash............................................. (528,397) -- 2,015 Purchase of fixed assets.................................... (4,139) (1,791) (22,662) Construction in progress (note 6)........................... (62,799) -- -- Granting of indefeasible rights of use and proceeds on sale of capital assets......................................... -- 1,596 -- Change in other assets...................................... 5 (218) (2) Due from related party...................................... 1,363 (1,363) -- Proceeds from sale of equity accounted for investment....... -- 410 -- Advances to equity accounted for investee................... -- (411) (22,479) --------- ------- -------- CASH (USED IN) INVESTING ACTIVITIES......................... (593,967) (1,777) (43,128) --------- ------- -------- INCREASE (DECREASE) IN CASH FOR THE YEAR.................... (3,030) 1,671 (8,522) CASH--BEGINNING OF YEAR..................................... 3,030 1,359 9,881 --------- ------- -------- CASH--END OF YEAR........................................... -- 3,030 1,359 --------- ------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-52 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1 NATURE OF OPERATIONS GlobeNet Communications Group Limited provides international telecommunications services to both residential and commercial customers and is a provider of telecommunications capacity. The Company is currently developing a fibre optic submarine cable system called Atlantica-1 that will link Bermuda, North and South America and offer capacity between major cities in the United States, Bermuda, Brazil, Venezuela and Argentina. Atlantica-1 is currently being constructed. In November 1997, the Company deployed a fibre optic submarine cable system which connects Bermuda and the United States ("BUS-1"). The Company provides international telecommunications services to both residential and commercial customers in Bermuda through a subsidiary company, TeleBermuda International Limited ("TBI") through the BUS-1. On January 10, 1997, TBI was granted its public telecommunications service licence in Bermuda under the provisions of the Telecommunications Act, 1986 and the Public Telecommunication Service (Licence) Regulations, 1988 for a five-year term and began commercial operations in May 1997. TBI has an interconnection agreement with the Bermuda Telephone Company ("BTC"), the domestic carrier in Bermuda. No consideration was paid by the Company in relation to these agreements. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The following is a summary of the significant accounting policies followed in the preparation of these consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiary companies. Intercompany accounts and transactions have been eliminated on consolidation. USE OF SIGNIFICANT ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could significantly differ from those estimates. REVENUE, DEFERRED REVENUE AND COST RECOGNITION REVENUE: The Company provides telecommunication services and the granting or leasing of indefeasible rights of use ("IRU") interests in its telecommunications infrastructure. The Company records as revenue the amount of telecommunications services rendered, as measured primarily by the minutes of traffic processed, after deducting an estimate of the traffic for F-53 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) which revenue will not be collected. Historical deductions have not been material. Service discounts and incentives are accounted for as a reduction of revenue when granted, or where provided in relation to a service contract, rateably over the contract period. The Company has entered into certain IRU agreements. Such agreements are accounted for as either service or lease transactions. Those IRU agreements that meet all of the following characteristics have been accounted for as leases: (a) The purchaser has exclusive right to the purchased capacity for a specified period, generally the estimated useful life of the system, which is 25 years. (b) The Company cannot sell or otherwise use any of the purchaser's unused capacity for the term of the agreement. (c) The purchased capacity is physically limited to discrete channels on the purchaser's own dedicated circuits at a specified amount of capacity, which cannot be exceeded. The specific circuits are agreed to by the parties. (d) The Company has no right to move the purchased capacity to another discrete channel from the purchaser's dedicated circuits without the purchaser's permission. IRU agreements that meet these criteria are accounted for as lease transactions. If the transactions meet the sales type lease criteria of Financial Accounting Standard No. 13, including those related to collectibility of the payments and the absence of any important uncertainties surrounding unreimbursable costs yet to be incurred by the Company, then revenue is recognized in the period that the IRUs are transferred and the capacity is available for service. If these criteria are not met, the transactions are accounted for as operating leases and revenue is recognized over the term of the lease. To date, the Company has not entered into any IRU agreements that are considered to be service transactions. Revenue from service transactions would be recognized as earned over the term of the agreement. In addition, we note that the accounting for sales of capacity is evolving, and is currently under consideration by accounting standard setters. Any change in accounting literature may affect the timing and method of recognition of these revenues and related costs. Revenues from private line services are recognized as earned. DEFERRED REVENUE: Rent from the operating leases of capacity in the telecommunications infrastructure to third party carriers is deferred and recognized over the term of the lease on a straight-line basis. Revenue from the sale of prepaid calling cards is recognized as the services are provided. COST: Carrier charges are comprised primarily of local access charges and international termination costs. These costs are recognized based on traffic volume. F-54 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FIXED ASSETS Fixed assets are recorded at cost less accumulated amortization. Amortization commences when an asset is available for use, and is calculated in a systematic manner based on the expected useful lives of the assets as follows:
ASSET CATEGORY BASIS RATE - ----------------------------------------------------- ------------------- ----------------- Fibre optic submarine cable.......................... straight-line 25 years Network and telecommunications equipment............. straight-line 10 years Leasehold improvements............................... straight-line term of the lease Computer equipment................................... straight-line 3 years Furniture and office equipment....................... diminishing balance 20% per year Software............................................. straight-line 5 years
CONSTRUCTION IN PROGRESS Construction in progress includes direct expenditures for the construction of the Company's Atlantica-1 project and is stated at cost. Costs are capitalized once it is probable that the fibre optic cable system will be constructed, otherwise they are expensed as incurred. Capitalized costs include costs incurred under the construction contract, advisory, consulting and legal fees and interest. DEFERRED FINANCING COSTS Deferred financing costs represent debt issuance costs, which are amortized over the estimated term of the related debt. INVESTMENTS The Company's investments are accounted for using the equity method. FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated into U.S. dollars at the average rates of exchange prevailing at the dates of the respective transactions. Transactions are translated into U.S. dollars at the exchange rates in effect at the time the transactions occur. Exchange gains and losses arising on translation are included in the operating results for the year. Assets and liabilities of non-Bermudian subsidiaries where the functional currency is other than the U.S. dollar are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. F-55 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS The fair value of financial assets and liabilities represents the amount at which these instruments could be exchanged in an arm's length transaction between willing parties. As at December 31, 1999, the carrying amounts of financial assets and liabilities in the consolidated balance sheet approximate their fair values due to the short-term nature of these instruments. The reported amount of fixed rate long-term debt instruments is estimated to approximate fair value as actual rates are consistent with rates estimated to be currently available for debt of similar terms and remaining maturities. In addition, the Company has entered into an interest rate cap agreement to modify the interest characteristics of part of its outstanding long-term debt. This agreement involves an exchange of amounts based on a fixed interest rate for amounts based on a variable interest rate whenever the interest rate exceeds the cap specified in the agreement. The premium paid by the Company upon entering in the agreement is amortized over the term of the agreement and recognized as an adjustment of interest expense related to the debt. The Company does not use derivative financial instruments for speculative trading purposes. As of December 31, 1999, the carrying value approximates fair value. INCOME TAXES Under current Bermuda laws, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda, pursuant to the Exempted Undertakings Tax Protection Act 1966, which exempts the Company from any such tax until March 28, 2016. Subsidiaries in other jurisdictions are subject to local taxes. STOCK BASED COMPENSATION The Company applies APB Opinion 25 ("Accounting for Stock Issued to Employees") in accounting for its stock option plan, and, accordingly, does not recognize compensation cost at the time options are granted unless the exercise price is less than the market price of the stock on the measurement date. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. SFAS 133, as amended, requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging F-56 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. Management has not determined the impact of this statement on its financial position, results of operations and cash flows. FASB Interpretation No. 43, "Real Estate Sales--an interpretation of FASB Statement No. 66," was issued in June 1999. It clarifies the standards for recognition of profit on all real estate sales transactions, including those related to fibre optic cable that cannot be removed and used separately from the real estate without incurring significant costs. This interpretation is effective for all applicable transactions after June 30, 1999. However, no such transactions have been entered into after June 30, 1999 and we have not yet completed our analysis of the applicability or the impact of this statement on future transactions. 3 RESTRICTED CASH Components of restricted cash are:
1999 1998 $ $ -------- -------- Cash....................................................... 6,628 -- Cash equivalents maturing within 90 days: Commercial paper......................................... 513,703 -- Term deposit............................................. 8,066 -- ------- -------- 528,397 -- Less: Current portion...................................... 79,998 -- ======= ======== 448,399 -- ======= ========
The Company's use of cash is generally restricted under the terms of the Credit Facility to operating and capital expenditures related to the Atlantica-1 project and to other telecommunications activities. The investment of the cash is restricted to investments with a minimum credit rating of A-1 by Standard and Poor's or P-1 by Moody's. 4 RELATED PARTY TRANSACTIONS a) On August 26, 1998, TBI loaned CAD$2,000 ($1,292) to the Chairman and Chief Executive Officer of the Company. This loan and all outstanding interest thereon were repaid in full in January 1999. b) In September 1997, the Company entered into a service agreement with First Bermuda Securities Ltd., of which a Director of the Company is the Chief Executive Officer. Under this agreement, First Bermuda Securities Ltd. provides the Company with various financial and business advisory services. Payments made to First Bermuda Securities in 1999 were $81 (1998--$125; 1997--$145) and are included in general and administrative expenses. F-57 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 5 FIXED ASSETS
1999 ACCUMULATED COST AMORTIZATION NET $ $ $ -------- ------------- -------- Land........................................................ 2,611 -- 2,611 Fibre optic submarine cable................................. 44,459 3,756 40,703 Network and telecommunications equipment.................... 5,328 1,037 4,291 Leasehold improvements...................................... 1,154 226 928 Computer equipment.......................................... 596 346 250 Furniture and office equipment.............................. 266 67 199 Software.................................................... 240 74 166 ------ ----- ------ 54,654 5,506 49,148 ====== ===== ======
1998 ACCUMULATED COST AMORTIZATION NET $ $ $ -------- ------------- -------- Fibre optic submarine cable................................. 21,881 971 20,910 Network and telecommunications equipment.................... 4,415 549 3,866 Leasehold improvements...................................... 944 140 804 Computer equipment.......................................... 470 167 303 Furniture and office equipment.............................. 140 38 102 Software.................................................... 224 27 197 ------ ----- ------ 28,074 1,892 26,182 ====== ===== ======
6 CONSTRUCTION IN PROGRESS The Company is currently constructing a fibre optic submarine cable system called Atlantica-1 linking Bermuda, North and South America. As of December 31, 1999, costs of $98,062 have been capitalized and included in this amount is capitalized interest of $4,220 (1998--$nil). 7 OTHER ASSETS
1999 1998 $ $ -------- -------- Deferred financing costs, net of accumulated amortization of $1,936 (1998--$626).................................... 24,743 981 Other....................................................... 1,104 430 ------ ----- 25,847 1,411 ====== =====
F-58 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable are comprised as follows:
1999 1998 $ $ -------- -------- Atlantica-1 payables........................................ 31,043 -- Trade payables.............................................. 1,873 777 Foreign carrier settlement payables......................... 3,263 3,037 Other payables.............................................. -- 57 ------ ----- 36,179 3,871 ====== =====
Accrued liabilities are comprised as follows:
1999 1998 $ $ -------- -------- Interest payable............................................ 18,266 2,002 Foreign carrier accrual..................................... 480 880 Equalization payment accrual................................ 470 668 Other accruals.............................................. 1,901 1,421 ------ ----- 21,117 4,971 ====== =====
Foreign carrier settlement payables and foreign carrier accrual represent costs for foreign traffic payable to other carriers. 9 LONG-TERM DEBT
1999 1998 $ $ -------- -------- Term loan (a)............................................... -- 21,990 Operating credit facility (a)............................... -- 1,687 Subordinated debentures and retractable warrants (a)........ -- 13,000 Accrued contingent interest (a)............................. -- 1,342 Senior notes (b)............................................ 300,000 -- Bank credit facility (c).................................... 100,000 -- ------- ------ 400,000 38,019 Less: Current portion....................................... -- 3,000 ------- ------ 400,000 35,019 ======= ======
(a) On July 14, 1999, the term loan, operating credit facility and certain accrued interest on the subordinated debentures were repaid. As well, all of the remaining obligations to the subordinated debentureholders were retired when the subordinated debentureholders elected F-59 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 9 LONG-TERM DEBT (CONTINUED) to exercise their warrants and convert the principal and remaining accrued interest on their subordinated debt into 1,635,286 common shares. In connection with the foregoing, deferred financing costs of $809 were written off as a result of the debt extinguishment. (b) On July 14, 1999, the Company issued debt in the principal amount of $300,000 in the form of 13% senior notes maturing July 15, 2007. Interest on these notes is payable semi-annually in arrears commencing January 15, 2000. The notes are unsecured. (c) On July 14, 1999, the Company secured a bank credit facility ("Credit Facility") of up to $400,000, consisting of various term facilities totalling $390,000 and a revolving credit facility of $10,000. In addition, under the Credit Facility, the Company may also request an additional facility of up to $50,000 subject to lender approval and other restrictions. The Credit Facility matures in 2005. Interest rates on the Credit Facility range from LIBOR plus 3.5% to LIBOR plus 4.0% and availability of funds under the Credit Facility is subject to certain terms and conditions. Commitment fees for the Credit Facility were $2,541. Substantially all of the assets of GlobeNet Communications Holdings Ltd. and of its present and future direct and indirect subsidiaries have been pledged as collateral for the Credit Facility. GlobeNet Communications Holdings Ltd. is a wholly owned subsidiary of the Company. In addition, a third party supplier has provided an initial guarantee subject to certain conditions and adjustments of up to $100,000 for one of the term facilities. On December 22, 1999, the Company entered into an interest rate cap transaction effectively fixing the interest rate on $50,000 of the Credit Facility at 7.0% for a three-year term. As at December 31, 1999 the unused facility was $300,000 and the average rate of interest during 1999 was 9.7%. The principal repayments required in the next five years and thereafter in respect of the senior notes and the Credit Facility are as follows:
$ -------- Fiscal year 2002.................................................. 1,000 2003.................................................. 1,000 2004.................................................. 1,000 2005.................................................. 97,000 2006.................................................. -- Thereafter............................................ 300,000 ------- 400,000 =======
10 GRANTING OF INDEFEASIBLE RIGHTS OF USE AND LEASING OF THE FIBRE OPTIC SUBMARINE CABLE a) During 1998, the Company granted indefeasible rights of use ("IRUs") in its fibre optic submarine cable to certain third party carriers for a period of 25 years for $1,521. The costs F-60 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 10 GRANTING OF INDEFEASIBLE RIGHTS OF USE AND LEASING OF THE FIBRE OPTIC SUBMARINE CABLE (CONTINUED) recognized with the granting of the IRUs are calculated as total capacity granted in relation to the total cost of the activated fibre optic submarine cable times the total cost of the fibre optic submarine cable system. In addition, under these IRU agreements, the third party carrier is responsible for paying its pro rata share of restoration costs. These costs are accounted for as expenses as they are incurred, less a recovery of expense being recorded to reflect the required pro rata reimbursement from the IRU customer. b) The Company has entered into an agreement to provide capacity in its fibre optic submarine cable to a third party. This arrangement is being accounted for as an operating lease. The term of the lease is for the greater of 25 years or the operational life of the fibre optic submarine cable. If the operational life is less than 10 years, the Company must provide a refund on a pro rata basis for each year short of the 10-year period. For the first four years of the agreement, the Company is responsible for maintenance and operating costs, thereafter the lessee will pay a monthly charge for operating and maintenance costs. The total rental payment for this agreement was $8,000, of which $4,000 was paid in 1999 and $3,000 in 1998. The remaining payment of $1,000 is due on September 24, 2000. Lease income is being recognized on a straight-line basis over the 25-year term. During 1999, lease income of $315 (1998--$263; 1997--$nil) was recognized. Under this agreement, the third party has the right to enter into a second lease of capacity in the fibre optic submarine cable commencing September 24, 2001. The consideration for the second lease will be $4,000 payable upon activation of the second circuit. If the third party elects not to proceed with the second lease a penalty of $250 is payable to the Company. 11 MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS ROCOM TBI LIMITED During 1998, the Company sold its interest in Rocom TBI Limited, a telecommunications services joint venture in the United Kingdom, for total consideration of $820 (L500), of which $410 (L250) was received in cash and a remaining receivable of $410 (L250) is included in other assets. TELEBERMUDA INTERNATIONAL L.L.C. On November 1, 1999, The Company indirectly acquired the 80% interest in TeleBermuda International L.L.C. ("TBI L.L.C.") that it did not previously own for nominal consideration pursuant to a Put and Call Agreement entered into in May 1996. TBI L.L.C. holds the landing license for the Company's Bermuda to United States cable system ("BUS-1") in the United States, a 50% interest in the BUS-1 and a 100% interest in the U.S. landing plant. From May 1996 to November 1, 1999, the Company's 20% investment in TBI L.L.C. was accounted for using the equity method. Under the equity method, the Company reported 100% of the losses of TBI L.L.C. as the Company had certain rights and obligations related to the investment, including the requirement to fund operations and capital expenditures. F-61 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 11 MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS (CONTINUED) Summarized financial information for TBI L.L.C. at and for the year ended December 31, 1998 is as follows:
DECEMBER 31, 1998 $ -------------- BALANCE SHEET Current asset............................................... 2 Non-current asset........................................... 21,432 Current liabilities......................................... 62 Non-current liabilities..................................... 22,803 STATEMENT OF OPERATIONS Revenues.................................................... -- Expenses.................................................... 943 Net loss from TBI L.L.C..................................... (943)
12 SHARE CAPITAL a) Authorized The Board of Directors has the authority to issue common shares, securities convertible into common shares or grant options, up to a maximum of 20% of the fully diluted shares of the Company pursuant to a general mandate of the shareholders. This mandate will expire at the next annual meeting of the shareholders, unless it is re-approved at that meeting. During 1999, the authorized common shares of the Company were increased by 10,499,900 effective June 15, 1999 and 6,500,200 effective July 12, 1999 to an aggregate total of 24,000,000 common shares. In addition, the Company bye-laws authorized the creation of 100 Class B shares. On July 12, 1999, the authorized Class B shares of the Company were increased by 1,900. Class B restricting voting shares are entitled to a maximum of $1.50 par value on any liquidation of the Company. The holders of these shares are the only shareholders permitted to hold common shares representing more than 35% of the aggregate issued share capital of the Company at any time or shares representing more than 35% of the votes attaching to all issued shares of the Company at any time. Approval of the holders of the majority of Class B share is required before changes may be made to any of the Company's governing documents and certain specific transactions. b) Capital transactions i) On October 3, 1997, 100 common shares were converted into Class A shares. On July 14, 1999, the Company purchased and cancelled 100 Class A shares at their par value of $1.50 per share. F-62 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 12 SHARE CAPITAL (CONTINUED) ii) On July 14, 1999, the Company issued for cash 1000 Class B shares at their par value of $1.50. iii) On July 14, 1999, the Company issued 13,263,646 common shares for cash at $20.40 per share and aggregate proceeds of $258,913, net of expenses related to the offering of $11,665. On the same date, the subordinated debenture holders elected to exercise their warrants and convert the principal and remaining accrued interest at their carrying amounts into 1,635,286 shares aggregating $17,313. On August 9, 1999, the Company purchased for cancellation 1,500,000 common shares at $20.40 per share for a total cost of $30,600. Commissions of $450 were paid to First Bermuda Securities Ltd., of which a Director of the Company is the Chief Executive Officer. 13 COMMON SHARE OPTIONS The Company, awards options to employees, officers and directors of the Company under the terms of the 1997 and 1998 Share Option and Incentive Plans. In addition, the Board has the authority to grant options outside of these plans under separate stock option agreements. A summary of the outstanding common share purchase option activities is as follows:
1999 1998 1997 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED COMMON AVERAGE COMMON AVERAGE COMMON AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE PURCHASE PRICE PURCHASE PRICE PURCHASE PRICE OPTIONS $ OPTIONS $ OPTIONS $ --------- --------- --------- --------- --------- --------- Options outstanding at beginning of year............ 543,489 5.15 556,489 5.22 352,500 3.21 Options granted................ 1,277,019 13.14 -- -- 232,000 8.00 Options exercised.............. (129,041) 7.37 -- -- (28,011) 3.00 Options forfeited.............. (11,670) 13.06 (13,000) 8.00 -- -- --------- ----- ------- ---- ------- ---- Options outstanding at year-end..................... 1,679,797 11.00 543,489 5.15 556,489 5.22 ========= ===== ======= ==== ======= ==== Options exercisable at year-end..................... 844,462 8.93 440,309 4.49 374,489 3.87 ========= ===== ======= ==== ======= ====
These options expire on various dates from 2001 to 2009 and generally vest over a three-year period. F-63 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 13 COMMON SHARE OPTIONS (CONTINUED) The following table summarizes information concerning outstanding and exercisable options at December 31, 1999:
WEIGHTED AVERAGE EXERCISE REMAINING CONTRACTUAL NUMBER OF SHARE PRICE LIFE (YEARS) OF OPTIONS NUMBER OF OPTIONS OPTIONS EXERCISABLE AT $ OUTSTANDING OUTSTANDING DECEMBER 31, 1999 - ---------------------- ----------------------- ------------------ ------------------------ 0.01.................. 6.09 45,000 45,000 1.00.................. 1.41 26,863 26,863 3.00.................. 2.03 180,000 180,000 8.00.................. 8.00 153,275 102,942 8.50.................. 2.77 50,000 50,000 9.00.................. 9.20 760,640 280,638 19.00................. 9.56 35,000 30,000 20.40................. 8.65 429,019 129,019 --------- ------- 1,679,797 844,462 ========= =======
i) On December 18, 1998 and May 21, 1999, the Board of Directors issued 263,000 options and 5,000 options, respectively to employees and certain officers and directors at an exercise price of $9.00 per option, vesting over a three-year period, under the 1998 Share Option and Incentive Plan. In July 1999, when these options were approved by the shareholders, the market price of these options was $20.40. The difference between the market price and the exercise price has been reflected as deferred compensation in the statement of shareholders' equity and is being amortized over the vesting period as at December 31, 1999. Compensation expense in the amount of $1,794 has been recorded in the financial statements. On July 9, 1999, 35,000 options, with an exercise price of $19.00 with a ten-year term were granted to certain directors. The market price of these options on the measurement date was $20.40. The vesting of these options occurred on July 14, 1999. The difference between the exercise price and market price at the time of vesting amounted to $49 and has been reflected as compensation expense. On April 12, 1999, the Company granted 540,000 options at an exercise price of $9.00 with a ten-year term to certain officers and directors. These options vest in three separate tranches based upon the Company meeting certain milestones related to the Atlantica-1 project. On July 14, 1999, the first vesting milestone occurred on 165,000 of these options, when the financing was secured and the vesting period for another 165,000 options was determined. The difference between the exercise price and the market value amortized over the vesting period amounted to $2,364 and has been reflected as compensation expense. F-64 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 13 COMMON SHARE OPTIONS (CONTINUED) On October 7, 1999, the Company granted 429,019 options at an exercise price of $20.40 to certain officers. Of these options, 129,019 vest immediately and 300,000 vest over three years although vesting on these options may be accelerated as a result of certain events. On October 22, 1999, the Company granted 5,000 options at an exercise price of $19.00 to an employee. These options vest over three years. Total stock-based compensation expense included in general and administrative expenses for the year ended December 31, 1999 is $4,207 (1998--$nil; 1997--$nil). Had the Company elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS 123, the pro forma effects to reported net loss for the year and basic and fully diluted loss per common share, would be as follows:
1999 1998 1997 $ $ $ -------- -------- -------- Net loss for the year--as reported.......................... 15,906 4,944 5,296 Net loss for the year--pro forma............................ 15,906 5,047 5,296 Basic and fully diluted loss per common share--as reported.................................................. 1.60 1.41 1.52 Basic and fully diluted loss per common share--pro forma.... 1.60 1.43 1.52
The fair value of each option grant has been estimated using the Black-Scholes option pricing model, using a volatility assumption of 20% (1998--20%; 1997--20%), expected life of 7 years (1998--7 years; 1997 -7 years), a dividend rate of nil (1998--$nil; 1997--$nil) and a risk-free interest rate of 5.64% (1998--5.28%; 1997--6.33%). The above pro forma effects on the net loss for the year may not be representative of the effects on the net loss for the year for future periods as option grants typically vest over several years and additional options are generally granted each year. 14 BASIC AND FULLY DILUTED LOSS PER COMMON SHARE The basic loss per common share is calculated using the weighted average number of common shares outstanding of 9,911,341 (1998--3,515,927; 1997--3,492,915). The weighted average number of common shares on a fully diluted basis is calculated on the same basis as the basic weighted average number of shares as the Company is in a loss position and the effects of possible conversion would be anti-dilutive. F-65 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 15 SUPPLEMENTAL INFORMATION i) Included in general and administrative expense are the following:
1999 1998 1997 $ $ $ -------- -------- -------- Rent................................................... 426 342 242 Bad debt............................................... 212 114 91 Advertising............................................ 312 224 148
ii) Amounts paid for interest and income taxes are as follows:
1999 1998 1997 $ $ $ -------- -------- -------- Interest.............................................. 4,517 1,901 540 Income taxes.......................................... 70 36 51
16 COMMITMENTS a) The Company has entered into operating lease agreements for its premises and for maintenance of its fibre optic cable. Minimum lease commitments pursuant to these leases over the next five years and thereafter are as follows:
$ -------- Year ending December 31, 2000..................................... 2,538 2001..................................... 1,059 2002..................................... 1,028 2003..................................... 1,061 2004..................................... 1,035 Thereafter............................... 12,128 ------ 18,849 ======
b) On June 16, 1999, the Company entered into a supply contract with Alcatel Submarine Networks ("Alcatel") to construct a fibre optic submarine cable called Atlantica-1 for a total contract price of $620,861, (of which $93,129 has been recorded at December 31, 1999), which is subject to amendment by the mutual agreement of the parties. Future payments are based upon a specified billing schedule and are due when the corresponding project milestone has been achieved and engineer acceptance has been provided. F-66 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 16 COMMITMENTS (CONTINUED) The future minimum payments, beyond the $93,129 that has been recorded as of December 31, 1999, required as a result of the contract, are as follows:
$ -------- Year ending December 31, 2000............................... 465,646 2001........................................................ 62,086 ------- 527,732 -------
c) As of December 31, 1999, the Company was committed to $2,901 of future construction costs under its participation in a cable network construction and maintenance agreement. d) In the normal course of business, the Company has also entered into a number of contracts under which it is committed to the purchase and supply of telecommunication services at fixed prices. It is not anticipated that losses will be incurred on these contracts. 17 SEGMENTED INFORMATION The Company operates predominantly in the international telecommunications services business and substantially all of the Company's business activity was conducted in Bermuda. 18 SUBSEQUENT EVENT On February 15, 2000, the Company signed a contract variation with Alcatel for the fixed price turnkey supply of all six undersea cable stations and the associated overland routes from the cable stations to the cable beach landing points at a cost of approximately $50 million. F-67 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the Subordinate Voting Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------ TABLE OF CONTENTS
Page -------- Prospectus Summary................... 1 Risk Factors......................... 11 Use of Proceeds...................... 30 Dividend Policy...................... 31 Description of Our Capital Stock..... 31 Exchange Rates....................... 32 Dilution............................. 32 Capitalization....................... 33 Selected Financial Data.............. 34 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 38 Business............................. 46 Management........................... 63 Principal and Selling Shareholder.... 72 Relationships and Related Party Transactions....................... 74 Description of Capital Stock and Share Capital Reorganization....... 78 Shares Eligible for Future Sale...... 81 Regulation........................... 83 Description of Indebtedness.......... 98 Material United States and Canadian Income Tax Considerations.......... 102 Underwriting......................... 106 Legal Matters........................ 109 Experts.............................. 109 Enforceability of Civil Liabilities Against Foreign Persons............ 110 Where You Can Find More Information.. 110 Index to Pro Forma Financial Statements......................... PF-1 Index to Financial Statements........ F-1
------------------------ THROUGH AND INCLUDING , 2000 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO ITS UNSOLD ALLOTMENTS OR SUBSCRIPTION. 46,275,000 Shares [LOGO] Subordinate Voting Shares ---------------- PROSPECTUS ---------------- GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE CREDIT SUISSE FIRST BOSTON TD SECURITIES BEAR, STEARNS & CO. INC. BMO NESBITT BURNS MORGAN STANLEY DEAN WITTER CHASE H&Q RBC DOMINION SECURITIES CORPORATION WARBURG DILLON READ LLC - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS PROSPECTUS HAS BEEN FILED UNDER PROCEDURES IN EACH OF THE PROVINCES OF CANADA WHICH PERMIT CERTAIN INFORMATION WITH RESPECT TO THESE SECURITIES TO BE DETERMINED AFTER THE PROSPECTUS HAS BECOME FINAL AND PERMIT THE OMISSION FROM THIS PROSPECTUS OF SUCH INFORMATION. SUCH PROCEDURES REQUIRE THE DELIVERY TO PURCHASERS OF A PROSPECTUS OR A PROSPECTUS SUPPLEMENT CONTAINING THIS OMITTED INFORMATION WITHIN A SPECIFIED PERIOD OF TIME AFTER AGREEING TO PURCHASE ANY OF THESE SECURITIES, AND SUCH INFORMATION SHALL BE DEEMED TO BE INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AS OF THE DATE OF THE SUPPLEMENTED PROSPECTUS. THIS PROSPECTUS CONSTITUTES A PUBLIC OFFERING OF THESE SECURITIES ONLY IN THOSE JURISDICTIONS WHERE THEY MAY BE LAWFULLY OFFERED FOR SALE AND THEREIN ONLY BY PERSONS PERMITTED TO SELL SUCH SECURITIES. NO SECURITIES COMMISSION OR SIMILAR AUTHORITY IN CANADA HAS IN ANY WAY PASSED UPON THE MERITS OF THE SECURITIES OFFERED HEREUNDER, AND ANY REPRESENTATION TO THE CONTRARY IS AN OFFENCE. THE COMPANY HAS FILED A REGISTRATION STATEMENT ON FORM F-1 WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT TO THESE SECURITIES. INITIAL PUBLIC OFFERING AND SECONDARY OFFERING APRIL 18, 2000 [LOGO] U.S. $ - 46,275,000 SUBORDINATE VOTING SHARES This offering of 46,275,000 Subordinate Voting Shares (the "Subordinate Voting Shares") of 360NETWORKS INC. (the "Company" or "360NETWORKS") consists of a new issue by the Company of 44,625,000 Subordinate Voting Shares and a secondary offering of 1,650,000 Subordinate Voting Shares being sold by the selling shareholder named in the U.S. Prospectus referred to below. The Company will not receive any of the proceeds of the sale of Subordinate Voting Shares by the selling shareholder. This prospectus incorporates the prospectus (the "U.S. Prospectus") included in a Registration Statement on Form F-1 filed with the United States Securities and Exchange Commission. The offering price of the Subordinate Voting Shares will be determined by negotiation between the Company and Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, TD Securities Inc., Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated, Hambrecht & Quist LLC, RBC Dominion Securities Inc. and Warburg Dillon Read LLC (collectively, the "Underwriters"). The Subordinate Voting Shares are being offered in Canada by Goldman Sachs Canada Inc., Credit Suisse First Boston Securities Canada Inc., TD Securities Inc., BMO Nesbitt Burns Inc., Morgan Stanley Canada Limited, Bunting Warburg Dillon Read Inc. and RBC Dominion Securities Inc. (collectively, the "Canadian Underwriters"). THERE IS CURRENTLY NO MARKET THROUGH WHICH THE SUBORDINATE VOTING SHARES MAY BE SOLD. The Toronto Stock Exchange has conditionally approved the listing of the Subordinate Voting Shares under the symbol "TSX". Listing is subject to the Company fulfilling all of the requirements of The Toronto Stock Exchange on or before July 11, 2000, including the distribution of the Subordinate Voting Shares to a minimum number of public shareholders. The Subordinate Voting Shares have been approved for listing on the Nasdaq National Market under the symbol "TSIX", subject to official notice of issuance. The offering price of each Subordinate Voting Share, after giving effect to this offering, and other material transactions but before exercise of the Underwriters' over-allotment option, exceeds the Company's consolidated net tangible book value as of December 31, 1999 by U.S.$11.63, resulting in a dilution of 89%. See "Dilution". AN INVESTMENT IN SUBORDINATE VOTING SHARES IS SUBJECT TO A NUMBER OF RISK FACTORS WHICH SHOULD BE CAREFULLY REVIEWED BY PROSPECTIVE PURCHASERS. SEE "RISK FACTORS". - -------------------------------------------------------------------------------- PRICE: U.S.$- PER SUBORDINATE VOTING SHARE -----------------------------------------------------------------
NET PROCEEDS TO PRICE UNDERWRITING NET PROCEEDS SELLING TO PUBLIC COMMISSION TO THE COMPANY(1) SHAREHOLDER(1) -------------- -------------- ------------------ ---------------- Per Subordinate Voting Share............................ U.S.$ - U.S.$ - U.S.$ - U.S.$ - Total(2)................................................ U.S.$ - U.S.$ - U.S.$ - U.S.$ -
- ---------------------------------- (1) Before deducting expenses of this offering, estimated at U.S.$ - , payable by the Company, on its own behalf and on behalf of the selling shareholder, out of general corporate funds. (2) The Company has granted to the Underwriters an option exercisable not later than 30 days after the date of the closing of this offering to purchase up to 6,941,250 additional Subordinate Voting Shares to cover over-allotments, if any. If the option is exercised, the Underwriters will offer the additional Subordinate Voting Shares at the price per Subordinate Voting Share shown above. If the option is exercised, the total Price to Public, Underwriting Commission and Net Proceeds to the Company would be U.S.$ - , U.S.$ - , and U.S.$ - , respectively. This prospectus also qualifies the distribution of the Subordinate Voting Shares upon the Underwriters' exercise of the over-allotment option. See "Underwriting" in the U.S. Prospectus. The number of Subordinate Voting Shares offered in this offering may be increased or decreased by up to 9,255,000 Subordinate Voting Shares. The Canadian Underwriters, as principals, conditionally offer the Subordinate Voting Shares, subject to prior sale, if, as and when issued and sold by the Company and accepted by the Underwriters, in accordance with the conditions contained in the underwriting agreement referred to under "Underwriting" in the U.S. Prospectus and subject to the approval of certain legal matters by Farris, Vaughan, Wills & Murphy and Cahill Gordon & Reindel, on behalf of the Company, and by Osler, Hoskin & Harcourt LLP and Latham & Watkins, on behalf of the Canadian Underwriters. Subscriptions will be received subject to rejection or allotment in whole or in part, and the right is reserved to close the subscription books at any time without notice. It is expected that definitive certificates evidencing the Subordinate Voting Shares will be available for delivery at closing which is expected to occur on or about - , 2000 or such later date as the Company and the Underwriters may agree but in any event not later than - , 2000. TABLE OF CONTENTS
PAGE -------- U.S. Prospectus Prospectus Summary........................................ 1 Risk Factors.............................................. 11 Use of Proceeds........................................... 30 Dividend Policy........................................... 31 Description of Our Capital Stock.......................... 31 Exchange Rates............................................ 32 Dilution.................................................. 32 Capitalization............................................ 33 Selected Financial Data................................... 34 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 38 Business.................................................. 45 Management................................................ 62 Principal and Selling Shareholders........................ 72 Relationships and Related Party Transactions.............. 73 Share Capital Reorganization and Description of Capital Stock.................................................. 77 Shares Eligible for Future Sale........................... 80 Regulation................................................ 82 Description of Indebtedness............................... 97 Material United States and Canadian Income Tax Considerations......................................... 101 Underwriting.............................................. 105 Legal Matters............................................. 108 Experts................................................... 108 Enforceability of Civil Liabilities against Foreign Persons................................................ 109 Where you Can find More Information....................... 109 Index to Pro Forma Financial Information.................. PF-1 Index to Financial Statements............................. F-1 Supplemental Canadian Disclosure Corporate Matters......................................... C-1 Financial Presentation.................................... C-1 Capitalization............................................ C-2 Dilution.................................................. C-4 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... C-4 Prior Sales of Class A Non-Voting Shares.................. C-4 Material Contracts........................................ C-4 Auditors, Registrar and Transfer Agent.................... C-5 Promoter.................................................. C-5 Eligibility for Investment................................ C-5 Purchasers' Statutory Rights.............................. C-6 Continuous Disclosure..................................... C-6 Information Incorporated By Reference..................... C-6 Index to Pro Forma Financial Information.................. CPF-1 Index to Canadian Financial Statements.................... CF-1 Certificate of the Company................................ CC-1 Certificate of the Canadian Underwriters.................. CC-2
i RISK FACTORS Investment in the Company's Subordinate Voting Shares is subject to a number of risk factors that prospective investors should carefully consider. These risk factors include: the Company's limited history of operations; risks associated with development and expansion of the Company's network; risk that network failure or disruptions could adversely affect the Company's operating results; the Company's limited experience in offering bandwidth and value added network services; risk that prices for the Company's network services and fiber assets will decline; the need to obtain additional rights-of-way; risks associated with the Company's joint ventures; risks associated with the Company's operations in international markets; competition; dependence of the Company on third parties, including suppliers; rapid technological change which could reduce the demand for fiber optic systems; potential conflicts of interest with Ledcor Inc. and its subsidiaries; the Company's negative cash flow during the network construction period; the Company's substantial leverage; the Company's need for additional borrowings; the ability of the Company to service its debt; the Company's holding company structure; restrictions imposed by the terms of the Company's indebtedness; the discretion of the Company's management over the use of proceeds; extensive telecommunications regulation applicable to the Company; the impact of currency exchange rate fluctuations; potential price volatility of the Subordinate Voting Shares; the impact of future sales of the Subordinate Voting Shares; the voting attributes of the Company's issued and outstanding shares which may deter a third party from acquiring the Company; lack of anticipated cash dividends; and dilution. See "Risk Factors" in the U.S. Prospectus. ii SUPPLEMENTAL CANADIAN DISCLOSURE In accordance with the requirements of applicable securities laws in all provinces of Canada, the disclosure in the U.S. Prospectus incorporated in this prospectus is supplemented with the following additional disclosure. ALL DOLLAR AMOUNTS IN THIS PROSPECTUS ARE STATED IN U.S. DOLLARS EXCEPT WHERE OTHERWISE INDICATED. CORPORATE MATTERS The principal and head office of 360NETWORKS INC. (formerly Worldwide Fiber Inc.) is located at 1500 - 1066 West Hastings Street, Vancouver, British Columbia, Canada, V6E 3X1. The Company was incorporated under the laws of the province of Alberta on February 5, 1998, was continued as a corporation under the CANADA BUSINESS CORPORATIONS ACT on August 17, 1999 and was continued as a company under the COMPANIES ACT (Nova Scotia) on April 17, 2000. Immediately prior to the closing of the offering, the memorandum and articles of association of the Company will be amended so that the share capital has the rights and attributes described in the U.S. Prospectus under "Share Capital Reorganization and Description of Capital Stock". FINANCIAL PRESENTATION Consistent with the Company's practice since its incorporation, its historical consolidated financial statements and those of its predecessor division are presented in accordance with United States generally accepted accounting principles ("U.S. GAAP"). These financial statements are included in the U.S. Prospectus. In accordance with applicable Canadian securities laws, these financial statements have also been presented herein in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The Company's historical consolidated financial statements under Canadian GAAP (the "Canadian Statements") for the years ended December 31, 1999 and December 31, 1998 and those of its predecessor division for the periods ended May 31, 1998, August 31, 1997 and 1996 and March 31, 1996 differ materially from the Company's historical consolidated financial statements under U.S. GAAP (the "U.S. Statements") in the following three respects: - Under U.S. GAAP, all assets and liabilities were translated into United States dollars using period end exchange rates. Under Canadian GAAP, monetary assets and liabilities were translated into United States dollars using period end exchange rates and non-monetary assets and liabilities using historical exchange rates. - In the Company's consolidated financial statements for the year ended December 31, 1999, its redeemable convertible preferred shares are presented as a separate line item between liabilities and shareholders' equity in the U.S. Statements and are apportioned and presented as debt and equity components as required under Canadian GAAP in the Canadian Statements. As a result of this classification, additional interest expense of $25,977,000 on the redeemable convertible preferred shares has been recorded in the Canadian Statements. - As required under U.S. GAAP, stock-based compensation charges of $7.1 million have been recorded in the Company's U.S. Statements for the year ended December 31, 1999. In accordance with Canadian GAAP, no stock-based compensation charges have been recorded in the Canadian Statements. C-1 CAPITALIZATION The table below describes the Company's consolidated cash and capitalization presented in accordance with Canadian GAAP as of December 31, 1999 and as of March 31, 2000 on an actual basis and on a pro forma as adjusted basis to give effect to: - the issuance of 44,625,000 Subordinate Voting Shares for net proceeds to us of approximately $548 million; - the acquisition of all outstanding stock of GlobeNet; - the issuance of $700 million of senior notes in the concurrent debt offerings; - the acquisition of the minority equity interests in certain of our subsidiaries and related issuance of Series A Non-Voting Preferred Shares; - the conversion or exchange of our redeemable convertible preferred shares into Subordinate Voting Shares and our share capital reorganization; and - the completion of the $565 million 360ATLANTIC credit facility, of which $175 million has been drawn. C-2 This table should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, included elsewhere in this prospectus and the U.S. Prospectus.
DECEMBER 31, 1999 DECEMBER 31, 1999 MARCH 31, 2000 PRO FORMA ACTUAL ACTUAL AS ADJUSTED ------------------- ------------------ ------------------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) Debt (including current portion): 12 1/2% senior notes due 2005(2)...................... 175,000 175,000 175,000 12% senior notes due 2009(2)... 500,000 500,000 500,000 360ATLANTIC credit facility(1).................. -- 175,000 175,000 Globenet 360AMERICAS secured credit facility.............. -- -- 100,000 Globenet 13% senior notes due 2007......................... -- -- 300,000 Debt component of redeemable convertible preferred shares(3).................... 270,049 272,144 -- New notes(2)................... -- -- 700,000 ---------- ---------- ---------- Total debt..................... $ 945,049 $1,122,144 $1,950,000 ========== ========== ========== Shareholders' equity Subordinate Voting Shares(4)... -- -- 2,115,268 Multiple Voting Shares......... -- -- 18,172 Class A Non-Voting Shares...... 92,996 92,996 -- Class B Subordinate Voting Shares....................... 7,623 7,623 -- Class C Multiple Voting Shares....................... 18,172 18,172 -- Redeemable convertible preferred shares............. 82,379 82,379 -- Other capital accounts......... (55,430) (55,430) (55,430) Deficit (5).................... (36,360) (36,360) (36,360) ---------- ---------- ---------- 109,380 109,380 2,041,650 ---------- ---------- ---------- TOTAL CAPITALIZATION........... $1,054,429 $1,231,524 $3,991,650 ========== ========== ==========
- ------------------------ (1) Secured by property and assets held by certain subsidiaries and relating to the Company's Hibernia project. The facility is non-recourse to 360NETWORKS. (2) Unsecured obligations ranking PARI PASSU with each other. (3) The redeemable convertible preferred shares will be converted or exchanged into Subordinate Voting Shares concurrent with the closing of the offering. On the closing of the offering, an unlimited number of preferred shares issuable in series will be created, but none will be issued or outstanding. See "Share Capital Reorganization and Description of Capital Stock" in the U.S. Prospectus. (4) Does not include 52,501,680 Subordinate Voting Shares issuable upon exercise of options under the Company's 1998 Long Term Incentive and Share Award Plan (as amended), and the exercise of 1,902,000 stock options and issuance of 411,214 Subordinate Voting Shares to a consultant after December 31, 1999. See "Management--Stock Option Plan" and "--Outstanding Options to Purchase Securities" in the U.S. Prospectus. (5) March 31, 2000 deficit is based on the deficit to December 31, 1999. C-3 DILUTION The calculation under the heading "Dilution" in the U.S. Prospectus incorporated herein has been prepared on the basis of U.S. GAAP which does not differ materially from the dilution calculations under Canadian GAAP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis ("MD&A") and Selected Financial Data in the U.S. Prospectus incorporated herein have been prepared on the basis of U.S. GAAP. As the Company's Canadian Statements do not differ from the Company's U.S. Statements, except as described under "Financial Presentation" above, the MD&A and Selected Financial Data have not been presented on the basis of Canadian GAAP in this prospectus. PRIOR SALES OF CLASS A NON-VOTING SHARES(1) During the 12 months prior to March 22, 2000, the Company issued the Class A Non-Voting Shares indicated below for the consideration indicated.
NUMBER OF CONSIDERATION PER DATE CLASS A NON-VOTING SHARES ISSUED CLASS A NON-VOTING SHARE - ---- --------------------------------- -------------------------- December 22, 1999 52,160,000 $1.25 November 18, 1999 301,266,400 One Class B Subordinate Voting Share March 15, 2000 411,214 $0.41 March 20, 2000 14,920,866(2) 25% equity interest in WFI-CN Fibre Inc and Worldwide Fiber IC LLC
- ------------------------ (1) Concurrent with the closing of the offering, the Company will reorganize its share capital. Pursuant to such reorganization the Class A Non-Voting Shares will be redesignated as Subordinate Voting Shares. See "Description of Capital Stock and Share Capital Reorganization" in the U.S. Prospectus. (2) To be reduced to 12,307,692 shares based on an assumed initial public offering price of $13. See Note 4(vi) to the Pro Forma Financial Information. MATERIAL CONTRACTS The material contracts entered into by the Company during the two year period prior to the date of this prospectus, other than contracts entered into in the ordinary course of business, are as follows: 1. Underwriting Agreement to be dated April 19, 2000 relating to the sale of the Subordinate Voting Shares and referred to under "Underwriting" in the U.S. Prospectus. 2. Transfer Restriction Agreement dated April 18, 2000 described under the heading "Share Capital Reorganization and Description of Capital Stock--Take-over Bid Protection" in the U.S. Prospectus. 3. Shareholders' Agreement dated September 9, 1999 between the Company and certain institutional investors, as amended by an amendment and waiver dated December 22, 1999. 4. Indenture dated as of July 28, 1999 between the Company and HSBC Bank USA relating to the Company's $500 million 12% Senior Notes due 2009. C-4 5. Indenture dated as of December 23, 1998 between the Company and HSBC Bank USA relating to the Company's $175 million 12 1/2% Senior Notes due 2005. Copies of the above, together with certain other contracts filed as exhibits to the Company's Registration Statement on Form F-1, may be inspected during ordinary office business hours at the head office of the Company, located at 1500 - 1066 West Hastings Street, Vancouver, British Columbia, Canada during the period of distribution of the Subordinate Voting Shares and for a period of 30 days thereafter or may be viewed at www.sec.gov as exhibits to the Company's Registration Statement on Form F-1. AUDITORS, REGISTRAR AND TRANSFER AGENT The auditors of the Company are PricewaterhouseCoopers LLP, 1111 West Hastings Street, Vancouver, British Columbia, Canada, V6E 3R2. The divisional financial statements of the predecessor division as of May 31, 1998 and August 31, 1997 and for each of the periods ended on May 31, 1998 and August 31, 1997, included in this prospectus, have been audited by Deloitte & Touche LLP, Edmonton, Alberta, as stated in their report contained in this prospectus. The audited consolidated financial statements of GlobeNet Communications Group Limited for the years ended December 31, 1999, 1998 and 1997 included in this prospectus, have been audited by PricewaterhouseCoopers LLP, Toronto, Ontario, as stated in their report contained in this prospectus. The registrar and transfer agent for the Subordinate Voting Shares in Canada is Montreal Trust Company of Canada at its principal stock and bond transfer offices located in Vancouver and Toronto. PROMOTER Ledcor Industries Limited took the initiative in founding and organizing the business of the Company and is an affiliate of the controlling shareholder of the Company and, as a result, is a "promoter" of the Company under the securities legislation in certain of the provinces of Canada. A description of the nature of the relationship between Ledcor Industries Limited, its affiliates and the Company, is described in the U.S. Prospectus under "Relationships and Related Party Transactions" and "Principal and Selling Shareholders". ELIGIBILITY FOR INVESTMENT In the opinion of Farris, Vaughan, Wills & Murphy, Canadian counsel to the Company, and Osler, Hoskin & Harcourt LLP, Canadian counsel to the Underwriters, the Subordinate Voting Shares, when listed on a prescribed stock exchange within the meaning of the INCOME TAX ACT (Canada) and the regulations thereunder (the "Act"), will be qualified investments under the Act for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and registered education savings plans. For these purposes, each of the Nasdaq National Market and The Toronto Stock Exchange is a prescribed stock exchange. Based on a certificate from the Company as to certain factual matters, in the opinion of such counsel, the Subordinate Voting Shares, if issued on the date hereof, would not, on the date hereof, be foreign property for purposes of the Act. Eligibility of the Subordinate Voting Shares offered hereby for investment by purchasers to whom any of the following statutes apply is, in certain cases, governed by criteria which such purchasers are required to establish as policies or guidelines pursuant to the applicable statute (and, where applicable, the regulations thereunder) and is subject to the prudent investment standards and general investment provisions provided therein: INSURANCE COMPANIES ACT (Canada) PENSION BENEFITS STANDARDS ACT, 1985 (Canada) TRUST AND LOAN COMPANIES ACT (Canada) FINANCIAL INSTITUTIONS ACT (British Columbia) C-5 PENSION BENEFITS STANDARDS ACT (British Columbia) EMPLOYMENT PENSION PLANS ACT (Alberta) LOAN AND TRUST CORPORATIONS ACT (Alberta) THE INSURANCE ACT (Manitoba) PENSION BENEFITS ACT (Ontario) LOAN AND TRUST CORPORATIONS ACT (Ontario) AN ACT RESPECTING TRUST COMPANIES AND SAVINGS COMPANIES (Quebec) (for a trust company, as defined therein, which invests its own funds and funds received as deposits or a savings company, as defined therein, which invests its own funds) AN ACT RESPECTING INSURANCE (Quebec) (in respect of insurers, as defined therein, incorporated under the laws of the Province of Quebec; other than guarantee fund corporations) SUPPLEMENTAL PENSION PLANS ACT (Quebec) for an insured plan, as defined therein. PURCHASERS' STATUTORY RIGHTS Securities legislation in several of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities within two business days after receipt, or deemed receipt, of a prospectus and any amendment. In several of the provinces securities legislation also provides a purchaser with remedies for rescission or, in some provinces, damages where the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that such remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province. A purchaser should refer to any applicable provisions of the securities legislation of the puchaser's province for the particulars of these rights or consult with a legal advisor. CONTINUOUS DISCLOSURE Upon the filing of the final prospectus with the securities regulatory authorities in the various provinces of Canada, the Company will become a reporting issuer under the securities laws of those of such jurisdictions that provide for a reporting issuer regime. Pursuant to the rules of the securities regulatory authority of the Province of Ontario, the Company is exempt from certain of the requirements of the laws of such jurisdiction relating to continuous disclosure in its Annual Information Form and Management's Discussion and Analysis filings. These rules generally permit the Company to comply with certain informational requirements applicable in the U.S. instead of the continuous disclosure requirements normally applicable in Ontario, provided that the relevant documents are filed with the securities regulatory authorities in Ontario. INFORMATION INCORPORATED BY REFERENCE The information permitted to be omitted from this prospectus will be contained in a supplemented prospectus and will be incorporated by reference herein as of the date of such supplemented prospectus. C-6 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) INDEX TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED) Compilation Report.......................................... CPF-2 Pro Forma Consolidated Balance Sheet as at December 31, 1999...................................................... CPF-3 Pro Forma Consolidated Income Statement for the year ended December 31, 1999......................................... CPF-4 Notes to Pro Forma Financial Information.................... CPF-5
CPF-1 COMPILATION REPORT TO THE BOARD OF DIRECTORS OF 360NETWORKS INC. We have reviewed, as to compilation only, the accompanying the pro forma consolidated balance sheet of 360NETWORKS INC. (formerly Worldwide Fiber Inc.) as at December 31, 1999 and the pro forma consolidated income statement for the year then ended which have been prepared for inclusion in the Prospectus dated April 18, 2000 relating to the sale and issue of Subordinate Voting Shares. In our opinion, the pro forma consolidated balance sheet and the pro forma consolidated income statement have been properly compiled to give effect to the proposed transactions and the assumptions described in the notes thereto. "PricewaterhouseCoopers LLP" April 18, 2000 CHARTERED ACCOUNTANTS Vancouver, Canada CPF-2 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) AS AT DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
GLOBENET PRO FORMA PRO FORMA COMMUNICATIONS ---------------------------- CONSOLIDATED 360NETWORKS GROUP ACQUISITION PRO FORMA BALANCE INC. LIMITED ADJUSTMENTS COMBINED ADJUSTMENTS SHEET $ $ $ $ $ $ ------------- ----------------- ------------ ---------- ------------ ------------- ASSETS CURRENT ASSETS Cash and cash equivalents.... 521,362 -- -- 521,362 548,119 4(i) 1,750,981 681,500 4(iii) Restricted cash.............. -- 79,998 -- 79,998 -- 79,998 Short-term investments....... 21,167 -- -- 21,167 -- 21,167 Accounts receivable.......... 35,351 3,878 -- 39,229 -- 39,229 Unbilled revenue............. 115,661 -- -- 115,661 -- 115,661 Inventory.................... 196,959 -- -- 196,959 -- 196,959 Deferred tax asset........... 8,838 -- -- 8,838 -- 8,838 --------- ------- -------- --------- ---------- --------- 899,338 83,876 -- 983,214 1,229,619 2,212,833 RESTRICTED CASH.............. -- 448,399 -- 448,399 -- 448,399 PROPERTY AND EQUIPMENT--NET............. 77,009 49,148 -- 126,157 (6,444)4(iv) 119,713 ASSETS UNDER CONSTRUCTION.... 300,403 98,062 -- 398,465 398,465 DEFERRED TAX ASSET........... 12,040 -- -- 12,040 -- 12,040 DEFERRED FINANCING COSTS--NET................. 22,199 24,743 (24,743)4(ii) 22,199 18,500 4(iii) 40,699 OTHER........................ -- 1,104 -- 1,104 -- 1,104 EQUITY ACCOUNTED FOR INVESTMENT................. -- -- -- -- 6,444 4(iv) 6,444 GOODWILL..................... -- -- 425,264 4(ii) 888,388 -- 888,388 306,924 4(v) 156,200 4(vi) --------- ------- -------- --------- ---------- --------- 1,310,989 705,332 863,645 2,879,966 1,248,119 4,128,085 ========= ======= ======== ========= ========== ========= LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities................ 191,437 57,296 -- 248,733 -- 248,733 Deferred revenue............. 18,831 -- -- 18,831 -- 18,831 Income taxes payable......... 34,343 -- -- 34,343 -- 34,343 --------- ------- -------- --------- ---------- --------- 244,611 57,296 -- 301,907 -- 301,907 DEFERRED REVENUE............. -- 6,455 -- 6,455 -- 6,455 DEFERRED TAX LIABILITY....... 3,073 -- -- 3,073 -- 3,073 SENIOR NOTES AND OTHER LONG-TERM DEBT............. 675,000 400,000 -- 1,075,000 700,000 4(iii) 1,775,000 DEBT COMPONENT OF REDEEMABLE CONVERTIBLE PREFERRED SHARES..................... 270,049 -- -- 270,049 (270,049)4(vii) -- --------- ------- -------- --------- ---------- --------- 1,192,733 463,751 -- 1,656,484 429,951 2,086,435 MINORITY INTEREST............ 8,876 -- (8,876)4(v) -- -- -- SHAREHOLDERS' EQUITY: Redeemable convertible preferred shares........... 82,379 -- -- 82,379 (82,379)4(vii) -- Shareholder's equity--GlobeNet........... -- 272,434 (272,434)4(ii) -- -- -- Class A Non-Voting Shares.... 92,996 -- 642,102 4(ii) 1,207,098 (1,207,098)4(viii) -- 312,000 4(v) 160,000 4(vi) Subordinate Voting Shares.... -- -- -- -- 548,119 4(i) 2,115,268 352,428 4(vii) 1,214,721 4(viii) Multiple Voting Shares....... -- -- -- -- 18,172 4(viii) 18,172 Class B Subordinate Voting Shares..................... 7,623 -- -- 7,623 (7,623)4(viii) -- Class C Multiple Voting Shares..................... 18,172 -- -- 18,172 (18,172)4(viii) -- Other capital accounts....... (55,430) -- -- (55,430) -- (55,430) Deficit...................... (36,360) (30,853) 30,853 4(ii) (36,360) -- (36,360) --------- ------- -------- --------- ---------- --------- 109,380 241,581 872,521 1,223,482 818,868 2,041,650 --------- ------- -------- --------- ---------- --------- 1,310,989 705,332 863,645 2,879,966 1,248,119 4,128,085 ========= ======= ======== ========= ========== =========
CPF-3 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) PRO FORMA CONSOLIDATED INCOME STATEMENT (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
GLOBENET COMMU- PRO FORMA PRO FORMA NICATIONS ------------------------- CONSOLIDATED 360NETWORKS GROUP ACQUISITION PRO FORMA INCOME INC. LIMITED ADJUSTMENTS COMBINED ADJUSTMENTS STATEMENT $ $ $ $ $ $ ------------- --------- ------------ ---------- ------------ ------------- REVENUE........................ 359,746 26,348 -- 386,094 -- 386,094 COSTS.......................... 250,612 10,989 -- 261,601 -- 261,601 ----------- ------- ------- ------- ----------- ----------- GROSS PROFIT................... 109,134 15,359 -- 124,493 -- 124,493 ----------- ------- ------- ------- ----------- ----------- EXPENSES Selling, general and administrative............... 21,846 15,104 -- 36,950 3,584 5(v) 40,534 Stock-based compensation....... -- 4,207 (4,207) 5(i) -- -- -- Depreciation................... 2,998 1,854 -- 4,852 -- 4,852 Amortization of goodwill....... -- -- 17,011 5(i) 35,536 -- 35,536 18,525 5(ii) ----------- ------- ------- ------- ----------- ----------- 24,844 21,165 31,829 77,338 3,584 80,922 ----------- ------- ------- ------- ----------- ----------- 84,290 (5,806) (31,329) 47,155 (3,584) 43,571 INTEREST EXPENSE............... 59,885 20,965 (1,310) 5(i) 79,540 132,367 5(iii) 186,189 (25,718)5(vi) INTEREST INCOME................ 18,122 12,588 -- 30,710 -- 30,710 LOSS ON DEBT EXTINGUISHMENT.... -- 809 (809) 5(i) -- -- -- ----------- ------- ------- ------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENT................... 42,527 (14,992) (29,210) (1,675) (110,233) (111,908) PROVISION FOR (RECOVERY OF) INCOME TAXES................. 30,314 141 -- 30,455 2,690 5(v) (17,121) (50,266)5(iv) ----------- ------- ------- ------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENT............... 12,213 (15,133) (29,210) (32,130) (62,657) (94,787) INCOME ATTRIBUTABLE TO MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENT............... (7,434) (773) 7,434 5(ii (773) -- (773) ----------- ------- ------- ------- ----------- ----------- NET INCOME (LOSS) FOR THE YEAR......................... 4,779 (15,906) (21,776) (32,903) (62,657) (95,560) =========== ======= ======= ======= =========== =========== BASIC AND FULLY DILUTED LOSS PER SHARE.................... $ (0.02) $ (0.16) WEIGHTED AVERAGE NUMBER OF SHARES USED TO COMPUTE BASIC AND FULLY DILUTED LOSS PER SHARE........................ 327,313,808 5(vii) 617,783,263
CPF-4 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1 NATURE AND PURPOSE OF PRO FORMA FINANCIAL INFORMATION The pro forma consolidated balance sheet of the 360NETWORKS INC. (formerly Worldwide Fiber Inc.) (the "Company") as at December 31, 1999 assumes the following transactions occurred on December 31, 1999: (i) the issuance of 44,625,000 Subordinate Voting Shares in a public offering for cash consideration of $580,125,000 net of commissions of $29,006,250 and offering expenses of $3,000,000; (ii) the Company's acquisition of GlobeNet Communications Group Limited ("GlobeNet"); (iii) the issuance of $700,000,000 13.5% Notes ("Notes"); (iv) the Canadian telecommunications arrangement of certain assets; (v) the Company's acquisition of Michels' shares in WFI USA, (the "Michels minority interest acquisition") in exchange for Subordinate Voting Shares of the Company; (vi) the Company's acquisition of Canadian National Railway Company's ("CN") minority equity interest in WFI-CN Fibre Inc. and the Company's acquisition of Illinois Central Railroad Company's ("IC") minority equity interest in Worldwide Fiber LLC (collectively the "CN/IC minority interest acquisition") in exchange for Subordinate Voting Shares of the Company; (vii) the conversion or exchange of Series A Non-Voting Preferred Shares into Subordinate Voting Shares; and (viii) the reorganization of the Company's share capital. The pro forma consolidated income statement of the Company for the year ended December 31, 1999 assumes that the following transactions occurred on January 1, 1999: (i) the Company's acquisition of GlobeNet; (ii) the elimination of minority interest earnings and the amortization of goodwill arising from the Michels and CN/IC minority interest acquisitions; and (iii) the effect of the interest expense including amortization of deferred financing costs relating to the Notes and $500,000,000 12% senior notes issued July 28, 1999 (the "1999 Notes"). 2 BASIS OF PRESENTATION The unaudited pro forma consolidated balance sheet and consolidated income statement have been prepared by management in accordance with generally accepted accounting principles in Canada and the pro forma assumptions and adjustments described in notes 1, 4 and 5. The unaudited pro forma consolidated balance sheet and income statement as at and for the year ended December 31, 1999 are based on the audited historical consolidated financial statements of the Company for the year ended December 31, 1999 and audited historical consolidated financial statements of GlobeNet for the year ended December 31, 1999. The unaudited pro forma financial information give effect to the acquisition by the Company of GlobeNet in a transaction to be accounted for as a purchase (the "Acquisition"). The unaudited pro forma consolidated balance sheet is based on the individual balance sheets of the Company and GlobeNet, and has been prepared to reflect the Acquisition as at December 31, 1999. The unaudited pro forma income statement is based on the individual statements of income of the Company and GlobeNet and combines the results of the operations for the year ended December 31, 1999 as if the Acquisition occurred on January 1, 1999. The unaudited pro forma consolidated financial information is not necessarily indicative of the results that actually would have occured if the transactions reflected herein had been completed on the CPF-5 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2 BASIS OF PRESENTATION (CONTINUED) dates indicated nor do they purport to project the results of operations for any future periods. The unaudited pro forma consolidated financial information should be read in conjunction with the description of the transactions and the consolidated financial statements of the Company and GlobeNet included elsewhere in this prospectus. 3 SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used in the preparation of the pro forma consolidated balance sheet and income statement include those disclosed in the consolidated financial statements of the Company. 4 PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (I) ISSUANCE OF SHARES IN A PUBLIC OFFERING This adjustment records the issuance of 44,625,000 Subordinate Voting Shares in a public offering for cash consideration of $580,125,000. This adjustment is recorded net of commisions of $29,006,250 and offering expenses of $3,000,000. (II) ACQUISITION OF GLOBENET The pro forma balance sheet has been prepared to reflect the Company's acquisition of GlobeNet in exchange for shares of the Company. This acquisition has been accounted for under the purchase method of accounting. Pro forma adjustments and assumptions are made to reflect: - The issuance of 49,392,499 Subordinate Voting Shares assuming a purchase price of $642,102,492. - The elimination of GlobeNet's Shareholders' Equity of $241,581,000; - The elimination of stock-based compensation expense in GlobeNet to conform to the Company's accounting policy; - The assumption that GlobeNet's long term debt will not be repaid as a result of a change in control of GlobeNet; CPF-6 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4 PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) - The allocation of the purchase price is as follows:
Purchase price.............................................. $642,102 Less: book value of net assets acquired..................... 241,581 -------- Excess of cost over book value of net assets acquired....... $400,521 ======== Allocation of excess of cost over book value of net assets acquired: Deferred financing costs.................................. $(24,743) Goodwill.................................................. 425,264 -------- $400,521 ========
Goodwill will be amortized over 25 years. The purchase price allocation is preliminary subject to management's due diligence and execution of definitive agreements, which may result in a different allocation than presented in these pro forma financial statements. This may result in an adjustment to pro forma inventory, property and equipment, assets under construction or long-term debt. (III) ISSUANCE OF $700,000,000 13.5% NOTES This adjustment records the issuance of $700,000,000 13.5% notes due 2010 (the "Notes") assuming the Notes were issued on December 31, 1999. Commissions of $17,500,000 and issuance expenses of $1,000,000 have been recorded as deferred financing costs which will be amortized over 10 years using the effective interest rate method. (IV) CANADIAN TELECOMMUNICATIONS ARRANGEMENT OF CERTAIN ASSETS This adjustment records the transfer of certain telecommunications facilities included in property & equipment to a company (the "transferee") owned 66 2/3% by a subsidiary of Ledcor and 33 1/3% by the Company. This transaction is recorded at the carrying value of the assets transferred of $6,444,000 as the transaction is between parties under common control. The Company's investment in the transferee is recorded using the equity basis of accounting. (V) MICHELS MINORITY INTEREST ACQUISITION This adjustment records the Company's acquisition of the shares in WFI USA in exchange for 24,000,000 Subordinate Voting Shares of the Company. This pro forma adjustment assumes a purchase price of $312,000,000. The number of Subordinate Voting Shares to be issued will be based on an initial CPF-7 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4 PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) public offering price which is assumed to be $13 per share. The allocation of the purchase price is as follows:
Purchase price.............................................. $312,000 Less: book value of net assets acquired..................... 5,076 -------- Excess of cost over book value of net assets acquired....... $306,924 ======== Allocation of excess of cost over book value of net assets acquired: Goodwill.................................................. $306,924 ========
Goodwill will be amortized over 25 years. The purchase price allocation is preliminary and subject to a detailed assessment of the fair values of the underlying assets. This assessment may result in a re-allocation of the excess of cost over the book value of net assets to pro forma inventory, property and equipment and assets under construction. (VI) CN/IC MINORITY INTEREST ACQUISITION This adjustment records the Company's acquisition of the shares in WFI-CN Fibre Inc. and Worldwide Fiber LLC in exchange for 12,307,692 Subordinate Voting Shares of the Company. The pro forma adjustment assumes a purchase price of $160,000,000. The number of Subordinate Voting Shares to be issued will be based on an initial public offering price which is assumed to be $13 per share. The allocation of the purchase price is as follows:
Purchase price.............................................. $160,000 Less: book value of net assets acquired..................... 3,800 -------- Excess of cost over book value of net assets acquired....... $156,200 ======== Allocation of excess of cost over book value of net assets acquired: Goodwill.................................................. $156,200 ========
Goodwill will be amortized over 25 years. The purchase price allocation is subject to a detailed assessment of the fair values of the underlying assets. This assessment may result in a re-allocation of the excess of cost over the book value of net assets to pro forma inventory, property and equipment and assets under construction. (VII) CONVERSION OR EXCHANGE OF SERIES A NON-VOTING PREFERRED SHARES INTO SUBORDINATE VOTING SHARES This adjustment records the conversion or exchange of all issued and outstanding Series A Non-Voting Preferred Shares into Subordinate Voting Shares. CPF-8 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4 PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS AND ADJUSTMENTS AS AT DECEMBER 31, 1999 (CONTINUED) (VIII) SHARE CAPITAL REORGANIZATION This adjustment records the reorganization of share capital as follows: - The conversion of all outstanding Class B Subordinate Voting Shares into Class A Non-Voting Shares. - The redesignation of all outstanding Class A Non-Voting Shares to Subordinate Voting Shares. - The redesignation of all outstanding Class C Multiple Voting Shares to Multiple Voting Shares. 5 PRO FORMA CONSOLIDATED INCOME STATEMENT ASSUMPTIONS AND ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 (I) ACQUISITION OF GLOBENET The pro forma income statement has been prepared to reflect the following adjustments and assumptions resulting from the acquisition of GlobeNet: - The elimination of the amortization of deferred financing costs of $1,310,000 related to GlobeNet's debt. - The amortization of goodwill of $17,011,000. - The assumption that GlobeNet's long term debt will not be repaid as a result of a change in control of GlobeNet. If the Company had repurchased GlobeNet's $300,000,000 13% notes using proceeds from the Notes assumed to have an interest rate of 12%, pro forma interest expense net of taxes would be lower by $768,000 and a loss on extinguishment of debt net of taxes of $1,632,000 would have been recorded as a result of the premium paid on repurchase of GlobeNet's notes. - The elimination of stock based compensation expense included in GlobeNet's Financial statements to conform to the Company's Canadian GAAP accounting policy whereby no stock based compensation is recorded on stock options granted. II) MICHELS AND CN/IC MINORITY INTEREST ACQUISITIONS This adjustment records the amortization of goodwill from the acquisition of the minority equity interests of Michels and CN/IC and elimination of minority interest earnings assuming the acquisitions occurred on January 1, 1999. III) INTEREST EXPENSE ON THE NOTES AND 1999 NOTES This adjustment records the interest expense, including amortization of deferred financing costs of $132,367,000 for the year ended December 31, 1999, assuming the Notes and the 1999 Notes were issued on January 1, 1999. Amortization of the deferred financing costs was computed based on the CPF-9 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5 PRO FORMA CONSOLIDATED INCOME STATEMENT ASSUMPTIONS AND ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED) effective interest rate method. The Company would have a capitalized a portion of interest expense related to the Notes and the 1999 Notes to the cost of the fiber optic network assets constructed in 1999, which is not reflected in these pro forma statements. IV) INCOME TAXES This adjustment records an income tax recovery of $17,121,000 for 1999 using an effective tax rate of 45.6%. Management believes that, based on a number of factors, it is more likely than not that the deferred tax asset will be fully realized, such that no valuation allowance would be recorded. V) CAPITAL TAXES This adjustment records estimated additional B.C. Corporation Capital taxes of $3,584,000 for 1999 and Federal Large Corporation taxes of $2,690,000 for 1999 resulting from the pro forma adjustments in notes 4 and 5. VI) INTEREST ON DEBT COMPONENT OF REDEEMABLE CONVERTIBLE PREFERRED SHARES This adjustment eliminates interest on the debt component of the redeemable convertible preferred shares assuming the shares were converted to Subordinate Voting Shares on September 7, 1999 (date of issuance). CPF-10 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED) (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1999 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5 PRO FORMA CONSOLIDATED INCOME STATEMENT ASSUMPTIONS AND ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED) VII) PRO FORMA BASIC AND FULLY DILUTED LOSS PER SHARE The weighted average number of shares used to compute pro forma basic and fully diluted loss per share is determined as follows:
Weighted average number of shares used to compute historical basic and fully diluted loss per share.................... 327,313,808 Issuance of shares in a public offering..................... 44,625,000 Purchase of GlobeNet........................................ 49,392,499 Purchase of Michels minority equity interest................ 24,000,000 Purchase of CN/IC minority equity interests................. 12,307,692 Issuance and conversion or exchange of Series A Non-Voting Preferred Shares.......................................... 160,722,502 Reciprocal shareholdings adjustment from the Canadian telecommunications arrangement transaction................ (578,238) ----------- 617,783,263 =========== Pro forma loss available to common stockholders is computed as follows: Pro forma net loss.......................................... (95,560) Stock dividend.............................................. (5,000) ----------- Pro forma net loss available to common stockholders......... (100,560) ===========
CPF-11 INDEX TO FINANCIAL STATEMENTS
PAGE -------- 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1999 Auditors' Report............................................ CF-2 Consolidated Balance Sheets................................. CF-3 Consolidated Income Statements.............................. CF-5 Consolidated Statements of Changes in Shareholders' Equity.................................................... CF-6 Consolidated Statements of Cash Flows....................... CF-7 Notes to Consolidated Financial Statements.................. CF-8 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION Auditors' Report............................................ CF-28 Divisional Balance Sheets................................... CF-29 Divisional Statements of Operations and Retained Earnings... CF-30 Divisional Statements of Cash Flows......................... CF-31 Notes to Divisional Financial Statements.................... CF-32 GLOBENET COMMUNICATIONS GROUP LIMITED Auditors' Report............................................ CF-40 Consolidated Balance Sheets................................. CF-41 Consolidated Statements of Changes in Shareholders' Equity.................................................... CF-42 Consolidated Statements of Operations....................... CF-43 Consolidated Statements of Cash Flows....................... CF-44 Notes to Consolidated Financial Statements.................. CF-45
CF-1 AUDITORS' REPORT To the Directors and Shareholders of 360NETWORKS INC. We have audited the consolidated balance sheets of 360NETWORKS INC. (formerly Worldwide Fiber Inc.) as at December 31, 1999 and 1998 and the consolidated income statements, and statements of changes in shareholders' equity and cash flows for the year ended December 31, 1999 and period from February 5, 1998 (date of incorporation) to December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1999 and 1998 and the results of its operations and the changes in its cash flows for the year ended December 31, 1999 and the period from February 5, 1998 (date of incorporation) to December 31, 1998, in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP Chartered Accountants Vancouver, Canada February 25, 2000 except for Note 16 which is as of March 20, 2000 CF-2 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 521,362 $156,366 Short term investments...................................... 21,167 -- Accounts receivable (note 4)................................ 35,351 3,272 Unbilled revenue (note 4)................................... 115,661 10,582 Inventory (note 4).......................................... 196,959 29,230 Due from parent-net (note 6)................................ -- 13,412 Deferred tax asset (note 11)................................ 8,838 -- ---------- -------- 899,338 212,862 PROPERTY AND EQUIPMENT--NET (note 4)........................ 77,009 4,014 ASSETS UNDER CONSTRUCTION................................... 300,403 11,461 DEFERRED TAX ASSET (note 11)................................ 12,040 1,273 DEFERRED FINANCING COSTS.................................... 22,199 6,650 ---------- -------- $1,310,989 $236,260 ========== ========
Director "GREGORY MAFFEI" Director "LARRY OLSEN" ------------------------- ------------------------- Gregory Maffei Larry Olsen
The accompanying notes are an integral part of these consolidated financial statements. CF-3 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities (note 4)........... $ 191,437 $ 19,895 Deferred revenue............................................ 18,831 13,651 Income taxes payable........................................ 34,343 7,609 ---------- -------- 244,611 41,155 DEFERRED TAX LIABILITY...................................... 3,073 -- SENIOR NOTES (note 7)....................................... 675,000 175,000 DEBT COMPONENT OF REDEEMABLE CONVERTIBLE PREFERRED SHARES... 270,049 -- ---------- -------- 1,192,733 216,155 MINORITY INTEREST........................................... 8,876 1,443 SHAREHOLDERS' EQUITY Authorized: 100,000,000,000 Series A Non-Voting Redeemable Convertible Preferred Shares,....................................... 100,000,000,000 Series B Subordinate Voting Redeemable Convertible Preferred Shares,........................... 45,000,000 Series C Redeemable Preferred Shares, no par value................................................... Unlimited number of Class A Non-Voting, Class B Subordinate Voting and Class C Multiple Voting shares, no par value................................................... Issued and outstanding: 150,951,312 Series A Non-Voting Redeemable Convertible Preferred Shares (net of issuance costs of $1,638,000 and adjusted for accretion to redemption value) (note 8)...................................................... 82,379 353,426,400 (1998--Nil) Class A Non-Voting Shares (note 9)...................................................... 92,996 -- 82,629,600 (1998--80,004,800) Class B Subordinate Voting Shares (note 9)................................................ 7,623 7,400 81,840,000 Class C Multiple Voting Shares (note 9)........ 18,172 -- OTHER CAPITAL ACCOUNTS...................................... (55,430) 2,242 (DEFICIT) RETAINED EARNINGS................................. (36,360) 9,020 ---------- -------- 109,380 18,662 ---------- -------- $1,310,989 $236,260 ========== ======== COMMITMENTS (note 14) SUBSEQUENT EVENTS (note 16)
The accompanying notes are an integral part of these consolidated financial statements. CF-4 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998. THE COMPANY'S OPERATIONS COMMENCED ON JUNE 1, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
1999 1998 -------------- -------------- Revenue..................................................... $ 359,746 $ 164,319 Costs....................................................... 250,612 147,621 ------------ ------------ Gross profit................................................ 109,134 16,698 ------------ ------------ Expenses Selling, general and administrative....................... 21,846 2,274 Depreciation.............................................. 2,998 464 ------------ ------------ 24,844 2,738 ------------ ------------ 84,290 13,960 Interest expense............................................ 59,885 492 Interest income............................................. 18,122 267 ------------ ------------ Income before equity income, income taxes and minority interest.................................................. 42,527 13,735 Equity income (note 5)...................................... -- 928 ------------ ------------ Income before income taxes and minority interest............ 42,527 14,663 Provision for income taxes (note 11) Current................................................... 40,338 5,643 Deferred.................................................. (10,024) -- ------------ ------------ 30,314 5,643 ------------ ------------ Income before minority interest............................. 12,213 9,020 Minority interest........................................... 7,434 -- ------------ ------------ Net income for the period................................... $ 4,779 $ 9,020 ============ ============ (Loss) earnings per share................................... $ (0.02) $ 0.43 Weighted average number of shares used to compute basic and fully diluted (loss) earnings per share................... 327,313,808 20,964,178
The accompanying notes are an integral part of these consolidated financial statements. CF-5 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
CLASS B SUBORDINATE SERIES A VOTING SHARES NON-VOTING CLASS A NON- (FORMERLY CLASS C MULTIPLE CONVERTIBLE VOTING SHARES CLASS A COMMON) VOTING SHARES PREFERRED SHARES ---------------------- ----------------------- --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ------------ -------- ---------- -------- ----------- -------- BALANCE--FEBRUARY 5, 1998 -- $ -- -- $ -- -- $ -- -- $ -- Incorporation shares issued..................... 1,600 $ -- Issuance of shares for certain Ledcor assets with deferred tax asset (note 5)......................... 3,200 7,400 Issuance of shares for investments (note 5)....... 80,000,000 -- Excess of proceeds over cost on fiber optic strands to be reacquired from parent company (note 1)........... Net income for the period.... ----------- ------- ------------ -------- ---------- ------- ----------- ------- BALANCE, DECEMBER 31, 1998... -- -- 80,004,800 7,400 -- -- -- Issuance of shares for certain Ledcor assets with deferred tax assets........ 319,995,200 25,019 Repurchase of Class B Subordinate Voting Shares in exchange for Class B Subordinate Voting Shares and Series C Redeemable Preferred Shares........... (400,000,000) (32,419) Shares(note 9)............... 381,496,000 32,419 Issuance of shares for cash (note 9)................... 2,400,000 3,000 Redemption of Series C Redeemable Preferred Shares and stock dividend (note 9)......................... Issuance of shares for certain Ledcor assets with deferred tax assets (note 1)......................... 72,000,000 5,872 Issuance of shares for cash (net of share issuance costs and adjusted for accretion to redemption value)..................... 150,951,312 82,379 Issuance of shares (note 9)................... 52,160,000 65,200 9,840,000 12,300 Conversion of Class B Subordinate Voting Shares to Class A Non-Voting Shares (note 9)............ 301,266,400 27,796 (301,266,400) (27,796) Purchase price adjustment to preferred shares........... Net Income for the period.... ----------- ------- ------------ -------- ---------- ------- ----------- ------- BALANCE, DECEMBER 31, 1999.. 353,426,400 $92,996 82,629,600 $ 7,623 81,840,000 $18,172 150,951,312 $82,379 =========== ======= ============ ======== ========== ======= =========== ======= OTHER RETAINED TOTAL CAPITAL EARNINGS SHAREHOLDERS' ACCOUNTS (DEFICIT) EQUITY ------------ --------- -------------- BALANCE--FEBRUARY 5, 1998 $ -- $ -- $ -- Incorporation shares issued..................... $ -- Issuance of shares for certain Ledcor assets with deferred tax asset (note 5)......................... 1,088 -- 8,488 Issuance of shares for investments (note 5)....... -- Excess of proceeds over cost on fiber optic strands to be reacquired from parent company (note 1)........... 1,154 1,154 Net income for the period.... 9,020 9,020 -------- -------- -------- BALANCE, DECEMBER 31, 1998... 2,242 9,020 18,662 Issuance of shares for certain Ledcor assets with deferred tax assets........ 25,019 Repurchase of Class B Subordinate Voting Shares in exchange for Class B Subordinate Voting Shares and Series C Redeemable Preferred Shares........... (32,419) Shares(note 9)............... 32,419 Issuance of shares for cash (note 9)................... 3,000 Redemption of Series C Redeemable Preferred Shares and stock dividend (note 9)......................... (45,000) (45,000) Issuance of shares for certain Ledcor assets with deferred tax assets (note 1)......................... (2,242) 3,630 Issuance of shares for cash (net of share issuance costs and adjusted for accretion to redemption value)..................... 82,379 Issuance of shares (note 9)................... (77,500) -- Conversion of Class B Subordinate Voting Shares to Class A Non-Voting Shares (note 9)............ -- Purchase price adjustment to preferred shares........... 22,070 (5,159) 16,911 Net Income for the period.... 4,779 4,779 -------- -------- -------- BALANCE, DECEMBER 31, 1999.. $(55,430) $(36,360) $109,380 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. CF-6 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FEBRUARY 5, 1998 (DATE OF INCORPORATION) TO DECEMBER 31, 1998. (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31, ------------------------------- 1999 1998 -------------- -------------- CASH FLOWS USED IN OPERATING ACTIVITIES Net income for the period................................... $ 4,779 $ 9,020 Adjustments to reconcile net income to net cash used for operating activities Depreciation.............................................. 2,998 464 Amortization of deferred finance costs.................... 1,732 -- Equity (income) loss...................................... -- (928) Interest recorded on redeemable convertible preferred shares.................................................. 25,977 -- Changes in non-cash working capital items Accounts receivable..................................... (31,887) (196) Unbilled revenue........................................ (103,597) (992) Inventory............................................... (164,713) (5,517) Due from parent......................................... 13,841 (16,230) Accounts payable and accrued liabilities................ 151,420 2,904 Deferred revenue........................................ (14,008) 13,708 Income taxes payable.................................... 26,405 6,491 Advances to WFI USA..................................... -- (21,783) Deferred income taxes................................... (10,024) --------- -------- (97,077) (13,059) --------- -------- CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES Additions to assets under construction...................... (283,598) -- Additions to property and equipment......................... (16,518) (1,065) Purchase of short-term investments.......................... (21,167) -- Cash acquired on acquisition of WFI USA..................... -- 2,242 --------- -------- (321,283) 1,177 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of capital stock..................... 348,000 -- Issuance of notes........................................... 500,000 175,000 Deferred financing costs.................................... (17,281) (6,650) Repurchase of Series C redeemable preferred shares.......... (45,000) -- --------- -------- 785,719 168,350 --------- -------- Effect of exchange rate changes on cash..................... (2,363) (102) --------- -------- Net increase in cash and cash equivalents................... 364,996 $156,366 --------- -------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 156,366 -- --------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 521,362 $156,366 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. CF-7 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1. THE COMPANY 360NETWORKS INC. (formerly Worldwide Fiber Inc.) (the "Company") was incorporated on February 5, 1998 and is indirectly a subsidiary of Ledcor Inc. On May 31, 1998 the Company began its operations after certain assets of the Telecommunications Division ("Division") of Ledcor Industries Limited ("Ledcor"), a Ledcor Inc. subsidiary were transferred to the Company. Prior to June 1, 1998, the operations were carried out by the Division. The Company's operations consist of designing, engineering, constructing and installing terrestrial and marine fiber optic systems for sale or lease to third parties or for its own use. For the period ended December 31, 1998, the Company's revenues related to Construction Services Agreements with Ledcor (see Note 1(b)). For the year ended December 31, 1999, the Company's revenue is primarily derived from the construction of fiber optic network assets for telecommunications companies in North America. TRANSACTIONS WITH LEDCOR AND ITS AFFILIATES (a) On May 31, 1998, the Company entered into undertaking agreements whereby certain fiber optic network assets, located in Canada and the U.S. would be transferred to the Company by Ledcor in exchange for 319,995,200 Class A Non-Voting Shares. The Company constructed these assets for Ledcor under the Construction Services Agreements noted below. Construction of the assets was substantially complete at December 31, 1998 and the Company completed the exchange on March 31, 1999. This transaction was accounted for using the carrying values reported in the accounts of Ledcor as a transaction between a parent and a wholly owned subsidiary and accordingly, the fixed assets acquired by the Company will be recorded at the carrying amount of the assets in the accounts of Ledcor. The cost of the assets acquired at March 31, 1999 amounted to $21,883,000. As a result of the transaction, the Company also received a deferred tax benefit of $3,136,000 which is reflected as a deferred tax asset. On May 28, 1999, the Company entered into an agreement with affiliates of Ledcor, whereby the Company would acquire certain fiber optic network assets. Closing occurred on September 27, 1999. As consideration, the Company issued 72,000,000 Class C Multiple Voting Shares to affiliates of Ledcor. In addition, the Company assumed certain rights and obligations under build agreements with a third party including obligations relating to the completion of those builds and certain support structure, maintenance, license and access, and underlying rights obligations. The cost of the fixed assets acquired amounted to $25,289,000, the cost of the assets in the accounts of Ledcor. The Company also received a deferred tax benefit of $3,341,000, as a result of a higher tax cost versus accounting cost of fixed assets. The Company also recorded deferred revenue of $25,000,000 relating to a build commitment assumed from Ledcor. (b) Construction Services Agreements were entered into May 31, 1998 to provide construction services to Ledcor to complete various projects including completion of the fiber optic network assets to be transferred to the Company. As the Company is required to obtain the fiber optic network assets from Ledcor, the revenues and costs associated with this portion of the agreement have not been reflected in the income statement for the period ended December 31, 1998. The costs to construct the network were reflected on completion of construction and the issuance of the shares. As at December 31, 1998, the Company had billed Ledcor $18,138,000 for the services related to CF-8 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 1. THE COMPANY (CONTINUED) construction of the fiber optic network assets which exceeded their costs by $2,099,000. This excess, net of income taxes of $945,000, had been excluded from the consolidated income statement and had been reported as contributed surplus included in other capital accounts. (c) A Management Services Agreement was entered into May 31, 1998 whereby Ledcor provides the Company with management staff, administrative and other support services. The Company reimburses Ledcor for direct costs and pays Cdn. $200,000 per month for the Company's share of corporate overheads. (d) Employee Services Agreements were entered into May 31, 1998 whereby the Company obtains the services of certain employees from Ledcor on a cost reimbursement basis. (e) The Company has entered into an agreement with Ledcor whereby personnel of Ledcor who were involved in the designing and planning of the transatlantic Hibernia cable stations will oversee management and supervision of construction of these facilities for a fee of approximately $1,700,000. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and include the accounts of the Company, its wholly owned subsidiaries and its 75% interests in Worldwide Fiber (USA), Inc. ("WFI USA"), WFI-CN Fiber Inc. and Worldwide Fiber IC LLC. All significant intercompany transactions and balances have been eliminated on consolidation. For investments where the Company exercises significant influence, the investment is accounted for using the equity method. On December 31, 1998, the Company increased its interest in WFI USA from 50% to 75% (note 5). The 1998 consolidated income statement and statement of cash flows accounted for the Company's initial 50% interest in WFI USA using the equity method for the period May 31, 1998 to December 31, 1998. The Company's consolidated balance sheets include WFI USA's assets and liabilities, and minority interest therein. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the period reported. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash on deposit and highly liquid short-term interest bearing securities with maturity at the date of purchase of three months or less. CF-9 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHORT TERM INVESTMENTS Short term investments consist of highly liquid short term interest bearing securities with maturities at the date of purchase greater than three months. Interest earned is recognized immediately in the income statement. PROPERTY AND EQUIPMENT Fiber optic network assets constructed for the Company's own use are recorded as property and equipment when the asset is fully constructed. Fiber optic network assets, construction equipment and other assets are recorded at cost. Property and equipment are depreciated using the following rates and methods: - Fiber optic network assets--straight-line over 25 years. - Equipment--hourly usage rates, estimated to depreciate the equipment over the estimated useful lives of the equipment. ASSETS UNDER CONSTRUCTION Assets under construction include fiber optic network assets constructed for the company's own use and include direct expenditures of materials and labor, indirect costs attributable to the projects and interest. LONG-LIVED ASSETS The Company reviews the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated to be generated during the remaining life of the assets to the net carrying value of the asset. INVENTORY Inventory consists of fiber optic network assets to be sold or leased under sales-type leases, construction supplies and small tools. Fiber optic network assets are recorded at the lower of cost and market. Cost includes direct materials and subcontractor charges, labour, and interest (see "capitalization of interest") determined on an average cost basis. Construction supplies and small tools inventory are recorded at the lower of cost and replacement value. REVENUE RECOGNITION Revenue for services provided to Ledcor for construction projects is recognized in the period the construction services are performed based on the costs incurred. CF-10 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue and income from construction contracts to develop fiber optic network assets are determined on the percentage-of-completion basis using the cost-to-cost method. Provision is made for all anticipated losses as soon as they become evident. Claims for additional contract compensation are not recognized until resolved. UNBILLED REVENUE Revenue recognized using the percentage-of-completion basis (see "Revenue recognition") less billings to date is recorded as unbilled revenue. Unbilled revenue classified as current represents billings expected to be collected within the following fiscal year. Billings are rendered on the achievement of certain construction milestones. CAPITALIZATION OF INTEREST Interest is capitalized as part of the cost of constructing fiber optic network assets. Interest capitalized during the construction period is computed by determining the average accumulated expenditures for each interim capitalization period and applying the interest rate related to the specific borrowings associated with each construction project. The total interest capitalized as at December 31, 1999 was $17,467,000 (December 31, 1998--$nil). DEFERRED FINANCING COSTS Costs incurred in connection with obtaining the Senior Notes financing are deferred and amortized, using the effective interest method, to interest expense over the term of the senior notes. DEFERRED REVENUE Cash received from customers pursuant to contracts where construction has not commenced is recorded as deferred revenue. FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS The functional currency of the Company's operations located in countries other than the U.S. is generally the domestic currency. The consolidated financial statements are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and weighted-average exchange rates for the period for revenues and expenses. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in shareholder's equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated income statement. INCOME TAXES Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current period and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of CF-11 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance, where, based on available evidence, the probability of realization of the deferred tax asset does not meet a more likely than not criterion. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments, consisting of cash and cash equivalents, short-term investments, accounts receivable, unbilled revenue, due from parent, accounts payable and accrued liabilities, and income taxes payable approximate their carrying values due to their short-term nature. As at December 31, 1999, the fair value of the $500,000,000 12% Senior Notes was $515,000,000 and the fair value of the $175,000,000 12.5% Senior Notes ("1998 Notes") was $182,000,000. The fair value of the 1998 Notes at December 31, 1998 approximated its carrying value. Fair value is based on a quoted market price. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares (including Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares) outstanding for the period. Fully diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and Redeemable Convertible Preferred Shares, in the weighted average number of common shares outstanding for a period, if dilutive. The following table sets forth the computation of (loss) earnings per share:
1999 1998 ----------- ---------- Net income................................................ $ 4,779 $ 9,020 Less: Stock dividend.......................................... 5,000 -- Purchase price adjustment to preferred shares........... 5,159 -- ----------- ---------- Net (loss) income available to common stockholders........ (5,380) 9,020 =========== ==========
The Redeemable Convertible Preferred Shares and stock options are not included in the computation of fully diluted loss per share as their effect is anti-dilutive. CF-12 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPARATIVE FINANCIAL INFORMATION Certain prior year amounts have been reclassified to conform to the current year presentation. 3. SUPPLEMENTAL CASH FLOW INFORMATION
1999 1998 -------------- -------------- Cash paid for income taxes.................................. $13,944 $ -- Cash paid for interest...................................... 21,391 -- Supplemental non-cash investing and financing activities Issuance of common shares for: Certain Ledcor assets............................... 47,172 8,488 Deferred revenue.................................... 25,000 -- Additional 25% investment in WFI USA in exchange for surrender of note receivable...................... -- 3,915 Series C Redeemable Preferred Stock dividend............ 5,000 -- Accretion of preferred stock to redemption value........ 6,465 --
CF-13 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 4. BALANCE SHEET COMPONENTS
1999 1998 -------------- -------------- Accounts receivable Trade accounts receivable................................. $ 34,736 $ 3,107 Interest and other........................................ 615 165 -------- ------- $ 35,351 $ 3,272 ======== ======= Unbilled revenue Revenue earned on uncompleted contracts................... $333,116 $22,236 Less: Billings to date.................................... 217,455 11,654 -------- ------- $115,661 $10,582 ======== ======= Inventory Fiber optic network assets................................ $188,013 $28,085 Construction supplies and small tools..................... 8,946 1,145 -------- ------- $196,959 $29,230 ======== ======= Property and equipment Land...................................................... $ 5,891 $ -- Fiber optic network assets................................ 64,079 -- Equipment................................................. 10,501 4,478 -------- ------- 80,471 4,478 Less: Accumulated depreciation............................ 3,462 (464) -------- ------- Property and equipment--net................................. $ 77,009 $ 4,014 ======== ======= Accounts payable and accrued liabilities Subcontractor and supplier costs.......................... $100,461 $13,067 Subcontractor holdbacks payable........................... 25,676 4,843 Accrued liabilities....................................... 36,733 1,493 Interest payable.......................................... 28,567 492 -------- ------- $191,437 $19,895 ======== =======
CF-14 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5. ACQUISITIONS TELECOMMUNICATIONS DIVISION ASSETS Effective May 31, 1998, the Company entered into a series of agreements whereby equipment, fiber optic network assets and other assets related to the business of the Telecommunications Division of Ledcor were transferred to the Company. In addition, the Company was granted a license to use Ledcor's patented rail plow technology. This license agreement was for an initial term of ten years, renewable annually upon completion of the initial term. As part of this transaction, Ledcor retained all existing construction contracts related to the business. This transaction was between entities under common control and has been accounted for using the carrying amounts recorded in Ledcor's accounts. The tax basis of substantially all the Canadian assets transferred to the Company was Ledcor's carrying values whereas the tax basis of the U.S. assets transferred was their fair value. The deferred tax balances were adjusted for the change in the tax basis of the U.S. assets with the adjustment being reflected as other capital accounts. As consideration for the transaction, the Company issued 3,200 Class A shares to Ledcor. The assets transferred and consideration given, in connection with this transaction were as follows: Assets Construction equipment.................................. $2,830 Fiber optic network assets.............................. 4,424 Deferred income taxes................................... 1,088 Other................................................... 146 ------ $8,488 ====== Consideration given Class A common shares and contributed surplus included in other capital accounts............................. $8,488 ======
LEDCOM HOLDINGS LTD. On December 1, 1998 the Company acquired 50 Class A common shares representing a 50% interest of Ledcom Holdings Ltd. ("Ledcom") from Worldwide Fiber Holdings Ltd. ("WFHL"), the Company's parent. As consideration, the Company issued 32,000,000 Class A Non-Voting Shares. Ledcom holds the patent to Ledcor's rail plow technology, and in conjunction with this acquisition Ledcor has committed to grant to the Company a worldwide exclusive license for the use of the rail plow technology. The license will become non-exclusive six months after a change of control of the Company. This transaction was between entities under common control and has been accounted for using the carrying value of the investment recorded in WFHL's accounts which was $nil. INVESTMENT IN WFI USA On August 31, 1998, the Company purchased Ledcor's 50% interest in, and a promissory note of $3,915,000 from WFI USA, in exchange for 48,000,000 Class A Non-Voting Shares of the Company and CF-15 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 5. ACQUISITIONS (CONTINUED) the issuance of a promissory note by the Company. WFI USA was a joint venture with Mi-Tech Communications LLC ("Mi-Tech") which held the remaining 50% interest in WFI USA. WFI USA's operations consist primarily of developing fiber optic network assets in the United States. As this transaction was between entities under common control, it was accounted for in a manner similar to a pooling of interests. These financial statements reflect the equity interest in the income of WFI USA from May 31, 1998 to December 31, 1998 in the amount of $928,000. Prior to May 31, 1998, the equity interest was reported as part of the Telecommunications division of Ledcor. On December 31, 1998 the Company increased its interest in WFI USA to 75% by surrendering its note receivable from WFI USA of $3,915,000 for 100 non-voting common shares and 100 Class A voting preferred shares of WFI USA. The acquisition has been accounted for using the purchase method effective December 31, 1998. The purchase price of the additional 25% has been allocated to assets and liabilities based on their fair values. As a result, the net assets acquired were as follows: Current assets.............................................. $ 3,742 Inventory................................................... 6,048 Fixed assets................................................ 1,795 Current liabilities......................................... 10,052
On December 31, 1998, the Company entered into a Shareholders' Agreement ("Agreement") with Ledcor, Mi-Tech and Michels Pipeline Construction, Inc. ("Michels") (an affiliate of Mi-Tech). Pursuant to this agreement, Mi-Tech will have the option to convert all of its 25% interest in WFI USA into shares of the Company should the Company complete a public offering of shares with an aggregate value of at least $20,000,000 or there is a change of control of WFI USA. In connection with the conversion, Mi-Tech will be granted certain registration rights in accordance with the Agreement. In addition, after the tenth anniversary of this agreement, Mi-Tech has the option to require WFI USA to purchase all of the shares owned by Mi-Tech and its affiliates at fair market value. If Mi-Tech exercises this option, the Company can elect to sell all the shares or assets of WFI USA in which case it will not be required to purchase Mi-Tech's shares in WFI USA. In the event of a proposed sale of the shares of WFI USA held by the Company, Mi-Tech will have certain tag-along rights. Also as part of the Agreement the Company: - Agreed not to participate in any projects or business nor provide advice or assistance to any business which undertakes projects within WFI USA's scope of business, as defined in the Agreement, for a period of four years from the date of the Agreement. - Is restricted from selling, transferring, encumbering or divesting its ownership or control of WFI USA. - WFI USA has an option to purchase from Mi-Tech 24 fiber optic strands along certain existing routes owned by Mi-Tech and its affiliates at fair market value. CF-16 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 6. DUE FROM PARENT The amounts due to and from parent are non-interest bearing, have no stated terms of repayment and are due on demand. Contract amounts billed to parent and costs charged by parent exceed revenues and costs as reported in the income statement, for the period ended December 31, 1998, due to fiber optic network assets to be transferred to the Company as described in note 1(b). The balance as at December 31, 1999, of $7,297,000, is included in accounts payable. 7. SENIOR NOTES On July 28, 1999 the Company issued 500,000,000 12% senior notes (the "Notes"). The Notes are unsecured obligations of the Company bearing interest at 12% payable semi-annually. The Notes are due August 1, 2009 and may be redeemed by the Company on or after August 1, 2004 at certain specified redemption prices ranging up to 106.00%. Up to 35% of the Notes may be redeemed by the Company prior to August 1, 2002 at a redemption price of 112% of the principal amount with the net proceeds from certain sales of the Company's common stock. If a change in control occurs, as defined in the Notes indentures, the holders of the Notes can require the company to repurchase all or part of the Notes at 101% of the principal amount. Where excess proceeds from certain asset sales, as defined in the Notes indentures, exceeds $10,000,000 the Company is required to make an offer to repurchase the maximum amount of Notes that can be repurchased with such excess proceeds at an offer price equal to 100% of the principal amount. On December 23, 1998, the Company issued $175,000,000 12.5% senior notes (the "1998 Notes"). The 1998 Notes are unsecured obligations of the Company bearing interest at 12.5% payable semi-annually. The 1998 Notes are due December 15, 2005 and may be redeemed by the Company on or after December 31, 2003 at certain specified redemption prices ranging up to 106.25% of the principal amount. Up to 35% of the 1998 Notes may be redeemed by the Company prior to December 15, 2001, at a redemption price of 112.5% of the principal amount with the net proceeds from certain sales of the Company's common equity to the public. If a change of control occurs, as defined in the 1998 Notes Indenture, the holders of the 1998 Notes can require the Company to repurchase all or part of the 1998 Notes at 101% of the principal amount. If at the end of December 31, 2000 and semi-annually thereafter, the Company's Accumulated Excess Cash Flow, as defined in the 1998 Notes Indenture, exceeds $10,000,000, the Company is required to make an offer to repurchase the maximum principal amounts of 1998 Notes that may be purchased by such Accumulated Excess Cash Flow Amount at an offer price equal to 110% of the principal amount of the 1998 Notes. Under this Excess Cash Flow provision, the Company is not required to repurchase more than 25% of the original principal amount of the Notes prior to December 31, 2003. The Notes and 1998 Notes contain certain covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, issue certain preferred stock, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. CF-17 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK On September 9, 1999 the Company authorized various classes of preferred shares. SERIES A NON-VOTING REDEEMABLE CONVERTIBLE PREFERRED SHARES On September 9, 1999, the Company issued 141,868,928 Series A Non-Voting Convertible Preferred Shares ("Series A Preferred Shares") for $345,000,000. On December 22, 1999, the Company issued an additional 9,082,384 Series A Preferred Shares to the holders of such shares pursuant to the terms of their original purchase agreement dated September 7, 1999. The Series A Preferred Shares are entitled to dividends on an equivalent basis to the Class A Non-Voting Shares into which the Series A Preferred Shares can be converted. The Series A Preferred Shares rank senior to all classes of capital stock upon liquidation, dissolution and wind-up and are junior in right of payment of all indebtedness of the Company and its subsidiaries. The Series A Preferred Shares have a mandatory redemption on November 2, 2009 at a liquidation value consisting of the original purchase price of $2.43 per share plus an adjustment equal to 6% per annum of the purchase price, plus declared and unpaid dividends and the excess of the market value of the Class A Non-Voting Shares over the liquidation value. Upon a qualified underwritten public offering of at least $150,000,000 with a share price of at least 300% of the purchase price of the Series A Preferred Shares, each Series A Preferred Share may, at the option of the Company, be converted into Class A Non-Voting Shares at a ratio equal to one plus 6% per annum. If a qualified underwritten public offering occurs by September 9, 2000 the conversion will be on a one for one basis. The Series A Preferred Shares may be converted by the holders into Class A Non-Voting Shares, at any time, on the same basis as the Company's conversion right and may be converted into Series B Non-Voting Convertible Preferred Shares on a one for one basis. In addition, the holders of the Series A Preferred Shares have anti-dilution protection. SERIES B SUBORDINATE VOTING REDEEMABLE CONVERTIBLE PREFERRED SHARES The Series B Subordinate Voting Convertible Preferred Shares ("Series B Preferred Shares") are entitled to dividends on an equivalent basis to any dividends declared or paid on Class B Subordinate Voting Shares into which the Series B Preferred Shares can be converted. The Series B Preferred Shares rank senior to all classes of capital stock upon liquidation, dissolution and wind-up and are junior in right of payment of all indebtedness of the Company and its subsidiaries. The Series B Preferred Shares are entitled to one vote per share. The Series B Preferred Shares are mandatorily redeemable on November 2, 2009 at a liquidation value of $2.43 per share plus an adjustment equal to 6% per annum of the purchase price, plus declared and unpaid dividends and the excess of the market value of the Class B Subordinate Voting Shares over the liquidation value. Upon a qualified underwritten public offering of at least $150,000,000 with a share price of at least 300% of the purchase price of the Series B Preferred Shares, each Series B Preferred Share, may at the CF-18 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED) option of the Company, be converted into Class B Subordinate Voting Shares at a ratio equal to one plus 6% per annum. If a qualified underwritten public offering occurs by September 9, 2000 the conversion will be on a one for one basis. The Series B Preferred Shares may be converted into Class B Subordinate Voting Shares, at any time on the same basis as the Company's conversion right and may be converted into Series A Preferred Shares on a one for one basis. In addition, the holders of the Series B Preferred Shares have anti-dilution protection. SERIES C REDEEMABLE PREFERRED SHARES On September 9, 1999, 80,000,000 Series C Redeemable Preferred Shares ("Series C Preferred Shares") were issued pursuant to a stock dividend and 640,000,000 Series C Preferred Shares were issued pursuant to a share re-organization. Subsequently, the Company repurchased the 720,000,000 issued Series C Preferred Shares for $45,000,000 (note 9). The holders of Series C Preferred Shares are not entitled to dividends or voting rights and may redeem the Series C Preferred Shares at $1 per share after November 2, 2009. 9. CAPITAL STOCK On September 9, 1999 the Company authorized various classes of capital stock (see "Share Capital Transactions"): The holders of the Class A Non-Voting Shares, Class B Subordinate Voting Shares, and Class C Multiple Voting Shares participate equally in dividends declared subject to any preference priority on other classes of shares. The holders of the Class A Non-Voting Shares are not entitled to voting rights. The holders of Class B Subordinate Voting Shares are entitled to one vote per share, and the holders Class C Multiple Voting Shares are entitled to 20 votes per share. In the event of liquidation, dissolution, or wind-up of the Company, any payment or distribution of assets will be paid or distributed equally share for share to the holders of the three classes of capital stock. The holders of Class A Non-Voting Shares are entitled to convert their shares to Class B Subordinate Voting Shares on a one for one basis. The holders of Class B Subordinate Voting Shares are entitled to convert their shares to Class A Non-Voting Shares on a one for one basis at any time prior to September 9, 2000 and into Series A Preferred Shares on a one for one basis. The holders of Class C Multiple Voting Shares are entitled to convert their shares into Class A Non-Voting Shares or Class B Subordinate Voting Shares on a one for one basis. SHARE CAPITAL TRANSACTIONS On September 9, 1999, the Company amended its share capital by re-designating 400,000,000 Class A voting Shares to Class B Subordinate Voting Shares, cancelling its remaining classes of shares CF-19 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 9. CAPITAL STOCK (CONTINUED) and creating Class A Non-Voting Shares, Class C Multiple Voting Shares, Series A and B Redeemable Convertible Preferred Shares and Series C Redeemable Preferred Shares. Subsequently, the Company declared a stock dividend of 80,000,000 Series C Redeemable Preferred Shares for $5,000,000. Concurrently, the Company repurchased the 400,000,000 outstanding Class B Subordinate Voting Shares from its parent in exchange for the issuance of 381,496,000 Class B Subordinate Voting Shares and 640,000,000 Series C Redeemable Preferred Shares. The Company then redeemed the 720,000,000 outstanding Series C Redeemable Preferred Shares for $45,000,000 cash resulting in a charge to retained earnings of $40,000,000. On August 31, 1999 the Company issued 2,400,000 Class B Subordinate Voting Shares for $3,000,000. On November 24, 1999 a shareholder converted 301,266,400 Class B Subordinate Voting Shares into 301,266,400 Class A Non-Voting Shares. On December 22, 1999, the Company issued 52,160,000 Class A Non-Voting Shares and 9,840,000 Class C Multiple Voting Shares under an employment agreement to an executive officer for $77,500,000. The Company also received a promissory note of $77,500,000 from the executive officer. The shares issued to the executive officer are subject to a repurchase by the Company at the lesser of fair market value of the shares and the original purchase price of the shares plus interest. The restriction lapsed with respect to 15,500,000 shares immediately on commencement of employment and lapses for 12,400,000 shares in 2000, 13,639,968 shares in 2001 and 2002 and the remainder in 2003. Under certain conditions, the executive officer may put back a certain number of shares to the Company, or at the option of the Company to Worldwide Fiber Holdings Ltd., at fair market value to repay the promissory note. On November 24, 1999, the Board of Directors approved an eight-for-one share split of all classes of the Company's stock. All share amounts for 1998 and 1999 have been presented on a post stock split basis. 10. STOCK OPTION PLAN The Company has a Long Term Incentive and Share Award Plan that permits the grant of non-qualified stock options, incentive stock options, share appreciation rights, restricted shares, restricted share units, performance shares, performance units, dividend equivalents and other share based awards to employees and directors. A maximum of 71,133,008 Class A Non-Voting Shares may be subject to awards under the plan, which generally have a vesting period of four years. The stock options have terms expiring on or before November 15, 2009. CF-20 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 10. STOCK OPTION PLAN (CONTINUED) Stock option transactions during 1999 were as follows:
WEIGHTED- NUMBER OF AVERAGE OPTIONS EXERCISE PRICE ----------- -------------- $ Balance--December 31, 1998 Options granted...................................... 43,412,480 0.77 Options cancelled.................................... -- -- Options exercised.................................... -- -- ---------- ---- Balance--December 31, 1999............................. 43,412,480 0.77 ========== ====
The following table summarizes information about stock options outstanding at December 31, 1999:
NUMBER OPTIONS OUTSTANDING AT WEIGHTED AVERAGE EXERCISABLE AT EXERCISE DECEMBER 31, REMAINING DECEMBER 31, PRICE 1999 CONTRACTUAL LIFE (YEARS) 1999 -------- -------------- ------------------------ -------------- $ 0.63 33,786,880 9.0 8,822,080 1.25 9,625,600 9.5 -- - --------------------- ---------- --------- --------- 0.63-1.25 43,412,480 9.2 8,822,080 ===================== ========== ========= =========
11. INCOME TAXES INCOME BEFORE EQUITY INCOME, INCOME TAXES AND MINORITY INTEREST The components of income before equity income, income taxes and minority interest, are as follows:
1999 1998 ---- ---- Canadian............................................... $28,020 $ 5,683 U.S.................................................... 14,507 8,052 ------- ------- $42,527 $13,735 ======= =======
CF-21 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 11. INCOME TAXES (CONTINUED) CURRENT INCOME TAXES The provision for current income taxes consists of the following:
1999 1998 ---- ---- Canadian.................................................... $25,742 $2,599 U.S. federal................................................ 11,775 2,563 U.S. state and local........................................ 2,821 481 ------- ------ $40,338 $5,643 ======= ======
The provision for income taxes differs from the amount computed by applying the statutory income tax rate to net income before taxes as follows:
1999 1998 -------- -------- % % Canadian statutory rate..................................... 45.6 45.6 Foreign tax at other than Canadian statutory rate........... (5.0) (4.5) Investment income........................................... 1.6 -- Non-deductible interest recorded on redeemable convertible preferred shares.......................................... 27.8 -- Other....................................................... 1.3 -- ---- ---- 71.3 41.1 ==== ====
CF-22 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 11. INCOME TAXES (CONTINUED) DEFERRED INCOME TAXES Significant components of the Company's deferred tax asset and liability are as follows:
1999 1998 -------- -------- DEFERRED TAX ASSET Expenses not deductible in current year................... $ 8,838 $ -- Tax loss carryforwards.................................... 4,259 -- Property and equipment.................................... 7,596 1,088 Other..................................................... 185 185 ------- ------ 20,878 1,273 Valuation allowance......................................... -- -- ------- ------ Net deferred tax asset...................................... $ -- $ -- ======= ====== DEFERRED TAX LIABILITY Property and equipment.................................... $ 1,760 $ -- Financing costs........................................... 1,313 -- ------- ------ $ 3,073 $ -- ======= ======
Management believes that, based on a number of factors, it is more likely than not that the deferred tax asset will be fully utilized, such that no valuation allowance has been recorded. Tax losses arising in 1999 of $9,342,000 expire in 2006. 12. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable, unbilled revenue and due from parent which are not collateralized. The Company limits its exposure to credit loss by placing its cash and cash equivalents and short-term investments with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable and unbilled revenue are considered to be limited due to the credit quality of the customers comprising the Company's customer base. The maximum amount of credit risk exposure is limited to the carrying amounts of these financial instruments. The Company performs ongoing credit evaluations of its customers' financial condition to determine the need for an allowance for doubtful accounts. The Company has not experienced significant credit losses to date. Accounts receivable was comprised of 22 customers at December 31, 1999 and 12 customers at December 31, 1998. The concentration of credit risk relating to the amount due from the parent is considered limited due to the credit quality of the Company's parent. As described in Note 1, substantially all of the Company's CF-23 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 12. CONCENTRATION OF CREDIT RISK (CONTINUED) revenues for the period ended December 31, 1998 was earned from construction services provided to Ledcor. 13. SEGMENTED INFORMATION The Company operates within a single operating segment being the construction and installation of fiber optic network assets. These fiber optic network assets are being constructed in Canada, the U.S. and Europe including a transatlantic link. A significant portion of the transatlantic link will be owned by a subsidiary in Barbados. Revenues, property and equipment, assets under construction, and deferred financing costs are located as follows:
DEFERRED PROPERTY AND ASSETS UNDER FINANCING REVENUES EQUIPMENT--NET CONSTRUCTION COSTS--NET --------------------- --------------------- --------------------- --------------------- 1999 1998 1999 1998 1999 1998 1999 1998 --------- --------- --------- --------- --------- --------- --------- --------- Canada............... $170,705 $ 84,534 $ 38,206 $ 3,794 $ 46,683 $ 4,424 $ 22,199 $ 6,650 U.S. ................ 189,041 79,785 33,669 220 53,221 7,037 -- -- Barbados............. -- -- -- -- 169,648 -- -- -- Europe............... -- -- 5,134 -- 30,851 -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- $359,746 $164,319 $ 77,009 $ 4,014 $300,403 $ 11,461 $ 22,199 $ 6,650 -------- -------- -------- -------- -------- -------- -------- --------
The revenues are based on the location of the construction activities. CF-24 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 14. COMMITMENTS NETWORK DEVELOPMENTS The Company has, in the normal course of business, entered into agreements to provide construction services and fiber optic network assets to third parties in Canada and the United States. RIGHT OF WAY ACCESS AGREEMENTS The Company has entered into various agreements during the period to secure the rights of ways along its network routes. In general, most agreements have an option renewal clause stating that grantors cannot unjustly withhold their acceptance of a renewal. Future minimum payments under significant right of way agreements are as follows: 2000........................................................ $25,051 2001........................................................ $17,051 2002........................................................ $17,051
OPERATING LEASES The Company leases certain facilities and equipment used in its operations under operating leases. Future minimum lease payments under these lease agreements at December 31, 1999 are as follows: 2000........................................................ $7,489 2001........................................................ $6,244 2002........................................................ $3,349 2003........................................................ $1,153 2004........................................................ $ 671
The Company pays Ledcor approximately $825,000 per year in connection with its lease of the Toronto facilities. The lease expires in 2009. SUPPLY AGREEMENTS On June 18, 1999, a subsidiary of the Company entered into a supply agreement with Tyco Submarine Systems Ltd. ("Tyco") whereby Tyco will serve as the primary contractor for the Company's transatlantic cable project called "360ATLANTIC". The initial contract price is approximately $607 million. The Company paid $214 million in the year ended December 31, 1999 on this contract. The Company has placed purchase orders of approximately $27,000,000 with suppliers of bandwidth equipment. CN/IC AGREEMENTS On May 28, 1999, the Company entered into agreements with Canadian National Railway Company ("CN") and Illinois Central Railroad Company ("IC") to license rights-of-way along certain of their respective rail transportation systems (the "Routes"). In connection with these license agreements, the CF-25 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 14. COMMITMENTS (CONTINUED) Company formed subsidiary companies with CN (WFI-CN Fibre Inc.) and IC (Worldwide Fiber LLC) (the Company having a 75% interest and CN or IC having the remaining 25% interest) for the purpose of licensing the rights-of-way from CN and IC and developing the projects along the Routes. 15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using the year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the year 2000 Issue that may affect the entity, including those related to customers, suppliers or other third parties, have been fully resolved. 16. SUBSEQUENT EVENTS SHARE CAPITAL REORGANIZATION Concurrent with the closing of a public offering, the Company will reorganize the share capital as follows: the holders of existing Class B Subordinate Voting Shares will convert or exchange their shares into Subordinate Voting Shares and all authorized but unissued Class B Subordinate Voting Shares will be cancelled; the Series A Preferred Shares will be converted into Subordinate Voting Shares and all of the authorized but unissued Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares will be cancelled; existing Class A Non-Voting Shares will be redesignated as Subordinate Voting Shares and the terms shall be amended to provide the holders with one vote per share and; the existing Class C Multiple Voting Shares will be amended to provide the holders with 10 votes per share and the Class C Multiple Voting Shares will be redesignated as Multiple Voting Shares; and a class of unlimited Preferred Shares, issuable in series will be created. GLOBENET ACQUISITION The Company has entered into a definitive agreement to acquire 100% of the outstanding shares of GlobeNet Communications Group Limited in exchange for approximately $640 million worth of newly created Subordinate Voting Shares. The number of Subordinate Voting Shares to be issued by the Company will be adjusted based on an initial public offering price. ACQUISITION OF REMAINING 25% IN WFI-USA The Company has entered into a commitment with Mi-Tech to acquire its 25% interest in WFI-USA in exchange for $312 million worth of Class A Non-Voting Shares of the Company. The number of shares to be issued by the Company will be determined based on an initial public offering price. CF-26 360NETWORKS INC. (FORMERLY WORLDWIDE FIBER INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 AND 1998 (TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) 16. SUBSEQUENT EVENTS (CONTINUED) CN/IC On March 6, 2000, the Company entered into an agreement with CN and IC to acquire their respective 25% interests in WFI-CN Fibre Inc. and Worldwide Fiber IC LLC in exchange for $160 million worth of Class A Non-Voting Shares of the Company. The number of Class A Non-Voting Shares to be issued by the Company will be based on an initial public offering price. Pursuant to this agreement, payment terms for right-of-way fees were amended requiring the right-of-way fees to be paid over a three year term. CANADIAN TELECOMMUNICATIONS ARRANGEMENT The Company has entered into an arrangement to transfer certain Canadian telecommunications equipment and related facilities to a subsidiary of Ledcor which will be held 66 2/3% by Ledcor and 33 1/3% by the Company in exchange for 51% of the non-voting participating shares of the subsidiary. ACQUISITION OF COLOCATION FACILITIES The Company has agreed, subject to execution of definitive agreements to acquire colocation facilities in a number of North American cities. The aggregate purchase price for these acquisitions is $156 million payable in a combination of cash and newly created Subordinated Voting Shares. 360ATLANTIC CREDIT FACILITY The Company has entered into a credit agreement with certain lenders pursuant to which the lenders have provided a credit facility totalling U.S. $565,000,000. SHARE SPLIT On March 20, 2000, the Board of Directors approved a two-for-one share split of all classes of the Company's stock. All share amounts in 1998 and 1999 have been presented on a post stock split basis. SHARE ISSUANCES Subsequent to December 31, 1999, the Company has issued 411,214 Class A Non-Voting Shares to a consultant of the Company. In addition, the Company will issue additional Series A Preferred Shares in connection with the purchase price adjustment provisions of the subscription agreement. NAME CHANGE On March 14, 2000, the Company changed its name from Worldwide Fiber Inc. to 360NETWORKS INC. CF-27 AUDITORS' REPORT To the Directors of Ledcor Industries Limited We have audited the divisional balance sheets of Ledcor Industries Limited--Telecommunications Division as at May 31, 1998, August 31, 1997 and August 31, 1996 and the divisional statements of operations and retained earnings and cash flows for the nine months ended May 31, 1998, year ended August 31, 1997, five months ended August 31, 1996 and year ended March 31, 1996. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these divisional financial statements present fairly, in all material respects, the financial position of the Division as at May 31, 1998, August 31, 1997 and August 31, 1996 and the results of its operations and cash flows for the periods ended May 31, 1998, August 31, 1997, August 31, 1996 and March 31, 1996 in accordance with Canadian generally accepted accounting principles. /s/ Deloitte & Touche LLP Edmonton, Canada November 30, 1998 CF-28 LEDCOR INDUSTRIES LIMITED-- TELECOMMUNICATIONS DIVISION DIVISIONAL BALANCE SHEETS (ALL FIGURES ARE IN U.S. DOLLARS)
MAY 31, AUGUST 31, AUGUST 31, 1998 1997 1996 ------------ ----------- ----------- ASSETS CURRENT Trade accounts receivable (Note 4).................. $ 5,538,543 $18,501,710 $ 845,173 Accounts receivable holdbacks (Note 4).............. 4,474,731 3,446,571 153,652 Unbilled revenue (Note 5)........................... 5,842,845 3,608,010 5,013,428 Inventory........................................... 16,976,078 5,240,252 -- ----------- ----------- ---------- 32,832,197 30,796,543 6,012,253 FIXED ASSETS (Note 6)............................... 8,300,835 1,471,043 463,651 ----------- ----------- ---------- $41,133,032 $32,267,586 $6,475,904 =========== =========== ========== LIABILITIES CURRENT Trade accounts payable.............................. $ 3,148,456 $12,855,863 $1,719,591 Accrued payroll..................................... 3,431,709 1,008,791 -- Accrued liabilities................................. 587,750 954,362 -- Accounts payable holdbacks.......................... 4,412,221 86,262 -- Income taxes payable................................ 5,509,000 338,000 5,000 ----------- ----------- ---------- 17,089,136 15,243,278 1,724,591 DEFERRED TAX LIABILITIES (Note 7)................... 2,657,000 4,426,000 1,212,000 INTER-DIVISIONAL ACCOUNT (Note 8)................... 10,875,903 6,780,397 2,060,696 ----------- ----------- ---------- 30,622,039 26,449,675 4,997,287 ----------- ----------- ---------- COMMITMENTS (Note 9) DIVISIONAL EQUITY Divisional retained earnings........................ 10,510,993 5,817,911 1,478,617 ----------- ----------- ---------- $41,133,032 $32,267,586 $6,475,904 =========== =========== ==========
See accompanying notes to the divisional financial statements. CF-29 LEDCOR INDUSTRIES LIMITED TELECOMMUNICATIONS DIVISION DIVISIONAL STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ALL FIGURES ARE IN U.S. DOLLARS)
NINE MONTHS FIVE MONTHS ENDED YEAR ENDED ENDED YEAR ENDED MAY 31, AUGUST 31, AUGUST 31, MARCH 31, 1998 1997 1996 1996 ------------- ----------- ------------ ----------- Revenue generated from contracts..... $54,633,888 $58,007,652 $7,372,942 $3,823,790 Contract costs....................... 45,321,566 49,184,985 5,768,543 3,463,514 ----------- ----------- ---------- ---------- Gross margin......................... 9,312,322 8,822,667 1,604,399 360,276 General and administrative expenses........................... 710,240 863,373 90,993 57,357 ----------- ----------- ---------- ---------- Net divisional income for the period, before taxes....................... 8,602,082 7,959,294 1,513,406 302,919 Income tax expense (recovery) Current.............................. 5,509,000 338,000 5,000 3,000 Deferred............................. (1,600,000) 3,282,000 681,000 136,000 ----------- ----------- ---------- ---------- Net divisional income for the period............................. 4,693,082 4,339,294 827,406 163,919 DIVISIONAL RETAINED EARNINGS, BEGINNING OF PERIOD................ 5,817,911 1,478,617 651,211 487,292 ----------- ----------- ---------- ---------- DIVISIONAL RETAINED EARNINGS, END OF PERIOD............................. $10,510,993 $ 5,817,911 $1,478,617 $ 651,211 =========== =========== ========== ==========
See accompanying notes to the divisional financial statements. CF-30 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION DIVISIONAL STATEMENTS OF CASH FLOWS (ALL FIGURES ARE IN U.S. DOLLARS)
FIVE NINE MONTHS MONTHS YEAR ENDED YEAR ENDED ENDED ENDED MAY 31, AUGUST 31, AUGUST 31, MARCH 31, 1998 1997 1996 1996 ------------- ------------ ----------- ---------- OPERATING ACTIVITIES Net divisional income for the period....... $ 4,693,082 $ 4,339,294 $ 827,406 $ 163,919 Adjustments to reconcile net divisional income to net cash provided by operating activities Depreciation and amortization............ 316,597 111,791 15,376 23,754 Deferred taxes........................... (1,600,000) 3,282,000 681,000 136,000 Foreign exchange (gain) loss............. (169,000) (68,000) (5,000) 9,000 Changes in assets and liabilities Decrease (increase) in accounts receivable............................. 12,963,167 (17,656,537) (467,268) (331,199) Increase in accounts receivable holdbacks.............................. (1,028,160) (3,292,919) (77,684) (75,969) Decrease (increase) in unbilled revenue................................ (2,234,835) 1,405,418 (5,599,836) 590,114 Increase in inventory.................... (11,735,826) (5,240,252) -- -- Increase (decrease) in accounts payable................................ (9,707,407) 11,136,272 1,551,305 142,886 Increase in accrued payroll.............. 2,422,918 1,008,791 -- -- (Decrease) increase in accrued liabilities............................ (366,612) 954,362 -- -- Increase in accounts payable holdbacks... 4,325,959 86,262 -- -- ------------ ------------ ----------- --------- Net cash provided (used) by operating activities............................. (2,120,117) (3,933,518) (3,074,708) 658,505 ------------ ------------ ----------- --------- INVESTING ACTIVITIES Purchase of construction equipment and other.................................... (2,403,827) (1,119,183) (180,923) (71,706) Fiber optic strands under construction..... (4,742,562) -- -- -- ------------ ------------ ----------- --------- Net cash used by investing activities...... (7,146,389) (1,119,183) (180,923) (71,706) ------------ ------------ ----------- --------- FINANCING ACTIVITIES Increase in income taxes payable........... 5,171,000 333,000 5,000 -- Net advances to (from) the division........ 4,095,506 4,719,701 3,250,624 586,799 ------------ ------------ ----------- --------- Net cash provided (used) by financing activities............................... 9,266,506 5,052,701 3,255,624 586,799 ------------ ------------ ----------- --------- NET CHANGE IN CASH, END OF PERIOD.......... $ -- $ -- $ -- $ -- ============ ============ =========== ========= Additional amounts paid by the Company and allocated to the Division Interest................................... $ 115,311 $ 677,715 $ 14,496 $ -- Rent....................................... 1,198,360 497,265 55,953 38,670 Income taxes............................... 338,000 5,000 3,000 -- ------------ ------------ ----------- --------- $ 1,651,671 $ 1,179,980 $ 73,449 $ 38,670 ============ ============ =========== =========
See accompanying notes to the divisional financial statements. CF-31 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (ALL FIGURES ARE IN U.S. DOLLARS) 1. DESCRIPTION OF BUSINESS The Telecommunications Division (the "Division") is a division of Ledcor Industries Limited ("LIL") which, in turn, is a wholly-owned subsidiary of Ledcor Inc. The Division is in the business of providing long-haul fiber optic systems, including planning, design, construction and maintenance to telecommunications clients. The Division headquarters are in Vancouver, Canada and its principal geographic areas of operation for these fiber optic systems are Canada and the United States. The accompanying divisional financial statements include the assets, liabilities, revenues and expenses of the Division. Since the Division has been operating as a fully integrated part of the Company, all construction equipment owned by LIL, but used in the Division's operations, was identified by LIL's management and allocated to the Division. In addition, certain assets, liabilities, revenues and expenses have been recorded by the Division using management's best estimates (Note 3). The divisional financial statements have been prepared from the divisional records maintained by LIL and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Division had been operated as a stand-alone company. The Division does not hold any cash or cash equivalents. LIL uses central bank accounts to deposit receipts and make payments on behalf of the Division. These transactions are reflected in the inter-divisional account (Note 8). On May 31, 1998, LIL transferred the net assets (at book value) and the operations of the Division to Worldwide Fiber Inc. (indirectly a wholly-owned subsidiary of Ledcor Inc.). 2. ACCOUNTING POLICIES A) BASIS OF ACCOUNTING These divisional financial statements have been prepared in accordance with Canadian generally accepted accounting principles. B) ACCOUNTING FOR CONTRACTS Revenue and income from construction contracts to develop fiber optic systems are determined on the percentage of completion basis using the cost-to-cost method. Due to the risks inherent in these contracts, management makes a provision for risk using their best estimate. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Provision is made for all anticipated losses as soon as they become evident. Claims for additional contract compensation are not recognized until resolved. C) UNBILLED REVENUE Unbilled revenue comprises costs incurred and margin in excess of billings and advance deposits, representing unperformed work, on uncompleted contracts. CF-32 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 2. ACCOUNTING POLICIES (CONTINUED) D) INVENTORY Inventory consists of fiber optic strands under construction and is valued at the lower of cost or market. Cost is determined using the full absorption method whereby the fiber optic strands have been allocated their proportionate share of materials, labour and overhead incurred. E) FIXED ASSETS Construction equipment, fiber optic strands and other assets are recorded at cost. Fixed assets are depreciated using the following rates and methods: - Construction equipment--hourly usage rates, estimated to depreciate the equipment, over estimated useful lives, ranging from three to five years. - Fiber optic strands, under construction--depreciation, at appropriate rates, will be provided for when the related fiber optic systems are in use. - Other assets-straight--line method over the estimated useful lives of the assets, ranging from three to five years. F) INCOME TAXES These are the financial statements of a Division, and not of a taxable legal entity. However, these financial statements present income taxes as if the Division was a stand-alone taxable legal entity. Current and deferred income taxes have been determined by applying the asset and liability method. The asset and liability method of accounting for income taxes recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. G) TRANSLATION OF FOREIGN CURRENCY The functional currency of the Division is the Canadian dollar. The financial statements are translated into United States dollars. Transactions are translated into United States dollars at rates of exchange at the time of such transactions. At balance sheet date, monetary assets and liabilities are translated at current rates of exchange. Exchange gains and losses are included in the divisional statement of operations. There were no long-term foreign currency denominated monetary items during these periods. 3. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the divisional financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CF-33 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 3. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS (CONTINUED) Unbilled revenue, inventory, fiber optic strands capitalized, and revenue have all been calculated using management's best estimates. Total estimated costs is a component of the percentage of completion calculation which determines revenue recognized, unbilled revenue, inventory and fiber optic strands capitalized. However, there may be unforeseen conditions which could include weather patterns, the continuing deterioration of the Canadian dollar, and the outcome of ongoing negotiations. Such conditions could substantially change the values of the above mentioned items reflected in these financial statements. The impact of these unforeseen conditions cannot be estimated by management as at May 31, 1998. Corporate expenses are allocated from LIL to the Division based on a percentage of the Division's revenue. Management is of the opinion that this allocation percentage is reasonable since all divisions fully absorb LIL's corporate expenses. Management regularly reviews this allocation basis and considers the amounts allocated to fairly represent actual corporate expenses incurred, on behalf of the Division, for the periods reported on. Because the Division is fully integrated, management is unable to estimate the actual corporate expenses that would have been incurred if the Division had operated on a stand-alone basis. Interest is allocated from LIL by charging a floating rate of prime plus 1% on the net cash position of the Division's projects at the end of each month. Management has capitalized interest by capitalizing the portion of interest costs incurred to date which relates to inventory and capital assets. The Division has no additional debt accruing interest which should be capitalized. In addition, LIL has no additional debt which would result in significant interest being allocated and capitalized. 4. TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE HOLDBACKS Trade accounts receivable are presented net of the allowance for doubtful accounts (which was nil for all years reported on since the Division has not experienced any bad debts). Accounts receivable holdbacks represent amounts billed but not yet paid under retainage provisions in the project contracts. These provisions state that holdbacks will be collected upon substantial completion of the projects. 5. UNBILLED REVENUE
AUGUST 31, MAY 31, ------------------------- 1998 1997 1996 ----------- ----------- ----------- Costs and billings on uncompleted contracts included in the divisional financial statements are as follows: Costs incurred on uncompleted contracts............. $45,321,566 $49,184,985 $ 5,768,543 Margin.............................................. 9,312,322 8,822,667 1,604,399 Customer advance deposits applied against contracts......................................... (25,259,100) (7,646,685) -- Less billings to date............................... (23,531,943) (46,752,957) (2,359,514) ----------- ----------- ----------- $ 5,842,845 $ 3,608,010 $ 5,013,428 =========== =========== ===========
CF-34 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 6. FIXED ASSETS
AUGUST 31, MAY 31, ---------------------- 1998 1997 1996 ---------- ---------- --------- Construction equipment................................... $3,796,102 $1,869,048 $802,548 Fiber optic strands, under construction.................. 4,742,562 -- -- Other.................................................... 529,456 52,683 -- ---------- ---------- -------- 9,068,120 1,921,731 802,548 Less accumulated depreciation............................ 767,285 450,688 338,897 ---------- ---------- -------- $8,300,835 $1,471,043 $463,651 ========== ========== ========
7. DEFERRED TAX LIABILITIES The components of the deferred tax liabilities are as follows:
AUGUST 31, MAY 31, ----------------------- 1998 1997 1996 ---------- ---------- ---------- Deferred tax assets Accounts payable holdback............................ $1,986,000 $ 39,000 $ -- Loss carryforward.................................... -- -- 1,113,000 ---------- ---------- ---------- Gross deferred tax assets............................ 1,986,000 39,000 1,113,000 ---------- ---------- ---------- Deferred tax liabilities Accounts receivable holdback......................... 2,014,000 1,551,000 69,000 Unbilled revenue..................................... 2,629,000 1,623,000 2,256,000 Inter-divisional account loss carryforward........... -- 1,291,000 -- ---------- ---------- ---------- Gross deferred tax liabilities....................... 4,643,000 4,465,000 2,325,000 ---------- ---------- ---------- $2,657,000 $4,426,000 $1,212,000 ========== ========== ==========
Reconciliation of deferred tax liabilities:
AUGUST 31, MAY 31, ----------------------- 1998 1997 1996 ---------- ---------- ---------- Deferred tax liabilities, beginning of period.......... $4,426,000 $1,212,000 $ 536,000 Deferred tax (recovery) expense........................ (1,600,000) 3,282,000 681,000 Foreign exchange gain.................................. (169,000) (68,000) (5,000) ---------- ---------- ---------- Deferred tax liabilities, end of period................ $2,657,000 $4,426,000 $1,212,000 ========== ========== ==========
The Division's provision for deferred taxes approximates the amounts computed by applying the Canadian and United States statutory rates to income before taxes. There are no permanent differences or other reconciling items that would result in an effective tax rate which is different from the statutory rates applied. CF-35 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 8. INTERDIVISIONAL ACCOUNT This account comprises the balance due to other divisions in connection with working capital advances. The balance due has no repayment terms and interest is allocated, from LIL, on the basis as described in Note 3. 9. COMMITMENTS A) FIBER OPTIC CONSTRUCTION PROJECT In 1996, the Division commenced construction of a Canadian-U.S. fiber optic telecommunications system (the Canadian FOTS) that is scheduled for completion in early 1999. B) FONOROLA CONTRACT In a variety of contracts, commencing in April, 1997, the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. C) BELL CANADA CONTRACT In February, 1998, the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. D) METRONET CONTRACT Subsequent to period end (September, 1998), the Division sold fiber optic strands of the Canadian FOTS. The Division has a commitment to complete construction of the fiber optic strands. E) LEASE COMMITMENTS The Division is committed under non-cancellable leases for equipment for the period ending April, 1999 in the amount of $826,271. The Division has an option to withdraw from all leases in April, 1999 and therefore has no commitments beyond that date. Lease expenses were the following: Nine months ending May 31, 1998............................. $1,198,360 Year ended August 31, 1997.................................. 497,265 Five months ended August 31, 1996........................... 55,953 Year ended March 31, 1996................................... 38,670
CF-36 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 10. SIGNIFICANT CONCENTRATION OF CREDIT AND SUPPLY RISK The following customers/supplier have accounted individually for 10% or more of the Division's total revenues/contract costs in one or more periods, as follows:
NINE MONTHS ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED MAY 31, 1998 AUGUST 31 1997 AUGUST 31, 1996 MARCH 31, 1996 ------------------- --------------- ------------------- --------------- Customers FONOROLA........... 62% 64% 51% 91% Bell Canada........ 28% -- -- -- Alaska Filter Star............. -- 25% -- -- Sprint Canada...... -- -- 24% -- AT&T Canada........ -- -- 24% -- Supplier Pirelli Cables..... 13% 27% 79% --
The Division also had significant accounts receivable from FONOROLAwhich accounted for the following percentages of trade accounts receivable:
MAY 31, 1998 AUGUST 31, 1997 AUGUST 31, 1996 ------------- ---------------- ---------------- FONOROLA................. 39% 52% 94%
The Division is receiving cash from this customer on a consistent basis and management expects to collect on all other accounts receivables. Therefore no provision for bad debts has been recorded for the reported periods. Based on this significant customer's creditworthiness, the Division has not required it to provide collateral against these receivables. There were no significant accounts payable to significant suppliers at the balance sheet dates. However, since significant purchases are made from Pirelli Cables, should this supplier fail to honor its contract and the Division was not able to find a substitute supplier, the Division would not be able to meet its commitments to complete the construction of the Canadian FOTS, as noted in 9(a). 11. FINANCIAL INSTRUMENTS Financial instruments consist of recorded accounts receivables (and other like accounts) which will result in future cash receipts, as well as accounts payables, (and other like accounts) that will result in future cash outlays. The carrying values of the financial instruments of the Division as at May 31, 1998, August 31, 1997 and August 31, 1996 were approximately equal to their estimated fair market values at these dates, due to the short-term nature of these instruments. Subjective judgment and uncertainties arise in the determination of estimated fair market values. Accordingly, the aggregate fair value should not be interpreted as being realizable in an immediate settlement of the instruments. CF-37 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 12. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION The Division currently operates in one industry segment (fiber optic installations) and in two geographic segments (the Canadian FOTS is being constructed in Canada and the U.S.). Revenue and total identifiable assets for these geographic segments is as follows:
CANADA U.S. --------------------------------- --------------------------------- REVENUE AMOUNT PERCENTAGE OF TOTAL AMOUNT PERCENTAGE OF TOTAL - ------- ----------- ------------------- ----------- ------------------- May 31, 1998........... $35,826,795 66% $18,807,093 34% August 31, 1997........ $42,611,672 73% $15,395,980 27% August 31, 1996........ $ 7,372,942 100% $ -- -- March 31, 1996......... $ 3,823,790 100% $ -- --
CANADA U.S. TOTAL IDENTIFIABLE --------------------------------- --------------------------------- ASSETS AMOUNT PERCENTAGE OF TOTAL AMOUNT PERCENTAGE OF TOTAL - ----------------------- ----------- ------------------- ----------- ------------------- May 31, 1998........... $29,204,452 71% $11,928,580 29% August 31, 1997........ $25,464,071 79% $ 6,803,515 21% August 31, 1996........ $ 6,475,904 100% $ -- --
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after, January 1, 2000 and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Division's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Division, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 14. SUBSEQUENT EVENTS A) AGREEMENTS WITH WFI Effective May 31 1998, LIL entered into a series of agreements to sell the equipment, fiber optic strands and certain other assets related to the business of Worldwide Fiber Inc. (an indirect wholly-owned subsidiary of Ledcor Inc.) ("WFI"). In addition, WFI was granted a licence by LIL to use certain processes related to the business. This licence agreement is for an initial term of ten years and will be renewable annually upon completion of the initial term. As part of this transaction, LIL retained all existing construction contracts related to the business. This transaction was between entities under common control and has been accounted for using the carrying amounts recorded in LIL's accounts. As consideration for the transaction, LIL was issued 200 Class A shares by WFI. CF-38 LEDCOR INDUSTRIES LIMITED--TELECOMMUNICATIONS DIVISION NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS (CONTINUED) (ALL FIGURES ARE IN U.S. DOLLARS) 14. SUBSEQUENT EVENTS (CONTINUED) B) DISPOSITION OF FIBER ASSETS As part of these agreements WFI undertook to purchase from LIL certain fiber optic system assets, located in both Canada and the U.S., which were not completed at May 31, 1998. These assets will be purchased by WFI upon their completion, which is estimated to be late 1998 or early 1999. As consideration, WFI will issue a total of 19,999,700 Class A common shares to LIL. These transactions are between entities under common control and, will be accounted for at their original construction costs. C) CONSTRUCTION SERVICES WFI has agreed to provide construction services to LIL to complete certain construction contracts for fiber optic strands and related facilities to third party customers. CF-39 AUDITORS' REPORT TO THE DIRECTORS AND SHAREHOLDERS OF GLOBENET COMMUNICATIONS GROUP LIMITED We have audited the accompanying consolidated balance sheets of GLOBENET COMMUNICATIONS GROUP LIMITED as at December 31, 1999 and 1998 and the consolidated statements of shareholders' equity, operations and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of GLOBENET COMMUNICATIONS GROUP LIMITED as at December 31, 1999 and 1998 and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997 in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP CHARTERED ACCOUNTANTS Toronto, Canada February 16, 2000 CF-40 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 $ $ --------- --------- ASSETS CURRENT ASSETS Cash........................................................ -- 3,030 Restricted cash (note 3).................................... 79,998 -- Accounts receivable (net of allowance of $224; 1998--$80)... 2,096 1,847 Other receivables........................................... 150 718 Due from related party (note 4)............................. -- 1,363 Prepaid expenses and deposits............................... 1,632 338 -------- -------- 83,876 7,296 Restricted cash (note 3).................................... 448,399 -- Fixed assets (note 5)....................................... 49,148 26,182 Construction in progress (note 6)........................... 98,062 -- Other assets (note 7)....................................... 25,847 1,411 Equity accounted for investments............................ -- 21,371 -------- -------- 705,332 56,260 ======== ======== LIABILITIES CURRENT LIABILITIES Accounts payable (note 8)................................... 36,179 3,871 Accrued liabilities (note 8)................................ 21,117 4,971 Current portion of long-term debt (note 9).................. -- 3,000 -------- -------- 57,296 11,842 LONG-TERM DEBT (note 9)..................................... 400,000 35,019 DEFERRED REVENUE (note 10).................................. 6,455 2,695 -------- -------- 463,751 49,556 -------- -------- SHAREHOLDERS' EQUITY SHARE CAPITAL (notes 12 and 13) Class A shares, 100 shares authorized, par value $1.50 each nil (1998--100) shares issued and outstanding............. -- -- Class B shares, 2,000 shares authorized, par value $1.50 each 1,000 (1998--nil) shares issued and outstanding 2 -- Common shares, 24,000,000 authorized, par value $1.50 each 17,043,900 (1998--3,515,927) shares issued and outstanding............................................... 25,566 5,274 ADDITIONAL PAID-IN CAPITAL.................................. 246,866 16,377 DEFICIT..................................................... (30,853) (14,947) -------- -------- 241,581 6,704 -------- -------- 705,332 56,260 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. CF-41 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PAR PAR TOTAL VALUE OF VALUE OF ADDITIONAL SHARE- CLASS A CLASS B CLASS B COMMON COMMON PAID-IN HOLDERS' SHARES SHARES SHARES SHARES SHARES CAPITAL DEFICIT EQUITY -------- -------- -------- ---------- -------- ---------- -------- --------- December 31, 1996.................... -- -- $-- 3,487,916 $ 5,232 $ 16,200 $ (4,707) $ 16,725 Shares options exercised............. -- -- -- 28,011 42 42 -- 84 Share options issued................. -- -- -- -- -- 135 -- 135 Shares issued........................ 100 -- -- -- -- -- -- -- Net loss for the year................ -- -- -- -- -- -- (5,296) (5,296) ---- ----- --- ---------- ------- -------- -------- -------- December 31, 1997.................... 100 -- -- 3,515,927 5,274 16,377 (10,003) 11,648 Net loss for the year................ -- -- -- -- -- -- (4,944) (4,944) ---- ----- --- ---------- ------- -------- -------- -------- December 31, 1998.................... 100 -- -- 3,515,927 5,274 16,377 (14,947) 6,704 Compensatory share options........... -- -- -- -- -- 8,758 -- 8,758 Deferred compensation................ -- -- -- -- -- (4,551) -- (4,551) Share options exercised.............. -- -- -- 129,041 194 754 -- 948 Shares issued in private equity financing.......................... -- -- -- 13,263,646 19,895 250,683 -- 270,578 Share issue costs.................... -- -- -- -- -- (11,665) -- (11,665) Shares issued........................ -- 1,000 2 -- -- -- -- 2 Shares issued on conversion of subordinated debt and exercise of warrants........................... -- -- -- 1,635,286 2,453 14,860 -- 17,313 Shares purchased and cancelled....... (100 ) -- -- (1,500,000) (2,250) (28,350) -- (30,600) Net loss for the year................ -- -- -- -- -- -- (15,906) (15,906) ---- ----- --- ---------- ------- -------- -------- -------- December 31, 1999.................... -- 1,000 $ 2 17,043,900 $25,566 $246,866 $(30,853) $241,581 ==== ===== === ========== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. CF-42 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 1997 $ $ $ -------- -------- -------- REVENUES Telecommunications services................................. 26,033 24,940 4,962 IRU capacity (note 10)...................................... 315 1,784 -- ------- ------ ------ 26,348 26,724 4,962 ------- ------ ------ EXPENSES Carrier charges............................................. 10,989 15,129 3,559 Cost of IRU capacity........................................ -- 547 -- General and administrative expenses (notes 4 and 15)........ 19,311 9,328 4,961 Amortization of fixed assets................................ 1,854 1,502 429 ------- ------ ------ 32,154 26,506 8,949 ------- ------ ------ OPERATING LOSS.............................................. (5,806) 218 (3,987) Interest on long-term debt.................................. 20,427 3,863 1,055 Accrued contingent interest (note 9)........................ 538 960 382 Interest income............................................. (12,588) (170) (193) Loss relating to extinguishment of debt (note 9)............ 809 -- -- ------- ------ ------ LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS................................. (14,992) (4,435) (5,231) Provision for income taxes.................................. (141) (36) (53) ------- ------ ------ LOSS BEFORE MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS............................................... (15,133) (4,471) (5,284) Minority interest (note 11)................................. -- 204 249 Loss from equity accounted for investments (note 11)........ (773) (677) (261) ------- ------ ------ NET LOSS FOR THE YEAR....................................... (15,906) (4,944) (5,296) ======= ====== ====== BASIC AND FULLY DILUTED LOSS PER COMMON SHARE (note 14)..... (1.60) (1.41) (1.52) ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements. CF-43 GLOBENET COMMUNICATIONS GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 1997 $ $ $ -------- -------- -------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year....................................... (15,906) (4,944) (5,296) Items not involving cash Amortization of fixed assets.............................. 1,854 1,502 429 Write-down of other assets................................ -- 201 -- Amortization of other assets.............................. 1,949 321 305 Loss related to extinguishment of debt.................... 809 -- -- Minority interest......................................... -- (204) (249) Loss from equity accounted for investments................ 773 677 261 Accrued contingent interest............................... 538 960 382 Gain on granting of indefeasible rights of use and loss on sale of capital assets.................................. -- (970) -- Compensatory share options................................ 4,207 -- -- Net change in non-cash operating items Accounts receivable....................................... (249) (577) (1,270) Other receivables......................................... 568 970 (1,688) Note receivable........................................... (32) -- -- Prepaid expenses and deposits............................. (1,294) (138) 32 Accounts payable.......................................... 1,265 (6,369) 9,669 Accrued liabilities....................................... 13,778 3,908 959 Deferred revenue.......................................... 3,760 1,174 1,521 Recoverable duties........................................ -- -- 392 -------- ------ ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............. 12,020 (3,489) 5,447 -------- ------ ------- FINANCING ACTIVITIES Issuance of common shares................................... 259,861 -- 84 Purchase and cancellation of common shares, net of fees..... (30,600) -- -- Proceeds from issuance of long-term debt.................... 400,500 9,350 29,740 Repayment of long-term debt................................. (23,677) (2,413) -- Deferred financing costs.................................... (26,514) -- (1,472) Other assets................................................ (653) -- -- Loans provided by minority shareholders..................... -- -- 807 -------- ------ ------- CASH PROVIDED BY FINANCING ACTIVITIES....................... 578,917 6,937 29,159 -------- ------ ------- INVESTING ACTIVITIES Restricted cash............................................. (528,397) -- 2,015 Purchase of fixed assets.................................... (4,139) (1,791) (22,662) Construction in progress (note 6)........................... (62,799) -- -- Granting of indefeasible rights of use and proceeds on sale of capital assets......................................... -- 1,596 -- Change in other assets...................................... 5 (218) (2) Due from related party...................................... 1,363 (1,363) -- Proceeds from sale of equity accounted for investment....... -- 410 -- Advances to equity accounted for investee................... -- (411) (22,479) -------- ------ ------- CASH (USED IN) INVESTING ACTIVITIES......................... (593,967) (1,777) (43,128) -------- ------ ------- INCREASE (DECREASE) IN CASH FOR THE YEAR.................... (3,030) 1,671 (8,522) CASH--BEGINNING OF YEAR..................................... 3,030 1,359 9,881 -------- ------ ------- CASH--END OF YEAR........................................... -- 3,030 1,359 ======== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. CF-44 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1 NATURE OF OPERATIONS GlobeNet Communications Group Limited provides international telecommunications services to both residential and commercial customers and is a provider of telecommunications capacity. The Company is currently developing a fibre optic submarine cable system called Atlantica-1 that will link Bermuda, North and South America and offer capacity between major cities in the United States, Bermuda, Brazil, Venezuela and Argentina. Atlantica-1 is currently being constructed. In November 1997, the Company deployed a fibre optic submarine cable system which connects Bermuda and the United States ("BUS-1"). The Company provides international telecommunications services to both residential and commercial customers in Bermuda through a subsidiary company, TeleBermuda International Limited ("TBI") through the BUS-1. On January 10, 1997, TBI was granted its public telecommunications service licence in Bermuda under the provisions of the Telecommunications Act, 1986 and the Public Telecommunication Service (Licence) Regulations, 1988 for a five-year term and began commercial operations in May 1997. TBI has an interconnection agreement with the Bermuda Telephone Company ("BTC"), the domestic carrier in Bermuda. No consideration was paid by the Company in relation to these agreements. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). These principles conform in all material respects with accounting principles generally accepted in the United States ("United States GAAP") except as described in note 19. The following is a summary of the significant accounting policies followed in the preparation of these consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiary companies. Intercompany accounts and transactions have been eliminated on consolidation. USE OF SIGNIFICANT ACCOUNTING ESTIMATES The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could significantly differ from those estimates. REVENUE, DEFERRED REVENUE AND COST RECOGNITION REVENUE: The Company provides telecommunication services and the granting or leasing of indefeasible rights of use ("IRU") interests in its telecommunications infrastructure. The Company records as revenue the amount of telecommunications services rendered, as measured primarily by the minutes of traffic processed, after deducting an estimate of the traffic for which revenue will not be collected. Historical deductions have not been material. Service discounts and CF-45 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) incentives are accounted for as a reduction of revenue when granted, or where provided in relation to a service contract, rateably over the contract period. The Company has entered into certain IRU agreements. Such agreements are accounted for as either service or lease transactions. Those IRU agreements that meet all of the following characteristics have been accounted for as leases: (a) The purchaser has exclusive right to the purchased capacity for a specified period, generally the estimated useful life of the system, which is 25 years. (b) The Company cannot sell or otherwise use any of the purchaser's unused capacity for the term of the agreement. (c) The purchased capacity is physically limited to discrete channels on the purchaser's own dedicated circuits at a specified amount of capacity, which cannot be exceeded. The specific circuits are agreed to by the parties. (d) The Company has no right to move the purchased capacity to another discrete channel from the purchaser's dedicated circuits without the purchaser's permission. IRU agreements that meet these criteria are accounted for as lease transactions. If the transactions meet the sales type lease criteria, including those related to collectibility of the payments and the absence of any important uncertainties surrounding unreimbursable costs yet to be incurred by the Company, then revenue is recognized in the period that the IRUs are transferred and the capacity is available for service. If these criteria are not met, the transactions are accounted for as operating leases and revenue is recognized over the term of the lease. To date, the Company has not entered into any IRU agreements that are considered to be service transactions. Revenue from service transactions would be recognized as earned over the term of the agreement. In addition, we note that the accounting for sales of capacity is evolving, and is currently under consideration by accounting standard setters. Any change in accounting literature may affect the timing and method of recognition of these revenues and related costs. Revenues from private line services are recognized as earned. DEFERRED REVENUE: Rent from the operating leases of capacity in the telecommunications infrastructure to third party carriers is deferred and recognized over the term of the lease on a straight-line basis. Revenue from the sale of prepaid calling cards is recognized as the services are provided. COST: Carrier charges are comprised primarily of local access charges and international termination costs. These costs are recognized based on traffic volume. CF-46 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FIXED ASSETS Fixed assets are recorded at cost less accumulated amortization. Amortization commences when an asset is available for use, and is calculated in a systematic manner based on the expected useful lives of the assets as follows:
ASSET CATEGORY BASIS RATE - --------------------------------------- ------------------------------- ------------------------------- Fibre optic submarine cable straight-line 25 years Network and telecommunications straight-line 10 years equipment Leasehold improvements straight-line term of the lease Computer equipment straight-line 3 years Furniture and office equipment diminishing balance 20% per year Software straight-line 5 years
CONSTRUCTION IN PROGRESS Construction in progress includes direct expenditures for the construction of the Company's Atlantica-1 project and is stated at cost. Costs are capitalized once it is probable that the fibre optic cable system will be constructed, otherwise they are expensed as incurred. Capitalized costs include costs incurred under the construction contract, advisory, consulting and legal fees and interest. DEFERRED FINANCING COSTS Deferred financing costs represent debt issuance costs, which are amortized over the estimated term of the related debt. INVESTMENTS The Company's investments are accounted for using the equity method. FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated into U.S. dollars at the average rates of exchange prevailing at the dates of the respective transactions. Transactions are translated into U.S. dollars at the exchange rates in effect at the time the transactions occur. Exchange gains and losses arising on translation are included in the operating results for the year. Assets and liabilities of non-Bermudian subsidiaries where the functional currency is other than the U.S. dollar are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. CF-47 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS The fair value of financial assets and liabilities represents the amount at which these instruments could be exchanged in an arm's length transaction between willing parties. As at December 31, 1999, the carrying amounts of financial assets and liabilities in the consolidated balance sheet approximate their fair values due to the short-term nature of these instruments. The reported amount of fixed rate long-term debt instruments is estimated to approximate fair value as actual rates are consistent with rates estimated to be currently available for debt of similar terms and remaining maturities. In addition, the Company has entered into an interest rate cap agreement to modify the interest characteristics of part of its outstanding long-term debt. This agreement involves an exchange of amounts based on a fixed interest rate for amounts based on a variable interest rate whenever the interest rate exceeds the cap specified in the agreement. The premium paid by the Company upon entering in the agreement is amortized over the term of the agreement and recognized as an adjustment of interest expense related to the debt. The Company does not use derivative financial instruments for speculative trading purposes. As of December 31, 1999, the carrying value approximates fair value. INCOME TAXES Under current Bermuda laws, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda, pursuant to the Exempted Undertakings Tax Protection Act 1966, which exempts the Company from any such tax until March 28, 2016. Subsidiaries in other jurisdictions are subject to local taxes. STOCK BASED COMPENSATION The Company does not recognize compensation cost at the time options are granted unless the exercise price is less than the market price of the stock on the measurement date. CF-48 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3 RESTRICTED CASH Components of restricted cash are:
1999 1998 --------- -------- $ $ Cash........................................................ 6,628 -- Cash equivalents maturing within 90 days: Commercial paper.......................................... 513,703 -- Term deposit.............................................. 8,066 -- -------- ---- 528,397 -- Less: Current portion....................................... 79,998 -- -------- ---- 448,399 -- ======== ====
The Company's use of cash is generally restricted under the terms of the Credit Facility to operating and capital expenditures related to the Atlantica-1 project and to other telecommunications activities. The investment of the cash is restricted to investments with a minimum credit rating of A-1 by Standard and Poor's or P-1 by Moody's. 4 RELATED PARTY TRANSACTIONS a) On August 26, 1998, TBI loaned CAD$2,000 ($1,292) to the Chairman and Chief Executive Officer of the Company. This loan and all outstanding interest thereon were repaid in full in January 1999. b) In September 1997, the Company entered into a service agreement with First Bermuda Securities Ltd., of which a Director of the Company is the Chief Executive Officer. Under this agreement, First Bermuda Securities Ltd. provides the Company with various financial and business advisory services. Payments made to First Bermuda Securities in 1999 were $81 (1998--$125; 1997--$145) and are included in general and administrative expenses. CF-49 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 5 FIXED ASSETS
1999 ----------------------------------- ACCUMULATED COST AMORTIZATION NET $ $ $ -------- ------------- -------- Land...................................................... 2,611 -- 2,611 Fibre optic submarine cable............................... 44,459 3,756 40,703 Network and telecommunications equipment.................. 5,328 1,037 4,291 Leasehold improvements.................................... 1,154 226 928 Computer equipment........................................ 596 346 250 Furniture and office equipment............................ 266 67 199 Software.................................................. 240 74 166 ------- ----- ------- 54,654 5,506 49,148 ======= ===== =======
1998 ----------------------------------- ACCUMULATED COST AMORTIZATION NET $ $ $ -------- ------------- -------- Fibre optic submarine cable............................... 21,881 971 20,910 Network and telecommunications equipment.................. 4,415 549 3,866 Leasehold improvements.................................... 944 140 804 Computer equipment........................................ 470 167 303 Furniture and office equipment............................ 140 38 102 Software.................................................. 224 27 197 ------- ------ ------- 28,074 1,892 26,182 ======= ====== =======
6 CONSTRUCTION IN PROGRESS The Company is currently constructing a fibre optic submarine cable system called Atlantica-1 linking Bermuda, North and South America. As of December 31, 1999, costs of $98,062 have been capitalized and included in this amount is capitalized interest of $4,220 (1998--$nil). 7 OTHER ASSETS
1999 1998 $ $ -------- -------- Deferred financing costs, net of accumulated amortization of $1,936 (1998--$626)....................................... 24,743 981 Other....................................................... 1,104 430 ------ ----- 25,847 1,411 ====== =====
CF-50 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable are comprised as follows:
1999 1998 $ $ -------- -------- Atlantica-1 payables........................................ 31,043 -- Trade payables.............................................. 1,873 777 Foreign carrier settlement payables......................... 3,263 3,037 Other payables.............................................. -- 57 ------- ------ 36,179 3,871 ======= ======
ACCRUED LIABILITIES ARE COMPRISED AS FOLLOWS:
1999 1998 $ $ -------- -------- Interest payable............................................ 18,266 2,002 Foreign carrier accrual..................................... 480 880 Equalization payment accrual................................ 470 668 Other accruals.............................................. 1,901 1,421 ------- ------ 21,117 4,971 ======= ======
Foreign carrier settlement payables and foreign carrier accrual represent costs for foreign traffic payable to other carriers. 9 LONG-TERM DEBT
1999 1998 $ $ --------- -------- Term loan (a)............................................... -- 21,990 Operating credit facility (a)............................... -- 1,687 Subordinated debentures and retractable warrants (a)........ -- 13,000 Accrued contingent interest (a)............................. -- 1,342 Senior notes (b)............................................ 300,000 -- Bank credit facility (c).................................... 100,000 -- -------- ------- 400,000 38,019 Less: Current portion....................................... -- 3,000 -------- ------- 400,000 35,019 ======== =======
(a) On July 14, 1999, the term loan, operating credit facility and certain accrued interest on the subordinated debentures were repaid. As well, all of the remaining obligations to the subordinated debentureholders were retired when the subordinated debentureholders elected to exercise their CF-51 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 9 LONG-TERM DEBT (CONTINUED) warrants and convert the principal and remaining accrued interest on their subordinated debt into 1,635,286 common shares. In connection with the foregoing, deferred financing costs of $809 were written off as a result of the debt extinguishment. (b) On July 14, 1999, the Company issued debt in the principal amount of $300,000 in the form of 13% senior notes maturing July 15, 2007. Interest on these notes is payable semi-annually in arrears commencing January 15, 2000. The notes are unsecured. (c) On July 14, 1999, the Company secured a bank credit facility ("Credit Facility") of up to $400,000, consisting of various term facilities totalling $390,000 and a revolving credit facility of $10,000. In addition, under the Credit Facility, the Company may also request an additional facility of up to $50,000 subject to lender approval and other restrictions. The Credit Facility matures in 2005. Interest rates on the Credit Facility range from LIBOR plus 3.5% to LIBOR plus 4.0% and availability of funds under the Credit Facility is subject to certain terms and conditions. Commitment fees for the Credit Facility were $2,541. Substantially all of the assets of GlobeNet Communications Holdings Ltd. and of its present and future direct and indirect subsidiaries have been pledged as collateral for the Credit Facility. GlobeNet Communications Holdings Ltd. is a wholly owned subsidiary of the Company. In addition, a third party supplier has provided an initial guarantee subject to certain conditions and adjustments of up to $100,000 for one of the term facilities. On December 22, 1999, the Company entered into an interest rate cap transaction effectively fixing the interest rate on $50,000 of the Credit Facility at 7.0% for a three-year term. As at December 31, 1999 the unused facility was $300,000 and the average rate of interest during 1999 was 9.7%. The principal repayments required in the next five years and thereafter in respect of the senior notes and the Credit Facility are as follows:
$ --------- Fiscal year 2002............................................ 1,000 2003........................................................ 1,000 2004........................................................ 1,000 2005........................................................ 97,000 2006........................................................ -- Thereafter.................................................. 300,000 -------- 400,000 ========
CF-52 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 10 GRANTING OF INDEFEASIBLE RIGHTS OF USE AND LEASING OF THE FIBRE OPTIC SUBMARINE CABLE a) During 1998, the Company granted indefeasible rights of use ("IRUs") in its fibre optic submarine cable to certain third party carriers for a period of 25 years for $1,521. The costs recognized with the granting of the IRUs are calculated as total capacity granted in relation to the total cost of the activated fibre optic submarine cable times the total cost of the fibre optic submarine cable system. In addition, under these IRU agreements, the third party carrier is responsible for paying its pro rata share of restoration costs. These costs are accounted for as expenses as they are incurred, less a recovery of expense being recorded to reflect the required pro rata reimbursement from the IRU customer. b) The Company has entered into an agreement to provide capacity in its fibre optic submarine cable to a third party. This arrangement is being accounted for as an operating lease. The term of the lease is for the greater of 25 years or the operational life of the fibre optic submarine cable. If the operational life is less than 10 years, the Company must provide a refund on a pro rata basis for each year short of the 10-year period. For the first four years of the agreement, the Company is responsible for maintenance and operating costs, thereafter the lessee will pay a monthly charge for operating and maintenance costs. The total rental payment for this agreement was $8,000, of which $4,000 was paid in 1999 and $3,000 in 1998. The remaining payment of $1,000 is due on September 24, 2000. Lease income is being recognized on a straight-line basis over the 25-year term. During 1999, lease income of $315 (1998--$263; 1997--$nil) was recognized. Under this agreement, the third party has the right to enter into a second lease of capacity in the fibre optic submarine cable commencing September 24, 2001. The consideration for the second lease will be $4,000 payable upon activation of the second circuit. If the third party elects not to proceed with the second lease a penalty of $250 is payable to the Company. 11 MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS ROCOM TBI LIMITED During 1998, the Company sold its interest in Rocom TBI Limited, a telecommunications services joint venture in the United Kingdom, for total consideration of $820 (L500), of which $410 (L250) was received in cash and a remaining receivable of $410 (L250) is included in other assets. TELEBERMUDA INTERNATIONAL L.L.C. On November 1, 1999, The Company indirectly acquired the 80% interest in TeleBermuda International L.L.C. ("TBI L.L.C.") that it did not previously own for nominal consideration pursuant to a Put and Call Agreement entered into in May 1996. TBI L.L.C. holds the landing license for the Company's Bermuda to United States cable system ("BUS-1") in the United States, a 50% interest in the BUS-1 and a 100% interest in the U.S. landing plant. From May 1996 to November 1, 1999, the Company's 20% investment in TBI L.L.C. was accounted for using the equity method. Under the equity method, the Company reported 100% of the losses of TBI L.L.C. as the Company had certain rights and obligations related to the investment, including the requirement to fund operations and capital expenditures. CF-53 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 11 MINORITY INTEREST AND EQUITY ACCOUNTED FOR INVESTMENTS (CONTINUED) Summarized financial information for TBI L.L.C. at and for the year ended December 31, 1998 is as follows:
DECEMBER 31, 1998 $ -------------- BALANCE SHEET Current asset............................................... 2 Non-current asset........................................... 21,432 Current liabilities......................................... 62 Non-current liabilities..................................... 22,803 STATEMENT OF OPERATIONS Revenues.................................................... -- Expenses.................................................... 943 Net loss from TBI L.L.C..................................... (943)
12 SHARE CAPITAL a) Authorized The Board of Directors has the authority to issue common shares, securities convertible into common shares or grant options, up to a maximum of 20% of the fully diluted shares of the Company pursuant to a general mandate of the shareholders. This mandate will expire at the next annual meeting of the shareholders, unless it is re-approved at that meeting. During 1999, the authorized common shares of the Company were increased by 10,499,900 effective June 15, 1999 and 6,500,200 effective July 12, 1999 to an aggregate total of 24,000,000 common shares. In addition, the Company bye-laws authorized the creation of 100 Class B shares. On July 12, 1999, the authorized Class B shares of the Company were increased by 1,900. Class B restricting voting shares are entitled to a maximum of $1.50 par value on any liquidation of the Company. The holders of these shares are the only shareholders permitted to hold common shares representing more than 35% of the aggregate issued share capital of the Company at any time or shares representing more than 35% of the votes attaching to all issued shares of the Company at any time. Approval of the holders of the majority of Class B share is required before changes may be made to any of the Company's governing documents and certain specific transactions. b) Capital transactions i) On October 3, 1997, 100 common shares were converted into Class A shares. On July 14, 1999, the Company purchased and cancelled 100 Class A shares at their par value of $1.50 per share. ii) On July 14, 1999, the Company issued for cash 1000 Class B shares at their par value of $1.50. CF-54 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 12 SHARE CAPITAL (CONTINUED) iii) On July 14, 1999, the Company issued 13,263,646 common shares for cash at $20.40 per share and aggregate proceeds of $258,913, net of expenses related to the offering of $11,665. On the same date, the subordinated debenture holders elected to exercise their warrants and convert the principal and remaining accrued interest at their carrying amounts into 1,635,286 shares aggregating $17,313. On August 9, 1999, the Company purchased for cancellation 1,500,000 common shares at $20.40 per share for a total cost of $30,600. Commissions of $450 were paid to First Bermuda Securities Ltd., of which a Director of the Company is the Chief Executive Officer. 13 COMMON SHARE OPTIONS The Company, awards options to employees, officers and directors of the Company under the terms of the 1997 and 1998 Share Option and Incentive Plans. In addition, the Board has the authority to grant options outside of these plans under separate stock option agreements. A summary of the outstanding common share purchase option activities is as follows:
1999 1998 1997 --------------------- --------------------- --------------------- COMMON WEIGHTED COMMON WEIGHTED COMMON WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE PURCHASE EXERCISE PURCHASE EXERCISE PURCHASE EXERCISE OPTIONS PRICE $ OPTIONS PRICE $ OPTIONS PRICE $ --------- --------- --------- --------- --------- --------- Options outstanding at beginning of year............ 543,489 5.15 556,489 5.22 352,500 3.21 Options granted..................................... 1,277,019 13.14 -- -- 232,000 8.00 Options exercised................................... (129,041) 7.37 -- -- (28,011) 3.00 Options forfeited................................... (11,670) 13.06 (13,000) 8.00 -- -- --------- ----- ------- ---- ------- ---- Options outstanding at year-end..................... 1,679,797 11.00 543,489 5.15 556,489 5.22 ========= ===== ======= ==== ======= ==== Options exercisable at year-end..................... 844,462 8.93 440,309 4.49 374,489 3.87 ========= ===== ======= ==== ======= ====
These options expire on various dates from 2001 to 2009 and generally vest over a three-year period. CF-55 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 13 COMMON SHARE OPTIONS (CONTINUED) The following table summarizes information concerning outstanding and exercisable options at December 31, 1999:
WEIGHTED AVERAGE REMAINING CONTRACTUAL NUMBER OF SHARE EXERCISE LIFE (YEARS) OF OPTIONS NUMBER OF OPTIONS OPTIONS EXERCISABLE AT PRICE $ OUTSTANDING OUTSTANDING DECEMBER 31, 1999 - ------- ----------------------- ------------------ ---------------------- 0.01 6.09 45,000 45,000 1.00 1.41 26,863 26,863 3.00 2.03 180,000 180,000 8.00 8.00 153,275 102,942 8.50 2.77 50,000 50,000 9.00 9.20 760,640 280,638 19.00 9.56 35,000 30,000 20.40 8.65 429,019 129,019 --------- ------- 1,679,797 844,462 ========= =======
i) On December 18, 1998 and May 21, 1999, the Board of Directors issued 263,000 options and 5,000 options, respectively to employees and certain officers and directors at an exercise price of $9.00 per option, vesting over a three-year period, under the 1998 Share Option and Incentive Plan. In July 1999, when these options were approved by the shareholders, the market price of these options was $20.40. The difference between the market price and the exercise price has been reflected as deferred compensation in the statement of shareholders' equity and is being amortized over the vesting period as at December 31, 1999. Compensation expense in the amount of $1,794 has been recorded in the financial statements. On July 9, 1999, 35,000 options, with an exercise price of $19.00 with a ten-year term were granted to certain directors. The market price of these options on the measurement date was $20.40. The vesting of these options occurred on July 14, 1999. The difference between the exercise price and market price at the time of vesting amounted to $49 and has been reflected as compensation expense. On April 12, 1999, the Company granted 540,000 options at an exercise price of $9.00 with a ten-year term to certain officers and directors. These options vest in three separate tranches based upon the Company meeting certain milestones related to the Atlantica-1 project. On July 14, 1999, the first vesting milestone occurred on 165,000 of these options, when the financing was secured and the vesting period for another 165,000 options was determined. The difference between the exercise price and the market value amortized over the vesting period amounted to $2,364 and has been reflected as compensation expense. On October 7, 1999, the Company granted 429,019 options at an exercise price of $20.40 to certain officers. Of these options, 129,019 vest immediately and 300,000 vest over three years although vesting on these options may be accelerated as a result of certain events. CF-56 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 13 COMMON SHARE OPTIONS (CONTINUED) On October 22, 1999, the Company granted 5,000 options at an exercise price of $19.00 to an employee. These options vest over three years. Total stock-based compensation expense included in general and administrative expenses for the year ended December 31, 1999 is $4,207 (1998--$nil; 1997--$nil). 14 BASIC AND FULLY DILUTED LOSS PER COMMON SHARE The basic loss per common share is calculated using the weighted average number of common shares outstanding of 9,911,341 (1998 - 3,515,927; 1997 - 3,492,915). The weighted average number of common shares on a fully diluted basis is calculated on the same basis as the basic weighted average number of shares as the Company is in a loss position and the effects of possible conversion would be anti-dilutive. 15 SUPPLEMENTAL INFORMATION i) Included in general and administrative expense are the following:
1999 1998 1997 $ $ $ -------- -------- -------- Rent................................................... 426 342 242 Bad debt............................................... 212 114 91 Advertising............................................ 312 224 148
ii) Amounts paid for interest and income taxes are as follows:
1999 1998 1997 $ $ $ -------- -------- -------- Interest.............................................. 4,517 1,901 540 Income taxes.......................................... 70 36 51
CF-57 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 16 COMMITMENTS a) The Company has entered into operating lease agreements for its premises and for maintenance of its fibre optic cable. Minimum lease commitments pursuant to these leases over the next five years and thereafter are as follows:
$ -------- Year ending December 31, 2000............................... 2,538 2001........................................................ 1,059 2002........................................................ 1,028 2003........................................................ 1,061 2004........................................................ 1,035 Thereafter.................................................. 12,128 ------- 18,849 =======
b) On June 16, 1999, the Company entered into a supply contract with Alcatel Submarine Networks ("Alcatel") to construct a fibre optic submarine cable called Atlantica-1 for a total contract price of $620,861, (of which $93,129 has been recorded at December 31, 1999), which is subject to amendment by the mutual agreement of the parties. Future payments are based upon a specified billing schedule and are due when the corresponding project milestone has been achieved and engineer acceptance has been provided. The future minimum payments, beyond the $93,129 that has been recorded as of December 31, 1999, required as a result of the contract, are as follows:
$ -------- Year ending December 31, 2000............................... 465,646 2001................................ 62,086 ------- 527,732 =======
c) As of December 31, 1999, the Company was committed to $2,901 of future construction costs under its participation in a cable network construction and maintenance agreement. d) In the normal course of business, the Company has also entered into a number of contracts under which it is committed to the purchase and supply of telecommunication services at fixed prices. It is not anticipated that losses will be incurred on these contracts. 17 SEGMENTED INFORMATION The Company operates predominantly in the international telecommunications services business and substantially all of the Company's business activity was conducted in Bermuda. CF-58 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 18 UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the entity, including those related to customers, suppliers, or other third parties, have been fully resolved. 19 RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The following adjustments and/or additional disclosures, would be required in order to present the financial statements in accordance with United States GAAP. a) Stock based compensation The Company applies APB Opinion 25 ("Accounting for Stock Issued to Employees") in accounting for its stock option plan, and, accordingly does not recognize compensation cost at the time options are granted unless the exercise price is less than the market price of the stock on the measurement date. Had the Company elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS 123, the pro forma effects to reported net loss for the year and basic and fully diluted loss per common share, would be as follows:
1999 1998 1997 $ $ $ -------- -------- -------- Net loss for the year--as reported................... 15,906 4,944 5,296 Net loss for the year--pro forma..................... 15,906 5,047 5,296 Basic and fully diluted loss per common share--as reported........................................... 1.60 1.41 1.52 Basic and fully diluted loss per common share--pro forma.............................................. 1.60 1.43 1.52
The fair value of each option grant has been estimated using the Black-Scholes option pricing model, using a volatility assumption of 20% (1998 - 20%; 1997 - 20%), expected life of 7 years (1998 - 7 years; 1997 - 7 years), a dividend rate of nil (1998--$nil; 1997--$nil) and a risk-free interest rate of 5.64% (1998 - 5.28%; 1997 - 6.33%). The above pro forma effects on the net loss for the year may not be representative of the effects on the net loss for the year for future periods as option grants typically vest over several years and additional options are generally granted each year. CF-59 GLOBENET COMMUNICATIONS GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 19 RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) b) Revenue recognition FASB Interpretation No. 43, "Real Estate Sales--an interpretation of FASB Statement No. 66," was issued in June 1999. It clarifies the standards for recognition of profit on all real estate sales transactions, including those related to fibre optic cable that cannot be removed and used separately from the real estate without incurring significant costs. This interpretation is effective for all applicable transactions after June 30, 1999. However, no such transactions have been entered into after June 30, 1999 and we have not yet completed our analysis of the applicability or the impact of this statement on future transactions. c) Derivative instruments and hedging activities In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 2000. SFAS 133, as amended, requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow, and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. Management has not determined the impact of this statement on its financial position, results of operations and cash flows. 20 SUBSEQUENT EVENT On February 15, 2000, the Company signed a contract variation with Alcatel for the fixed price turnkey supply of all six undersea cable stations and the associated overland routes from the cable stations to the cable beach landing points at a cost of approximately $50 million. CF-60 CERTIFICATE OF THE COMPANY Dated: April 18, 2000 The foregoing, together with the information deemed to be incorporated herein by reference, as of the date of the supplemented prospectus providing the information permitted to be omitted from this prospectus, will constitute full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 9 of the SECURITIES ACT (British Columbia), Part 8 of the SECURITIES ACT (Alberta), Part XI of THE SECURITIES ACT, 1988 (Saskatchewan), Part VII of THE SECURITIES ACT (Manitoba), Part XV of the SECURITIES ACT (Ontario), Section 63 of the SECURITIES ACT (Nova Scotia), Section 13 of the SECURITY FRAUDS PREVENTION ACT (New Brunswick), Part II of the SECURITIES ACT (Prince Edward Island) and Part XIV of the SECURITIES ACT (Newfoundland) and the respective rules and regulations thereunder and, for the purposes of the SECURITIES ACT (Quebec) and the Regulations thereunder, will not contain any misrepresentation likely to affect the value or the market price of the securities to be distributed hereunder. (Signed) GREGORY B. MAFFEI LARRY OLSEN Chief Executive Officer (Signed) Chief Financial Officer On behalf of the Board of Directors DAVID LEDE CLIFFORD LEDE (Signed) Chairman (Signed) Vice-Chairman PROMOTER Ledcor Industries Limited BY: (Signed) DAVID LEDE Chairman
CC-1 CERTIFICATE OF THE CANADIAN UNDERWRITERS Dated: April , 2000 To the best of our knowledge, information and belief, the foregoing, together with the information deemed to be incorporated herein by reference, as of the date of the supplemented prospectus providing the information permitted to be omitted from this prospectus, will constitute full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 9 of the SECURITIES ACT (British Columbia), Part 8 of the SECURITIES ACT (Alberta), Part XI of THE SECURITIES ACT, 1988 (Saskatchewan), Part VII of THE SECURITIES ACT (Manitoba), Part XV of the SECURITIES ACT (Ontario), Section 13 of the SECURITY FRAUDS PREVENTION ACT (New Brunswick), Section 64 of the SECURITIES ACT (Nova Scotia), Part II of the SECURITIES ACT (Prince Edward Island), Part XIV of the SECURITIES ACT, (Newfoundland) and the respective rules and regulations thereunder and, for the purposes of the SECURITIES ACT (Quebec) and the Regulations thereunder, to our knowledge, will not contain any misrepresentation that is likely to affect the value or the market price of the securities to be distributed hereunder. GOLDMAN SACHS CANADA INC. BY: (SIGNED) EVAN SIDDALL CREDIT SUISSE FIRST BOSTON TD SECURITIES INC. SECURITIES CANADA INC. BY: (SIGNED) BRIAN C. IMRIE BY: (SIGNED) PATRICK B. MENELEY BMO NESBITT BURNS INC. MORGAN STANLEY CANADA LIMITED BY: (SIGNED) ALEXANDER G. RHIND BY: (SIGNED) STEVEN A. MAYER BUNTING WARBURG DILLON READ INC. RBC DOMINION SECURITIES INC. BY: (SIGNED) DAVID C.W. MACDONALD BY: (SIGNED) NEIL M. SELFE
The following includes the name of every person or company having an interest, directly or indirectly, to the extent of not less than 5% in the capital of: GOLDMAN SACHS CANADA INC.: a wholly-owned subsidiary of The Goldman Sachs Group, Inc.; CREDIT SUISSE FIRST BOSTON SECURITIES CANADA INC.: an indirect subsidiary of Credit Suisse First Boston, a Swiss Bank; TD SECURITIES INC.: a wholly-owned subsidiary of a Canadian chartered bank; BMO NESBITT BURNS INC.: a wholly-owned subsidiary of BMO Nesbitt Burns Corporation Limited, an indirect majority-owned subsidiary of a Canadian chartered bank; MORGAN STANLEY CANADA LIMITED: a wholly-owned subsidiary of Morgan Stanley International Incorporated; BUNTING WARBURG DILLON READ INC.: a wholly-owned subsidiary of Bunting Warburg Dillon Read Limited; and RBC DOMINION SECURITIES INC.: a direct wholly-owned subsidiary of a Canadian chartered bank. CC-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Class A Subordinate Voting Shares being registered (all amounts are estimated except the SEC Registration Fee, the Nasdaq National Market Listing Fee) and The Toronto Stock Exchange Listing Fee:
AMOUNT TO BE PAID ---------- SEC Registration Fee........................................ $ 196,687 Canadian Securities Commissions Filing Fees................. 322,771 NASD Filing Fee............................................. 30,500 Transfer Agent Fee.......................................... 7,500 Nasdaq National Market Listing Fee.......................... 95,000 The Toronto Stock Exchange Listing Fee...................... 50,000 Blue Sky Qualification Fees and Expenses.................... 7,500 Accounting Fees and Expenses................................ 400,000 Legal Fees and Expenses..................................... 1,400,000 Printing Expenses........................................... 450,000 Miscellaneous............................................... 40,042 ---------- Total..................................................... $3,000,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Pursuant to the By-laws of the Company, as amended, subject to Section 124 of the Canada Business Corporations Act (the "Act"), a director or officer of the Company, a former director or officer of the Company or a person who acts or acted at the Company's request as a director or officer of a body corporate of which the Company is or was a shareholder or creditor, and his or her heirs and legal representatives: 1. may be indemnified by the Company against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the Company or such body corporate; 2. may be indemnified by the Company, with the approval of a court, against all costs, charges and expenses reasonably incurred by him or her in connection with an action by or on behalf of the Company or such body corporate to procure a judgment in its favor, to which he or she is made a party by reason of being or having been a director or an officer of the Company or such body corporate; and 3. is entitled to indemnity from the Company in respect of all costs, charges and expenses reasonably incurred by him or her in connection with the defense of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the Company or such body corporate, if the person seeking indemnity was substantially successful on the merits in his or her defense of the actions or proceeding; PROVIDED, in all cases, such person fulfills the conditions that (a) he or she acted honestly and in good faith with a view to the best interests of the Company, and (b) in the case of a criminal or II-1 administrative action or proceeding that is enforced by a monetary penalty, he or she had reasonable grounds for believing that his or her conduct was lawful. As contemplated by Section 81 of the Act, the Company has purchased insurance against potential claims against the directors and officers of the Company and against loss for which the Company may be required or permitted by law to indemnify such directors and officers. Pursuant to Section 104 of the COMPANIES ACT (Nova Scotia), every director, manager, Secretary, Treasurer and other officer or servant of the Company shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses that any such director, manager, Secretary, Treasurer or other officer or servant may incur or become liable to pay by reason of any contract entered into, or act or thing done by him or her as such officer or servant or in any way in the discharge of his or her duties including travelling expenses; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the members over all other claims. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (a) The Company has issued and sold the following unregistered securities in the following transactions (unless otherwise indicated share numbers reflect our 8 for 1 stock split): (1) On our incorporation on February 5, 1998, we issued 800 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares) to Ledcor Industries Limited for $70. (2) On May 31, 1998, we issued 1600 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares) to Ledcor Industries Limited for equipment, fiber optic strands and other assets related to the telecommunications division of Ledcor Industries Limited. (3) On August 31, 1998, we issued 24,000,000 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares) to Worldwide Fiber Holdings Ltd. as partial consideration for a 50% interest in, and a promissory note of $3,915,000 from, Worldwide Fiber (USA) Inc. (4) On December 1, 1998 we issued 16,000,000 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares) to Worldwide Fiber Holdings Ltd. for 50 Class A common shares of Ledcor Holdings Ltd. (5) Pursuant to an Indenture dated December 23, 1998, the Company issued senior notes with a face value of $175,000,000 to Qualified Institutional Buyers in reliance on the exemption found in Rule 144A of the Securities Act of 1933, as amended, or to persons outside the United States in compliance with Regulation S, of the Securities Act of 1933, as amended. The notes are unsecured obligations of the Company bearing interest at 12 1/2% interest payable semi-annually. (6) On March 31, 1999 the Company completed a series of transactions whereby certain fiber optic network assets were transferred to the Company by Worldwide Fiber Holdings Ltd. in exchange for 159,997,600 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares). The cost of the assets acquired at March 31, 1999 amounted to $21,884,000. As a result of the transaction, the Company also received a deferred tax benefit of $3,136,000 which is reflected as a deferred tax asset. (7) Pursuant to an Indenture dated July 28, 1999, the Company issued senior notes with a face value of $500,000,000, to Qualified Institutional Buyers in reliance on the exemption found in Rule 144A of the Securities Act of 1933, as amended, or to persons outside the United States in compliance with Regulation S, of the Securities Act of 1933, as amended. The notes are unsecured obligations of the Company bearing interest at 12% interest payable semi-annually. II-2 (8) On August 31, 1999 the Company issued 1,200,000 Class "A" Voting Common Shares (now Class B Subordinate Voting Shares) to Mackenzie Partners, LLC for $3,000,000 cash. (9) On September 9, 1999, the Company repurchased 200,000,000 outstanding Class B Subordinate Voting Shares from its parent in exchange for the issuance of 190,748,000 Class B Subordinate Voting Shares and 40,000,000 (pre-subdivision) Series C Redeemable Preferred Shares. (10) On September 9, 1999 and December 22, 1999, respectively, the Company issued 70,934,464 and 4,541,192, respectively, Series A Non-Voting Preferred Shares to affiliates of Tyco International Ltd., Providence Equity Partners Inc., DLJ Merchant Banking Partners II L.P. and GS Capital Partners III, L.P. for $300,000,000 in cash. (11) On September 27, 1999, the Company issued 36,000,000 Class C Multiple Voting Shares to Ledcor and assumed certain other rights and obligations in consideration for certain fiber optic network assets valued at cost in the accounts of Ledcor at $26,349,800. (12) On December 22, 1999, the Company issued 26,080,000 Class A Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares to an executive officer of the Company for consideration of $77,500,000. (13) From January 5, 1999 through January 24, 2000, the Company issued options to purchase an aggregate of 22,892,540 Class A Non-Voting Shares to directors, officers and employees of the Company and its affiliates. Each option was for a ten year term and the options are exercisable at prices ranging from $1.25 to $10.00. (14) On March 13, 2000, the Company issued 411,214 Class A Non-Voting Shares to Ramsey Beirne Investment Partners, LLC in consideration for certain consulting services valued by the consultant at approximately $999,995. (b) The issuances of the securities set forth in paragraphs 1, 2, 3, 4, 6, 9 and 11 above were deemed to be not subject to registration under the Securities Act because they were extraterritorial issuances not subject to the Securities Act or other U.S. securities laws. The issuances of the securities set forth in (a) paragraphs 5 and 7 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act regarding the initial purchasers, to be resold in reliance on Rule 144A and Regulation S of the Securities Act and (b) paragraphs 8, 10, 12 and 14 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, in each case as transactions by an issuer not involving any public offering. The issuance of securities set forth in paragraph 13 was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Rule 701 promulgated under the Securities Act as a transaction by an issuer not involving any public offering and a transaction pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities represented their intentions to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof and appropriate legends were affixed to the certificates representing the securities issued in such transactions. II-3 ITEM 16. EXHIBITS. The following exhibits are filed as part of this Registration Statement:
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Form of Underwriting Agreement between Worldwide Fiber Inc. and the Underwriters dated , 2000. 3.1* Articles of Continuance of Worldwide Fiber Inc. 3.2* Articles of Amendment of Worldwide Fiber Inc. 3.3* By-Laws of Worldwide Fiber Inc., as amended. 3.4 Memorandum of Association of 360NETWORKS INC. 3.5 Articles of Association of 360NETWORKS INC. 3.6 Form of Memorandum of Association of 360NETWORKS INC. (effective upon closing). 3.7 Form of Articles of Association of 360NETWORKS INC. (effective upon closing). 4.1* Indenture between Worldwide Fiber Inc. and HSBC Bank USA (formerly Marine Midland Bank) dated December 23, 1998. 4.2* Form of 12 1/2% Series A Senior Notes due 2005. 4.3* Form of 12 1/2% Series B Senior Notes due 2005. 4.4* Registration Rights Agreement between Worldwide Fiber Inc., Donaldson, Lufkin & Jenrette Securities Corporation and TD Securities (USA) Inc. dated December 23, 1998. 4.5* Indenture between Worldwide Fiber Inc. and HSBC Bank USA (formerly Marine Midland Bank) dated July 28, 1999. 4.6* Form of 12% Series A Senior Notes due 2009 (included in exhibit 4.5 hereto). 4.7* Form of 12% Series B Senior Notes due 2009 (included in exhibit 4.5 hereto). 4.8* Registration Rights Agreement between Worldwide Fiber Inc. and the Initial Purchasers dated July 28, 1999. 4.9* Voting Agreement between certain shareholders of GlobeNet Communications Group Limited and Worldwide Fiber Inc. dated March 11, 2000. 4.10* Form of Trust Agreement among Worldwide Fiber Holdings Ltd., Gregory B. Maffei, Madison Square Inc., Larry R. Olsen, Worldwide Fiber Inc. and Trust Company dated as of , 2000. 5.1 Opinion of Stewart McKelvey Stirling Scales regarding the legality of the securities being registered. 10.1* Shareholders Agreement between Worldwide Fiber Inc., Worldwide Fiber Networks Ltd., Ledcor Communications Ltd., Ledcor Industries, Inc., Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.), MI-Tech Communications, LLC, Ledcor Inc., and Michels Pipeline Construction, Inc. dated December 31, 1998. 10.2* Railplow License Agreement between Ledcor Industries Limited and Worldwide Fiber Communications Ltd. (formerly 786520 Alberta Ltd.) dated May 31, 1998. 10.3* Non-exclusive Railplow License Agreement between Ledcor Industries Limited and Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.) dated May 31, 1998. 10.4* Letter from Ledcor, Inc. committing Ledcom Holdings Ltd. to grant an exclusive Railplow license to Worldwide Fiber Communications Ltd. dated December 1, 1998. 10.5* Management Services Agreement between Ledcor Industries Limited and Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated May 31, 1998. 10.6* Employment Agreement between Ledcor Industries Limited and Ledcor Communications Ltd., a wholly owned subsidiary of the Worldwide Fiber Inc. dated May 31, 1998. 10.7* Employment Agreement between Ledcor Industries Inc. and Ledcor Communications Inc., a subsidiary of Worldwide Fiber Inc. dated May 31, 1998.
II-4
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.8* Construction Services Agreement between Ledcor Industries Limited and Ledcor Communications Ltd., a wholly-owned subsidiary of the Worldwide Fiber Inc. dated May 31, 1998. 10.9* Construction Services Agreement between Ledcor Industries Inc. and Ledcor Communications Ltd. (formerly Ledcor Communications Inc.) dated May 31, 1998. 10.10* Non-Competition Agreement between Worldwide Fiber Inc. (formerly Starfiber Inc.) and Ledcor, Inc., dated May 31, 1998. 10.11* Roll-over Agreement between Ledcor Industries Limited and Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.) dated May 31, 1998 transferring certain technology of Ledcor Industries Limited. 10.12* Roll-over Agreement between Ledcor Industries Limited, Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.) and Ledcor Industries Inc. dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.13* Roll-over Agreement between Mi-Tech Communications, LLC, Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.14* Roll-over Agreement between Ledcor Industries Limited and Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink Holdings Ltd., dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.15* Roll-over Agreement between Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink Holdings Ltd., and Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.16* Roll-over Agreement between Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) and Worldwide Fiber Networks Ltd. (formerly Worldwide Fiber Ltd.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.17* Roll-over Agreement between Ledcor Inc. And Worldwide Fiber Holdings Ltd. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.18* Roll-over Agreement between Worldwide Fiber Holdings Ltd. and Worldwide Fiber Inc. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.19* Roll-over Agreement between Worldwide Fiber Inc. and Worldwide Fiber Communications Ltd. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.20* License Agreement among WFI-CN Fiber Inc., Worldwide Fiber Inc. and Canadian National Railway Company, dated May 28, 1999. 10.21* Unanimous Shareholders Agreement among Worldwide Fiber Networks Ltd., Canadian National Railway Company and WFI-CN Fiber Inc. dated May 28, 1999. 10.22* Limited Liability Company Agreement of Worldwide Fiber IC LLC between Worldwide Fiber IC Holdings, Inc., and IC Fiber Holding Inc., dated May 28, 1999. 10.23* Form of License Agreement among Worldwide Fiber Inc., Illinois Central Railroad Company and each of IC Fiber Alabama LLC, IC Fiber Illinois LLC, IC Fiber Iowa LLC, IC Fiber Kentucky LLC, IC Fiber Louisiana LLC, IC Fiber Mississippi LLC and IC Fiber Tennessee LLC, dated as of May 28, 1999. 10.24* Amended and Restated Share Purchase Agreement by and between Ledcor Industries Limited, Ledcor Industries Inc. and Worldwide Fiber Inc. dated May 28, 1999. 10.25* Supply contract for Hibernia Undersea Cable System between Worldwide Telecom (Bermuda) Ltd. and Tyco Submarine Systems Ltd. dated June 18, 1999. 10.26* Preferred Share Purchase Agreement by and among Worldwide Fiber Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados) SRL, Providence Equity Fiber L.P., and Tyco Group S.A.R.L. dated as of September 7, 1999.
II-5
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.27* Shareholders Agreement by and among Worldwide Fiber Inc., DWF SRL, GS Capital Partners III, L.P., GSCP3 WWF (Barbados) SRL, Providence Equity Fiber, L.P., Tyco Group S.a.r.l., Worldwide Fiber Holdings Ltd., Ledcor Inc. and the Several Shareholders named in Schedule 1.15 thereto dated as of September 9, 1999. 10.28* Amended and Restated Share Purchase Agreement between Ledcor Industries Limited, Ledcor Industries Inc. and Worldwide Fiber Inc. dated September 7, 1999. 10.29* Letter Agreement between Ledcor Industries Limited, Ledcor Industries Inc., Worldwide Fiber Inc. and Worldwide Fiber (F.O.T.S.) No. 3, Ltd. dated September 27, 1999. 10.30* Stock Purchase Agreement by and between Worldwide Fiber Inc. and Gregory B. Maffei, dated December 22, 1999. 10.31* Agreement and Plan of Arrangement between Worldwide Fiber Inc. and GlobeNet Communications Group Limited dated as of March 11, 2000. 10.32* Share Exchange Agreement by and among 360NETWORKS INC., Worldwide Fiber Networks Ltd., Ledcor Communications Ltd., Ledcor Industries, Inc., Worldwide Fiber (USA), Inc., Mi-Tech Communications, LLC, Ledcor Inc. and Michels Pipeline Construction, Inc. dated as of March 20, 2000. 10.33* Share Exchange Agreement by and among Worldwide Fiber Inc. and Canadian National Railway Company dated as of March 6, 2000. 10.34* Purchase Agreement by and between IC Fiber Holding Inc., Worldwide Fiber IC Holdings, Inc. and Illinois Central Railroad Company dated as of March 3, 2000. 10.35 Urbanlink Reorganization Definitive Agreement between 360NETWORKS INC., Worldwide Fiber Holdings Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.36 Asset Purchase Agreement between Ledcor Communications Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.37 Asset Purchase Agreement between WFI-CN Fibre Inc. and WFI Urbanlink Ltd., dated April 17, 2000. 10.38 Asset Purchase Agreement between Worldwide Fiber (F.O.T.S.) No. 3, Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.39 Asset Purchase Agreement between Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.40 Reseller Agreement between 360NETWORKS INC., Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.41 Initial Capacity Purchase Agreement under the Reseller Agreement between Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.42 Network Operating Center Agreement between 360NETWORKS INC., Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.43 Rollover Agreement between 360 Urbanlink Ltd. and Urbanlink Holdings, Ltd., dated April 17, 2000. 10.44 Rollover Agreement between Worldwide Fiber Holdings Ltd. and Urbanlink Holdings, Ltd. regarding transfer of Subordinate Voting Shares of 360network services inc., dated April 17, 2000. 10.45 Unanimous Shareholders Agreement for Urbanlink Holdings between 360NETWORKS INC., 360 Urbanlink Ltd., Worldwide Fiber Holdings Ltd., Urbanlink Holdings Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 21* Subsidiaries of Worldwide Fiber Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors. 23.2 Consent of Deloitte & Touche LLP, Independent Auditors. 23.3 Consent of PricewaterhouseCoopers LLP, Independent Auditors. 23.4 Consent of Kevin Compton. 23.5 Consent of John Malone. 23.6 Consent of John Stanton.
II-6
EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.7 Consent of Farris, Vaughan, Wills & Murphy. 23.8 Consent of Stewart McKelvey Stirling Scales (included in Exhibit 5.1). 24.1* Powers of Attorney authorizing execution of Registration Statement on Form F-1 on behalf of certain directors of Registrant (included on signature pages to this Registration Statement). 24.2* Power of Attorney authorizing execution of Registration Statement on Form F-1 on behalf of WFI Fiber Inc.
- ------------------------ * Previously filed. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue; (2) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (3) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1993, the undersigned Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Vancouver, BC, Canada on April 18, 2000. 360NETWORKS INC. By: /s/ GREGORY MAFFEI ----------------------------------------- Name: Gregory Maffei Title: Chief Executive Officer
II-8 POWER OF ATTORNEY Each of the undersigned hereby constitutes and appoints David Lede and Larry Olsen and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact, with power of substitution and resubstitution, in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) and supplements to this Registration Statement, and any registration statement for this offering that is to be effective upon the filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any or them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- * ------------------------------------------- Chairman of the Board April 18, 2000 David Lede * ------------------------------------------- Director (Principal April 18, 2000 Gregory Maffei Executive Officer) * ------------------------------------------- Vice Chairman April 18, 2000 Clifford Lede * Vice Chairman (Principal ------------------------------------------- Financial and Accounting April 18, 2000 Larry Olsen Officer) * ------------------------------------------- Director April 18, 2000 Ron Stevenson * ------------------------------------------- Director April 18, 2000 Stephen Stow /s/ CLAUDE MONGEAU ------------------------------------------- Director April 18, 2000 Claude Mongeau ------------------------------------------- Director April 18, 2000 James F. Voelker * ------------------------------------------- Director April 18, 2000 Andrew Rush
II-9
SIGNATURE TITLE DATE --------- ----- ---- /s/ GENE SYKES ------------------------------------------- Director April 18, 2000 Gene Sykes * ------------------------------------------- Director April 18, 2000 Glenn Creamer WFI Fiber Inc. WFI Fiber Inc. (Authorized U.S. April 18, 2000 Representative)
By: * --- Larry Olsen, Authorized Signatory * Pursuant to Power of Attorney filed with the Commission as Exhibit 24.1 or 24.2 By: /s/ LARRY OLSEN --- Attorney-in-fact April 18, 2000 Olsen
II-10 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Form of Underwriting Agreement between Worldwide Fiber Inc. and the Underwriters dated , 2000. 3.1 * Articles of Continuance of Worldwide Fiber Inc. 3.2 * Articles of Amendment of Worldwide Fiber Inc. 3.3 * By-Laws of Worldwide Fiber Inc., as amended. 3.4 Memorandum of Association of 360NETWORKS INC. 3.5 Articles of Association of 360NETWORKS INC. 3.6 Form of Memorandum of Association of 360NETWORKS INC. (effective upon closing). 3.7 Form of Articles of Association of 360NETWORKS INC. (effective upon closing). 4.1 * Indenture between Worldwide Fiber Inc. and HSBC Bank USA (formerly Marine Midland Bank) dated December 23, 1998. 4.2 * Form of 12 1/2% Series A Senior Notes due 2005. 4.3 * Form of 12 1/2% Series B Senior Notes due 2005. 4.4 * Registration Rights Agreement between Worldwide Fiber Inc., Donaldson, Lufkin & Jenrette Securities Corporation and TD Securities (USA) Inc. dated December 23, 1998. 4.5 * Indenture between Worldwide Fiber Inc. and HSBC Bank USA (formerly Marine Midland Bank) dated July 28, 1999. 4.6 * Form of 12% Series A Senior Notes due 2009 (included in exhibit 4.5 hereto). 4.7 * Form of 12% Series B Senior Notes due 2009 (included in exhibit 4.5 hereto). 4.8 * Registration Rights Agreement between Worldwide Fiber Inc. and the Initial Purchasers dated July 28, 1999. 4.9 * Voting Agreement between certain shareholders of GlobeNet Communications Group Limited and Worldwide Fiber Inc. dated March 11, 2000. 4.10* Form of Trust Agreement among Worldwide Fiber Holdings Ltd., Gregory B. Maffei, Madison Square Inc., Larry R. Olsen, Worldwide Fiber Inc. and Trust Company dated as of , 2000. 5.1 Opinion of Stewart McKelvey Stirling Scales regarding the legality of the securities being registered. 10.1 * Shareholders Agreement between Worldwide Fiber Inc., Worldwide Fiber Networks Ltd., Ledcor Communications Ltd., Ledcor Industries, Inc., Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.), MI-Tech Communications, LLC, Ledcor Inc., and Michels Pipeline Construction, Inc. dated December 31, 1998. 10.2 * Railplow License Agreement between Ledcor Industries Limited and Worldwide Fiber Communications Ltd. (formerly 786520 Alberta Ltd.) dated May 31, 1998. 10.3 * Non-exclusive Railplow License Agreement between Ledcor Industries Limited and Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.) dated May 31, 1998. 10.4 * Letter from Ledcor, Inc. committing Ledcom Holdings Ltd. to grant an exclusive Railplow license to Worldwide Fiber Communications Ltd. dated December 1, 1998. 10.5 * Management Services Agreement between Ledcor Industries Limited and Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated May 31, 1998. 10.6 * Employment Agreement between Ledcor Industries Limited and Ledcor Communications Ltd., a wholly owned subsidiary of the Worldwide Fiber Inc. dated May 31, 1998. 10.7 * Employment Agreement between Ledcor Industries Inc. and Ledcor Communications Inc., a subsidiary of Worldwide Fiber Inc. dated May 31, 1998. 10.8 * Construction Services Agreement between Ledcor Industries Limited and Ledcor Communications Ltd., a wholly-owned subsidiary of the Worldwide Fiber Inc. dated May 31, 1998. 10.9 * Construction Services Agreement between Ledcor Industries Inc. and Ledcor Communications Ltd. (formerly Ledcor Communications Inc.) dated May 31, 1998. 10.10* Non-Competition Agreement between Worldwide Fiber Inc. (formerly Starfiber Inc.) and Ledcor, Inc., dated May 31, 1998.
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.11* Roll-over Agreement between Ledcor Industries Limited and Ledcom Holdings Ltd. (formerly Starfiber Communications Ltd.) dated May 31, 1998 transferring certain technology of Ledcor Industries Limited. 10.12* Roll-over Agreement between Ledcor Industries Limited, Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.) and Ledcor Industries Inc. dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.13* Roll-over Agreement between Mi-Tech Communications, LLC, Worldwide Fiber (USA), Inc. (formerly Pacific Fiber Link, Inc.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.14* Roll-over Agreement between Ledcor Industries Limited and Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink Holdings Ltd., dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.15* Roll-over Agreement between Worldwide Fiber Holdings Ltd. (formerly Worldwide Fiberlink Holdings Ltd., and Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.16* Roll-over Agreement between Worldwide Fiber Inc. (formerly Worldwide Fiberlink Ltd.) and Worldwide Fiber Networks Ltd. (formerly Worldwide Fiber Ltd.) dated August 31, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.17* Roll-over Agreement between Ledcor Inc. And Worldwide Fiber Holdings Ltd. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.18* Roll-over Agreement between Worldwide Fiber Holdings Ltd. and Worldwide Fiber Inc. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.19* Roll-over Agreement between Worldwide Fiber Inc. and Worldwide Fiber Communications Ltd. dated December 1, 1998 transferring assets of Ledcor Inc.'s telecommunications division. 10.20* License Agreement among WFI-CN Fiber Inc., Worldwide Fiber Inc. and Canadian National Railway Company, dated May 28, 1999. 10.21* Unanimous Shareholders Agreement among Worldwide Fiber Networks Ltd., Canadian National Railway Company and WFI-CN Fiber Inc. dated May 28, 1999. 10.22* Limited Liability Company Agreement of Worldwide Fiber IC LLC between Worldwide Fiber IC Holdings, Inc., and IC Fiber Holding Inc., dated May 28, 1999. 10.23* Form of License Agreement among Worldwide Fiber Inc., Illinois Central Railroad Company and each of IC Fiber Alabama LLC, IC Fiber Illinois LLC, IC Fiber Iowa LLC, IC Fiber Kentucky LLC, IC Fiber Louisiana LLC, IC Fiber Mississippi LLC and IC Fiber Tennessee LLC, dated as of May 28, 1999. 10.24* Amended and Restated Share Purchase Agreement by and between Ledcor Industries Limited, Ledcor Industries Inc. and Worldwide Fiber Inc. dated May 28, 1999. 10.25* Supply contract for Hibernia Undersea Cable System between Worldwide Telecom (Bermuda) Ltd. and Tyco Submarine Systems Ltd. dated June 18, 1999. 10.26* Preferred Share Purchase Agreement by and among Worldwide Fiber Inc., DWF SRL, GSCP3 WWF (Barbados) SRL, WWF (Barbados) SRL, Providence Equity Fiber L.P., and Tyco Group S.A.R.L. dated as of September 7, 1999. 10.27* Shareholders Agreement by and among Worldwide Fiber Inc., DWF SRL, GS Capital Partners III, L.P., GSCP3 WWF (Barbados) SRL, Providence Equity Fiber, L.P., Tyco Group S.a.r.l., Worldwide Fiber Holdings Ltd., Ledcor Inc. and the Several Shareholders named in Schedule 1.15 thereto dated as of September 9, 1999. 10.28* Amended and Restated Share Purchase Agreement between Ledcor Industries Limited, Ledcor Industries Inc. and Worldwide Fiber Inc. dated September 7, 1999. 10.29* Letter Agreement between Ledcor Industries Limited, Ledcor Industries Inc., Worldwide Fiber Inc. and Worldwide Fiber (F.O.T.S.) No. 3, Ltd. dated September 27, 1999. 10.30* Stock Purchase Agreement by and between Worldwide Fiber Inc. and Gregory B. Maffei, dated December 22, 1999.
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.31* Agreement and Plan of Arrangement between Worldwide Fiber Inc. and GlobeNet Communications Group Limited dated as of March 11, 2000. 10.32* Share Exchange Agreement by and among 360NETWORKS INC., Worldwide Fiber Networks Ltd., Ledcor Communications Ltd., Ledcor Industries, Inc., Worldwide Fiber (USA), Inc., Mi-Tech Communications, LLC, Ledcor Inc. and Michels Pipeline Construction, Inc. dated as of March 20, 2000. 10.33* Share Exchange Agreement by and among Worldwide Fiber Inc. and Canadian National Railway Company dated as of March 6, 2000. 10.34* Purchase Agreement by and between IC Fiber Holding Inc., Worldwide Fiber IC Holdings, Inc. and Illinois Central Railroad Company dated as of March 3, 2000. 10.35 Urbanlink Reorganization Definitive Agreement between 360NETWORKS INC., Worldwide Fiber Holdings Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.36 Asset Purchase Agreement between Ledcor Communications Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.37 Asset Purchase Agreement between WFI-CN Fibre Inc. and WFI Urbanlink Ltd., dated April 17, 2000. 10.38 Asset Purchase Agreement between Worldwide Fiber (F.O.T.S.) No. 3, Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.39 Asset Purchase Agreement between Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.40 Reseller Agreement between 360NETWORKS INC., Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.41 Initial Capacity Purchase Agreement under the Reseller Agreement between Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.42 Network Operating Center Agreement between 360NETWORKS INC., Worldwide Fiber Network Services Ltd. and WFI Urbanlink Ltd., dated April 17, 2000. 10.43 Rollover Agreement between 360 Urbanlink Ltd. and Urbanlink Holdings, Ltd., dated April 17, 2000. 10.44 Rollover Agreement between Worldwide Fiber Holdings Ltd. and Urbanlink Holdings, Ltd. regarding transfer of Subordinate Voting Shares of 360network services inc., dated April 17, 2000. 10.45 Unanimous Shareholders Agreement for Urbanlink Holdings between 360NETWORKS INC., 360 Urbanlink Ltd., Worldwide Fiber Holdings Ltd., Urbanlink Holdings Ltd. and WFI Urbanlink Ltd. dated April 17, 2000. 21 * Subsidiaries of Worldwide Fiber Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors. 23.2 Consent of Deloitte & Touche LLP, Independent Auditors. 23.3 Consent of PricewaterhouseCoopers LLP, Independent Auditors. 23.4 Consent of Kevin Compton. 23.5 Consent of John Malone. 23.6 Consent of John Stanton. 23.7 Consent of Farris, Vaughan, Wills & Murphy. 23.8 Consent of Stewart McKelvey Stirling Scales (included in Exhibit 5.1). 24.1 * Powers of Attorney authorizing execution of Registration Statement on Form F-1 on behalf of certain directors of Registrant (included on signature pages to this Registration Statement). 24.2 * Power of Attorney authorizing execution of Registration Statement on Form F-1 on behalf of WFI Fiber Inc.
- ------------------------ * Previously filed. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 360NETWORKS INC. SUBORDINATE VOTING SHARES ------------ UNDERWRITING AGREEMENT ---------------------- April __, 2000 Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, TD Securities Inc., Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated, Chase Securities Inc., RBC Dominion Securities Inc. Warburg Dillon Read LLC As Representatives of the several Underwriters and Sub-Underwriters named in Schedule A hereto, c/o Goldman, Sachs & Co. 85 Broad Street, New York, New York 10004 Ladies and Gentlemen: 360NETWORKS INC., a company continued under the laws of Nova Scotia, Canada (the "COMPANY"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule A hereto (the "UNDERWRITERS") an aggregate of 44,625,000 Subordinate Voting Shares and, at the election of the Underwriters, up to 6,941,250 additional Subordinate Voting Shares of the Company and Ledcor Limited Partnership (the "SELLING SHAREHOLDER") proposes, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of 1,650,000 Subordinate Voting Shares. The aggregate of 46,275,000 shares to be sold by the Company and the Selling Shareholder is herein called the "FIRM SHARES" and the aggregate of 6,941,250 additional shares to be sold by the Company is herein called the "OPTIONAL SHARES". The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the "SHARES". 1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters and Sub-Underwriters (as defined in Section 2(b)) and the Selling Shareholder that: (i) A registration statement on Form F-1 (File No. 33-95621) (the "INITIAL REGISTRATION STATEMENT") in respect of the Shares has been filed with the Securities and Exchange Commission (the "COMMISSION"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "RULE 462(B) REGISTRATION STATEMENT"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "ACT"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "PRELIMINARY PROSPECTUS"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 4(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "REGISTRATION STATEMENT"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "PROSPECTUS"; (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. or Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") expressly for use therein or by the Selling Shareholder expressly for use in the preparation of the answers therein to Items 7 and 11(item 11 of form 20F) of Form F-1; (iii) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. or DLJ expressly for use therein or by the Selling Shareholder expressly for use in the preparation of the answers therein to Items 7 and 11(item 11 of form 20F) of Form F-1; (iv) The preliminary prospectus dated January 28, 2000 (the "CANADIAN PRELIMINARY PROSPECTUS") and the amended preliminary prospectus dated March 22, 2000 (the "AMENDED CANADIAN PRELIMINARY PROSPECTUS"), together with the other 2 required documentation supplemental thereto, have been filed in the English language and, where applicable, the French language with the applicable securities regulatory authority (each, a "CANADIAN COMMISSION") in each of the provinces of Canada (collectively, the "CANADIAN JURISDICTIONS") in conformity with applicable Canadian Securities Laws (as defined below) and receipts for each of the Canadian Preliminary Prospectus and the Amended Canadian Preliminary Prospectus have been obtained from or on behalf of each of the Canadian Commissions. "CANADIAN SECURITIES LAWS" means the applicable securities laws of each of the Canadian Jurisdictions and the respective rules, regulations and published policies thereunder; (v) The Canadian Preliminary Prospectus and the Amended Canadian Preliminary Prospectus, as of the respective times of filing thereof, (i) did not include a misrepresentation, (ii) constituted full, true and plain disclosure of all material facts relating to the Shares, and to the Company and its subsidiaries taken as a whole, (iii) did not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. and DLJ expressly for use therein; and (iv) conformed in all material respects to the requirements of the Canadian Securities Laws in each of the Canadian Jurisdictions; (vi) If the Company has elected to use the rules and procedures of Canadian Securities Laws for the pricing of securities after the final receipt for a prospectus has been obtained (the "PREP PROCEDURES") in connection with the distribution of the Shares in Canada, the Company (A) has obtained the exemption orders or rulings issued by the Canadian Commissions permitting the Company to use the PREP Procedures in connection with the distribution of the Shares in Canada (the "PREP EXEMPTION ORDERS"); (B) has prepared and filed in the English language and, where applicable, the French language with each of the Canadian Commissions the final prospectus dated April __, 2000 (the "CANADIAN FINAL PROSPECTUS") omitting the information, if any, that is omitted from the Canadian Prospectus (as defined) in accordance with the PREP Procedures and the PREP Exemption Orders but that is deemed under the PREP Procedures and the PREP Exemption Orders to be incorporated by reference into the Canadian Prospectus as of the date of the Canadian Prospectus (the "PREP INFORMATION"); (C) will prepare and file in the English language and, where applicable, the French language, promptly after pricing of the Firm Shares with each of the Canadian Commissions a supplemented Canadian Final Prospectus setting forth the PREP Information; and (D) the Company shall fulfill and comply with all Canadian Securities Laws to enable the Shares to be lawfully distributed to the public in each of the Canadian Jurisdictions; (vii) No order preventing or suspending the use of the Canadian Preliminary Prospectus or the Amended Canadian Preliminary Prospectus has been issued by any of the Canadian Commissions; (viii) The Canadian Prospectus (as defined below) (and any amendments or supplements thereto), as of the time of filing thereof, the Time of Delivery (as defined in Section 3(a)) and any settlement date (i) will conform in all material respects to the 3 requirements of the applicable Canadian Securities Laws in each of the Canadian Jurisdictions, (ii) will not include a misrepresentation, (iii) will constitute full, true and plain disclosure of all material facts relating to the Shares, and to the Company and its subsidiaries taken as a whole and (iv) will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. and DLJ expressly for use therein. "CANADIAN PROSPECTUS" means the supplemented Canadian Final Prospectus, incorporating the PREP Information, to be dated April __, 2000 (in both the English and French languages unless the context indicates otherwise) used in Canada relating to the Shares or, if the Company does not elect to use the PREP Procedures in connection with the distribution of the Shares in Canada, means the Canadian Final Prospectus; (ix) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Prospectus and the Canadian Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus and the Canadian Prospectus; and, since the respective dates as of which information is given in the Registration Statement, the Prospectus and the Canadian Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus and the Canadian Prospectus; (x) The entities listed on Schedule B hereto are the only subsidiaries, direct or indirect, of the Company (collectively, the "SUBSIDIARIES"). The only Subsidiaries that are material for purposes for this Agreement (the "MATERIAL SUBSIDIARIES") are listed on Schedule C attached hereto. Each of the Subsidiaries which is not a Material Subsidiary carries on no active business. All of the outstanding shares of capital stock of each of the Company's Material Subsidiaries and WFI Urbanlink Ltd. ("Urbanlink"), 360 Urbanlink, Urbanlink Holdings Ltd. ("CARRIER HOLDCO") and Urbanlink Equipment Ltd. (collectively, the "URBANLINK COMPANIES") have been duly authorized and validly issued and are fully paid and non-assessable, and, except for Ledcom Holdings Ltd., Carrier Holdco, Urbanlink and Urbanlink Equipment Ltd. are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien encumbrance, or adverse interest of any nature (each, a "LIEN"). Ledcom Holdings Ltd. is owned 50% by the Company and 50% by Ledcor Inc., in the case of the Company, directly or indirectly, through one or more subsidiaries, free and clear of any Lien except for the security interest granted to Ledcor Inc. pursuant to the Unanimous Shareholders Agreement, dated as of December 1, 1998, by and among Worldwide Fiber Communications Ltd., Ledcor Inc., Ledcor Industries Limited and Ledcor Holdings Ltd. Each of Urbanlink and Urbanlink Equipment Ltd. is owned 100% by Carrier Holdco, free and clear of any Lien, the voting securities of Carrier Holdco are owned 33 1/3% by the Company and 66 2/3% by Worldwide Fiber Holdings Ltd. ("WFH"), and the 4 remaining equity securities of Carrier Holdco are owned 51% by the Company and 49% by WFH, in each case free and clear of any Lien; (xi) The Company, its Material Subsidiaries and each of the Urbanlink Companies have good and marketable title to all real property and good title to all personal property owned by them which is material to the business of the Company, its Material Subsidiaries and Urbanlink, in each case free and clear of all Liens and defects, except such as are described in the Prospectus and the Canadian Prospectus or such as do not materially affect the value of such property taken as a whole and do not materially interfere with the use made and proposed to be made of such property by the Company, its Material Subsidiaries taken as a whole and Urbanlink and any real property and buildings held under lease by the Company, its Material Subsidiaries and Urbanlink are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, its subsidiaries and Urbanlink, in each case except as described in the Prospectus and the Canadian Prospectus; (xii) Each of the Company, its subsidiaries and each of the Urbanlink Companies has been duly organized, is validly existing as a corporation or limited liability company, as applicable, in good standing under the laws of its jurisdiction of incorporation, organization, amalgamation or continuance and has the requisite, corporate or other, power and authority to carry on its business as described in the Prospectus and the Canadian Prospectus, and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation, partnership or limited liability company, as applicable, authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company, its subsidiaries and Urbanlink, taken as a whole (a "MATERIAL ADVERSE EFFECT"); (xiii) On completion of the offering, the Company will have authorized capital as set forth in the Prospectus and the Canadian Prospectus, and all of the issued shares in the capital of the Company ("STOCK") will be duly and validly authorized and issued as fully paid and non-assessable and conform to the description of the Stock contained in the Prospectus and the Canadian Prospectus; (xiv) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly allotted and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and, at the Time of Delivery (as defined in Section 3(a)), will conform to the description of the Shares contained in the Prospectus and the Canadian Prospectus; (xv) The execution and delivery of this Agreement and the transfer restriction agreement to be entered into on or before the First Time of Delivery among the Company, WFH and Gregory B. Maffei and Montreal Trust Company of Canada (the "TRANSFER RESTRICTION AGREEMENT"), the establishment and implementation of the Canadian Telecommunications Arrangement (as described in the Canadian Prospectus), the issue and sale of the Shares to be sold by the Company and the compliance by the Company and, if applicable, Gregory B. Maffei and WFH with all of 5 the provisions of this Agreement and the Transfer Restriction Agreement and the consummation of the transactions herein and therein contemplated will not (a) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except the registration under the Act of the Shares and such as may be required or previously obtained under the securities or Blue Sky laws of the various states or the Canadian Securities Laws) other than consents, approvals, authorizations or other orders of, or qualifications with, any court or governmental body or agency the failure of which to be obtained would not, in the aggregate, have a Material Adverse Effect, (b) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the Memorandum of Association or Articles of Association of the Company, WFH or any of the Material Subsidiaries or any of the Urbanlink Companies or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company, and its subsidiaries, taken as a whole, to which the Company, or WFH or any of its subsidiaries or the Urbanlink Companies is a party or by which the Company or WFH or any of its subsidiaries or the Urbanlink Companies or their respective property is bound, except those violations or conflicts which would not, in the aggregate, have a Material Adverse Effect, (c) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, WFH, any of the Material Subsidiaries or the Urbanlink Companies or their respective property, (d) result in the imposition or creation of (or the obligation to create or impose) a Lien under, any agreement or instrument to which the Company, WFH, any of the Material Subsidiaries or the Urbanlink Companies is a party or by which the Company, WFH, any of their subsidiaries or the Urbanlink Companies or their respective property is bound except as would not have a Material Adverse Effect, or (e) result in the termination, suspension or revocation of any Authorization (as defined below) of the Company, WFH or any of the Material Subsidiaries or the Urbanlink Companies or result in any other impairment of the rights of the holder of any such Authorization except such terminations, suspensions, revocations or impairments as would not have a Material Adverse Effect; (xvi) None of the Company, or any of the Company's Material Subsidiaries or the Urbanlink Companies is in violation of its respective (a) articles or by-laws or (b) Memorandum of Association or Articles of Association or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company, Urbanlink or any of the Company's subsidiaries is a party or by which the Company, Urbanlink or any of the Company's subsidiaries or their respective property is bound, except violations or defaults which would not, in the aggregate, have a Material Adverse Effect; (xvii) The statements set forth in the Prospectus and the Canadian Prospectus under the captions "Description of our Capital Stock" and "Description of Capital Stock and Share Capital Reorganization", insofar as they purport to constitute a summary of the terms of the Stock, under the caption "Material United States and Canadian Income Tax Considerations", "Relationships and Related Party Transactions", "Description of Indebtedness" and under the caption "Underwriting", insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair; 6 (xviii) Other than as set forth in the Prospectus or the Canadian Prospectus, there are no legal or governmental proceedings pending or, to the best of the Company's knowledge, threatened to which the Company or any of its Material Subsidiaries or the Urbanlink Companies is or could be a party or to which any of their respective property is or could be subject, which might result, singly or in the aggregate, in a Material Adverse Effect or materially and adversely affect the ability of the Company or any of its subsidiaries to perform its obligations under this Agreement, to consummate the transactions contemplated hereby or to establish and implement the Canadian Telecommunications Arrangement; (xix) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"); (xx) The accountants, PricewaterhouseCoopers LLP and Deloitte & Touche LLP, that have certified the financial statements and supporting schedules included in the Prospectus and the Canadian Prospectus are independent public accountants with respect to the Company and its predecessor, as required by the Act and the Exchange Act and the rules and regulations thereunder and are independent with respect to the Company within the meaning of the Companies Act (Nova Scotia). To the best knowledge of the Company, the historical financial statements and PRO FORMA financial information, together with related schedules and notes, set forth in the Prospectus and the Canadian Prospectus comply as to form in all material respects with the requirements applicable to registration statements on Form F-1 under the Act and the Canadian Securities Laws, respectively; (xxi) (i) There are no restrictions on the corporate power and capacity of the Company and, to the knowledge of the Company, of WFH, to enter into this Agreement and the Transfer Restriction Agreement, to issue and sell the Shares, or to carry out its obligations hereunder and thereunder; (ii) the execution and delivery of this Agreement and the Transfer Restriction Agreement and the consummation at the Time of Delivery (as defined in Section 3(a)) of the transactions contemplated herein and therein and the establishment and implementation of the Canadian Telecommunications Arrangement have been duly authorized by all necessary corporate action on the part of the Company and, to knowledge of the Company, of WFH; and (iii) when duly executed and delivered by each of the Company, Gregory B. Maffei and WFH, the Transfer Restriction Agreement will constitute a valid and binding obligation of the Company, and to the knowledge of the Company, of each of WFH and Gregory B. Maffei and will be enforceable against the Company, and to the knowledge of the Company, of each of WFH and Gregory B. Maffei in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, transfer and other laws relating to or affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity); (xxii) This Agreement has been duly authorized, executed and delivered by the Company; (xxiii) The listing of the Shares on The Toronto Stock Exchange has been approved by such exchange subject only to filing of documents and evidence of 7 satisfactory distribution in accordance with the requirements of such exchange on or before July 11, 2000. The Nasdaq Stock Market, Inc. has conditionally approved the Shares for listing on the Nasdaq National Market, subject to compliance with only customary listing conditions. The definitive form of certificate for the Shares has been duly approved and adopted by the Company and complies with the provisions of the Companies Act (Nova Scotia) and the requirements of The Toronto Stock Exchange; (xxiv) Montreal Trust Company of Canada at its principal offices in Toronto, and Vancouver and HSBC Bank USA at its principal offices in New York have been duly appointed as the transfer agent and registrar for the Company's Subordinate Voting Shares in Canada and the United States, respectively; (xxv) Except for withholding tax eligible on any amount paid or credited, or deemed to be paid or credited, to a non-resident person as, on account for, or in lieu of payment of, or in satisfaction of a dividend, no stamp duty, registration or documentary taxes, duties or similar charges are payable to the Canadian government or to any political subdivision or taxing authority thereof or therein in connection with (A) the issuance, sale and delivery by the Company and the Selling Shareholder to or for the respective accounts of the Underwriters of the Shares, (B) the sale and delivery outside Canada by the Underwriters of the Shares to the initial purchasers thereof in the manner contemplated in this Agreement, or (C) the payment or crediting by the Company or the Selling Shareholder of any commission or fee to or for the respective account of any Underwriter who is not resident in Canada, provided that a commission or fee is payable in respect of services rendered by such Underwriter outside of Canada; (xxvi) No goods and services tax imposed under the federal laws of Canada will be collectible by an Underwriter in respect of the payment or crediting of any discount, commission or fee as contemplated by this Agreement to any Underwriter, provided that any such discount, commission or fee is payable in respect of services performed by such Underwriter wholly outside of Canada; (xxvii) Except as disclosed in the Prospectus and the Canadian Prospectus, none of the Company, any of the Company's Material Subsidiaries or the Urbanlink Companies is a party or subject to the provision of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body except as would not have a Material Adverse Effect; (xxviii) The Company, Urbanlink and each of the Company's Material Subsidiaries is in compliance with all applicable statutes, laws, ordinances, administrative or governmental rules and regulations of the jurisdictions in which it is conducting its business except where a failure to be in such compliance would not have a Material Adverse Effect; (xxix) Except as discussed in the Prospectus or the Canadian Prospectus, neither the Company nor any of its Material Subsidiaries has violated any foreign, federal, state, provincial or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and provisions of any federal or provincial pension standards legislation (or rules, regulations and 8 administration policies thereunder) in Canada, or any provisions of the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect; (xxx) Except as described in the Prospectus or the Canadian Prospectus, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up (including, without limitation, to remediate any substance which exceeds decommissioning, remediation or similar guidelines, standards or criteria under Environmental Laws or applied by governmental authorities acting under Environmental Laws), closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties or as a result of government action) which would, singly or in the aggregate, have a Material Adverse Effect; (xxxi) Except as disclosed in the Prospectus and the Canadian Prospectus, each of the Company, its Material Subsidiaries and the Urbanlink Companies has all permits, licenses, certificates, consents, exemptions, waivers, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect. Except as disclosed in the Prospectus and the Canadian Prospectus, each such Authorization is valid and in full force and effect and each of the Company and its Material Subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto except where failure to comply would not have a Material Adverse Effect; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization except where such event would not have a Material Adverse Affect; and such Authorizations contain no restrictions that are burdensome to the Company or any of its Material Subsidiaries except as would not, singly or in the aggregate, have a Material Adverse Effect; (xxxii) No "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act (i) has imposed (or has informed the Company that it is considering imposing) any condition (financial or otherwise) on the Company's retaining any rating assigned to the Company, any securities of the Company or (ii) has indicated to the Company that it is considering (a) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (b) any change in the outlook for any rating of the Company, or any securities of the Company; (xxxiii) Since the respective dates as of which information is given in the Prospectus and the Canadian Prospectus other than as set forth in the Prospectus and 9 the Canadian Prospectus, respectively, (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) none of the Company, Urbanlink or any of the Company's subsidiaries has incurred any material liability or obligation, direct or contingent; (xxxiv) The Company is a "foreign issuer" as defined in Rule 902 under the Act; (xxxv) The Company and each of its Canadian subsidiaries as set forth in Schedule D, Urbanlink and Carrier Holdco (collectively, the "CANADIAN COMPANIES") hold all Canadian Radio-television and Telecommunications Commission ("CRTC") and Industry Canada licenses or authorizations and possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them, other than those the absence of which could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely, could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect; (xxxvi) The Canadian Telecommunications Arrangement (as described in the Prospectus and the Canadian Prospectus) including the execution, delivery and performance by the parties thereto of (i) the Reseller Agreement dated - , 2000 between Urbanlink, the Company and Worldwide Fiber Network Services Ltd. ("WF Services"), (ii) the Co-Development Agreement dated - , 2000 between the Company and Urbanlink, (iii) the Definitive Agreement dated - , 2000 between Urbanlink and the Company, (iv) the Shareholders Agreement dated - , 2000 between Carrier Holdco, Urbanlink, the Company, 360 Urbanlink Ltd. and WFH, (v) the Capacity Purchase Agreement dated - , 2000 between Urbanlink and WF Services, (vi) the Fibre Optic Maintenance Agreement dated - , 2000 between Urbanlink and WF Services, (vii) the Roll-Over Agreement dated - , 2000 between 360 Urbanlink Ltd. and Ledcor Communications Ltd., (viii) the Roll-Over Agreement dated - , 2000 between 360 Urbanlink Ltd. and WFI-CN Fibre Inc., (ix) the Roll-Over Agreement dated - , 2000 between 360 Urbanlink Ltd. and Worldwide Fiber (F.O.T.S.) No. 3, Ltd., (x) the Roll-Over Agreement dated - , 2000 between 360 Urbanlink Ltd. and WF Services, (xi) the Roll-Over Agreement dated - , 2000 between 360 Urbanlink Ltd. and Worldwide Fiber Networks Ltd., (xii) the Roll-Over Agreement dated - , 2000 between Carrier Holdco and 360 Urbanlink Ltd., (xiii) the Roll-Over Agreement dated - , 2000 between Carrier Holdco and WFH, (xiv) the Asset Purchase Agreement dated - , 2000 between Urbanlink and Ledcor Communications Ltd., (xv) the Asset Purchase Agreement dated - , 2000 between WFI-CN Fibre Inc. and Ledcor Cayer Inc., (xvi) the Asset Purchase Agreement dated - , 2000 between Urbanlink and WF Services, (xvii) the Asset Purchase Agreement dated - , 2000 between Urbanlink Equipment Ltd. and WF Services, (xviii) the Asset Purchase Agreement dated - , 2000 between Urbanlink and WFI-CN Fibre Inc., (xvix) the Asset Purchase Agreement dated - , 2000 between Urbanlink and Ledcor Communications Ltd., (xx) the Asset Purchase Agreement dated 10 - , 2000 between Urbanlink and Worldwide Fiber (F.O.T.S.) No. 3, Ltd., (xxi) the Asset Purchase Agreement dated - , 2000 between Urbanlink and WFI-CN Fibre Inc., (xxii) the Asset Purchase Agreement dated - , 2000 between WFI-CN Fibre Inc. and Ledcor Communications Ltd., (xxiii) the Asset Purchase Agreement dated - , 2000 between WFI-CN Fibre Inc. and Ledcor Cayer Inc. and (xxiv) the Asset Purchase Agreement dated - , 2000 between WFI-CN Fibre Inc. and Ledcor Communications Ltd. will not violate or conflict with any provisions of the Telecommunications Act or the Ownership Regulations (as defined below) or any applicable law, rule, regulation, judgment, decision, order or decree of any court or any governmental body or agency having jurisdiction over any of the Canadian Companies and will not result in any tax or other consequence to the Company, actual or contingent, which will have a Material Adverse Effect; (xxxvii) (i) Urbanlink is eligible to operate as a telecommunications common carrier in Canada, as defined under and in accordance with the Telecommunications Act (Canada) (the "TELECOMMUNICATIONS ACT") and the Canadian Telecommunications Common Carrier Ownership and Control Regulations (the "OWNERSHIP Regulations"); (ii) none of the Canadian Companies violates the prohibition contained in subsection 16(4) of the Telecommunications Act against operating in Canada as a telecommunications common carrier when ineligible to do so; (iii) control of Urbanlink is not exercised by any person(s) that is (are) not Canadian, in accordance with the meanings ascribed to the term "control" under the Telecommunications Act and the term "Canadian" under the Ownership Regulations; and (iv) the Canadian Companies are not in violation of any judgment, decree, order, writ, law, statute, rule or regulation rendered or enacted in Canada respecting telecommunications and the regulation within Canada of telecommunications common carriers, as defined in the Telecommunications Act, applicable to the Canadian Companies, or any interpretation or policy relating thereto known to be applicable by and to them; (xxxviii)(i) Not less than eighty percent of the members of the board of directors of Urbanlink are individual Canadians, as defined under the Ownership Regulations; (ii) Canadians, as defined under the Ownership Regulations, beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than eighty percent of the issued and outstanding voting shares, as defined under the Ownership Regulations, of Urbanlink; (iii) Carrier Holdco, in respect of its ownership of and control over Urbanlink is a carrier holding corporation, as defined under the Ownership Regulations; and (iv) Carrier Holdco is a carrier holding corporation that is a qualified corporation, as defined under the Ownership Regulations; (xxxix) With the exception of Urbanlink, no other Canadian Company operates in Canada as a telecommunications common carrier as that term is defined in the Telecommunications Act; (xl) Except as disclosed in the Prospectus, neither the Company nor its subsidiaries is currently, nor will the conduct of its business as described in the Prospectus cause it to be subject to the provisions of the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (the "COMMUNICATIONS Act") or to any rules, regulations and policies of the Federal Communications Commission (the "FCC") related hereto; 11 (xli) The Company and its Material Subsidiaries are in compliance with all federal, state and local telecommunications laws, rules, regulations and policies (i) in the United States to which they are subject, including the Communications Act and the related rules, regulations and policies of the FCC except as would not have a Material Adverse Effect and (ii) in Europe to which they are subject, including the Full Competition Directive, the Licensing Directive, and the Interconnection Directive and the related rules, regulations and policies of each of the member states of the European Union except as would not have a Material Adverse Effect; (xlii) The Company and its subsidiaries, and as of the First Time of Delivery (as defined in Section 3(a)) Urbanlink will, own or possess, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by them in connection with the business now operated by them except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect; (xliii) Except as disclosed in the Prospectus and the Canadian Prospectus, no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries or affiliates on the one hand, and the directors, officers, Shareholders, customers or suppliers of the Company or any of its subsidiaries or affiliates on the other hand, which is required by the Act or Canadian Securities Laws to be described in the Prospectus or the Canadian Prospectus; (xliv) There is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or threatened against the Company or any of its subsidiaries before the National Labor Relations Board, Canada Labor Relations Board or any state, provincial, or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending or threatened against the Company or any of its subsidiaries or (iii) union representation question existing with respect to the employees of the Company or any of its subsidiaries, except in the case of clauses (i), (ii) and (iii) for such actions which, singly or in the aggregate, would not have a Material Adverse Effect. To the best knowledge of the Company, no collective bargaining organizing activities are taking place with respect to the Company or any of its subsidiaries; (xlv) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with the United States generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; 12 (xlvi) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or otherwise or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided except where failure to file would not have a Material Adverse Effect; (xlvii) The Company has made available to the Underwriters true and complete copies of all agreements between the Company or any of its directors, officers or employees on one hand and Ledcor and Urbanlink, or any of their respective directors, officers or employees on the other hand; (xlviii) the Shares are not subject to any registration rights or preemptive rights pursuant to any shareholder agreement or any other agreement, other than rights that have been expressly waived by the parties to any such agreements; and (xlix) Neither the Company nor any of its Restricted Subsidiaries, as defined in the indenture governing the Company's 12% Senior Notes due 2009, nor is any of its or their respective property or assets subject to, any obligation (including, without limitation, any mortgage, assignment, pledge, charge or other security interest) under the Hibernia Facility (as defined). (b) The Selling Shareholder represents and warrants to, and agrees with, each of the Underwriters, Sub-Underwriters and the Company that: (i) All consents, approvals, authorizations and orders necessary for the execution and delivery by the Selling Shareholder of this Agreement, and for the sale and delivery of the Shares to be sold by the Selling Shareholder hereunder, have been obtained; and the Selling Shareholder has full right, power and authority to enter into this Agreement, and to sell, assign, transfer and deliver the Shares to be sold by the Selling Shareholder hereunder; (ii) The sale of the Shares to be sold by the Selling Shareholder hereunder and the compliance by the Selling Shareholder with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Selling Shareholder is a party or by which the Selling Shareholder is bound or to which any of the property or assets of the Selling Shareholder is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Selling Shareholder if the Selling Shareholder is a corporation or the Partnership Agreement of the Selling Shareholder if the Selling Shareholder is a partnership or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Shareholder or the property of the Selling Shareholder; (iii) This Agreement has been duly and validly executed and delivered on behalf of the Selling Shareholder; 13 (iv) The Selling Shareholder has, and immediately prior to the each Time of Delivery (as defined in Section 3(a)) the Selling Shareholder will have, good and valid title to the Shares to be sold by the Selling Shareholder hereunder, free and clear of all liens, encumbrances, equities or claims; and, upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters; (v) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Subordinate Voting Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Subordinate Voting Shares or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; except for those securities the sale of which by the Selling Shareholder is contemplated by the Prospectus and the Canadian Final Prospectus; (vi) The Selling Shareholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (vii) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus, the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by the Selling Shareholder expressly for use therein, such Preliminary Prospectus, the Registration Statement, the Canadian Preliminary Prospectus and the Amended Canadian Preliminary Prospectus did, and the Prospectus and the Canadian Prospectus and any further amendments or supplements to the Registration Statement, the Prospectus and the Canadian Prospectus, when they become effective or are filed with the Commission or the Canadian Commissions, as the case may be, will conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and the Canadian Securities Laws and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (viii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with 14 respect to the transactions herein contemplated, the Selling Shareholder will deliver to you prior to or at the First Time of Delivery (as defined in Section 3(a)) a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof); and (ix) The obligations of the Selling Shareholder hereunder shall not be terminated by operation of law whether, in the case of a partnership, by the dissolution of such partnership, or by the occurrence of any other event; if any such partnership should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of the Selling Shareholder in accordance with the terms and conditions of this Agreement; 2. Subject to the terms and conditions herein set forth, (a) the Company and the Selling Shareholder agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and the Selling Shareholder, at a purchase price per share of $.............., the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company and the Selling Shareholder as set forth opposite its name in Schedule E hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule A hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and the Selling Shareholder hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule A hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder. The Company, as and to the extent indicated in Schedule E hereto, hereby grants, to the Underwriters the right to purchase at their election up to 6,941,250 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of shares in excess of the number of Firm Shares. Any such election to purchase Optional Shares shall be made in proportion to the maximum number of Optional Shares to be sold by the Company as set forth in Schedule E hereto initially with respect to the Optional Shares to be sold by the Company. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 3(a)) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. 15 (a) Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. (b) The Company understands that a portion of the Shares may be offered and sold in the Canadian Jurisdictions by Goldman Sachs Canada Inc., Credit Suisse First Boston Securities Canada Inc., Morgan Stanley Canada Limited, and Bunting Warburg Dillon Read Inc. (collectively, the "SUB-UNDERWRITERS") and TD Securities Inc., BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. pursuant to the Canadian Prospectus. Any Shares so sold by the Sub-Underwriters will be purchased by the Sub-Underwriters from their respective Underwriter affiliates at the Time of Delivery (as defined in Section 3(a)) at a price equal to the purchase price set forth in Section 2 above or such purchase price less an amount to be mutually agreed upon by the Sub-Underwriter and its Underwriter affiliate, which amount shall not be greater than the underwriting commission set forth on the cover page of the Prospectus and the Canadian Prospectus. (c) The Underwriters shall give prompt written notice to the Company and the Selling Shareholder when, in the opinion of the Underwriters, they have ceased distribution to the public of the Firm Shares or the Optional Shares, as the case may be, and after the First Time of Delivery or the Second Time of Delivery, as the case may be, of the total proceeds realized in each of the provinces from such distribution. 3. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. and DLJ may request upon at least forty-eight hours' prior notice to the Company and the Selling Shareholder shall be delivered by or on behalf of the Company and the Selling Shareholder to Goldman, Sachs & Co. and DLJ, through the facilities of the Depository Trust Company ("DTC"), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and the Selling Shareholder, as their interests may appear, to Goldman, Sachs & Co. and DLJ at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:00 a.m., New York time, on April __, 2000 or such other time and date as Goldman, Sachs & Co. and DLJ, the Company and the Selling Shareholder may agree upon in writing, and, with respect to the Optional Shares, 9:00 a.m., New York time, on the date specified by Goldman, Sachs & Co. and DLJ in the written notice given by Goldman, Sachs & Co. and DLJ of the Underwriters' election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co., DLJ and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "FIRST TIME OF DELIVERY", such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "SECOND TIME OF DELIVERY", and each such time and date for delivery is herein called a "TIME OF DELIVERY". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 6 hereof, including the cross receipt for the Shares, will be delivered at the offices of Latham & Watkins, 885 Third Avenue, New York, New York 16 10022 (the "CLOSING LOCATION"), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 3, "NEW YORK BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 4. The Company agrees with each of the Underwriters and Sub-Underwriters: (a) To (i) prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; (ii) obtain a Mutual Reliance Review Decision document for the Canadian Final Prospectus from the Principal Regulator of the Canadian Commissions not later than 5:00 p.m. (Vancouver time) on the business day next following the date of this Agreement and, if the Company has elected to use the PREP Procedures in connection with the distribution of the Shares in Canada, to file the Canadian Prospectus, in a form approved by you, with each of the Canadian Commissions not later than the time of filing of the Prospectus with the Commission, and in any event, in accordance with the PREP Procedures and the PREP Exemption Orders; (iii) advise you, promptly, when the Canadian Prospectus shall have been filed with the Canadian Commissions; (iv) advise you, promptly, after it receives any communication from any Canadian Commission or any other regulatory authority in Canada relating to the Canadian Prospectus, the offering of the Shares or the listing of the Shares on The Toronto Stock Exchange; and (v) make no further amendment or any supplement to the Registration Statement, Prospectus or Canadian Prospectus which shall be disapproved by you promptly after reasonable notice thereof; (vi) advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; (vii) advise you, promptly after it receives notice thereof, of the issuance by the Commission or any Canadian Commission of any stop order, cease trading order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, Canadian Preliminary Prospectus, Amended Canadian Preliminary Prospectus, Canadian Final Prospectus, Canadian Prospectus or any Canadian Prospectus Amendment (as defined) of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission or a Canadian Commission for the amending or supplementing of the Registration Statement, Prospectus or Canadian Prospectus or for additional information; and, (viii) in the event of the issuance of any stop order, cease trading order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, Canadian Preliminary Prospectus, Amended Canadian Preliminary Prospectus, Canadian Final Prospectus, Canadian Prospectus or any Canadian Prospectus Amendment (as defined) or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be 17 required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) Prior to 10:00 A.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters and Sub-Underwriters with copies of the Prospectus in New York City and the Canadian Prospectus in both the English and French languages in Toronto and Montreal in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as a result of which the Prospectus or the Canadian Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus or Canadian Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus or the Canadian Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or Canadian Prospectus or a supplement to the Prospectus or Canadian Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act; (d) If at any time it shall be necessary to amend or supplement the Canadian Prospectus (each such amendment or supplement, a "CANADIAN PROSPECTUS AMENDMENT") to comply with Section 4(c) or to otherwise comply with Canadian Securities Laws, the Company promptly will (i) prepare and file with each of the Canadian Commissions, an amendment or supplement in a form approved by you which will effect such compliance and file such Canadian Prospectus Amendment with the Canadian Commission in each of the Canadian Jurisdictions where such filing is required and (ii) supply such Canadian Prospectus Amendment to you in such quantities as you may reasonably request. The Company shall deliver to the Underwriters, concurrently with the delivery of any Canadian Prospectus Amendment, opinions similar to those referred to in Sections 7(l) and 7(m) with respect to such Canadian Prospectus Amendment, if a French language version of such Canadian Prospectus Amendment is required to be filed; (e) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (f) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Subordinate Voting Shares, including but not limited to any securities that are convertible 18 into or exchangeable for, or that represent the right to receive, Subordinate Voting Shares or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent except for those Securities the sale of which by the Company is contemplated by the Prospectus and the Final Canadian Prospectus or securities issued as consideration in connection with strategic investments or acquisitions of businesses, technologies or products complementary to ours, in which the Company may otherwise engage, so long as the recipients of such securities agree to be bound by the restriction set forth in this representation for the remainder of the 180-day period; (g) To furnish to its shareholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its shareholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (h) During a period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to shareholders, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its shareholders generally or to the Commission); (i) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; (j) To use its best efforts to effect the listing of the Shares on The Toronto Stock Exchange (the "Exchange") and list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ"); (k) To cause the Canadian Telecommunications Arrangement to be established prior to the First Time of Delivery; (l) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act; and (m) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 5. The Company and the Selling Shareholder covenant and agree with one another and with the several Underwriters that (a) the Company and the Selling Shareholder will pay or cause to be paid their respective pro rata share based on the proceeds received by the Company and the Selling Shareholder hereunder, as the case may be, of the following: (i) the 19 fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus, the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Prospectus and the Canadian Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state, and any relevant foreign, securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (iv) all fees and expenses in connection with listing the Shares on the Exchange and NASDAQ; and (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; and (b) the Company will pay or cause to be paid: (i) the cost of preparing stock certificates; (ii) the cost and charges of any transfer agents or registrars and (iii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 5; and (c) the Selling Shareholder will pay or cause to be paid all costs and expenses incident to the performance of the Selling Shareholder's obligations hereunder which are not otherwise specifically provided for in this Section, including (i) any fees and expenses of counsel for the Selling Shareholder, and (ii) all expenses and taxes incident to the sale and delivery of the Shares to be sold by the Selling Shareholder to the Underwriters hereunder. It is understood, however, that the Company shall bear, and the Selling Shareholder shall not be required to pay or to reimburse the Company for, the cost of any other matters not directly relating to the sale and purchase of the Shares pursuant to this Agreement, and that, except as provided in this Section, and Sections 7 and 10 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 6. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company and of the Selling Shareholder herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Shareholder shall have performed all of their obligations hereunder theretofore to be performed, and the following additional conditions: (a) (1) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 4(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; and (2) the Canadian Final Prospectus shall have been filed with each 20 of the Canadian Commissions and receipts obtained therefor and, if the Company has elected to use the PREP Procedures in connection with the distribution of the Shares in Canada, the Canadian Prospectus shall have been filed with each of the Canadian Commissions within the applicable time period prescribed by and in accordance with Section 4(a) hereof, and all other steps or proceedings shall have been taken that may be necessary to enable the Shares to be lawfully distributed to the public in each of the Canadian Jurisdictions; (b) (i) Latham & Watkins, counsel for the Underwriters, shall have furnished to you such written opinion or opinions, dated such Time of Delivery, with respect to the matters as you may reasonably request and (ii) Osler, Hoskin & Harcourt LLP, Canadian counsel for the Underwriters shall have furnished to you such written opinion or opinions, dated such Time of Delivery with respect to the matters as you may reasonably request, and each such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (c) (1) Cahill Gordon and Reindel, U.S. counsel for the Company, shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) assuming due authorization by the Company, this Agreement has been duly executed and delivered by the Company, to the extent that execution and delivery are governed by New York law; (ii) the statements under the caption "Description of Indebtedness" in the Prospectus, insofar as such statements constitute a summary of the documents referred to therein, fairly summarize in all material respects such documents; (iii) the statements in the Prospectus under the caption "Material United States and Canadian Income Tax Considerations," to the extent they constitute matters of United States law or legal conclusions with respect thereto, have been prepared or reviewed by us and are correct in all material respects and fairly summarize the matters set forth therein; (iv) the execution, delivery and performance by the Company of this Agreement, the issuance and sale by the Company of the Shares, the compliance by the Company with all provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby: (i) do not conflict with or violate any federal statute of the United States of America or any statute of the State of New York or any rule or regulation thereunder (provided that no opinion is expressed in this paragraph as to compliance with the Act, any state securities or blue sky laws or the Telecommunications Act of 1996, as amended, and the rules and regulations thereunder); or (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the indenture governing the Company's 12% Senior Notes due 2009, the indenture governing the Company's 12 1/2% Senior Notes due 2008, the indenture governing the Company's U.S. Dollar ___% Senior Notes due 2008, the indenture governing the Company's Euro ___% Senior Notes due 2008, the agreement governing the Hibernia project financing Facilities entered into by the Company, Goldman Sachs, DLJ, Credit Suisse First Boston, Toronto Dominion, Bank of Montreal and EDC (the "HIBERNIA FACILITIES"); 21 (v) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the net proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (vi) assuming the due authorization, execution and delivery of this Agreement by each party thereto, the Company has validly and irrevocably submitted to the jurisdiction of any United States or state court in the State of New York, County of New York, has expressly accepted the non-exclusive jurisdiction of any such court and has validly and irrevocably appointed CT Corporation System as its authorized agent in any suit or proceeding against them instituted by the Underwriters based on or arising under this Agreement; (vii) each of Worldwide Fiber IC LLC, IC Fiber Alabama LLC, IC Fiber Illinois LLC, IC Fiber Iowa LLC, IC Fiber Kentucky LLC, IC Fiber Louisiana LLC, IC Fiber Mississippi LLC and IC Fiber Tennessee LLC (collectively, the "DELAWARE COMPANIES") has been duly organized as a Delaware limited liability Company, and is validly existing and in good standing under the laws of Delaware; there are no restrictions on the power and capacity of each of the Delaware Companies to own and lease property and assets and to carry on business; and (viii) the Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. The opinion of Cahill Gordon and Reindel described in Section 6(c)(1) above shall be rendered to you at the request of the Company and shall so state therein. In addition, such counsel shall state that it has participated in conferences, by person or by telephone, with officers and other representatives of the Company, with representatives of the chartered accountants for the Company and with representatives of the Underwriters and their counsel. At such meetings the contents of the Registration Statement and Prospectus and related matters were discussed among the parties present at such meetings. Although such counsel will not be passing upon and will not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus except as set forth in paragraphs (ii) and (iii) above, such counsel shall advise the Underwriters that they have no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the 22 statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Time of Delivery, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) (2) Farris, Vaughan, Wills & Murphy, counsel for the Company, shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) each of the Canadian Companies is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation; each of the Canadian Companies has the corporate power and capacity to own and lease property and assets and to carry on business as described in the Prospectus and the Canadian Prospectus; (ii) each of the Canadian Companies is qualified or registered to carry on business as an extra-provincial corporation in each jurisdiction in which it is required to be so qualified or registered; (iii) the Company has authorized capital as set forth in the Prospectus and the Canadian Prospectus, and all of the issued shares of capital stock of the Company (including the Shares being delivered at such Time of Delivery) have been duly and validly allotted and issued and are outstanding as fully paid and non-assessable; and the Shares conform to the description contained in the Canadian Prospectus; (iv) there are no statutory rights, including pre-emptive or similar rights, to purchase or otherwise acquire shares or sell or otherwise transfer the share capital of the Company pursuant to any provision of the laws of Nova Scotia or the federal laws of Canada applicable therein or the Memorandum of Association or Articles of Association of the Company; (v) all of the issued shares of each Canadian Company that is a subsidiary of the Company have been duly and validly authorized and issued and are outstanding as fully paid and non-assessable; (vi) to the best of such counsel's knowledge and other than as set forth in the Prospectus and the Canadian Prospectus, there are no pending or threatened legal or governmental proceedings to which any of the Canadian Companies is a party which questions the validity of this Agreement or the Transfer Restriction Agreement or any action taken or to be taken pursuant hereto or thereto or, if determined adversely to any of the Canadian Companies, would individually or in the aggregate have a Material Adverse Effect; (vii) the Company has the corporate power and capacity to enter into this Agreement and the Transfer Restriction Agreement and to carry out its obligations under this Agreement and the Transfer Restriction Agreement; the execution and delivery of this Agreement and the Transfer Restriction Agreement and the 23 consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company; (viii) each of this Agreement and the Transfer Restriction Agreement has been duly authorized, executed and delivered by the Company, and the Transfer Restriction Agreement is a valid and legally binding agreement, enforceable against the Company in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, transfer and other laws relating to or affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity); (ix) WFH has the corporate power and capacity to enter into the Transfer Restriction Agreement and to carry out its obligations under the Transfer Restriction Agreement; the execution and delivery of the Transfer Restriction Agreement and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of WFH ; (x) The Transfer Restriction Agreement has been duly authorized, executed and delivered by WFH, and the Transfer Restriction Agreement is a valid and legally binding agreement, enforceable against WFH in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, transfer and other laws relating to or affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity); (xi) the execution and delivery by the Company of this Agreement and the Transfer Restriction Agreement, the issue and sale of the Shares being delivered at such Time of Delivery to be sold by the Company, the compliance by the Company with all of the provisions of this Agreement and the Transfer Restriction Agreement, the compliance by WFH with all of the provisions of the Transfer Restriction Agreement and the consummation of the transactions contemplated in this Agreement and the Transfer Restriction Agreement will not conflict with or result in a breach or violation, of the provisions of the Memorandum of Association or Articles of Association of the Company or any laws of the Province of British Columbia or Nova Scotia or the federal laws of Canada; (xii) the statements set forth in the Prospectus and the Canadian Prospectus under the captions "Description of our Capital Stock" and "Description of Capital Stock and Share Capital Reorganization," insofar as they purport to constitute a summary of the terms of the Stock, fairly summarize in all material respects the attributes of such Stock, and the statements set forth under the captions "Regulation - Canada," "Shares Eligible for Future Sale - Canadian Resale Restrictions," "Risk Factors - Extensive Regulation - Canada," and "Enforceability of Civil Liabilities Against Foreign Persons," insofar as such disclosure describes or summarizes matters of Canadian law or constitutes conclusions of Canadian law, fairly summaries such matters or conclusions of law; (xiii) the form of certificate for the Shares has been duly approved and adopted by the Company and complies with the provisions of the Companies Act (Nova Scotia) and the requirements of The Toronto Stock Exchange; 24 (xiv) The listing of the Shares on The Toronto Stock Exchange has been approved by such Exchange, subject only to the filing of documents and evidence of satisfactory distribution in accordance with the requirements of such Exchange on or before July 11, 2000. (xv) the statements contained in the Prospectus and the Canadian Prospectus under the caption "Material United States and Canadian Income Tax Considerations - Certain Canadian Federal Income Tax Considerations" and, "Eligibility for Investment" fairly and accurately describe the principal Canadian federal income tax consequences under the INCOME TAX ACT (Canada); (xvi) Montreal Trust Company of Canada at its principal stock and bond offices in Vancouver and Toronto and HSBC Bank USA have been duly appointed as the transfer agents and registrars for the Shares; (xvii) the statements in the Canadian Prospectus under the heading "Purchasers' Statutory Rights" are correct insofar as such statements are, or refer to, statements of law or legal conclusions relating to the laws of the Canadian Jurisdictions; (xviii) The Canadian Telecommunications Arrangement (as described in the Prospectus and the Canadian Prospectus) including the execution, delivery and performance of the Canadian Telecommunications Agreements by the parties thereto will not violate or conflict with any provisions of the Telecommunications Act or the Ownership Regulations, any applicable rule, regulation, judgment, order or decree of the Canadian Radio-television and Telecommunications Commission (the "CRTC") or Industry Canada or the articles or by-laws, or the Memorandum of Association or Articles of Association, as the case may be, of each of the parties thereto; (xix) no filing, license, consent, permission, approval, authorization, or order of any court or governmental agency or body in Canada is required to be obtained by the Canadian Companies under the laws of the Provinces of British Columbia or Nova Scotia or the federal laws of Canada applicable therein, in connection with the execution, delivery and performance of this Agreement by the Company or to permit the issue, delivery and sale by the Company of the Shares, except such filings, licenses, consents, permissions, approvals, authorizations or orders that have been obtained; (xx) No filing, license, consent, permission, approval, authorization, or order of any court or governmental agency of body in Canada is required to be obtained by any of the Canadian Companies from the CRTC or Industry Canada in connection with the Canadian Telecommunications Arrangement; (xxi) the choice of law provisions set forth in Section 16 hereof, is legal, valid and binding under the laws of the Province of British Columbia and the federal laws of Canada applicable therein, provided that such choice of law is bona fide (in the sense that it was not made with a view to avoiding the consequences of the laws of any other jurisdiction) and provided that such choice of law is not contrary to public policy, as that term is applied by the courts in the 25 Province of British Columbia ("PUBLIC POLICY"); such counsel knows of no Public Policy reason why the courts in the Province of British Columbia (a "CANADIAN COURT") would not give effect to the choice of New York law as the proper law of this Agreement and if this Agreement is sought to be enforced in the Province of British Columbia in accordance with the laws applicable thereto as chosen by the parties, namely New York law, a Canadian Court would, subject to the foregoing, recognize the choice of New York law, and, upon appropriate evidence as to such law being adduced, apply such law; provided that none of the provisions of this Agreement, or of applicable New York law, are contrary to Public Policy or foreign revenue, expropriation or penal laws; provided, however, that, in matters of procedure, the laws of the Province of British Columbia will be applied and a Canadian Court will retain discretion to decline to hear such action if it is contrary to Public Policy for it to do so, or if it is not the proper forum to hear such an action, or if concurrent proceedings are being brought elsewhere; (xxii) there are no reasons, to such counsel's knowledge, under the laws of the Province of British Columbia or the federal laws of Canada applicable therein or with respect to the application of New York law by a Canadian Court, why enforcement of this Agreement would be avoided on the grounds of Public Policy; (xxiii) the Company has the legal capacity to sue and be sued in its own name under the laws of the Province of British Columbia and the federal laws of Canada applicable therein; the Company has the power to submit, and has irrevocably submitted, to the non-exclusive jurisdiction of the federal or state courts located in the Borough of Manhattan in The City of New York (a "NEW YORK COURT") and has validly and irrevocably appointed CT Corporation System as its authorized agent for the purpose described in Section 16 hereof; the Company has the power to submit, and has irrevocably submitted, to the non-exclusive jurisdiction of the New York Court and has validly and irrevocably appointed CT Corporation System as its authorized agent under the laws of the Province of British Columbia and the federal laws of Canada applicable therein; the irrevocable submission of the Company to the non-exclusive jurisdiction of the New York Court and the waivers by it of any immunity and any objection to the venue of the proceeding in a New York Court herein is legal, valid and binding under the laws of the Province of British Columbia and the federal laws of Canada applicable therein, and such counsel knows of no reason why a Canadian Court would not give effect to such submission and waivers; the irrevocable submission of the Company to the non-exclusive jurisdiction of the New York Court and the waivers by the Company of any immunity and any objection to the venue of the proceeding in a New York Court herein is legal, valid and binding under the laws of the Province of British Columbia and the federal laws of Canada applicable therein, and such counsel knows of no reason why a Canadian Court would not give effect to such submission and waivers; (xxiv) service of process in the manner set forth in Section 16 hereof will be effective to confer valid personal jurisdiction over the Company under the laws of the Province of British Columbia and the federal laws of Canada applicable therein; (xxv) a Canadian Court will recognize as valid and final, and will enforce, any final and conclusive judgment in personam, of any New York Court that is not impeachable as void or voidable under the internal laws of the State of New York for a sum certain in respect of the enforcement of the obligations of the Company under this Agreement, if (i) the court rendering such judgment had jurisdiction over the judgment debtor, as recognized by the Canadian Court (and submission by the Company in this Agreement to the jurisdiction of the New York Court, will be sufficient for this purpose), (ii) such judgment was not obtained by fraud or in a manner contrary to natural justice 26 and the enforcement thereof would not be inconsistent with Public Policy, or contrary to any order made by the Attorney General of Canada under the Foreign Extraterritorial Measures Act (Canada), (iii) the enforcement of such judgment does not constitute, directly or indirectly, the enforcement of foreign revenue, expropriatory or penal laws, (iv) the action to enforce such judgment is commenced within the applicable limitation period and (v) such counsel knows of no Public Policy reason for avoiding the recognition of judgments of a New York Court under this Agreement under the laws of the Province of British Columbia and the federal laws of Canada applicable therein; (xxvi) all necessary documents have been filed, all requisite proceedings have been taken and all legal requirements have been fulfilled by the Company in order to qualify the Shares for distribution and sale to the public in each of the Canadian Jurisdictions by or through persons appropriately registered under the Canadian Securities Laws who have complied with all relevant provisions of such laws; (xxvii) Except for withholding tax eligible on any amount paid or credited, or deemed to be paid or credited to a non-resident person as, on account or in lieu of payment of, or in satisfaction of a dividend, no stamp duty, registration or documentary taxes, duties or similar charges are payable to the Canadian government or to any political subdivision or taxing authority thereof or therein in connection with (A) the issuance, sale and delivery by the Company and the Selling Shareholder to or for the respective accounts of the Underwriters of the Shares or (B) the sale and delivery outside Canada by the Underwriters of the Shares to the initial purchasers thereof in the manner contemplated in this Agreement, no withholding tax will be payable by or on behalf of the Underwriters to the Canadian government or to any political subdivision or taxing authority thereof or therein in connection with (A) the issuance, sale and delivery by the Company and the Selling Shareholder to or for the respective accounts of the Underwriters of the Shares, (B) the sale and delivery outside Canada by the Underwriters of the Shares to the initial purchasers thereof in the manner contemplated in this Agreement; or (C) the payment or crediting by the Company or the Selling Shareholder of any commission or fee to or for the respective account of any Underwriter who is not resident in Canada, provided that commission or fee is payable in respect of services rendered by such Underwriter outside of Canada. (xxviii) No goods and services tax imposed under the federal laws of Canada will be collectible by an Underwriter in respect of the payment or crediting of any discount, commission or fee as contemplated by this Agreement to any Underwriters, provided that any such discount, commission or fee is payable in respect of services performed by such Underwriter wholly outside of Canada; (xxix) (a) Urbanlink is eligible to operate as a telecommunications common carrier in Canada, as defined under and in accordance with the Telecommunications Act (Canada) (the "Telecommunications Act") and the Canadian Telecommunications Common Carrier Ownership and Control Regulations (the "OWNERSHIP Regulations"); (b) none of the Canadian Companies violates the prohibition contained in subsection 16(4) of the Telecommunications Act against operating in Canada as a telecommunications common carrier when ineligible to do so; (c) control of Urbanlink is not exercised by any person(s) that is (are) not Canadian, in accordance with the meanings ascribed to the term "control" under the Telecommunications Act and the term "Canadian" under the Ownership Regulations; and (d) none of the Canadian Companies 27 is in violation of any judgment, decree, order, writ, law, statute, rule or regulation rendered or enacted in Canada respecting telecommunications and the regulation within Canada of telecommunications common carriers, as defined in the Telecommunications Act, applicable to any of the Canadian Companies, or any interpretation or policy relating thereto known to such counsel to be applicable to them; (xxx) after giving effect to the performance by the Company of its obligations under this Agreement at such Time of Delivery: (a) not less than eighty percent of the members of the board of directors of Urbanlink are individual Canadians, as defined under the Ownership Regulations; (b) Canadians, as defined under the Ownership Regulations beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, at least 80% of the issued and outstanding voting shares, as defined under the Ownership Regulations, of Urbanlink; (c) Carrier Holdco, in respect of its ownership of and control over Urbanlink, is a carrier holding corporation, as defined under the Ownership Regulations; and (d) Carrier Holdco is a carrier holding corporation that is a qualified corporation, as defined under the Ownership Regulations; (e) no notices, reports or other filings are required to be made by any of the Canadian Companies, either prior to or immediately after giving effect to the performance by the Company of its obligations under this Agreement at such Time of Delivery, with, nor are any consents, registrations, applications, approvals, permits, licenses or authorizations required to be obtained by any of the Canadian Companies from the CRTC or Industry Canada pursuant to Canadian telecommunications law in connection with the performance by the Company of its obligations under this Agreement at such Time of Delivery; (f) to the knowledge of such counsel, and except as described in the Prospectus and the Canadian Prospectus, no litigation, regulatory proceeding or investigation is pending against the Canadian Companies in connection with the requirements of Canadian telecommunications law existing at such Time of Delivery; and (g) with the exception of Urbanlink, no other Canadian Company operates in Canada as a telecommunications common carrier as that term is defined in the Telecommunications Act. Such counsel shall also confirm the accuracy of the statements set forth under the heading "Eligibility for Investment" in the Canadian Prospectus. Such counsel shall also confirm that at the date of the Registration Statement, Prospectus and Canadian Prospectus and at such Time of Delivery that no facts have come to their attention in the course of their review that lead them to believe that the Registration 28 Statement, Prospectus and Canadian Prospectus contained or contains any untrue statement of a material fact, or omitted or omits to state a material fact necessary to make a statement therein not misleading in light of the circumstances under which it was made, within the meaning of the Securities Act (British Columbia). The opinion of Farris, Vaughan, Wills & Murphy described in Section 6(c)(2) above (i) shall be rendered to you at the request of the Company and shall so state therein, (ii) as to matters of Alberta law, will rely upon the opinion of the Company's Alberta Counsel, McLennan Ross, (iii) as to matters of Nova Scotia law, will rely upon the opinion of Stewart McKelvey Stirling Scales (iv) as to matters of law in the other Canadian Jurisdictions, other than British Columbia, will rely upon counsel of good standing whom they believe to be reliable and who are acceptable to you; and (v) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. (c) (3) Beckley, Singleton, Jemison, Cobeaga & List, Chtd., special Nevada counsel for the Company, shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you to the effect that: (i) each of PFL Holdings, Inc., Worldwide Fiber (USA), Inc., Ledcor Communications, Inc., Worldwide Fiber IC Holdings, Inc. (fka Worldwide Fiberlink, Inc.), Worldwide Fiber Networks, Inc. (fka Pacific Fiber Link POR-SAC, Inc.), Pacific Fiber Link Sea-Por, Inc., Worldwide Fiber Network Services, Inc., WFI Fiber Inc. and Worldwide Fiber (F.O.T.S.), Inc. (collectively, the "NEVADA SUBSIDIARIES") has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Nevada and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) each of the Nevada Subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; (iii) all of the outstanding shares of capital stock of each of the Nevada Subsidiaries has been duly authorized and validly issued and is fully paid and non-assessable, and are owned by the Company, free and clear of any Lien; (iv) the execution, delivery, and performance of this Agreement will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the Articles or Bylaws of any of the Nevada Subsidiaries, or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Nevada Subsidiaries, taken as a whole, to which any of the Nevada Subsidiaries is a party or by which any of the Nevada Subsidiaries is bound; violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over any of the Nevada Subsidiaries or their respective property; result in the imposition or creation of (or the obligation to create or impose) a Lien under, any agreement or instrument to which any of the Nevada Subsidiaries or their respective property is bound; or result in the termination, suspension or revocation of any Authorization of any of the Nevada Subsidiaries or result in any other impairment of the rights of the holder of such Authorization; and 29 (v) there are no known legal or governmental proceedings pending or threatened to which any of the Nevada Subsidiaries is or could be a party or to which any of their property is or could be subject, which might result, singly or in the aggregate, in a Material Adverse Effect. The opinion of Beckley, Singleton, Jemison, Cobeaga & List, Chtd. described in Section 6(c)(3) above shall be rendered to you at the request of the Company and shall so state therein. (c) (4) Wiley Rein & Fielding, special regulatory counsel for the Company, shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you to the effect that the statements, with respect to federal communications law, under the captions "Regulation--United States," and "Risk Factors--Extensive Regulation--United States" in the Prospectus, insofar as such statements as a whole constitute a summary of the legal matters, documents and proceedings referred to therein, fairly present in all material respects such legal matters, documents and proceedings. The opinion of Wiley Rein & Fielding described in this Section 6(c)(4) shall be rendered to you at the request of the Company and shall so state therein. (c) (5) Bird & Bird, special regulatory counsel for the Company, shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that the statements, with respect to European regulatory matters, under the captions "Regulation--European Union" and "Risk Factors--Extensive Regulation" (to the extent such section deals with European Regulatory matters) in the Prospectus insofar as such statements as a whole constitute a summary of the legal matters, documents and proceedings referred to therein, fairly present in all material respects such legal matters, documents and proceedings. The opinion of Bird & Bird described in this Section 6(c)(5) shall be rendered to you at the request of the company and shall so state therein. (d) The counsel for the Selling Shareholder, as indicated in Schedule E hereto, shall have furnished to you their written opinion with respect to the Selling Shareholder dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder; and the sale of the Shares to be sold by the Selling Shareholder hereunder and the compliance by the Selling Shareholder with all of the provisions of this Agreement, and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any agreement which the Selling Shareholder has represented to such counsel as material to the Selling Shareholder, all of which are listed on a schedule to the opinion of such counsel, nor will such action result in any violation of the provisions of the Partnership Agreement of the Selling Shareholder or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Selling Shareholder or the property of the Selling Shareholder; 30 (iii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated by this Agreement in connection with the Shares to be sold by the Selling Shareholder hereunder, except [name any such consent, approval, authorization or order] which [has] [have] been duly obtained and [is] [are] in full force and effect, such as have been obtained under the Act and the Canadian Securities Laws in connection with the purchase and distribution of such Shares by the Underwriters; (iv) Immediately prior to such Time of Delivery, the Selling Shareholder had full right, power and authority to sell, assign, transfer and deliver the Shares to be sold by the Selling Shareholder hereunder; and (v) There are no reasons, to such counsel's knowledge, under the laws of the Province of Alberta, or the federal laws of Canada applicable therein or with respect to the application of New York law by a Canadian Court, why enforcement of this Agreement would be avoided on the grounds of Public Policy. In rendering the opinion in paragraph (iv), such counsel may rely upon a certificate of the Selling Shareholder in respect of matters of fact as to ownership of the Shares sold by the Selling Shareholder, provided that such counsel shall state that they believe that both you and they are justified in relying upon such certificate; (e) On the date of the Prospectus and the Canadian Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at each Time of Delivery, PricewaterhouseCoopers LLP and Deloitte & Touche LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, Prospectus and Canadian Prospectus; (f) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus and the Canadian Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus and the Canadian Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus and the Canadian Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the 31 Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus and the Canadian Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus and the Canadian Prospectus; (g) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (h) On or after the date hereof there shall not have occurred any of the following: (i) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, The Toronto Stock Exchange, the American Stock Exchange or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (ii) the suspension or material limitation of trading of any securities of the Company on any exchange or in the over-the-counter market, (iii) the declaration of a banking moratorium by either federal or New York State authorities or authorities in Canada or any province thereof, (iv) a change or development involving a prospective change in taxation affecting the Company, the Shares or the transfer thereof or the imposition of exchange controls by the United States or Canada, (v) the outbreak or escalation of hostilities involving the United States or Canada or the declaration by the United States or Canada of a national emergency or war, if the effect of any such event specified in this clause (v) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus, (vi) the occurrence of any material adverse change in the existing financial, political or economic conditions in the United States or Canada or elsewhere which, in the judgment of the Representatives would materially and adversely affect the financial markets or the market for the Shares and other equity securities, (vii) the enactment, publication, decree or other promulgation of any federal, state, provincial or municipal statute, regulation, rule or order of any court or other governmental authority which in the judgment of the Representatives materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, or (viii) the taking of any action by any federal, state, provincial, municipal or local government or agency in respect of its monetary or fiscal affairs which in the judgment of the Representatives has a material adverse effect on the financial markets in the United States or Canada. (i) The Shares at such Time of Delivery shall have been conditionally approved for listing on the Exchange, subject to the Company fulfilling all of the requirements of the Exchange, and shall be listed for quotation on NASDAQ; (j) the Canadian Telecommunications Arrangement shall have been established and the Canadian Telecommunications Agreements shall have been executed and delivered by each of the parties thereto; 32 (k) The Company has obtained and delivered to the Underwriters executed copies of an agreement from each of the parties listed on Schedule G hereto agreeing not to sell, transfer of hypothecate their Shares for a set period of time in form and substance satisfactory to you; (l) The Company shall have complied with the provisions of Section 4(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; (m) PricewaterhouseCoopers LLP shall have furnished to the Underwriters an opinion, dated the respective dates of the documents enumerated below, in form and substance satisfactory to the Underwriters that the French language versions of the pro forma financial statements and notes to such statements, the historical financial statements and notes to such statements and the related auditors' reports on such statements, the Management's Discussion and Analysis of Financial Condition and Results of Operations and the tables of financial and accounting information and notes thereto (collectively, the "Financial Information") contained in each of the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Prospectus are in all material respects a complete and proper translation of the English language versions thereof. (n) Lafleur, Brown, Quebec counsel to the Company, shall have furnished to the Underwriters an opinion, in form and substance satisfactory to the Underwriters, dated the respective dates of the documents enumerated below, that, except for the Financial Information as to which they need express no opinion, the French language version of each of the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus and the Canadian Prospectus is in all material respects a complete and proper translation of the English language version thereof and that such version is not susceptible of any materially different interpretation with respect to any matter contained therein; and that all laws relating to the use of the French language will have been complied with in connection with the offer and sale of the Shares in the Province of Quebec. (o) On or prior to such Time of Delivery, the Transfer Restriction Agreement, in form and substance satisfactory to the Underwriters and their counsel, shall have been executed and delivered to you by the parties thereto. (p) The Company and the Selling Shareholder shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company and of the Selling Shareholder, respectively, satisfactory to you as to the accuracy of the representations and warranties of the Company and the Selling Shareholder, respectively, herein at and as of such Time of Delivery, as to the performance by the Company and the Selling Shareholder of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (f) of this Section. 7. (a) The Company and the Selling Shareholder, jointly and severally, will indemnify and hold harmless each Underwriter and Sub-Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter and Sub-Underwriter may become subject, under the Act, the Canadian Securities Laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based 33 upon (i) an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any misrepresentation or alleged misrepresentation (as defined in the Canadian Securities Laws) contained in the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus, the Canadian Prospectus, any Canadian Prospectus Amendment, or any untrue, false or misleading statement therein, or any omission or alleged omission to state therein any material fact or information required to be stated therein or necessary to make any of the statements therein not misleading in light of the circumstances in which they were made, and will reimburse each Underwriter and Sub-Underwriter for any legal or other expenses reasonably incurred by such Underwriter and Sub-Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company and the Selling Shareholder shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement, the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus, the Canadian Prospectus or any Canadian Prospectus Amendment, in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. or DLJ expressly for use therein; PROVIDED, FURTHER, that the Selling Shareholder will not be liable for any amounts pursuant to this Section 7(a) in excess of the total proceeds to the Selling Shareholder from the sale of the Shares. (b) Each Underwriter and Sub-Underwriter will indemnify and hold harmless the Company and the Selling Shareholder against any losses, claims, damages or liabilities to which the Company or the Selling Shareholder may become subject, under the Act, the Canadian Securities Laws or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus, the Canadian Prospectus or any Canadian Prospectus Amendment or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement, the Canadian Preliminary Prospectus, the Amended Canadian Preliminary Prospectus, the Canadian Final Prospectus, the Canadian Prospectus or any Canadian Prospectus Amendment in reliance upon and in conformity with written information furnished to the Company by such Underwriter or Sub-Underwriter through Goldman, Sachs & Co. or DLJ expressly for use therein; and will reimburse the Company and the Selling Shareholder for any legal or other expenses reasonably incurred by the Company or the Selling Shareholder in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the 34 indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. No Indemnifying Party shall be required to indemnify an Indemnified Party for any amount paid or payable by such Indemnified Party in the settlement of any action, proceeding or investigation without the written consent of such Indemnifying Party, with consent which shall not be unreasonably withheld. (d) If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters and Sub-Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholder on the one hand and the Underwriters and Sub-Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters and the Sub-Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholder bear to the total underwriting discounts and commissions received by the Underwriters and the Sub-Underwriters, in each case as set forth in the table on the cover page of the Prospectus and the Canadian Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholder on the one hand or the Underwriters and Sub-Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent 35 such statement or omission. The Company, the Selling Shareholder and the Underwriters and Sub-Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by PRO RATA allocation (even if the Underwriters and Sub-Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter or Sub-Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter or Sub-Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' and Sub-Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company and the Selling Shareholder under this Section 7 shall be in addition to any liability which the Company and the Selling Shareholder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter or Sub-Underwriter within the meaning of the Act; and the obligations of the Underwriters and Sub-Underwriters under this Section 7 shall be in addition to any liability which the respective Underwriters and Sub-Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company or the Selling Shareholder within the meaning of the Act. 8. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Shareholder shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Shareholder that you have so arranged for the purchase of such Shares, or the Company and the Selling Shareholder notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Shareholder shall have the right to postpone a Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Prospectus or the Canadian Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement, the Prospectus or the Canadian Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. 36 (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Shareholder as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Shareholder shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Shareholder as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Shareholder shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company or the Selling Shareholder, except for the expenses to be borne by the Company and the Selling Shareholder and the Underwriters as provided in Section 5 hereof and the indemnity and contribution agreements in Section 7 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 9. The respective indemnities, agreements, representations, warranties and other statements of the Company, the Selling Shareholder and the several Underwriters and Sub-Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or Sub-Underwriter or any controlling person of any Underwriter or Sub-Underwriter, or the Company, or the Selling Shareholder, or any officer or director or controlling person of the Company, or any controlling person of the Selling Shareholder, and shall survive delivery of and payment for the Shares. Anything herein to the contrary notwithstanding, the indemnity agreement of the Company in subsection (a) of Section 7 hereof, the representations and warranties in subsections (a)(ii) and (a)(iii) of Section 1 hereof and any representation or warranty as to the accuracy of the Registration Statement or the Prospectus contained in any certificate furnished by the Company pursuant to Section 6 hereof, insofar as they may constitute a basis for indemnification for liabilities (other than payment by the Company of expenses incurred or paid in the successful defense of any action, suit or proceeding) arising under the Act, shall not extend to the extent of any interest therein of a controlling person or partner of an Underwriter or Sub-Underwriter who is a director, officer or controlling person of the Company when the Registration Statement has become effective or who, with his or her consent, is named in the Registration Statement as about to become a director of the Company, except in each case to the extent that an interest of such character shall have been determined by a court of appropriate jurisdiction as not against public policy as expressed in the Act. Unless in the opinion of counsel for the Company the matter has been settled by controlling precedent, the 37 Company will, if a claim for such indemnification is asserted, submit to a court of appropriate jurisdiction the question of whether such interest is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 10. If this Agreement shall be terminated pursuant to Section 8 hereof, neither the Company nor the Selling Shareholder shall then be under any liability to any Underwriter or Sub-Underwriter except as provided in Sections 5 and 7 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Shareholder as provided herein, the Company and the Selling Shareholder pro rata (based on the number of Shares to be sold by the Company and Selling Shareholder hereunder) will reimburse the Underwriters and Sub-Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters and Sub-Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company and the Selling Shareholder shall then be under no further liability to any Underwriter or Sub-Underwriter in respect of the Shares not so delivered except as provided in Sections 5 and 7 hereof. 11. In all dealings hereunder, you shall act on behalf of each of the Underwriters and Sub-Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter or Sub-Underwriter made or given by you jointly or by Goldman, Sachs & Co. and DLJ on behalf of you as the representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters or the Sub-Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration Department; if to the Selling Shareholder shall be delivered or sent by mail, telex or facsimile transmission to counsel for the Selling Shareholder at its address set forth in Schedule E hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary; provided, however, that any notice to an Underwriter or its Sub-Underwriter affiliate pursuant to Section 7(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter or its Sub-Underwriter affiliate at its address set forth in its Underwriters' Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company or the Selling Shareholder by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 12. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Sub-Underwriters, the Company and the Selling Shareholder and, to the extent provided in Sections 7 and 9 hereof, the officers and directors of the Company and each person who controls the Company, the Selling Shareholder or any Underwriter or Sub-Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter or Sub-Underwriter shall be deemed a successor or assign by reason merely of such purchase. 13. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 38 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 15. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 16. The Company and its subsidiaries agree that any suit, action or proceeding against them brought by any Underwriter or Sub-Underwriter, the directors, officers, employees and agents of any Underwriter, or by any person who controls any Underwriter or Sub-Underwriter, arising out of or based upon this Agreement or the transactions contemplated hereby, may be instituted in any State or Federal court in The City of New York, and waive any objection which they may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submit to the non-exclusive jurisdiction of such courts in any suit, action or proceeding. Each of the Company and the Selling Shareholder has appointed CT Corporation System as its authorized agent (the "AUTHORIZED AGENT") upon whom process may be served in any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated herein that may be instituted in any State or Federal court in The City of New York, by any Underwriter or Sub-Underwriter, the directors, officers, employees and agents of any Underwriter or Sub-Underwriter, or by any person, if any, who controls any Underwriter or Sub-Underwriter, and expressly accept the non-exclusive jurisdiction of any such court in respect of any such suit, action or proceeding. Each of the Company and the Selling Shareholder hereby represents and warrants that the Authorized Agent has accepted such appointment and has agreed to act as said agent for service of process, and each of the Company and the Selling Shareholder agrees to take any and all action, including the filing of any and all documents that may be necessary to continue such appointment in full force and effect as aforesaid. Service of process upon the Authorized Agent shall be deemed, in every respect, effective service of process upon the Company or the Selling Shareholder, as the case may be. Notwithstanding the foregoing, any action arising out of or based upon this Agreement may be instituted by any Underwriter or Sub-Underwriter, the directors, officers, employees and agents of any Underwriter or Sub-Underwriter, or by any person who controls any Underwriter or Sub-Underwriter, in any court of competent jurisdiction in Canada. 39 If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and each of the Representatives plus one for each counsel, if any counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters and the Sub-Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters and the Sub-Underwriters, the Company and the Selling Shareholder. It is understood that your acceptance of this letter on behalf of each of the Underwriters and the Sub-Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company and the Selling Shareholder for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, 360NETWORKS INC. By: ----------------------------------- Name: Title: LEDCOR LIMITED PARTNERSHIP By: ----------------------------------- Name: Title: Accepted as of the date hereof: Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation Credit Suisse First Boston Securities Corporation, TD Securities Inc., Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc., Morgan Stanley & Co. Incorporated, Chase Securities Inc., RBC Dominion Securities Inc. Warburg Dillon Read LLC. BY: --------------------------------------------- (Goldman, Sachs & Co.) BY: --------------------------------------------- (Donaldson, Lufkin & Jenrette Securities Corporation) On behalf of each of the Underwriters and Sub-Underwriters 40 SCHEDULE A
NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF PURCHASED IF FIRM SHARES MAXIMUM OPTION UNDERWRITER TO BE PURCHASED EXERCISED ----------- --------------- ------------------ Goldman, Sachs & Co................................................. Donaldson, Lufkin & Jenrette Securities Corporation................. Credit Suisse First Boston Corporation.............................. TD Securities Inc................................................... Bear, Stearns & Co. Inc............................................. BMO Nesbitt Burns Inc............................................... Morgan Stanley & Co. Incorporated................................... Chase Securities Inc................................................ RBC Dominion Securities Inc......................................... Warburg Dillon Read LLC............................................. --------------- ------------------ Total............................................................... 46,000,000 6,900,000 =============== ================== SUB-UNDERWRITERS ----------------
Goldman Sachs Canada Inc. Credit Suisse First Boston Securities Canada Inc. Morgan Stanley Canada Limited Bunting Warburg Dillon Read Inc. 41 SCHEDULE B ---------- SUBSIDIARIES Ledcom Holdings Ltd. Ledcor Communications Ltd. Ledcor Cayer Inc. Ledcor Engineering Inc. Worldwide Fiber Finance Ltd. Worldwide Fiber Networks Ltd. Worldwide Fiber (F.O.T.S.) Ltd. Worldwide Fiber (F.O.T.S.) No. 2, Inc. WFI-CN Fibre Inc. Worldwide Fiber Comuncations Ltd. Worldwide Fiber (F.O.T.S.) No. 3, Ltd. WFNS Holdings Ltd. Worldwide Fiber Network Services Ltd. Ledcor Communications, Inc. Worldwide Fiber (USA), Inc. Worldwide Fiber Networks, Inc. Worldwide Fiber (F.O.T.S.), Inc. Worldwide Fiber IC Holdings, Inc. Worldwide Fiber IC LLC IC Fiber Alabama LLC IC Fiber Illinois LLC IC Fiber Iowa LLC IC Fiber Kentucky LLC IC Fiber Mississippi LLC IC Fiber Tennessee LLC PFL Holdings, Inc. Pacific Fiber Link SEA-POR, Inc. Worldwide Fiber Network Services, Inc. WFI Liquidity Management Hungary Limited Liability Company WFI Urbanlink Ltd. WFI Fiber Inc. Worldwide Fiber Networks (UK) Limited 360 Urbanlink Ltd. Urbanlink Holdings Ltd. Urbanlink Equipment Ltd. WFI Metrobuild Ltd. Worldwide Telecom (Bermuda) Holdings Ltd. Worldwide Telecom Limited Worldwide Telecom (Bermuda) Ltd. Worldwide Telecom (Barbados) Inc. Worldwide Telecom (Denmark) ApS Worldwide Telecom (Canada) Inc. Worldwide Telecom (USA) Inc. WTI Telecom (Ireland) Limited WTI Telecom (UK) Limited Worldwide Telecom Distribution (USA) Inc. 42 WTI Telecom Distribution (UK) Limited 360pacific (Bermuda) holdings ltd. 360pacific (Bermuda) ltd. Threesixty pacific (Barbados) inc. 360pacific (USA) inc. 43 SCHEDULE C MATERIAL SUBSIDIARIES Ledcom Holdings Ltd. Ledcor Communications Ltd. Ledcor Cayer Inc. Worldwide Fiber Finance Ltd. Worldwide Fiber Networks Ltd. Worldwide Fiber (F.O.T.S.) Ltd. Worldwide Fiber (F.O.T.S.) No. 2, Inc. WFI-CN Fibre Inc. Worldwide Fiber Comuncations Ltd. Worldwide Fiber (F.O.T.S.) No. 3, Ltd. WFNS Holdings Ltd. Worldwide Fiber Network Services Ltd. Ledcor Communications, Inc. Worldwide Fiber (USA), Inc. Worldwide Fiber Networks, Inc. Worldwide Fiber (F.O.T.S.), Inc. Worldwide Fiber IC Holdings, Inc. Worldwide Fiber IC LLC IC Fiber Alabama LLC IC Fiber Illinois LLC IC Fiber Iowa LLC IC Fiber Kentucky LLC IC Fiber Mississippi LLC IC Fiber Tennessee LLC Worldwide Fiber Network Services, Inc. WFI Liquidity Management Hungary Limited Liability Company WFI Urbanlink Ltd. WFI Fiber Inc. Worldwide Fiber Networks (UK) Limited 360 Urbanlink Ltd. Urbanlink Holdings Ltd. Urbanlink Equipment Ltd. WFI Metrobuild Ltd. Worldwide Telecom (Bermuda) Holdings Ltd. Worldwide Telecom Limited Worldwide Telecom (Bermuda) Ltd. Worldwide Telecom (Barbados) Inc. Worldwide Telecom (Danmark) ApS Worldwide Telecom (Canada) Inc. Worldwide Telecom (USA) Inc. WTI Telecom (Ireland) Limited WTI Telecom (UK) Limited Worldwide Telecom Distribution (USA) Inc. WTI Telecom Distribution (UK) Limited Threesixty pacific (Barbados) inc. 44 SCHEDULE D CANADIAN COMPANIES Ledcom Holdings Ltd. Ledcor Communications Ltd. Ledcor Cayer Inc. Ledcor Engineering Inc. Worldwide Fiber Finance Ltd. Worldwide Fiber Networks Ltd. Worldwide Fiber (F.O.T.S.) Ltd. Worldwide Fiber (F.O.T.S.) No. 2, Inc. WFI-CN Fibre Inc. Worldwide Fiber Comuncations Ltd. Worldwide Fiber (F.O.T.S.) No. 3, Ltd. WFNS Holdings Ltd. Worldwide Fiber Network Services Ltd. WFI Urbanlink Ltd. 360 Urbanlink Ltd. Urbanlink Holdings Ltd. Urbanlink Equipment Ltd. WFI Metrobuild Ltd. Worldwide Telecom (Canada) Inc. 45 SCHEDULE E
NUMBER OF OPTIONAL SHARES TO BE TOTAL NUMBER OF SOLD IF FIRM SHARES MAXIMUM OPTION TO BE SOLD EXERCISED --------------- ------------------ The Company........................................................ 44,625,000 6,941,250 The Selling Shareholder (a):................................... 1,650,000 0 ----------- ---------- Total..................................................... 46,275,000 6,900,000 =========== ==========
- ---------- (a) The Selling Shareholder is represented by McLennan Ross. 46 SCHEDULE F (subject to completion) DLJ Merchant Banking Partners II L.P. DWF SRL GS Capital Partners III, L.P. GSCP3 WWF (Barbados) SRL WWF (Barbados) SRL Providence Equity Fiber, L.P. TYCO Group S.A.R.L. Mackenzie Partners, LLC Ledcor Inc. Boston Ventures Limited Partnership V TD Capital Group Limited Kelso Investment Associates VI, L.P. KEP VI, L.L.C. Capital Communications CDPQ, Inc. Providence Equity Partners III, L.P. Providence Equity Operating Partners III, L.P. Spectrum Equity Investors III, L.P. Spectrum Entrepreneurs' Fund, L.P. Spectrum III Investment Managers' Fund, L.P. Sandler Capital Partners IV, L.P. Sandler Capital Partners IV FTE, L.P. Ontario Municipal Employees Retirement Board Nautilus Equity Investors, LLC IHI Hydro, Inc. the Directors of the Company: Greg Maffei David Lede Clifford Lede Larry Olsen Ron Stevenson Glenn Creamer Claude Mongeau Andrew Rush Gene Sykes James Voelker the Vice Presidents of the Company: Steven Stowe Lionel Desmarais David Love William Sumner Joel Allen Stephen Baker Ashwin Chitamun 47 Jayne Hart Michael Leitner Scott Lyons Catherine McEachern Bruce Tinney William Walls Vanessa Wittman Bernie Stene Brian Johnson David Brierley Derek Gill Dawn Breen Ed Remingon Gary Anderson George Hoar George Parker Herb Heise Jayne Hart Jerry Tharp Jim Cox John Shaban Patrick Summers Robert Cayer Scott Vallentine Steve Lake Ledcor Limited Partnership Worldwide Fiber Holdings Ltd. Madison Square, Inc. Comcast TSIX Holding, Inc. (shares from Comcast Corporation) Liberty WF Holdings LLC RLM Holdings, LLC MSD Capital L.P. MSD Select Sponsors Venture I, LLC MSD Portfolio L.P. - Investments DBV Investments, L.P. MSD ED I, LLC Susan L. Dell Separate Property Trust Shaw Communications Inc. Oak Investment Partners IX an affiliate of Denis O'Brien, Jr. Kleiner Perkins Caufield & Byers InterNAP Network Services Corporation divine interVentures, inc. Dr. Nathan Myhrvold GT Group Telecom Services 48 [PSINet Strategic Investments, Inc.] [America On Line] [News Corp] [an affiliate of Thomas Kwok] [Singapore Telecommunications Limited] Canadian National Railway Company MI-Tech Communications, LLC William Blair & Company, Ramsey Bierne, 49 EX-3.4 3 EXHIBIT 3.4 Exhibit 3.4 MEMORANDUM OF ASSOCIATION OF 360NETWORKS INC. 1. The name of the Company is 360NETWORKS INC. 2. There are no restrictions on the objects and powers of the Company and the Company shall expressly have the following powers: (a) To sell or dispose of its undertaking, or a substantial part thereof; (b) To distribute any of its property IN SPECIE among its members; and (c) To amalgamate with any company or other body of persons. 3. The liability of the members is limited. 4. The capital of the Company is 100,000,000,000 Class A Non-Voting Shares, 100,000,000,000 Class B Subordinate Voting Shares, 100,000,000,000 Class C Multiple Voting Shares, and 200,045,000,000 Preferred Shares divided into 100,000,000,000 Series A Non-Voting Preferred Shares, 100,000,000,000 Series B Subordinate Voting Preferred Shares and 45,000,000 Series C Redeemable Preferred Shares, all without nominal or par value, and all having the rights, restrictions, conditions and limitations set out in Annex 1 hereto with power to divide the shares in the capital for the time being into several classes and to attach thereto respectively any preferred, deferred or qualified rights, privileges or conditions, including restrictions on voting rights and including redemption and purchase of such shares, subject, however, to the provisions of the COMPANIES ACT of Nova Scotia. ANNEX I The rights, privileges, restrictions and conditions attaching to each class of shares and each existing series of shares of the Company are as follows: A. CLASS A NON-VOTING SHARES, CLASS B SUBORDINATE VOTING SHARES AND CLASS C MULTIPLE VOTING SHARES The Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares shall have attached thereto the following rights, privileges, restrictions and conditions: 1. DIVIDENDS 1.1 Subject to any preference or priority as to the payment of dividends upon shares of any class or series ranking in priority to the Class A Non-Voting Shares, Class B Subordinate Voting Shares or Class C Multiple Voting Shares in respect of the payment of dividends, the holders of Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares shall, except as otherwise hereinafter provided, be entitled to participate equally with each other, share for share, as to dividends and the Company shall pay dividends thereon, as and when declared by the Board of Directors of the Company out of moneys properly applicable to the payment of dividends, in equal amounts per share and at the same time on each Class A Non-Voting Share, Class B Subordinate Voting Share and Class C Multiple Voting Share outstanding as at the respective record dates for the payment of such dividends. 2. DISSOLUTION 2.1 In the event of the liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company among shareholders for the purpose of winding up its affairs, all of the property and assets of the Company which remain, after payment of all amounts attributed and properly payable to the holders of any shares ranking in priority to the Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares in respect of payment upon liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company among shareholders for the purpose of winding up its affairs, shall be paid or distributed equally, share for share, to the holders of the Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares, without preference or distinction outstanding as at the respective record dates for such payment. 3. SUBDIVISION OR CONSOLIDATION 3.1 None of the Class A Non-Voting Shares, Class B Subordinate Voting Shares or Class C Multiple Voting Shares shall be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the shares of each other such class is subdivided, consolidated, reclassified or otherwise changed equally, share for share, in the same proportion and in the same manner. - 2 - 4. VOTING RIGHTS 4.1 Except as provided in the COMPANIES ACT (NOVA SCOTIA), the holders of the Class A Non-Voting Shares shall not be entitled to vote at any meeting of the shareholders of the Company. The holders of the Class A Non-Voting Shares shall be entitled to receive notice of and to attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of the shares of any other class of shares of the Company or of the shares of any series of shares of any other class of shares of the Company). 4.2 The holders of the Class B Subordinate Voting Shares shall be entitled, as such, to receive notice of and to attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of shares of any other class of shares of the Company or of shares of any series of shares of any other class of shares of the Company) and to vote at all such meetings and each holder of Class B Subordinate Voting Shares shall be entitled at any such meeting to one vote per Class B Subordinate Voting Share held by such holder as at the record date for such meeting, provided that if the Company proposes to (i) sell, lease or exchange all or substantially all of its property and assets to or with a person or persons other than one or more wholly owned subsidiaries of the Company, or (ii) liquidate, dissolve, wind up or distribute its assets among the shareholders of the Company for the purpose of winding up its affairs, each holder of Class B Subordinate Voting Shares shall be entitled to twenty votes per Class B Subordinate Voting Share held in respect of any such matter. 4.3 The holders of the Class C Multiple Voting Shares shall be entitled, as such, to receive notice of and attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of shares of any other class of shares of the Company or any series of shares of such other class of shares of the Company) and to vote at all such meetings and each holder of Class C Multiple Voting Shares shall be entitled at any such meeting to twenty votes per Class C Multiple Voting Share held by such holder as at the record date for such meeting. 5. CONVERSION OF CLASS A NON-VOTING SHARES INTO CLASS B SUBORDINATE VOTING SHARES 5.1 Subject to compliance with the provisions of Section 5.2 of this Article A, each holder of Class A Non-Voting Shares shall be entitled at any time and from time to time to have all or any part of the Class A Non-Voting Shares held by such holder converted into fully paid and non-assessable Class B Subordinate Voting Shares upon the basis of one Class B Subordinate Voting Share for each Class A Non-Voting Share in respect of which the conversion right is exercised. 5.2 Before any holder of Class A Non-Voting Shares shall be entitled to convert the same into Class B Subordinate Voting Shares, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Class A Non-Voting Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Class B Subordinate Voting Shares are to be issued; the number of Class A Non-Voting Shares to be converted; and notice of such holder's election to convert such Class A Non-Voting Shares. After giving such notice in - 3 - writing, the election of the holder of Class A Non-Voting Shares shall be irrevocable. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Class A Non-Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class B Subordinate Voting Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Class A Non-Voting Shares to be converted, and the person or persons entitled to receive the shares of Class B Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class B Subordinate Voting Shares as of such date. The issuance of certificates for Class B Subordinate Voting Shares, upon conversion of the Class A Non-Voting Shares, shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Class A Non-Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Class A Non-Voting Shares represented by the original certificate which are not to be converted. 5.3 The Company shall at no time close its transfer books against the transfer of any Class A Non-Voting Shares, or of any Class B Subordinate Voting Shares issuable upon the conversion of any Class A Non-Voting Shares, in any manner which interferes with the timely conversion of such Class A Non-Voting Shares, except as may be otherwise be required to comply with applicable laws or the provisions of the Attachment to these Articles. 6. CONVERSION OF CLASS B SUBORDINATE VOTING SHARES INTO CLASS A NON-VOTING SHARES 6.1 Subject to compliance with the provisions of Section 6.2 of this Article A, each holder of Class B Subordinate Voting Shares shall be entitled at any time and from time to time to have all or any part of the Class B Subordinate Voting Shares held by such holder converted into fully paid and non-assessable Class A Non-Voting Shares upon the basis of one Class A Non-Voting Share for each Class B Subordinate Voting Share in respect of which the conversion right is exercised. 6.2 Before any holder of Class B Subordinate Voting Shares shall be entitled to convert the same into Class A Non-Voting Shares, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Class B Subordinate Voting Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Class A Non-Voting Shares are to be issued; the number of Class B Subordinate Voting Shares to be converted; and notice of such holder's election to convert such Class B Subordinate Voting Shares. After giving such notice in writing, the election of the holder of Class B Subordinate Voting Shares shall be irrevocable. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Class B Subordinate Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class A Non-Voting Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Class B Subordinate Voting Shares to be converted, and the person or persons entitled to receive the shares of Class A Non-Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Non-Voting Shares as of - 4 - such date. The issuance of certificates for Class A Non-Voting Shares, upon conversion of the Class B Subordinate Voting Shares, shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Class B Subordinate Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Class B Subordinate Voting Shares represented by the original certificate which are not to be converted. 6.3 The Company shall at no time close its transfer books against the transfer of any Class B Subordinate Voting Shares, or of any Class A Non-Voting Shares issuable upon the conversion of any Class B Subordinate Voting Shares, in any manner which interferes with the timely conversion of such Class B Subordinate Voting Shares, except as may be otherwise be required to comply with applicable laws or the provisions of the Attachment to these Articles. 6.4 (1) The Company shall be entitled, at any time, to convert the Class B Subordinate Voting Shares into Class A Non-Voting Shares on a one for one basis. (2) Before the Company shall be entitled to convert Class B Subordinate Voting Shares into Class A Non-Voting Shares pursuant to Section 6.4(1) of this Article A, the Company shall not less than one day and not more than 20 days before the date specified for conversion (the "Conversion Date") send by prepaid first class mail or deliver to the registered address of each person who at the date not more than 7 days prior to the date of mailing or delivery is a registered holder of Class B Subordinate Voting Shares to be converted, a notice in writing of the intention of the Company to convert the Class B Subordinate Voting Shares registered in the name of such holder. Accidental failure or omission to give such notice to one (1) or more holders shall not affect the validity of such conversion, but upon such failure or omission being discovered notice shall be given forthwith to such holder or holders and such notice shall have the same force and effect as if given in due time. Such notice shall set out the number of Class B Subordinate Voting Shares held by the person to whom it is addressed which are to be converted, the Conversion Date and the place or places at which holders of Class B Subordinate Voting Shares may present and surrender such shares for conversion. After the giving of such notice in writing, the election of the Company shall be irrevocable. (3) Within three (3) days following the Conversion Date, the Company shall, on presentation and surrender of the certificate or certificates representing the Class B Subordinate Voting Shares called for conversion at the place or places specified in the notice of conversion, issue and deliver to such holder of Class B Subordinate Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class A Non-Voting Shares entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date or, if the Company is converting the Class B Subordinate Voting Shares into Class A Non-Voting Shares in connection with a Qualified IPO (as defined in Section 1.13 of Article C), immediately prior to the consummation of the Qualified IPO and the person or persons entitled to receive the Class A Non-Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Non-Voting Shares as of such date. The issuance of certificates for Class A Non-Voting Shares, upon conversion of the Class B Subordinate Voting Shares, shall be made without charge to the holder but the holder shall pay any governmental or other tax imposed on or in respect of such conversion. - 5 - (4) The Company shall have the right at any time on or after the Conversion Date to deposit the certificate or certificates representing Class A Non-Voting Shares into trust for holders of the Class B Subordinate Voting Shares called for conversion, which have not at the date of such deposit been surrendered in connection with such conversion. Certificates deposited into trust shall be held by the Company or other designated person named in the notice of conversion or in a subsequent notice to the registered holders of the Class B Subordinate Voting Shares in respect of which the deposit was made. Upon such deposit being made, Class B Subordinate Voting Shares in respect of which such deposit shall have been made shall be deemed to have been converted and the rights of the holders thereof after such deposit or such Conversion Date, as the case may be shall be, limited to receiving the certificate or certificates representing the Class A Non-Voting Shares to which they are entitled upon presentation and surrender of the certificate or certificates representing the Class B Subordinate Voting Shares being converted. 7. CONVERSION OF CLASS B SUBORDINATE VOTING SHARES INTO SERIES A NON-VOTING PREFERRED SHARES 7.1 Subject to compliance with the provisions of Section 7.2 of this Article A, at any time prior to September 9, 2000, each holder of Class B Subordinate Voting Shares shall be entitled at any time and from time to time to have all or any part of the Class B Subordinate Voting Shares held by such holder converted into fully paid and non-assessable Series A Non-Voting Preferred Shares. Upon conversion, each Class B Subordinate Voting Share in respect of which the conversion right is exercised pursuant to this Section 7.1 will be converted into a number of Series A Preferred Shares equal to the Class B Conversion Ratio. For the purposes of this Section 7.1, "Class B Conversion Ratio" shall initially equal one and shall automatically adjust so that it is always equal to the inverse of the Conversion Ratio as defined in Section 1.13 of Article C. 7.2 Before any holder of Class B Subordinate Voting Shares shall be entitled to convert the same into Series A Non-Voting Preferred Shares, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Class B Subordinate Voting Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Series A Non-Voting Preferred Shares are to be issued; the number of Class B Subordinate Voting Shares to be converted; and notice of such holder's election to convert such Class B Subordinate Voting Shares. After giving such notice in writing, the election of the holder of Class B Subordinate Voting Shares shall be irrevocable. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Class B Subordinate Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Series A Non-Voting Preferred Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Class B Subordinate Voting Shares to be converted, and the person or persons entitled to receive the shares of Series A Non-Voting Preferred Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Series A Non-Voting Preferred Shares as of such date. The issuance of certificates for Series A Non-Voting Preferred Shares, upon conversion of the Class B Subordinate Voting Shares, shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the - 6 - Class B Subordinate Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Class B Subordinate Voting Shares represented by the original certificate which are not to be converted. 7.3 The Company will at no time close its transfer books against the transfer of any Class B Subordinate Voting Shares, or of any Series A Non-Voting Preferred Shares issued or issuable upon the conversion of any Class B Subordinate Voting Shares, in any manner which interferes with the timely conversion of such Class B Subordinate Voting Shares, except as may otherwise be required to comply with applicable laws or the provisions of the Attachment to these Articles. 7.4 No fractional shares shall be issued upon the conversion of the Class B Subordinate Voting Shares and the number of Series A Non-Voting Preferred Shares to be issued shall be rounded down to the nearest whole share. No payment shall be made in respect of any unissued or rounded fraction. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Class B Subordinate Voting Shares the holder is at the time converting into Series A Non-Voting Preferred Shares and the number of Series A Non-Voting Preferred Shares issuable upon such aggregate conversion. 8. CONVERSION OF CLASS C MULTIPLE VOTING SHARES INTO CLASS A NON-VOTING SHARES AND/OR CLASS B SUBORDINATE VOTING SHARES 8.1 Subject to compliance with the provisions of Section 8.2 of this Article A, each holder of Class C Multiple Voting Shares shall be entitled at any time and from time to time to have all or any part of the Class C Multiple Voting Shares held by such holder converted into fully paid and non-assessable Class A Non-Voting Shares or Class B Subordinate Voting Shares upon the basis of one Class A Non-Voting Share or one Class B Subordinate Voting Share for each Class C Multiple Voting Share for which the conversion right provided for in this Section 8.1 is exercised, as specified by the holder of the Class C Multiple Voting Shares in the notice in writing given to the Company or any transfer agent in exercise of such conversion right. 8.2 Before any holder of Class C Multiple Voting Shares shall be entitled to convert the same into Class A Non-Voting Shares and/or Class B Subordinate Voting Shares, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Class C Multiple Voting Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Class A Non-Voting Shares and/or Class B Subordinate Voting Shares are to be issued; the number of Class C Multiple Voting Shares to be converted; notice of such holder's election to convert such Class C Multiple Voting Shares; and the number of Class A Non-Voting Shares and/or Subordinate Voting Shares into which the Class C Multiple Voting Shares are to be converted. After giving such notice in writing, the election of the holder of Class C Multiple Voting Shares shall be irrevocable. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Class C Multiple Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class A Non-Voting Shares and/or Class B Subordinate Voting Shares, as the case may be, to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made - 7 - immediately prior to the close of business on the date of such surrender of the shares of Class C Multiple Voting Shares, to be converted, and the person or persons entitled to receive the shares of Class A Non-Voting Shares and/or Class B Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Non-Voting Shares and/or Class B Subordinate Voting Shares, as the case may be, as of such date. The issuance of certificates for Class A Non-Voting Shares and/or Class B Subordinate Voting Shares, upon conversion of the Class C Multiple Voting Shares shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Class C Multiple Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Class C Multiple Voting Shares represented by the original certificate which are not to be converted. 8.3 The Company will at no time close its transfer books against the transfer of any Class C Multiple Voting Shares, or of any Class B Subordinate Voting Shares or Class A Non-Voting Shares issuable upon the conversion of any Class C Multiple Voting Shares, in any manner which interferes with the timely conversion of such Class C Multiple Voting Shares, except as may otherwise be required to comply with applicable laws. B. PREFERRED SHARES The rights, privileges, restrictions and conditions attaching to the Preferred Shares, as a class, are as follows: 1. DIRECTORS' AUTHORITY TO ISSUE ONE OR MORE SERIES 1.1 The Board of Directors of the Company may issue the Preferred Shares at any time and from time to time in not more than three series. Before the first shares of a particular series are issued, the Board of Directors of the Company shall fix the number of shares in such series and shall determine, subject to the limitations set out in the Articles, the designation, rights, privileges, restrictions and conditions to attach to the shares of such series including, without limiting the generality of the foregoing, the rate or rates, amount or method or methods of calculation of preferential dividends, whether cumulative or non-cumulative or partially cumulative, and whether such rate(s), amount or method(s) of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof and the date or dates from which such preferential dividends shall accrue, the redemption price and terms and conditions of redemption (if any), the rights of retraction (if any), and the prices and other terms and conditions of any rights of retraction and whether any additional rights of retraction may be vested in such holders in the future, voting rights and conversion or exchange rights (if any) and any sinking fund, purchase fund or other provisions attaching thereto. Before the issue of the first shares of a series, the Board of Directors of the Company shall send to the Registrar (as defined in the COMPANIES ACT (NOVA SCOTIA)) any necessary documentation in the prescribed form containing a description of such series including the designation, rights, privileges, restrictions and conditions determined by the directors. - 8 - 2. RANKING OF PREFERRED SHARES 2.1 No rights, privileges, restrictions or conditions attaching to a series of Preferred Shares shall confer upon a series a priority in respect of dividends or return of capital over any other series of Preferred Shares then outstanding. The Preferred Shares of each series shall rank on a parity with the Preferred Shares of every other series with respect to priority in the payment of dividends and the return of capital and the distribution of assets of the Company in the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs. 2.2 The Preferred Shares shall be entitled to priority over the Common Shares (as defined in Article C) of the Company and over any other shares of any other class of the Company ranking junior to the Preferred Shares with respect to priority in the payment of dividends and the return of capital and the distribution of assets in the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs. 2.3 The Preferred Shares of any series may also be given such other preferences, not inconsistent with the provisions hereof, over the Common Shares and over any other shares ranking junior to the Preferred Shares as may be determined in the case of such series of Preferred Shares. 3. VOTING RIGHTS 3.1 Except as otherwise provided by law or in accordance with any voting rights which may from time to time be attached to any series of Preferred Shares, the holders of the Preferred Shares as a class shall not be entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Company. C. SERIES A NON-VOTING PREFERRED SHARES 1. SERIES RIGHTS 1.1 DESIGNATION AND NUMBER The first series of Preferred Shares shall consist of 100,000,000,000 Preferred Shares, which shares shall be designated as Series A Non-Voting Preferred Shares (the "Series A Non-Voting Preferred Shares") and which, in addition to the rights, privileges, restrictions and conditions attached to the Preferred Shares as a class, shall have attached thereto the rights, privileges, restrictions and conditions as set forth herein. The Company shall only issue Series A Non-Voting Preferred Shares pursuant to the Purchase Agreement or upon the conversion of Series B Subordinate Voting Preferred Shares or upon the conversion of the Class B Subordinate Voting Shares in compliance with the terms of the Shareholders Agreement. - 9 - 1.2 DIVIDENDS The holders of Series A Non-Voting Preferred Shares shall be entitled to receive dividends equivalent on a per share basis to any dividends declared, paid, issued or distributed with respect to shares of Common Shares into which such share of Series A Non-Voting Preferred Shares could be converted pursuant to the provisions of Section 1.6 of this Article C, on the record date for the determination of holders of Common Shares entitled to such dividends. The Board of Directors may not declare, and the Company shall not pay, issue or distribute, any dividend on any Common Shares unless simultaneously the Board of Directors declares, and the Company pays, issues or distributes the dividend on the Series A Non-Voting Preferred Shares specified in the first sentence of this Section 1.2. The holders of Series A Non-Voting Preferred Shares shall not be entitled to any dividend other than, or in excess of, the dividends as hereinbefore provided. 1.3 VOTING RIGHTS Except as required by law or otherwise provided for in this Article C, the holders of the Series A Non-Voting Preferred Shares shall not be entitled to vote at any meeting of the shareholders of the Company. The holders of the Series A Non-Voting Preferred Shares shall be entitled to receive notice of and to attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of the shares of any other class of shares of the Company or of the shares of any series of shares of any other class of shares of the Company). 1.4 RETIRED SHARES Any Series A Non-Voting Preferred Shares converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. None of such Series A Non-Voting Preferred Shares shall be reissued by the Company. 1.5 LIQUIDATION, DISSOLUTION OR WINDING UP (1) Upon (i) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (ii) a sale of all or substantially all of the assets of the Company or (iii) a reorganization of the Company required by any court or administrative body in order to comply with any provision of law (each of the events referred to in clauses (i), (ii) and (iii) being referred to as a "Liquidation"), the holders of Series A Non-Voting Preferred Shares shall be entitled to receive and to be paid out of assets of the Company available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the greater of (i) the Series A Non-Voting Liquidation Value with respect to each such outstanding Series A Non-Voting Preferred Share, and (ii) the amount which would have been paid in such Liquidation, based upon the number of Class A Non-Voting Shares into which a Series A Non-Voting Preferred Share could be converted pursuant to the provisions of Section 1.6 of this Article C. If, upon any Liquidation of the Company, the assets of the Company available for distribution shall be insufficient to pay in full the Series A Non-Voting Liquidation Value with respect to each outstanding Series A Non-Voting Preferred Share, then such assets shall be distributed among the holders of Series A Non-Voting Preferred Shares ratably in accordance - 10 - with the respective amounts that would be payable on such Series A Non-Voting Preferred Shares if such assets were sufficient to permit payment in full of all amounts payable thereon. (2) After the payment to the holders of Series A Non-Voting Preferred Shares of the full amount of the liquidating distribution to which they are entitled under this Section 1.5, the holders of the Series A Non-Voting Preferred Shares as such shall have no right or claim to any of the remaining assets of the Company and shall not be entitled to share in any further distribution of assets of the Company. (3) Any consolidation, merger or other business combination of the Company with or into any other Person (as defined in Section 1.13 of this Article C) or Persons shall be deemed to be a Liquidation for purposes of this Section 1.5, except for any such merger, consolidation or other business combination where, after the completion of such transaction, the holders of voting shares in the capital of the Company immediately prior to such merger, consolidation or other business combination will beneficially own a majority of the voting shares in the capital of the surviving or acquiring entity. Notwithstanding the foregoing, no consolidation, merger or other business combination of the Company with or into any other Person shall be deemed to be a Liquidation for the purposes of this Section 1.5 if the holders of not less than 85% of the issued and outstanding Series A Non-Voting Preferred Shares waive in writing the provisions of this Section 1.5 with respect to such event. (4) "Series A Non-Voting Liquidation Value" determined as of any date shall mean, in respect of each Series A Non-Voting Preferred Share, the sum of (A) an amount equal to the Initial Purchase Price plus an amount equal to six percent (6%) of the Initial Purchase Price, compounded annually on each anniversary of the Initial Issue Date prior to the date of determination and (B) all declared but unpaid dividends per Series A Non-Voting Preferred Shares, if any. The Series A Non-Voting Liquidation Value shall also be subject to adjustment as provided in Section 1.5(6) of this Article C. (5) Notwithstanding the foregoing, (i) the rate of six percent (6%) referred to in Clause (A) of Section 1.5(4) of this Article C shall be read as eight percent (8%) from such time and as long as an Event of Default shall have occurred and be continuing and (ii) no amount shall be added to the Initial Purchase Price pursuant to clause (A) of Section 1.5(4) of this Article C if the Company shall consummate a Qualified IPO prior to the first anniversary of the Initial Issue Date. (6) The Series A Non-Voting Liquidation Value shall be multiplied by a factor equal to the sum of (x) 1.00 and (y) the Additional Issuance Ratio if and for so long as the Company is in default in the performance of or compliance with Section 1.4(a), 1.4(b) or 1.4(c) of the Purchase Agreement. 1.6 CONVERSION (1) If a Conversion Event occurs, each Series A Non-Voting Preferred Share may, at the option of the Company, and in compliance with the provisions of Section 1.6(4) of this Article C, be converted into a number of Class A Non-Voting Shares equal to the Conversion Ratio. In addition, at the option of the holder of any Series A Non-Voting Preferred Shares, such holder shall have the right, at any time and from time to time, by written notice to the Company, - 11 - to convert each Series A Non-Voting Preferred Share owned by such holder into (a) a number of Class A Non-Voting Shares equal in the aggregate to the Conversion Ratio or (b) Series B Subordinate Voting Preferred Shares on a one for one basis, in each case without payment of any additional consideration. (2) The Conversion Ratio, determined at any time, shall equal one (1.00) plus an adjustment equal to six percent (6%) of the Conversion Ratio, compounded annually on each anniversary of the Initial Issue Date prior to the date of determination but, from such time and as long as an Event of Default shall have occurred and be continuing, the rate of six percent (6%) referred to above in this Section 1.6(2) shall be read as eight percent (8%); provided, however, that if the Company consummates a Qualified IPO prior to the first anniversary of the Initial Issue Date then no adjustment shall be made pursuant to this sentence. The Conversion Ratio shall also be adjusted as provided below in this Section 1.6(2). The Conversion Ratio shall be multiplied by a factor equal to the sum of (x) 1.00 and (y) the Additional Issuance Ratio if and for so long as the Company is in default in the performance of or compliance with Section 1.4(a), 1.4(b) or 1.4(c) of the Purchase Agreement. The Conversion Ratio shall also be subject to adjustment from time to time as follows: (a) If the Company at any time or from time to time after the Initial Issue Date (A) pays any dividend or makes any distribution in additional Common Shares of the Company or of securities convertible into, or exchangeable or exercisable for, shares of Common Shares of the Company, (B) subdivides the outstanding Common Shares, (C) combines the outstanding Common Shares into a smaller number of shares or (D) issues by reclassification of the Common Shares any shares in the capital of the Company, then, and in each such case, the Conversion Ratio in effect immediately prior to such event or the record date therefor, whichever is earlier, shall be adjusted so that the holder of Series A Non-Voting Preferred Shares thereafter convertible into Class A Non-Voting Shares pursuant to this Section 1.6 of this Article C shall be entitled to receive the number and type of Class A Non-Voting Shares or other securities of the Company which such holder would have owned or have been entitled to receive after the happening of any of the events described above had such Series A Non-Voting Preferred Shares been converted into Class A Non-Voting Shares immediately prior to the happening of such event or the record date therefore, whichever is earlier. An adjustment made pursuant to this clause (a) shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of Common Shares entitled to receive such dividend or distribution, or (y) in the case of such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. (b) If the Company issues to all (or substantially all) holders of Common Shares any rights or subscriptions to purchase Common Shares or Common Share Equivalents after the Initial Issue Date at a price per Common Share (or having a conversion or exercise price per share in the case of Common Share Equivalents) of less than either (i) the Series A Non-Voting Liquidation Value or (ii) the Market Price of the Common Shares on the earlier of the date of such issuance or the record date therefor (the "Applicable Date") then, in each such case the Conversion Ratio shall be adjusted by multiplying (A) the Conversion Ratio in effect at the close of business on the day immediately prior to the Applicable Date by (B) a fraction, the numerator of which shall be the sum of (1) the number of Common Shares outstanding at the close of business on the date immediately prior to the Applicable Date and (2) the number of - 12 - additional Common Shares issued or issuable upon acceptance, conversion, exchange or exercise of such rights or subscriptions (or upon conversion, exchange or exercise of Common Share Equivalents issued or issuable pursuant to such rights or subscriptions), and the denominator of which shall be the sum of (x) the number of Common Shares outstanding at the close of business on the date immediately prior to the Applicable Date and (y) the number of Common Shares which would be purchasable for the aggregate consideration received by the Company upon issuance of such Common Shares or Common Share Equivalents or receivable by the Company for the total number of Common Shares issuable upon acceptance, conversion, exchange or exercise of such rights or subscriptions (or upon conversion, exchange or exercise of Common Share Equivalents issued or issuable pursuant to such rights or subscriptions) if the price per share for such purchase, conversion, exchange or exercise was equal to the greater of (i) the Series A Non-Voting Liquidation Value or (ii) the Market Price of the Common Shares as of the Applicable Date. An adjustment made pursuant to this clause (b) shall become effective immediately after the close of business on the Applicable Date. (c) Except with respect to Deemed Outstanding Securities (as defined below), if the Company issues any Common Shares (or Common Share Equivalents) after the Initial Issue Date at a price per Common Share (or having a conversion or exercise price per share in the case of Common Share Equivalents) of less than either (i) the Series A Non-Voting Liquidation Value or (ii) the Market Price of the Common Shares on the date of issuance of such Common Shares (or Common Share Equivalents), then, in each such case, the Conversion Ratio shall be adjusted by multiplying (A) the Conversion Ratio in effect at the close of business on the day immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) by (B) a fraction, the numerator of which shall be the sum of (l) the number of Common Shares outstanding at the close of business on the date immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) and (2) the number of such additional Common Shares and the number of Common Shares issued or issuable upon conversion, exchange or exercise of such Common Share Equivalents, and the denominator of which shall be the sum of (x) the number of Common Shares outstanding on the date immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) and (y) the number of Common Shares which would be purchasable for the aggregate consideration received by the Company upon issuance of such Common Shares or Common Share Equivalents or receivable by the Company for the total number of Common Shares issuable or issuable upon conversion, exchange or exercise of Common Share Equivalents if the price per share for such purchase, conversion, exchange or exercise was equal to the greater of (i) the Series A Non-Voting Liquidation Value or (ii) the Market Price of the Common Shares as of the date of issuance of such Common Shares (or Common Share Equivalents). An adjustment made pursuant to this clause (c) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively to the close of business on the date of such issuance. "Deemed Outstanding Securities" shall mean (i) the stock options and Class A Non-Voting Shares to be issued upon the exercise of such stock options, initially issued or issuable, or Permitted Reissued Options (as defined in the Purchase Agreement) pursuant to the 1998 Long Term Incentive and Share Award Plan (Amended) of the Company exercisable for a maximum of 4,445,813 Class A Non-Voting Shares; (ii) any Series A Non-Voting Preferred Shares issued pursuant to the Purchase Agreement or any Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares issued on the conversion of the Series A Non-Voting Preferred Shares; (iii) 4,500,000 Common Shares issued, or to be issued, in consideration for the acquisition by the Company of fiber assets and related rights and - 13 - obligations from Ledcor Industries Limited or Ledcor Industries Inc. under the amended and restated Share Purchase Agreement dated September 7, 1999 between Ledcor Industries Limited, Ledcor Industries Inc. and the Company; (iv) any Class A Non-Voting Shares issued on conversion of the Series B Subordinate Voting Shares; (v) any Common Shares or Common Share Equivalent issued pursuant to any Minority Roll-Up Transaction; (vi) any Common Shares, or Common Share Equivalents issued pursuant to an event described in clauses (a) or (b) of this Section 1.6(2); or (vii) 26,080,000 Class A Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares issued to Gregory B. Maffei. (d) For purposes of this Section 1.6(2) the aggregate consideration receivable by the Company in connection with the issuance of Common Shares and/or Common Share Equivalents shall be deemed to be equal to the sum of the aggregate offering price (before deduction of underwriting discounts or commissions and expenses payable to third parties, if any) of all such Common Shares and/or Common Share Equivalents plus the minimum aggregate amount, if any, payable upon conversion, exchange or exercise of any such Common Share Equivalents. Upon the expiration or termination of any unconverted, unexchanged or unexercised Common Share Equivalents for which an adjustment has been made pursuant to clause (b) or clause (c) of this Section 1.6(2), the adjustments shall forthwith be reversed to effect such Conversion Ratio as would have been in effect at the time of such expiration or termination had such Common Share Equivalents, to the extent outstanding immediately prior to such expiration or termination, never been issued. The consideration received by the Company in connection with the sale or issuance of Common Shares (or Common Share Equivalents) shall be computed as follows: (A) insofar as such consideration consists of cash, such consideration shall equal the aggregate amount of cash received by the Company prior to amounts paid or payable for accrued interest or accrued dividends and prior to any commissions or expenses paid by the Company; (B) insofar as such consideration consists of property other than cash, such consideration shall be calculated at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors, which shall be based upon a written opinion of an investment banking or appraisal firm of national standing in the United States if such consideration is given a value exceeding $10 million; and (C) in the event Common Shares or Common Share Equivalents are issued together with other securities or other assets of the Company for consideration that is allocable to both such Common Shares and Common Share Equivalents, and to such other securities and assets, the portion of such consideration allocable to such Common Shares or Common Share Equivalents shall be that set forth in the instruments and agreements issued or entered into in connection with such transaction, and if no such allocation is so set forth, then the portion of such consideration allocable to such Common Shares or Common Share Equivalents, calculated as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (e) For purposes of this Section 1.6(2) the number of Common Shares at any time outstanding shall mean the aggregate of all Common Shares then outstanding (other than any Common Shares then owned or held by or for the account of the Company). - 14 - (f) If the Company shall take a record of the holders of its Common Shares for the purpose of entitling them to receive a dividend or other distribution and shall thereafter, and before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then no adjustment in the Conversion Ratio then in effect shall be made by reason of the taking of such record, and any such adjustment previously made as a result of the taking of such record shall be reversed. (3) Subject to compliance with the provisions of Section 1.6(5) of this Article C, each holder of Series A Non-Voting Preferred Shares shall be entitled at any time and from time to time to have all or any part of the Series A Non-Voting Preferred Shares held by such holder converted into validly issued, fully paid and non-assessable Series B Subordinate Voting Preferred Shares upon the basis of one Series B Subordinate Voting Preferred Share for each Series A Non-Voting Preferred Share in respect of which the conversion right is exercised. (4) Before the Company shall be entitled to convert Series A Non-Voting Preferred Shares into Class A Non-Voting Shares pursuant to Section 1.6(1) of this Article C, the Company shall not less than 10 days and not more than 20 days before the date specified for conversion (the "Conversion Date") send by prepaid first class mail or deliver to the registered address of each person who at the date not more than 7 days prior to the date of mailing or delivery is a registered holder of Series A Non-Voting Preferred Shares to be converted a notice in writing of the intention of the Company to convert the Series A Non-Voting Preferred Shares registered in the name of such holder. Accidental failure or omission to give such notice to one (1) or more holders shall not affect the validity of such conversion, but upon such failure or omission being discovered notice shall be given forthwith to such holder or holders and such notice shall have the same force and effect as if given in due time. Such notice shall set out the number of Series A Non-Voting Preferred Shares held by the person to whom it is addressed which are to be converted, the Conversion Ratio, the Conversion Date and the place or places at which holders of Series A Non-Voting Preferred Shares may present and surrender such shares for conversion. After the giving of such notice in writing, the election of the Company shall be irrevocable. (a) Within three (3) days following the Conversion Date, the Company shall, on presentation and surrender of the certificate or certificates representing the Series A Non-Voting Preferred Shares called for conversion at the place or places specified in the notice of conversion, issue and deliver to such holder of Series A Non-Voting Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class A Non-Voting Shares entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date or, if the Conversion Event is a Qualified IPO, then immediately prior to the consummation of the Qualified IPO, and the person or persons entitled to receive the Class A Non-Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Non-Voting Shares as of such date. The issuance of certificates for Class A Non-Voting Shares, upon conversion of the Series A Non-Voting Preferred Shares, shall be made without charge to the holder but the holder shall pay any governmental or other tax imposed on or in respect of such conversion. If less than all of the Series A Non-Voting Preferred Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Series A Non-Voting Preferred Shares represented by the original certificate which are not to be converted. - 15 - (b) The Company shall have the right at any time on or after the Conversion Date to deposit the certificate or certificates representing Class A Non-Voting Shares into trust for holders of the Series A Non-Voting Preferred Shares called for conversion, which have not at the date of such deposit been surrendered in connection with such conversion. Certificates deposited into trust shall be held by the Company or other designated person named in the notice of conversion or in a subsequent notice to the registered holders of the Series A Non-Voting Preferred Shares in respect of which the deposit was made. Upon such deposit being made, the Series A Non-Voting Preferred Shares in respect of which such deposit shall have been made shall be deemed to have been converted and the rights of the holders thereof after such deposit or such Conversion Date, as the case may be shall be, limited to receiving the certificate or certificates representing the Class A Non-Voting Shares to which they are entitled upon presentation and surrender of the certificate or certificates representing the Series A Non-Voting Preferred Shares being converted. (5) Before any holder of Series A Non-Voting Preferred Shares shall be entitled to convert the same into Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series A Non-Voting Preferred Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Common Shares or Preferred Shares are to be issued; the number of Series A Non-Voting Preferred Shares to be converted; and notice of such holder's election to convert such Series A Non-Voting Preferred Shares. After giving such notice in writing, the election of the holder of Series A Non-Voting Preferred Shares shall be irrevocable although may be subject to the condition described below when the conversion is in connection with an underwritten public offering. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Series A Non-Voting Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares, as the case may be, to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series A Non-Voting Preferred Shares to be converted, and the person or persons entitled to receive the shares of Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares, as the case may be, issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares, as the case may be, as of such date. If the conversion is in connection with an underwritten public offering of securities (other than a Qualified IPO), the conversion into Common Shares may, at the option of any holder tendering Series A Non-Voting Preferred Shares for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Shares upon conversion of the Series A Non-Voting Preferred Shares shall not be deemed to have converted such Series A Non-Voting Preferred Shares until immediately prior to the closing of such sale of securities. The issuance of certificates for Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares, as the case may be, upon conversion of the Series A Non-Voting Preferred Shares shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Series A Non-Voting Preferred Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Series A Non-Voting Preferred Shares which are not to be converted. - 16 - (6) The Company shall at no time close its transfer books against the transfer of any Series A Non-Voting Preferred Shares, or of any Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares issuable upon the conversion of any Series A Non-Voting Preferred Shares, in any manner which interferes with the timely conversion of such Series A Non-Voting Preferred Shares, except as may otherwise be required to comply with applicable laws or the provisions of the Attachment to these Articles. (7) As used in this Section 1.6 the term "Class A Non-Voting Shares" shall mean and include the Company's Class A Non-Voting Shares as constituted on the Initial Issue Date, and shall also include any shares of any class of the capital of the Company thereafter authorized which shall neither be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends nor be entitled to a preference in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company provided that the Class A Non-Voting Shares receivable upon conversion of Series A Non-Voting Preferred Shares shall include only shares designated as Class A Non-Voting Shares of the Company on the Initial Issue Date, or in case of any reorganization or reclassification of the outstanding shares thereof, the shares, securities or assets to be issued in exchange for such Class A Non-Voting Shares pursuant thereto. (8) If the Company shall be a party to any transaction including without limitation, an amalgamation, arrangement, consolidation, sale of all or substantially all of the Company's assets or a reorganization, reclassification or recapitalization of the capital of the Company but excluding any transaction for which provision for adjustment is otherwise made in this Section 1.6 (each of the foregoing being referred to as a "Transaction"), in each case, as a result of which Class A Non-Voting Shares are converted into the right to receive shares, securities or other property (including, without limitation, cash or any combination thereof), each Series A Non-Voting Preferred Share shall thereafter be convertible into the number of shares or other securities or property to which a holder of the number of Class A Non-Voting Shares of the Company deliverable upon conversion of such Series A Non-Voting Preferred Shares would have been entitled upon such Transaction; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions set forth in this Section 1.6 with respect to the rights and interest thereafter of the holders of the Series A Non-Voting Preferred Shares, to the end that the provisions set forth in this Section 1.6 shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares or other property thereafter deliverable upon the conversion of the Series A Non-Voting Preferred Shares. The Company shall not effect any Transaction unless prior to or simultaneously with the consummation thereof the Company or purchaser, as the case may be, shall provide in its charter document that each Series A Non-Voting Preferred Share shall be converted into such shares, securities or property as, in accordance with the foregoing provisions, each such holder is entitled to receive. The provisions of this Section 1.6(8) shall similarly apply to successive Transactions. (9) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Non-Voting Preferred Shares, and the number of Common Shares to be issued shall be rounded down to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Non-Voting Preferred Shares the holder is at the time converting into Common Shares or Series - 17 - B Subordinate Voting Preferred Shares and the number of Common Shares or Series B Subordinate Voting Preferred Shares issuable upon such aggregate conversion. (10) If an event not specified in this Section 1.6 occurs that has substantially the same economic effect on the Series A Non-Voting Preferred Shares as those specifically enumerated above in this Section 1.6, then this Section 1.6 shall be construed liberally, mutatis mutandis, in order to give the holders of Series A Non-Voting Preferred Shares the intended benefit of the protections provided under this Section 1.6. In such event, the Company's Board of Directors shall make an appropriate adjustment in the Conversion Ratio so as to protect the rights of the holders of Series A Non-Voting Preferred Shares; provided that no such adjustment shall increase or decrease the Conversion Ratio as otherwise determined pursuant to this Section 1.6 or decrease the number of Class A Non-Voting Shares issuable upon conversion of each Series A Non-Voting Preferred Share. (11) The Company will not, by amendment of its Articles or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, and will at all times in good faith assist in the carrying out of all the provisions of this Section 1.6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Non-Voting Preferred Shares against impairment. (12) All calculations under this Section 1.6 shall be made to (a) the nearest cent or (b) the nearest one hundredth of a share or (c) the nearest one percent, as the case may be. 1.7 NOTICE OF CERTAIN EVENTS In case, at any time while any Series A Non-Voting Preferred Shares are outstanding, (1) the Company shall declare a dividend (or any other distribution) on its Common Shares; (2) the Company shall authorize the issuance to the holders of its Common Shares, of Common Share Equivalents, or rights or warrants to subscribe for or purchase Common Shares or of any other subscriptions rights or warrants; (3) the Company shall authorize any reorganization, reclassification or recapitalization of its Common Shares; (4) the Company shall authorize the consolidation or merger of the Company into or with any other person, the sale or transfer of all or substantially all of its business or assets to another person, or any other similar business combination or transaction; or (5) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up on the Company, then the Company shall promptly deliver to the transfer agent of the Series A Non-Voting Preferred Shares, if any, and to each of the holders of Series A Non-Voting Preferred Shares at - 18 - their last addresses as they shall appear on the register for the Series A Non-Voting Preferred Shares, at least 15 days before the date hereafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice describing such event and stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which any such reclassification, reorganization, recapitalization, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property (including cash), if any, deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. 1.8 REPORTS AS TO ADJUSTMENT Upon any adjustment of the Conversion Ratio then in effect pursuant to the provisions of Section 1.6 of this Article C then, and in each such case, the Company shall promptly deliver to each of the holders of the Series A Non-Voting Preferred Shares, a certificate signed by an officer of the Company setting forth in reasonable detail the event requiring the adjustment, the method by which such adjustment was calculated and the Conversion Ratio then in effect following such Adjustment. Where appropriate, such notice to holders of the Series A Non-Voting Preferred Shares may be given in advance. 1.9 MANDATORY REDEMPTION On November 2, 2009 (the "Redemption Date"), the Company shall redeem all the Series A Non-Voting Preferred Shares then outstanding and not theretofore surrendered for conversion, as follows: Thirty days prior to the Redemption Date, the Company shall give written notice to all holders of Series A Non-Voting Preferred Shares which shall specify the Redemption Date. For each Series A Non-Voting Preferred Share which is to be redeemed, the Company shall be obligated on the Redemption Date to pay and deliver share certificates to the holder thereof (upon surrender by such holder at the Company's principal executive office of the certificate representing such share or an Affidavit of Loss with respect thereto) (a) an amount in immediately available funds equal to the Series A Non-Voting Liquidation Value, and (b) such number of Class A Non-Voting Shares as have an aggregate Market Price (as determined on the day immediately before the Redemption Date) equal to the excess of the Market Price (as determined on the day immediately before the Redemption Date) of the Series A Non-Voting Preferred Share over the Series A Non-Voting Liquidation Value. All Class A Non-Voting Shares shall, when issued as contemplated herein, be validly issued, fully paid and non-assessable. If the funds of the Company legally available for redemption of the Series A Non-Voting Preferred Shares on the Redemption Date are insufficient to redeem the total number of such shares to be redeemed on such date, then those funds which are legally available shall be used to redeem the maximum possible number of such shares ratably among the holders thereof, based upon the aggregate Series A Non-Voting Liquidation Value of such Series A Non-Voting Preferred Shares held by each such holder. At any time thereafter when additional funds of the Company are legally available for the redemption of Series A Non-Voting Preferred Shares, such funds shall immediately be used to redeem on a similar ratable basis the balance of such shares. Notwithstanding the foregoing, each holder of Series A Non-Voting Preferred Shares shall be entitled to convert all or any portion of such holder's shares pursuant to Section 1.6 of this Article C prior to the Redemption Date and thereafter until such Series A Non-Voting Preferred Shares are redeemed. 1.10 RESERVATION OF SHARES ISSUABLE UPON CONVERSION The Company shall at all times reserve and keep available out of its authorized but unissued Class A Non-Voting Shares and out of its authorized but unissued Preferred Shares solely for the purpose of effecting the conversion of the issued or issuable Series A Non-Voting Preferred Shares, such number of its Class A Non-Voting Shares and Series B Subordinate Voting Preferred Shares, as the case may be, as shall from time to time be sufficient to effect the conversion of all outstanding Series A Non-Voting Preferred Shares, and if at any time the number of authorized but unissued Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares shall not be sufficient to effect the conversion of all then outstanding Series A Non-Voting Preferred Shares, the Company will take all such corporate action as may be necessary to increase its authorized but unissued Class A Non-Voting Shares or Series B Subordinate Voting Preferred Shares to such number of shares as shall be sufficient for such purpose. All Class A Non-Voting Shares and Series B Subordinate Voting Preferred Shares shall, when issued upon conversion as contemplated herein, be validly issued, fully paid and non-assessable. 1.11 LISTING ON SECURITIES EXCHANGES, ETC. The Company will list on each national securities exchange on which any Common Shares may at any time be listed, subject to official notice of issuance upon the conversion of the Series A Non-Voting Preferred Shares, all Class A Non-Voting Shares from time to time issuable upon the conversion of Series A Non-Voting Preferred Shares and will maintain such listing as long as any Class A Non-Voting Shares are listed. 1.12 CERTAIN COVENANTS Any registered holder of Series A Non-Voting Preferred Shares may proceed to protect and enforce its rights and the rights of any other holders of Series A Non-Voting Preferred Shares with any and all remedies available at law or in equity. 1.13 DEFINITIONS In addition to any other terms defined herein for purposes of this Article C, the following terms shall have the meaning indicated (references to particular sections of the Purchase Agreement or Shareholders Agreement shall include any amended, successor or substitute provisions in such agreements, as they may be amended from time to time in accordance with their respective terms): "Additional Issuance Ratio" is defined in Section 1.4(b) of the Purchase Agreement. "Affidavit of Loss" an affidavit or agreement satisfactory to the Company to indemnify the Company (without the need to post any bond or other security for such obligation) - 20 - from any loss incurred in connection with the loss of any share certificate evidencing shares of the Company's Capital Securities. "Business Day" means any day other than a Saturday, Sunday or a day when commercial banks in New York City or Vancouver, British Columbia are required to be closed. "Capital Securities" means, as to any Person that is a Company, the authorized shares of such Person's capital stock, including all classes of common, preferred, voting and non voting capital stock, and, as to any Person that is not a corporation or an individual, the ownership interests in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and property, and the right to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether or not such interests include voting or similar rights entitling the holder thereof to exercise control over such Person. "Common Share Equivalent" shall mean securities convertible into, or exchangeable or exercisable for Common Shares of any class. "Common Shares" means the Class " Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares in the capital of the Company. "Conversion Event" means (i) a Qualified IPO or (ii) (x) there shall occur an underwritten public offering providing gross proceeds to the Company and selling shareholders of at least U.S. $150,000,000 before deducting underwriting discounts, commissions and offering expenses and (y) thereafter the closing price for a period of 45 consecutive trading days per listed Common Share is at least 300% of the per share price obtained by dividing US$345,000,000 by the number of Series A Non-Voting Preferred Shares, Common Shares or Common Share Equivalents issued by the Company pursuant to Section 1.1 and 1.4 of the Purchase Agreement (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification or other similar event). For purposes of clause (ii) above, the closing price of each day shall be the last sale price or, in case no such sale takes place on such day, the average of the closing bid and asked prices in either case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the listed Common Shares are listed or the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ. "Conversion Ratio" determined as of any date, shall equal the number of Class A Non-Voting Shares (in the aggregate) into which one share of Series A Non-Voting Preferred Shares is convertible pursuant to Section 1.6 of this Article C. The term "distribution" shall include the transfer of cash or property to the holders of a class of shares of the Company, without consideration, whether by way of dividend or otherwise (except a dividend in shares of such class), or the purchase or redemption of shares of the Company, for cash or property, including such transfer, purchase or redemption by a subsidiary of the Company. The time of any distribution by way of dividends shall be the date of declaration thereof, and the time of any distribution by purchase or redemption of shares shall be the date on which cash or property is transferred by the Company, whether or not pursuant to a - 21 - contract of an earlier date; provided, however, that, where a debt security is issued in exchange for shares, the time of the distribution is the date when a Company acquires the shares for such exchange. "Dollars" and the symbol "$" shall mean, unless otherwise indicated, U.S. dollars, and the symbol "C$" shall refer to Canadian dollars. "Employee Shares" is defined in Section 1.4(b) of the Purchase Agreement. "Event of Default" means (i) the Company shall default in the performance of or compliance with the terms of Section 1.9 of this Article C or (ii) Ledcor Inc. shall default in the performance of or compliance with Section 12.4 of the Shareholders Agreement. "Initial Issue Date" means the date on which the first Series A Non-Voting Preferred Shares were issued by the Company. "Initial Purchase Price" means, U.S. $38.909 per Series A Non-Voting Preferred Share, (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification or other similar event involving Common Shares after the Initial Issue Date). "Junior Shares" shall mean any of the Company's Common Shares and all other Capital Securities of the Company (other than the Series A Non-Voting Preferred Shares and the Series B Subordinate Voting Preferred Shares, which shall rank equally with the Series A Non-Voting Preferred Shares). "Market Price" of any security with a Minimum Float means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive Business Days prior to such day. If there is not a Minimum Float with respect to the Series A Non-Voting Preferred Shares, then the Market Price of a Series A Non-Voting Preferred Share shall be determined as equal to the Market Price of a Common Share times the number of Common Shares into which the Series A Non-Voting Preferred Share is convertible as of the date of determination of the Market Price. If at any time such security does not have a Minimum Float or is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the holders of a majority of the Series A Non-Voting Preferred Shares. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Company and the holders of a majority of the Series A Non-Voting Preferred Shares. If the Company and the holders of a majority of the Series A Non-Voting Preferred - 22 - Shares are unable to agree on the selection of an independent appraiser within 30 days of the date when the holders of a majority of the Series A Non-Voting Preferred Shares have first delivered notice in writing to the Company of the name of a proposed independent appraiser, then the holders of a majority of the Series A Non-Voting Preferred Shares may request the President of the American Arbitration Association to appoint an independent appraiser and such appointment shall be final and binding for purposes of determination of the Market Price in question. The determination of such appraiser shall be final and binding upon the parties, and the Company shall pay the fees and expenses of such appraiser. "Minimum Float" is achieved if the product of (i) the closing price of a security listed on any securities exchange or quoted in the NASDAQ system or the over-the-counter market multiplied by (ii) the number of shares or units of such security registered pursuant to the United States Securities Act of 1933, as then in effect, and held by the public is at least U.S. $150,000,000. "Minority Roll-Up Transaction" is defined in Section 1.4(b) of the Purchase Agreement. "Minority Roll-Up Factor" means the sum of (i) 1.00 plus (ii) the Additional Issuance Ratio. "Minority Roll-Up Shares" is defined in Section 1.4(b) of the Purchase Agreement. "Person" shall include an individual, partnership, association, body corporate, trustee, executor, administrator or legal representative. "Public Sale" is defined in Section 1.27 of the Shareholders Agreement. "Purchase Agreement" means the Preferred Share Purchase Agreement dated September 7, 1999 among the Company and the parties named as "Investors" therein, as the same may be amended from time to time in accordance with its terms. "Qualified IPO" shall mean the Company's first BONA FIDE underwritten public offering of Common Shares pursuant to a preliminary prospectus and a prospectus if under Canadian federal and provincial securities laws and pursuant to an effective registration statement under the United States Securities Act of 1933, as amended, (i) resulting in at least U.S. $150,000,000 of gross aggregate proceeds to the Company and any selling stockholders before deducting underwriting discounts and commissions and offering expenses, (ii) the gross offering price per share of which is at least 300% of the per share price obtained by dividing U.S.$345,000,000 by the number of Series A Non-Voting Preferred Shares, Common Shares or Common Share Equivalents issued by the Company pursuant to Sections 1.1 and 1.4 of the Purchase Agreement (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification or other similar event), and (iii) upon the consummation of which the Class A Non-Voting Shares or Class B Subordinate Voting Shares are listed on The Toronto Stock Exchange and on a U.S. national securities exchange or quoted on Nasdaq National Market. - 23 - "Shareholders Agreement" means the Shareholders Agreement dated as of September 9, 1999 among the Company and the parties named therein, as the same may be amended from time to time in accordance with its terms. D. SERIES B SUBORDINATE VOTING PREFERRED SHARES 1. SERIES RIGHTS 1.1 DESIGNATION AND NUMBER The second series of Preferred Shares shall consist of 100,000,000,000 Preferred Shares, which shares shall be designated as Series B Subordinate Voting Preferred Shares (the "Series B Subordinate Voting Preferred Shares") and which, in addition to the rights, privileges, restrictions and conditions attached to the Preferred Shares as a class, shall have attached thereto the rights, privileges, restrictions and conditions as set forth herein. The Company shall only issue Series B Subordinate Voting Preferred Shares pursuant to the Purchase Agreement or upon the conversion of Series A Non-Voting Preferred Shares. 1.2 DIVIDENDS The holders of Series B Subordinate Voting Preferred Shares shall be entitled to receive dividends equivalent on a per share basis to any dividends declared, paid, issued or distributed with respect to shares of Common Shares into which such share of Series B Subordinate Voting Preferred Shares could be converted pursuant to the provisions of Section 1.6 of this Article D, on the record date for the determination of holders of Common Shares entitled to such dividends. The Board of Directors may not declare, and the Company shall not pay, issue or distribute, any dividend on any Common Shares unless simultaneously the Board of Directors declares, and the Company pays, issues or distributes the dividend on the Series B Subordinate Voting Preferred Shares specified in the first sentence of this Section 1.2. The holders of Series B Subordinate Voting Preferred Shares shall not be entitled to any dividend other than, or in excess of, the dividends as hereinbefore provided. 1.3 VOTING RIGHTS The holders of the Series B Subordinate Voting Preferred Shares shall be entitled, as such, to receive notice of and to attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of shares of any other class of shares of the Company or of shares of any series of shares of any such other class of shares) and to vote at all such meetings and each holder of Series B Subordinate Voting Preferred Shares shall be entitled to one vote at any such meeting per Series B Subordinate Voting Preferred Share held by such holder as at the record date for such meeting. 1.4 RETIRED SHARES Any Series B Subordinate Voting Preferred Shares converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. None of such Series B Subordinate Voting Preferred Shares shall be reissued by the Company. - 24 - 1.5 LIQUIDATION, DISSOLUTION OR WINDING UP (1) Upon (i) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (ii) a sale of all or substantially all of the assets of the Company or (iii) a reorganization of the Company required by any court or administrative body in order to comply with any provision of law (each of the events referred to in clauses (i), (ii) and (iii) being referred to as a "Liquidation"), the holders of Series B Subordinate Voting Preferred Shares shall be entitled to receive and to be paid out of assets of the Company available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the greater of (i) the Series B Subordinate Voting Liquidation Value with respect to each such outstanding Series B Subordinate Voting Preferred Share, and (ii) the amount which would have been paid in such Liquidation, based upon the number of Class B Subordinate Voting Shares into which a Series B Subordinate Voting Preferred Share could be converted pursuant to the provisions of Section 1.6 of this Article D. If, upon any Liquidation of the Company, the assets of the Company available for distribution shall be insufficient to pay in full the Series B Subordinate Voting Liquidation Value with respect to each outstanding Series B Subordinate Voting Preferred Share, then such assets shall be distributed among the holders of Series B Subordinate Voting Preferred Shares ratably in accordance with the respective amounts that would be payable on such Series B Subordinate Voting Preferred Shares if such assets were sufficient to permit payment in full of all amounts payable thereon. (2) After the payment to the holders of Series B Subordinate Voting Preferred Shares of the full amount of the liquidating distribution to which they are entitled under this Section 1.5, the holders of the Series B Subordinate Voting Preferred Shares as such shall have no right or claim to any of the remaining assets of the Company and shall not be entitled to share in any further distribution of assets of the Company. (3) Any consolidation, merger or other business combination of the Company with or into any other Person or Persons shall be deemed to be a Liquidation for purposes of this Section 1.5, except for any such merger, consolidation or other business combination where, after the completion of such transaction, the holders of voting shares in the capital of the Company immediately prior to such merger, consolidation or other business combination will beneficially own a majority of the voting shares in the capital of the surviving or acquiring entity. Notwithstanding the foregoing, no consolidation, merger or other business combination of the Company with or into any other Person shall be deemed to be a Liquidation for the purposes of this Section 1.5 if the holders of not less than 85% of the issued and outstanding Series B Subordinate Voting Preferred Shares waive in writing the provisions of this Section 1.5 with respect to such event. (4) "Series B Subordinate Voting Liquidation Value" determined as of any date shall mean, in respect of each Series B Subordinate Voting Preferred Share, the sum of (A) an amount equal to the Initial Purchase Price plus an amount equal to six percent (6%) of the Initial Purchase Price, compounded annually on each anniversary of the Initial Issue Date prior to the date of determination and (B) all declared but unpaid dividends per Series B Subordinate Voting Preferred Shares, if any. The Series B Subordinate Voting Liquidation Value shall also be subject to adjustment as provided in Section 1.5(6) of this Article D. - 25 - (5) Notwithstanding the foregoing, (i) the rate of six percent (6%) referred to in Clause (A) of Section 1.5(4) of this Article D shall be read as eight percent (8%) from such time and as long as an Event of Default shall have occurred and be continuing and (ii) no amount shall be added to the Initial Purchase Price pursuant to clause (A) of Section 1.5(4) of this Article D if the Company shall consummate a Qualified IPO prior to the first anniversary of the Initial Issue Date. (6) The Series B Subordinate Voting Liquidation Value shall be multiplied by a factor equal to the sum of (x) 1.00 and (y) the Additional Issuance Ratio if and for so long as the Company is in default in the performance of or compliance with Section 1.4(a), 1.4(b) or 1.4(c) of the Purchase Agreement. 1.6 CONVERSION (1) If a Conversion Event occurs, each Series B Subordinate Voting Preferred Share may, at the option of the Company, and in compliance with the provisions of Section 1.6(4) of this Article D, be converted into a number of Class B Subordinate Voting Shares equal to the Conversion Ratio. In addition, at the option of the holder of any Series B Subordinate Voting Preferred Shares, such holder shall have the right, at any time and from time to time, by written notice to the Company, to convert each Series B Subordinate Voting Preferred Share owned by such holder into (a) a number of Class B Subordinate Voting Shares equal in the aggregate to the Conversion Ratio or (b) Series A Non-Voting Preferred Shares on a one for one basis, in each case without payment of any additional consideration. (2) The Conversion Ratio, determined at any time, shall equal one (1.00) plus an adjustment equal to six percent (6%) of the Conversion Ratio, compounded annually on each anniversary of the Initial Issue Date prior to the date of determination but, from such time and as long as an Event of Default shall have occurred and be continuing, the rate of six percent (6%) referred to above in this Section 1.6(2) shall be read as eight percent (8%); provided, however, that if the Company consummates a Qualified IPO prior to the first anniversary of the Initial Issue Date then no adjustment shall be made pursuant to this sentence. This Conversion Ratio shall also be adjusted as provided below in this Section 1.6(2). The Conversion Ratio shall be multiplied by a factor equal to the sum of (x) 1.00 and (y) the Additional Issuance Ratio if and for so long as the Company is in default in the performance of or compliance with Section 1.4(a), 1.4(b) or 1.4(c) of the Purchase Agreement. The Conversion Ratio shall also be subject to adjustment from time to time as follows: (a) If the Company at any time or from time to time after the Initial Issue Date (A) pays any dividend or makes any distribution in additional Common Shares of the Company or of securities convertible into, or exchangeable or exercisable for, shares of Common Shares of the Company, (B) subdivides the outstanding Common Shares, (C) combines the outstanding Common Shares into a smaller number of shares or (D) issues by reclassification of the Common Shares any shares in the capital of the Company, then, and in each such case, the Conversion Ratio in effect immediately prior to such event or the record date therefor, whichever is earlier, shall be adjusted so that the holder of Series B Subordinate Voting Preferred Shares thereafter convertible into Class B Subordinate Voting Shares pursuant to this Section 1.6 shall be entitled to receive the number and type of Class B Subordinate Voting Shares or other securities of the Company which such holder would have owned or have been entitled to receive after the - 26 - happening of any of the events described above had such Series B Subordinate Voting Preferred Shares been converted into Class B Subordinate Voting Shares immediately prior to the happening of such event or the record date therefore, whichever is earlier. An adjustment made pursuant to this clause (a) shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of Common Shares entitled to receive such dividend or distribution, or (y) in the case of such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. (b) If the Company issues to all (or substantially all) holders of Common Shares any rights or subscriptions to purchase Common Shares or Common Share Equivalents after the Initial Issue Date at a price per Common Share (or having a conversion or exercise price per share in the case of Common Share Equivalents) of less than either (i) the Series B Subordinate Voting Liquidation Value or (ii) the Market Price of the Common Shares on the earlier of the date of such issuance or the record date therefor (the "Applicable Date") then, in each such case the Conversion Ratio shall be adjusted by multiplying (A) the Conversion Ratio in effect at the close of business on the day immediately prior to the Applicable Date by (B) a fraction, the numerator of which shall be the sum of (1) the number of Common Shares outstanding at the close of business on the date immediately prior to the Applicable Date and (2) the number of additional Common Shares issued or issuable upon acceptance, conversion, exchange or exercise of such rights or subscriptions (or upon conversion, exchange or exercise of Common Share Equivalents issued or issuable pursuant to such rights or subscriptions), and the denominator of which shall be the sum of (x) the number of Common Shares outstanding at the close of business on the date immediately prior to the Applicable Date and (y) the number of Common Shares which would be purchasable for the aggregate consideration received by the Company upon issuance of such Common Shares or Common Share Equivalents or receivable by the Company for the total number of Common Shares issuable upon acceptance conversion, exchange or exercise of such rights or subscriptions (or upon conversion, exchange or exercise of Common Share Equivalents issued or issuable pursuant to such rights or subscriptions) if the price per share for such purchase, conversion, exchange or exercise was equal to the greater of (i) the Series B Subordinate Voting Liquidation Value or (ii) the Market Price of the Common Shares as of the Applicable Date. An adjustment made pursuant to this clause (b) shall become effective immediately after the close of business on the Applicable Date. (c) Except with respect to Deemed Outstanding Securities (as defined below), if the Company issues any Common Shares (or Common Share Equivalents) after the Initial Issue Date at a price per Common Share (or having a conversion or exercise price per share in the case of Common Share Equivalents) of less than either (i) the Series B Subordinate Voting Liquidation Value or (ii) the Market Price of the Common Shares on the date of issuance of such Common Shares (or Common Share Equivalents), then, in each such case, the Conversion Ratio shall be adjusted by multiplying (A) the Conversion Ratio in effect at the close of business on the day immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) by (B) a fraction, the numerator of which shall be the sum of (l) the number of Common Shares outstanding at the close of business on the date immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) and (2) the number of such additional Common Shares and the number of Common Shares issued or issuable upon conversion, exchange or exercise of such Common Share Equivalents, and the denominator of which shall be the sum of (x) the number of Common Shares outstanding on the date - 27 - immediately prior to the date of issuance of such Common Shares (or Common Share Equivalents) and (y) the number of Common Shares which would be purchasable for the aggregate consideration received by the Company upon issuance of such Common Shares or Common Share Equivalents or receivable by the Company for the total number of Common Shares issuable or issuable upon conversion, exchange or exercise of Common Share Equivalents if the price per share for such purchase, conversion, exchange or exercise was equal to the greater of (i) the Series B Subordinate Voting Liquidation Value or (ii) the Market Price of the Common Shares as of the date of issuance of such Common Shares (or Common Share Equivalents). An adjustment made pursuant to this clause (c) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively to the close of business on the date of such issuance. "Deemed Outstanding Securities" shall mean (i) the stock options and Class A Non-Voting Shares to be issued upon the exercise of such stock options, initially issued or issuable, or Permitted Reissued Options (as defined in the Purchase Agreement) pursuant to the 1998 Long Term Incentive and Share Award Plan (Amended) of the Company exercisable for a maximum of 4,445,813 Class A Non-Voting Shares; (ii) any Series A Non-Voting Preferred Shares issued pursuant to the Purchase Agreement or any Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares issued on the conversion of the Series B Subordinate Voting Preferred Shares; (iii) 4,500,000 Common Shares issued, or to be issued, in consideration for the acquisition by the Company of fiber assets and related rights and obligations from Ledcor Industries Limited or Ledcor Industries Inc. under the amended and restated Share Purchase Agreement dated September 7, 1999 between Ledcor Industries Limited, Ledcor Industries Inc. and the Company; (iv) any Class A Non-Voting Shares issued on conversion of the Series B Subordinate Voting Shares; (v) any Common Shares or Common Share Equivalents issued pursuant to a Minority Roll-Up Transaction; (vi) any Common Shares, or Common Share Equivalents issued pursuant to an event described in clauses (a) or (b) of this Section 1.6(2); or (vii) 26,080,000 Class A Non-Voting Shares and 4,920,000 Class C Multiple Voting Shares issued to Gregory B. Maffei. (d) For purposes of this Section 1.6(2) the aggregate consideration receivable by the Company in connection with the issuance of Common Shares and/or Common Share Equivalents shall be deemed to be equal to the sum of the aggregate offering price (before deduction of underwriting discounts or commissions and expenses payable to third parties, if any) of all such Common Shares and/or Common Share Equivalents plus the minimum aggregate amount, if any, payable upon conversion, exchange or exercise of any such Common Share Equivalents. Upon the expiration or termination of any unconverted, unexchanged or unexercised Common Share Equivalents for which an adjustment has been made pursuant to clause (b) or clause (c) of this Section 1.6(2), the adjustments shall forthwith be reversed to effect such Conversion Ratio as would have been in effect at the time of such expiration or termination had such Common Share Equivalents, to the extent outstanding immediately prior to such expiration or termination, never been issued. The consideration received by the Company in connection with the sale or issuance of Common Shares (or Common Share Equivalents) shall be computed as follows: (A) insofar as such consideration consists of cash, such consideration shall equal the aggregate amount of cash received by the Company prior to amounts paid or payable for accrued interest or accrued dividends and prior to any commissions or expenses paid by the Company; - 28 - (B) insofar as such consideration consists of property other than cash, such consideration shall be calculated at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors, which shall be based upon a written opinion of an investment banking or appraisal firm of national standing in the United States if such consideration is given a value exceeding $10 million; and (C) in the event Common Shares or Common Share Equivalents are issued together with other securities or other assets of the Company for consideration that is allocable to both such Common Shares and Common Share Equivalents, and to such other securities and assets, the portion of such consideration allocable to such Common Shares or Common Share Equivalents shall be that set forth in the instruments and agreements issued or entered into in connection with such transaction, and if no such allocation is so set forth, then the portion of such consideration allocable to such Common Shares or Common Share Equivalents, calculated as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (e) For purposes of this Section 1.6(2) the number of Common Shares at any time outstanding shall mean the aggregate of all Common Shares then outstanding (other than any Common Shares then owned or held by or for the account of the Company). (f) If the Company shall take a record of the holders of its Common Shares for the purpose of entitling them to receive a dividend or other distribution and shall thereafter, and before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then no adjustment in the Conversion Ratio then in effect shall be made by reason of the taking of such record, and any such adjustment previously made as a result of the taking of such record shall be reversed. (3) Subject to compliance with the provisions of Section 1.6(5) of this Article D, each holder of Series B Subordinate Voting Preferred Shares shall be entitled at any time and from time to time to have all or any part of the Series B Subordinate Voting Preferred Shares held by such holder converted into validly issued, fully paid and non-assessable Series A Non-Voting Preferred Shares upon the basis of one Series A Non-Voting Preferred Share for each Series B Subordinate Voting Preferred Share in respect of which the conversion right is exercised. (4) Before the Company shall be entitled to convert Series B Subordinate Voting Preferred Shares into Class B Subordinate Voting Shares pursuant to Section 1.6(1) of this Article D, the Company shall not less than 10 days and not more than 20 days before the date specified for conversion (the "Conversion Date") send by prepaid first class mail or deliver to the registered address of each person who at the date not more than 7 days prior to the date of mailing or delivery is a registered holder of Series B Subordinate Voting Preferred Shares to be converted a notice in writing of the intention of the Company to convert the Series B Subordinate Voting Preferred Shares registered in the name of such holder. Accidental failure or omission to give such notice to one (1) or more holders shall not affect the validity of such conversion, but upon such failure or omission being discovered notice shall be given forthwith to such holder or holders and such notice shall have the same force and effect as if given in due time. Such notice shall set out the number of Series B Subordinate Voting Preferred Shares held by the person to whom it is addressed which are to be converted, the Conversion Ratio, the Conversion Date and the place or places at which holders of Series B Subordinate Voting Preferred Shares may - 29 - present and surrender such shares for conversion. After the giving of such notice in writing, the election of the Company shall be irrevocable. (a) Within three (3) days following the Conversion Date, the Company shall, on presentation and surrender of the certificate or certificates representing the Series B Subordinate Voting Preferred Shares called for conversion at the place or places specified in the notice of conversion, issue and deliver to such holder of Series B Subordinate Voting Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class B Subordinate Voting Shares entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the Conversion Date, and the person or persons entitled to receive the Class B Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class B Subordinate Voting Shares as of such date. The issuance of certificates for Class B Subordinate Voting Shares, upon conversion of the Series B Subordinate Voting Preferred Shares, shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Series B Subordinate Voting Preferred Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Series B Subordinate Voting Shares represented by the original certificate which are not to be converted. (b) The Company shall have the right at any time on or after the Conversion Date to deposit the certificate or certificates representing Class B Subordinate Voting Shares into trust for holders of the Series B Subordinate Voting Preferred Shares called for conversion, which have not at the date of such deposit been surrendered in connection with such conversion. Certificates deposited into trust shall be held by the Company or other designated person named in the notice of conversion or in a subsequent notice to the registered holders of the Series B Subordinate Voting Preferred Shares in respect of which the deposit was made. Upon such deposit being made, the Series B Subordinate Voting Preferred Shares in respect of which such deposit shall have been made shall be deemed to have been converted and the rights of the holders thereof after such deposit or such Conversion Date, as the case may be, shall be limited to receiving the certificate or certificates representing the Class B Subordinate Voting Shares to which they are entitled upon presentation and surrender of the certificate or certificates representing the Series B Subordinate Voting Preferred Shares being converted. (5) Before any holder of Series B Subordinate Voting Preferred Shares shall be entitled to convert the same into Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series B Subordinate Voting Preferred Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Common Shares or Preferred Shares are to be issued; the number of Series B Subordinate Voting Preferred Shares to be converted; and notice of such holder's election to convert such Series B Subordinate Voting Preferred Shares. After giving notice in writing, the election of the holder of Series B Subordinate Voting Preferred Shares shall be irrevocable although may be subject to the condition described below when the conversion is in connection with an underwritten public offering. The Company shall, within three (3) days of such written notice, issue and deliver at such office to such holder of Series B Subordinate Voting Preferred Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Class B Subordinate Voting Shares or Series A Non-Voting - 30 - Preferred Shares, as the case may be, to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series B Subordinate Voting Preferred Shares to be converted, and the person or persons entitled to receive the shares of Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares, as the case may be, issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares, as the case may be, as of such date. If the conversion is in connection with an underwritten public offering of securities (other than a Qualified IPO), the conversion into Common Shares may, at the option of any holder tendering Series B Subordinate Voting Preferred Shares for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Shares upon conversion of the Series B Subordinate Voting Preferred Shares shall not be deemed to have converted such Series B Subordinate Voting Preferred Shares until immediately prior to the closing of such sale of securities. The issuance of certificates for Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares, as the case may be, upon conversion of the Series B Subordinate Voting Preferred Shares shall be made without charge to the holder thereof for any issuance tax in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series B Subordinate Voting Preferred Shares which is being converted. (6) The Company shall at no time close its transfer books against the transfer of any Series B Subordinate Voting Preferred Shares, or of any Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares issuable upon the conversion of any Series B Subordinate Voting Preferred Shares, in any manner which interferes with the timely conversion of such Series B Subordinate Voting Preferred Shares, except as may otherwise be required to comply with applicable laws or the provisions of the Attachment for these Articles. (7) As used in this Section 1.6 the term "Class B Subordinate Voting Shares" shall mean and include the Company's issued Class B Subordinate Voting Shares as constituted on the Initial Issue Date, and shall also include any shares of any class of the capital of the Company thereafter authorized which shall neither be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends nor be entitled to a preference in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company provided that the Class B Subordinate Voting Shares receivable upon conversion of Series B Subordinate Voting Preferred Shares shall include only shares designated as Class B Subordinate Voting Shares of the Company on the Initial Issue Date, or in case of any reorganization or reclassification of the outstanding shares thereof, the shares, securities or assets to be issued in exchange for such Class B Subordinate Voting Shares pursuant thereto. (8) If the Company shall be a party to any transaction including without limitation, an amalgamation, arrangement, consolidation, sale of all or substantially all of the Company's assets or a reorganization, reclassification or recapitalization of the capital of the Company but excluding any transaction for which provision for adjustment is otherwise made in this Section 1.6 (each of the foregoing being referred to as a "Transaction"), in each case, as a result of which Class B Subordinate Voting Shares are converted into the right to receive shares, securities or other property (including, without limitation, cash or any combination thereof), each Series B Subordinate Voting Preferred Share shall thereafter be convertible into the number of - 31 - shares or other securities or property to which a holder of the number of Class B Subordinate Voting Shares of the Company deliverable upon conversion of such Series B Subordinate Voting Preferred Shares would have been entitled upon such Transaction; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions set forth in this Section 1.6 with respect to the rights and interest thereafter of the holders of the Series B Subordinate Voting Preferred Shares, to the end that the provisions set forth in this Section 1.6 shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares or other property thereafter deliverable upon the conversion of the Series B Subordinate Voting Preferred Shares. The Company shall not effect any Transaction unless prior to or simultaneously with the consummation thereof the Company or purchaser, as the case may be, shall provide in its charter document that each Series B Subordinate Voting Preferred Share shall be converted into such shares, securities or property as, in accordance with the foregoing provisions, each such holder is entitled to receive. The provisions of this Section 1.6(8) shall similarly apply to successive Transactions. (9) No fractional shares shall be issued upon the conversion of any share or shares of the Series B Subordinate Voting Preferred Shares, and the number of Common Shares to be issued shall be rounded down to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series B Subordinate Voting Preferred Shares the holder is at the time converting into Common Shares or Series A Non-Voting Preferred Shares and the number of Common Shares or Series A Non-Voting Preferred Shares issuable upon such aggregate conversion. (10) If an event not specified in this Section 1.6 occurs that has substantially the same economic effect on the Series B Subordinate Voting Preferred Shares as those specifically enumerated above in this Section 1.6, then this Section 1.6 shall be construed liberally, mutatis mutandis, in order to give the holders of Series B Subordinate Voting Preferred Shares the intended benefit of the protections provided under this Section 1.6. In such event, the Company's Board of Directors shall make an appropriate adjustment in the Conversion Ratio so as to protect the rights of the holders of Series B Subordinate Voting Preferred Shares; provided that no such adjustment shall increase or decrease the Conversion Ratio as otherwise determined pursuant to this Section 1.6 or decrease the number of Class B Subordinate Voting Shares issuable upon conversion of each Series B Subordinate Voting Preferred Share. (11) The Company will not, by amendment of its Articles or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, and will at all times in good faith assist in the carrying out of all the provisions of this Section 1.6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series B Subordinate Voting Preferred Shares against impairment. (12) All calculations under this Section 1.6 shall be made to (a) the nearest cent or (b) the nearest one hundredth of a share or (c) the nearest one percent, as the case may be. - 32 - 1.7 NOTICE OF CERTAIN EVENTS In case, at any time while any Series B Subordinate Voting Preferred Shares are outstanding, (1) the Company shall declare a dividend (or any other distribution) on its Common Shares; (2) the Company shall authorize the issuance to the holders of its Common Shares, of Common Share Equivalents, or rights or warrants to subscribe for or purchase Common Shares or of any other subscriptions rights or warrants; (3) the Company shall authorize any reorganization, reclassification or recapitalization of its Common Shares; (4) the Company shall authorize the consolidation or merger of the Company into or with any other person, the sale or transfer of all or substantially all of its business or assets to another person, or any other similar business combination or transaction; or (5) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up on the Company; then the Company shall promptly deliver to the transfer agent of the Series B Subordinate Voting Preferred Shares, if any, and to each of the holders of Series B Subordinate Voting Preferred Shares at their last addresses as they shall appear on the register for the Series B Subordinate Voting Preferred Shares, at least 15 days before the date hereafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice describing such event and stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which any such reclassification, reorganization, recapitalization, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property (including cash), if any, deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. 1.8 REPORTS AS TO ADJUSTMENT Upon any adjustment of the Conversion Ratio then in effect pursuant to the provisions of Section 1.6 of this Article D then, and in each such case, the Company shall promptly deliver to each of the holders of the Series B Subordinate Voting Preferred Shares, a certificate signed by an officer of the Company setting forth in reasonable detail the event requiring the adjustment, the method by which such adjustment was calculated and the Conversion Ratio then in effect following such Adjustment. Where appropriate, such notice to holders of the Series B Subordinate Voting Preferred Shares may be given in advance. - 33 - 1.9 MANDATORY REDEMPTION On November 2, 2009 (the "Redemption Date"), the Company shall redeem all the Series B Subordinate Voting Preferred Shares then outstanding and not theretofore surrendered for conversion, as follows: Thirty days prior to the Redemption Date, the Company shall give written notice to all holders of Series B Subordinate Voting Preferred Shares which shall specify the Redemption Date. For each Series B Subordinate Voting Preferred Share which is to be redeemed, the Company shall be obligated on the Redemption Date to pay and deliver share certificates to the holder thereof (upon surrender by such holder at the Company's principal executive office of the certificate representing such share or an Affidavit of Loss with respect thereto) (a) an amount in immediately available funds equal to the Series B Subordinate Voting Liquidation Value, and (b) such number of Class B Subordinate Voting Shares as have an aggregate Market Price (as determined on the day immediately before the Redemption Date) equal to the excess of the Market Price (as determined on the day immediately before the Redemption Date) of the Series B Subordinate Voting Preferred Share over the Series A Non-Voting Liquidation Value. All Class B Subordinate Voting Shares shall, when issued as contemplated herein, be validly issued, fully paid and non-assessable. If the funds of the Company legally available for redemption of the Series B Subordinate Voting Preferred Shares on the Redemption Date are insufficient to redeem the total number of such shares to be redeemed on such date, then those funds which are legally available shall be used to redeem the maximum possible number of such shares ratably among the holders thereof, based upon the aggregate Series B Subordinate Voting Liquidation Value of such Series B Subordinate Voting Preferred Shares held by each such holder. At any time thereafter when additional funds of the Company are legally available for the redemption of Series B Subordinate Voting Preferred Shares, such funds shall immediately be used to redeem on a similar ratable basis the balance of such shares. Notwithstanding the foregoing, each holder of Series B Subordinate Voting Preferred Shares shall be entitled to convert all or any portion of such holder's shares pursuant to Section 1.6 of this Article D prior to the Redemption Date and thereafter until such Series B Subordinate Voting Preferred Shares are redeemed. 1.10 RESERVATION OF SHARES ISSUABLE UPON CONVERSION The Company shall at all times reserve and keep available out of its authorized but unissued Class B Subordinate Voting Shares and out of its authorized but unissued Preferred Shares solely for the purpose of effecting the conversion of the issued or issuable Series B Subordinate Voting Preferred Shares, such number of its Class B Subordinate Voting Shares and Series A Non-Voting Preferred Shares, as the case may be, as shall from time to time be sufficient to effect the conversion of all outstanding Series B Subordinate Voting Preferred Shares, and if at any time the number of authorized but unissued Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares shall not be sufficient to effect the conversion of all then outstanding Series B Subordinate Voting Preferred Shares, the Company will take all such corporate action as may be necessary to increase its authorized but unissued Class B Subordinate Voting Shares or Series A Non-Voting Preferred Shares to such number of shares as shall be sufficient for such purpose. All Class B Subordinate Voting Shares and Series A Non-Voting Preferred Shares shall, when issued upon conversion as contemplated herein, be validly issued, fully paid and non-assessable. - 34 - 1.11 LISTING ON SECURITIES EXCHANGES, ETC. The Company will list on each national securities exchange on which any Common Shares may at any time be listed, subject to official notice of issuance upon the conversion of the Series B Subordinate Voting Preferred Shares, all Class B Subordinate Voting Shares from time to time issuable upon the conversion of Series B Subordinate Voting Preferred Shares and will maintain such listing as long as any Class B Subordinate Voting Shares are listed. 1.12 CERTAIN COVENANTS Any registered holder of Series B Subordinate Voting Preferred Shares may proceed to protect and enforce its rights and the rights of any other holders of Series B Subordinate Voting Preferred Shares with any and all remedies available at law or in equity. 1.13 DEFINITIONS In addition to any other terms defined herein for purposes of this Article D, the following terms shall have the meaning indicated (references to particular sections of the Purchase Agreement or Shareholders Agreement shall include any amended, successor or substitute provisions in such agreements, as they may be amended from time to time in accordance with their respective terms): "Additional Issuance Ratio" is defined in Section 1.4(b) of the Purchase Agreement. "Affidavit of Loss" an affidavit or agreement satisfactory to the Company to indemnify the Company (without the need to post any bond or other security for such obligation) from any loss incurred in connection with the loss of any share certificate evidencing shares of the Company's Capital Securities. "Business Day" means any day other than a Saturday, Sunday or a day when commercial banks in New York City or Vancouver, British Columbia are required to be closed. "Capital Securities" means, as to any Person that is a Company, the authorized shares of such Person's capital stock, including all classes of common, preferred, voting and non voting capital stock, and, as to any Person that is not a Company or an individual, the ownership interests in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and property, and the right to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether or not such interests include voting or similar rights entitling the holder thereof to exercise control over such Person. "Common Share Equivalent" shall mean securities convertible into, or exchangeable or exercisable for Common Shares of any class. "Common Shares" means the Class A Non-Voting Shares, Class B Subordinate Voting Shares and Class C Multiple Voting Shares in the capital of the Company. - 35 - "Conversion Event" means (i) a Qualified IPO or (ii) (x) there shall occur an underwritten public offering providing gross proceeds to the Company and selling shareholders of at least U.S. $150,000,000 before deducting underwriting discounts, commissions and offering expenses and (y) thereafter the closing price for a period of 45 consecutive trading days per listed Common Share is at least 300% of the per share price obtained by dividing US$345,000,000 by the number of Series A Non-Voting Preferred Shares, Common Shares or Common Share Equivalents issued by the Company pursuant to Sections 1.1 and 1.4 of the Purchase Agreement (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification, or other similar event). For purposes of clause (ii) above, the closing price of each day shall be the last sale price or, in case no such sale takes place on such day, the average of the closing bid and asked prices in either case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the listed Common Shares are listed or the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ. "Conversion Ratio" determined as of any date, shall equal the number of Class B Subordinate Voting Shares (in the aggregate) into which one share of Series B Subordinate Voting Preferred Shares is convertible pursuant to Section 1.6 of this Article D. The term "distribution" shall include the transfer of cash or property to the holders of a class of shares of the Company, without consideration, whether by way of dividend or otherwise (except a dividend in shares of such class), or the purchase or redemption of shares of the Company, for cash or property, including such transfer, purchase or redemption by a subsidiary of the Company. The time of any distribution by way of dividends shall be the date of declaration thereof, and the time of any distribution by purchase or redemption of shares shall be the date on which cash or property is transferred by the Company, whether or not pursuant to a contract of an earlier date; PROVIDED, HOWEVER, that, where a debt security is issued in exchange for shares, the time of the distribution is the date when a Company acquires the shares for such exchange. "Dollars" and the symbol "$" shall mean, unless otherwise indicated, U.S. dollars, and the symbol "C$" shall refer to Canadian dollars. "Employee Shares" is defined in Section 1.4(b) of the Purchase Agreement. "Event of Default" means (i) the Company shall default in the performance of or compliance with the terms of Section 1.9 of this Article D or (ii) Ledcor Inc. shall default in the performance of or compliance with Section 12.4 of the Shareholders Agreement. "Initial Issue Date" means the date on which the first Series A Non-Voting Preferred Shares were issued by the Company. "Initial Purchase Price" means, U.S.$38.909 per Series A Non-Voting Preferred Share, (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification or other similar event involving Common Shares after the Initial Issue Date). - 36 - "Junior Shares" shall mean any of the Company's Common Shares and all other Capital Securities of the Company (other than the Series B Subordinate Voting Preferred Shares and the Series A Non-Voting Preferred Shares, which shall rank equally with the Series B Subordinate Voting Preferred Shares). "Market Price" of any security with a Minimum Float means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive Business Days prior to such day. If there is not a Minimum Float with respect to the Series B Subordinate Voting Preferred Shares, then the Market Price of a Series B Subordinate Voting Preferred Share shall be determined as equal to the Market Price of a Common Share times the number of Common Shares into which the Series B Subordinate Voting Preferred Share is convertible as of the date of determination of the Market Price. If at any time such security does not have a Minimum Float or is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the holders of a majority of the Series B Subordinate Voting Preferred Shares. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Company and the holders of a majority of the Series B Subordinate Voting Preferred Shares. If the Company and the holders of a majority of the Series B Subordinate Voting Preferred Shares are unable to agree on the selection of an independent appraiser within 30 days of the date when the holders of a majority of the Series B Subordinate Voting Preferred Shares have first delivered notice in writing to the Company of the name of a proposed independent appraiser, then the holders of a majority of the Series B Subordinate Voting Preferred Shares may request the President of the American Arbitration Association to appoint an independent appraiser and such appointment shall be final and binding for purposes of determination of the Market Price in question. The determination of such appraiser shall be final and binding upon the parties, and the Company shall pay the fees and expenses of such appraiser. "Minimum Float" is achieved if the product of (i) the closing price of a security listed on any securities exchange or quoted in the NASDAQ system or the over-the-counter market multiplied by (ii) the number of shares or units of such security registered pursuant to the United States Securities Act of 1933, as then in effect, and held by the public is at least U.S. $150,000,000. "Minority Roll-Up Factor" means the sum of (i) 1.00 plus (ii) the Additional Issuance Ratio. "Minority Roll-Up Transaction" is defined in Section 1.4(b) of the Purchase Agreement. - 37 - "Minority Roll-Up Shares" is defined in Section 1.4(b) of the Purchase Agreement. "Person" shall include an individual, partnership, association, body corporate, trustee, executor, administrator or legal representative. "Public Sale" is defined in Section 1.27 of the Shareholders Agreement. "Purchase Agreement" means the Preferred Share Purchase Agreement dated September 7, 1999 among the Company and the parties named as "Investors" therein, as the same may be amended from time to time in accordance with its terms. "Qualified IPO" shall mean the Company's first BONA FIDE underwritten public offering of Common Shares pursuant to a preliminary prospectus and a prospectus if under Canadian federal and provincial securities laws and pursuant to an effective registration statement under the United States Securities Act of 1933, as amended, (i) resulting in at least U.S. $150,000,000 of gross aggregate proceeds to the Company and any selling stockholders before deducting underwriting discounts and commissions and offering expenses, (ii) the gross offering price per share of which is at least 300% of the per share price obtained by dividing U.S.$345,000,000 by the number of Series A Non-Voting Preferred Shares, Common Shares or Common Share Equivalents issued by the Company pursuant to Sections 1.1 and 1.4 of the Purchase Agreement (as equitably adjusted to reflect any stock split, stock dividend, combination, reorganization, recapitalization, reclassification or other similar event) and (iii) upon the consummation of which the Class A Non-Voting Shares or Class B Subordinate Voting Shares are listed on The Toronto Stock Exchange and on a U.S. national securities exchange or quoted on Nasdaq National Market. "Shareholders Agreement" means the Shareholders Agreement dated as of September 9, 1999 among the Company and the parties named therein, as the same may be amended from time to time in accordance with its terms. E. SERIES C REDEEMABLE PREFERRED SHARES 1. SERIES RIGHTS 1.1 DESIGNATION AND NUMBER The third series of Preferred Shares shall consist of 45,000,000 Preferred Shares, which shares shall be designated as Series C Redeemable Preferred Shares (the "Series C Redeemable Preferred Shares") and which, in addition to the rights privileges, restrictions and conditions attached to the Preferred Shares as a class, shall have attached thereto the rights, privileges, restrictions and conditions as set forth herein. 1.2 DIVIDENDS The holders of the Series C Redeemable Preferred Shares shall not be entitled to dividends. - 38 - 1.3 VOTING RIGHTS Except as required by law, the holders of the Series C Redeemable Preferred Shares shall not be entitled to receive notice of nor to attend any meeting of the shareholders of the Company. 1.4 REDEMPTION BY HOLDER 1.4.1 NOTICE OF RETRACTION Each holder of Series C Redeemable Preferred Shares may, at any time after November 2, 2009, demand by notice in writing that the Company redeem all or any of the Series C Redeemable Preferred Shares held by such holder by payment to the holder the sum of US $1.00 per share (the "Series C Redemption Amount") 1.4.2 PROCEDURE FOR REDEMPTION (1) Such demand for redemption shall be made in writing and signed by the holder demanding redemption and shall be delivered or mailed to the registered office of the Company. Such demand for redemption shall be deemed to have been received on the date of delivery if delivered and on the business day following the date of mailing if mailed. (2) Forthwith upon receipt of a demand for redemption the Company shall deliver or mail a copy thereof to all other holders, if any, of Series C Redeemable Preferred Shares. The rationale for this mailing shall be to allow other holders of Series C Redeemable Preferred Shares to submit demands for redemption. (3) If there is only one holder of Series C Redeemable Preferred Shares the Company shall redeem the Series C Redeemable Preferred Shares referred to in the holder's notice forthwith upon receipt thereof; if there is more than one such holder, thirty-one (31) days after deemed receipt of an initial demand for redemption, the Company shall redeem all Series C Redeemable Preferred Shares in respect of which it has received demands for redemption. If the assets of the Company are not sufficient to redeem all Series C Redeemable Preferred Shares in respect of which demands for redemption have been made, redemption shall be made pro rata among the holders of Series C Redeemable Preferred Shares in proportion to the number of Series C Redeemable Preferred Shares specified in the notices given by the holders demanding redemption. 1.4.3 EFFECT OF PAYMENT Upon payment of the Series C Redemption Amount of the Series C Redeemable Preferred Shares so redeemed by the Company, the holders thereof shall cease to exercise any rights of the holders in respect thereof. 1.5 LIQUIDATION, DISSOLUTION OR WINDING-UP In the event of the liquidation, dissolution or winding-up of the Company or any other distribution of assets of the Company among its shareholders for the purpose of winding-up its affairs, the holders of the Series C Redeemable Preferred Shares shall be entitled to receive, - 39 - before any payment or distribution shall be made on any shares ranking junior to the Series C Redeemable Preferred Shares in respect of payment upon liquidation, dissolution or winding-up of the Company, an amount equal to the amount of the paid up capital thereof. After payment of such amounts the holders of the Series C Redeemable Preferred Shares shall not be entitled to share in any further distribution of the property or assets of the Company. 1.6 RETIRED SHARES Any Series C Redeemable Preferred Shares converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. None of such Series C Redeemable Preferred Shares shall be reissued by the Company. - 40 - ATTACHMENT TO ANNEX I RESTRICTIONS ON THE ISSUE, TRANSFER AND OWNERSHIP OF VOTING SHARES For the purposes of this Attachment to Annex I and Appendix A hereto, "Voting Share" means a share of any class or series of shares of the Company carrying voting rights under all circumstances or by reason of an event that has occurred and is continuing or by reason of a condition that has been fulfilled, and includes: (a) any security that is convertible into such a share at the time a calculation of the percentage of shares owned and controlled by Canadians is made; and (b) any option or right to acquire such a share, or any security referred to in paragraph (a), that is exercisable at the time the calculation referred to in that paragraph is made. The issue, transfer and ownership of Voting Shares are restricted as follows: (a) The Board of Directors of the Company may, in connection with the issue, transfer or ownership of Voting Shares, take any action, or refuse to take any action, as the case may be, as may be permitted by the provisions of any of the TELECOMMUNICATIONS ACT (Canada) and the rules, regulations, policies, decisions, directives and orders promulgated or issued thereunder, as amended from time to time, (collectively hereinafter referred to as the "TELECOM ACT"); and (b) The issue and transfer of Voting Shares are restricted in accordance with the constraints set out in Appendix A hereto. In the event of any inconsistency among the provisions of the TELECOM ACT, and Appendix A hereto, the provisions of the TELECOM ACT, shall prevail over Appendix A hereto. APPENDIX A ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS - For the purposes of this Appendix A, the following terms have the following meanings: (a) "affiliate" and "associate" shall have their respective meanings as defined in the CBCA and includes persons, firms and corporations acting in concert with the person with respect to whom the term affiliate or associate is relevant; (b) "CBCA" means the CANADA BUSINESS CORPORATIONS ACT, as amended from time to time; (c) "Constrained Class" means: (i) any person or persons who are not Canadians within the meaning of that Part of the Regulation dealing with constrained share corporations, and (ii) any person or persons, where the issue or transfer of shares to any such person or persons will affect the ability of the Company or any of its affiliates or associates to qualify under any applicable laws of Canada, including for greater certainty, the TELECOM ACT and the regulations promulgated thereunder, or any applicable laws of a province prescribed pursuant to paragraph 57(l)(a) of the Regulations (a "Prescribed Law") in order to carry on any business that the Company is currently engaged in or proposes to engage in and to obtain, maintain, amend or renew any licenses which are necessary to carry on any such business; (d) "Maximum Aggregate Holdings" means the total number of Voting Shares that may be held by or on behalf of persons in the Constrained Class and their affiliates and associates pursuant to any applicable Prescribed Law; (e) "Maximum Individual Holding" means the total number of Voting Shares that may be held by or on behalf of any one person in the Constrained Class and their affiliates and associates pursuant to any applicable Prescribed Law; and (f) "Regulations" means those regulations made under the CBCA as amended from time to time. 1.2 JOINT OWNERSHIP BY NON-CANADIANS - For the purposes of this Appendix A, where a Voting Share is held, beneficially owned or controlled jointly, and one or more of the joint holders, beneficial owners or persons controlling the share is a member of the Constrained Class, the share is deemed to be held, beneficially owned or controlled, as the case may be, by such member of the Constrained Class. 1.3 PURPOSE OF CONSTRAINED SHARE PROVISIONS - The power of the directors of the Company to issue Voting Shares, and the right of any holder of Voting Shares to transfer or vote such Voting Shares, is restricted in the manner hereinafter set out, for the purposes of: (a) ensuring that the Company, or any of its affiliates or associates, is qualified under any applicable Prescribed Law to obtain or renew any license to carry on any business and/or hold any licenses that are necessary to carry on any such business; and (b) ensuring that the Company, or any of its affiliates or associates, is not in breach of any applicable Prescribed Law or the terms of any license issued thereunder. ARTICLE 2 CONSTRAINTS 2.1 RESTRICTION ON ISSUE OR TRANSFER OF VOTING SHARES - The directors of the Company shall not issue a Voting Share (including the conversion into a Voting Share of any share that is not a Voting Share) and shall refuse to register a transfer of a Voting Share, if the issuance or transfer, as the case may be, would, in the opinion of the directors of the Company, jeopardize the purposes stated in section 1.3 of this Appendix A and, without limiting the generality of the foregoing, the directors of the Company shall not issue a Voting Share, and shall refuse to register a transfer of a Voting Share, to a person who is a member of the Constrained Class, if: (a) the total number of Voting Shares held by or on behalf of persons in the Constrained Class exceeds the Maximum Aggregate Holdings and the issuance or transfer, as the case may be, of such Voting Shares is to a person in the Constrained Class; (b) the total number of Voting Shares held by or on behalf of persons in the Constrained Class does not exceed the Maximum Aggregate Holdings and the issuance or transfer, as the case may be, of such Voting Shares would cause the number of Voting Shares held by persons in the Constrained Class to exceed the Maximum Aggregate Holdings; (c) the total number of Voting Shares held by or on behalf of a person in the Constrained Class exceeds the Maximum Individual Holdings and the issuance or transfer, as the case may be, of such Voting Shares is to that person; or (d) the total number of Voting Shares held by or on behalf of a person in the Constrained Class does not exceed the Maximum Individual Holdings and the issuance or transfer, as the case may be, of such Voting Shares would cause the number of such Voting Shares held by that person to exceed the Maximum Individual Holdings. 2.2 FURTHER RESTRICTIONS ON THE ISSUE OR TRANSFER OF VOTING SHARES - - The directors of the Company may refuse to issue a Voting Share or register a transfer of a Voting Share, if the issue or transfer, as the case may be, is to a person who may be a member of a Constrained Class and who, in respect of the issue or registration of the transfer of such Voting Share, as the case may be, has been requested by the Company to furnish it with information referred to in subsection 56(l) of the Regulations, and has not furnished such information. 2.3 BY-LAWS - Subject to the CBCA, the Regulations and any Prescribed Law, the directors of the Company may make, amend or repeal any by-laws required to administer the constrained share provisions set out in this Appendix A, including such by-laws as are contemplated in section 56 of the Regulations. ARTICLE 3 POWERS AND DISCRETION OF DIRECTORS 3.1 OPINION OF THE DIRECTORS - Wherever in this Appendix A it is necessary to determine the opinion of the directors of the Company, such opinion shall be expressed and conclusively evidenced by a resolution of the directors of the Company duly adopted, including a resolution in writing executed pursuant to the provisions of the CBCA. 3.2 NO CLAIMS - Neither any shareholder of the Company nor any other interested person shall have any claim or action against the Company or against any director or officer of the Company nor shall the Company have any claim or action against any director or officer of the Company arising out of any act (including any omission to act) performed pursuant to or in intended pursuance of the provisions of this Appendix A or any breach or alleged breach by the Company of any of the provisions of this Appendix A, and, for greater certainty, no such person shall be liable for any damages or losses related to or as a consequence of any such act or any such breach of such provisions. 3.3 POWERS OF DIRECTORS - In the administration of this Appendix A, the directors of the Company shall enjoy, in addition to the powers explicitly set forth herein, all of the powers necessary or desirable, in their opinion, to carry out the intent and purpose hereof, including but not limited to all powers contemplated by the provisions relating to constrained share corporations in the CBCA, the Regulations and any Prescribed Law. ARTICLE 4 MISCELLANEOUS 4.1 SHARE PROVISIONS - The directors shall cause to be noted conspicuously upon every certificate representing a Voting Share the general nature of these constrained share provisions. ARTICLE 5 MISCELLANEOUS 5.1 CONFLICT - In the event of any conflict between the provisions of this Appendix A and of the provisions in the CBCA and the Regulations relating to constrained share corporations, the provisions in the CBCA and the Regulations shall prevail, and the provisions of this Appendix A shall be deemed to be amended accordingly and shall be retroactive in effect, as so amended. 5.2 SEVERABILITY - The invalidity or unenforceability of any provision, in whole or in part, of this Appendix A for any reason shall not affect the validity or enforceability of any other provision hereof. SCHEDULE B ARTICLES OF ASSOCIATION OF 360NETWORKS INC. 1. Interpretation In these Articles, unless there be something in the subject or context inconsistent therewith: (1) "Act" means the COMPANIES ACT (Nova Scotia); (2) "Articles" means these Articles of Association of the Company and all amendments hereto; (3) "Company" means the company named above; (4) "director" means a director of the Company; (5) "investor designees" means, collectively, those members of the board nominated by each of the following: DWF SRL, a Barbados Company; GS Capital Partners III, L.P., a Delaware limited partnership; Providence Equity Fiber, L.P., a Delaware limited partnership; and Tyco Group S.A.R.L., a Luxembourg corporation; (6) "Memorandum" means the Memorandum of Association of the Company and all amendments thereto; (7) "month" means calendar month; (8) "Office" means the registered office of the Company; (9) "person" includes a body corporate; (10) "proxyholder" includes an alternate proxyholder; (11) "Register" means the register of members kept pursuant to the Act, and where the context permits includes a branch register of members; (12) "Registrar" means the Registrar as defined in the Act; (13) "resolution of shareholders" means a resolution passed by those of the shareholders entitled to vote on the matters dealt with in such resolution. (14) "Secretary" includes any person appointed to perform the duties of the Secretary temporarily; - 2 - (15) "shareholder" means member as that term is used in the Act in connection with a company limited by shares; (16) "special resolution" has the meaning assigned by the Act; (17) "in writing" and "written" includes printing, lithography and other modes of representing or reproducing words in visible form; (18) words importing number or gender include all numbers and genders unless the context otherwise requires; 2. The regulations in Table A in the First Schedule to the Act shall not apply to the Company. 3. The directors may enter into and carry into effect or adopt and carry into effect any agreement made by the promoters of the Company on behalf of the Company and may agree to any modification in the terms of any such agreement, either before or after its execution. 4. The directors may, out of the funds of the Company, pay all expenses incurred for the continuance and reorganization of the Company. SHARES 5. The directors shall control the shares and, subject to the provisions of these Articles, may allot or otherwise dispose of them to such person at such times, on such terms and conditions and, if the shares have a par value, either at a premium or at par, as they think fit. 6. The directors may pay on behalf of the Company a reasonable commission to any person in consideration of subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company, or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company. Subject to the Act, the commission may be paid or satisfied in shares of the Company. 7. If the whole or part of the allotment price of any shares is, by the conditions of their allotment, payable in instalments, every such instalment shall, when due, be payable to the Company by the person who is at such time the registered holder of the shares. 8. Shares may be registered in the names of joint holders not exceeding three in number. 9. On the death of one or more joint holders of shares the survivor or survivors of them shall alone be recognized by the Company as the registered holder or holders of the shares. 10. Save as herein otherwise provided, the Company may treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or required by statute, be bound to recognize any equitable or other claim to or interest in such share on the part of any other person. - 3 - CERTIFICATES 11. Certificates of title to shares shall comply with the Act and may otherwise be in such form as the directors may from time to time determine. Unless the directors otherwise determine, every certificate of title to shares shall be signed manually by at least one of the Chair, President, Secretary, Treasurer, a vice-president, an assistant secretary, any other officer of the Company or any director of the Company or by or on behalf of a share registrar transfer agent or branch transfer agent appointed by the Company or by any other person whom the directors may designate. When signatures of more than one person appear on a certificate all but one may be printed or otherwise mechanically reproduced. All such certificates when signed as provided in this Article shall be valid and binding upon the Company. If a certificate contains a printed or mechanically reproduced signature of a person, the Company may issue the certificate, notwithstanding that the person has ceased to be a director or an officer of the Company and the certificate is as valid as if such person were a director or an officer at the date of its issue. Any certificate representing shares of a class publicly traded on any stock exchange shall be valid and binding on the Company if it complies with the rules of such exchange whether or not it otherwise complies with this Article. 12. Except as the directors may determine, each shareholder's shares may be evidenced by any number of certificates so long as the aggregate of the shares stipulated in such certificates equals the aggregate registered in the name of the shareholder. 13. Where shares are registered in the names of two or more persons, the Company shall not be bound to issue more than one certificate or set of certificates, and such certificate or set of certificates shall be delivered to the person first named on the Register. 14. Any certificate that has become worn, damaged or defaced may, upon its surrender to the directors, be cancelled and replaced by a new certificate. Any certificate that has become lost or destroyed may be replaced by a new certificate upon proof of such loss or destruction to the satisfaction of the directors and the furnishing to the Company of such undertakings of indemnity as the directors deem adequate. 15. The sum of one dollar or such other sum as the directors from time to time determine shall be paid to the Company for every certificate other than the first certificate issued to any holder in respect of any share or shares. 16. The directors may cause one or more branch Registers of shareholders to be kept in any place or places, whether inside or outside of Nova Scotia. TRANSFER OF SHARES 17. The instrument of transfer of any share in the Company shall be signed by the transferor. The transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof and shall be entitled to receive any dividend declared thereon before the registration of the transfer. - 4 - 18. The instrument of transfer of any share shall be in writing in the following form or to the following effect or in such other form as the directors may approve from time to time: For value received, _____ hereby sell, assign, and transfer unto ______, _____ shares in the capital of the Company represented by the within certificate, and do hereby irrevocably constitute and appoint _________ attorney to transfer such shares on the books of the Company with full power of substitution in the premises. Dated the ____ day of ___________, Witness:_____________________________ 19. Every instrument of transfer shall be left for registration at the Office of the Company, or at any office of its transfer agent where a Register is maintained, together with the certificate of the shares to be transferred and such other evidence as the Company may require to prove title to or the right to transfer the shares. 20. The directors may require that a fee determined by them be paid before or after registration of any transfer. 21. Every instrument of transfer shall, after its registration, remain in the custody of the Company. Any instrument of transfer that the directors decline to register shall, except in case of fraud, be returned to the person who deposited it. TRANSMISSION OF SHARES 22. The executors or administrators of a deceased shareholder (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such shareholder. When a share is registered in the names of two or more joint holders, the survivor or survivors and the executors or administrators of the deceased shareholder, shall be the only persons recognized by the Company as having any title to, or interest in, such share. 23. Notwithstanding anything in these Articles, if the Company has only one shareholder (not being one of several joint holders) and that shareholder dies, the executors or administrators of the deceased shareholder shall be entitled to register themselves in the Register as the holders of the shares registered in the name of the deceased shareholder whereupon they shall have all the rights given by these Articles and by law to shareholders. 24. Any person entitled to shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer, upon producing such evidence of entitlement as the directors require, may be registered as a shareholder in respect of such shares, or may, without being registered, transfer such shares subject to the provisions of these Articles respecting the transfer of shares. The directors shall have the same right to refuse registration as if the transferee were named in an ordinary transfer presented for registration. - 5 - SURRENDER OF SHARES 25. The directors may accept the surrender of any share by way of compromise of any question as to the holder being properly registered in respect thereof. Any share so surrendered may be disposed of in the same manner as a forfeited share. SHARE WARRANT 26. The Company, with respect to any fully paid-up shares, may issue warrants ("Share Warrants") stating that the bearer is entitled to the shares therein specified, and may provide, by coupons or otherwise, for the payment of future dividends on the shares included in the Share Warrants. 27. The directors may determine and vary the conditions upon which Share Warrants will be issued and, without limiting the generality of the foregoing, may determine the conditions upon which (1) a new Share Warrant or coupon will be issued in the place of one worn out, defaced, lost or destroyed, or (2) the bearer of a Share Warrant will be entitled to attend and vote at general meetings, or (3) a Share Warrant may be surrendered and the name of the bearer entered in the Register in respect of the shares therein specified. Subject to such conditions and to these Articles the bearer of a Share Warrant shall be a shareholder to the full extent. The bearer of a Share Warrant shall be subject to the conditions for the time being in force, whether made before or after the issue of the Share Warrant. INCREASE AND REDUCTION OF CAPITAL 28. Subject to the Act, the Company may by resolution of its shareholders increase its share capital by the creation of new shares of such amount as it thinks expedient.\ 29. Subject to the Act, the new shares may be issued upon such terms and conditions and with such rights, privileges, limitations, restrictions and conditions attached thereto as the Company by resolution of its shareholders determines or, if no direction is given, as the directors determine. 30. Except as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the provisions herein contained with reference to transfer and transmission, and otherwise. 31. The Company may, by special resolution where required, reduce its share capital in any way and with and subject to any incident authorized and consent required by law. - 6 - ALTERATION OF CAPITAL 31. Subject to the Act, the Company may by resolution of its shareholders: (1) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (2) convert all or any of its paid-up shares into stock and reconvert that stock into paid-up shares of any denomination; (3) exchange shares of one denomination for another; or (4) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. 33. Subject to the Act, the Company may by special resolution: (1) subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum, so, however, that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived and the special resolution whereby any share is subdivided may determine that as between the holders of the shares resulting from such subdivision, one or more of such shares shall have some preference or special advantage as regards dividend, capital, voting or otherwise, over, or as compared with, the others or other; (2) convert any part of its issued or unissued share capital into preference shares redeemable or purchasable by the Company; (3) provide for the issue of shares without any nominal or par value provided that, upon any such issue, a declaration executed by the Secretary must be filed with the Registrar stating the number of shares issued and the amount received therefor; (4) convert all or any of its previously authorized, unissued or issued, fully paid-up shares, other than preferred shares, with nominal or par value into the same number of shares without any nominal or par value, and reduce, maintain or increase accordingly its liability on any of its shares so converted; provided that the power to reduce its liability on any of its shares so converted may, where it results in a reduction of capital, only be exercised subject to confirmation by the court as provided by the Act; or (5) convert all or any of its previously authorized, unissued or issued, fully paid-up shares without nominal or par value into the same or a different number of shares with nominal or par value, and for such purpose the shares issued without nominal or par value and replaced by shares with a nominal or par value shall be considered as fully paid, but their aggregate par value shall not exceed the value of the net assets of the Company as represented by the shares without par value issued before the conversion. - 7 - 34. Subject to the Act and any provisions attached to such shares, the Company may redeem, purchase or acquire any of its shares and the directors may determine the manner and the terms for redeeming, purchasing or acquiring such shares and may provide a sinking fund on such terms as they think fit for the redemption, purchase or acquisition of shares of any class or series. INTEREST ON SHARE CAPITAL 35. The Company may pay interest at a rate not exceeding 6% per year on share capital issued and paid-up for the purpose of raising funds to defray the expenses of the construction of any works or buildings or the provision of any plant which cannot be operated profitably for a lengthy period of time. Such interest may be paid for such period and may be charged to capital as part of the cost of construction of the work or building or of the provision of the plant. The payment of the interest shall not operate to reduce the amount paid-up on the shares in respect of which it is paid. The accounts of the Company shall show full particulars of the payment during the period to which the accounts relate. CLASSES AND SERIES OF SHARES 36. Subject to the Act and the Memorandum, and without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights, or with such restrictions, whether in regard to dividends, voting, return of share capital or otherwise, as the Company may from time to time determine by special resolution. MEETINGS AND VOTING BY CLASS OR SERIES 37. Where the holders of shares of a class or series have, under the Act, the Memorandum, the terms or conditions attaching to such shares or otherwise, the right to vote separately as a class in respect of any matter then, except as provided in the Act, the Memorandum, these Articles or such terms or conditions, all the provisions in these Articles concerning general meetings (including, without limitation, provisions respecting notice, quorum and procedure) shall, mutatis mutandis, apply to every meeting of holders of such class or series of shares convened for the purpose of such vote. 38. Unless the rights, privileges, terms or conditions attached to a class or series of shares provided otherwise, such class or series of shares shall not have the right to vote separately as a class or series upon an amendment to the Memorandum or Articles to: (1) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series; (2) effect an exchange, reclassification or cancellation of all or part of the shares of such class or series; or - 8 - (3) create a new class or series of shares equal or superior to the shares of such class or series. BORROWING POWERS 39. The directors on behalf of the Company may: (1) raise or borrow money for the purposes of the Company or any of them; (2) secure, subject to the sanction of a special resolution where required by the Act, the repayment of funds so raised or borrowed in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the execution and delivery of mortgages of the Company's real or personal property, or by the issue of bonds, debentures or other securities of the Company secured by mortgage or other charge upon all or any part of the property of the Company, both present and future; (3) sign or endorse bills, notes, acceptances, cheques, contracts, and other evidence of or securities for funds borrowed or to be borrowed for the purposes aforesaid; (4) pledge debentures as security for loans; (5) guarantee obligations of any person. 40. Bonds, debentures and other securities may be made assignable, free from any equities between the Company and the person to whom such securities were issued. 41. Any bonds, debentures and other securities may be issued at a discount, premium or otherwise and with special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of directors and other matters. GENERAL MEETINGS 42. Ordinary general meetings of the Company shall be held at least once in every calendar year at such time and place as may be determined by the directors and not later than 15 months after the preceding ordinary general meeting. All other meetings of the Company shall be called special general meetings. Ordinary or special general meetings may be held either within or without the Province of Nova Scotia. 43. The Chair, President, Chief Financial Officer or the directors may at any time convene a special general meeting, and the directors, upon the requisition of shareholders in accordance with the Act shall forthwith proceed to convene such meeting or meetings to be held at such time and place or times and places as the directors determine. 44. The requisition shall state the objects of the meeting requested, be signed by the requisitionists and deposited at the Office of the Company. It may consist of several documents in like form each signed by one or more of the requisitionists. - 9 - 45. At least seven clear days' notice, or such longer period of notice as may be required by the Act, of every general meeting, specifying the place, day and hour of the meeting and, when special business is to be considered, the general nature of such business, shall be given to the shareholders entitled to be present at such meeting by notice given as permitted by these Articles. With the consent in writing of all the shareholders entitled to vote at such meeting, a meeting may be convened by a shorter notice and in any manner they think fit, or notice of the time, place and purpose of the meeting may be waived by all of the shareholders. 46. When it is proposed to pass a special resolution, the two meetings may be convened by the same notice, and it shall be no objection to such notice that it only convenes the second meeting contingently upon the resolution being passed by the requisite majority at the first meeting. 47. The accidental omission to give notice to a shareholder, or non-receipt of notice by a shareholder, shall not invalidate any resolution passed at any general meeting. RECORD DATES 48. (1) The directors may fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend or entitled to receive any distribution; (b) entitled to receive notice of a meeting; or (c) for any other purpose. (2) If no record date is fixed, the record date for the determination of shareholders (a) entitled to receive notice of a meeting shall be the day immediately preceding the day on which the notice is given, or, if no notice is given, the day on which the meeting is held; and (b) for any other purpose shall be the day on which the directors pass the resolution relating to the particular purpose. PROCEEDINGS AT GENERAL MEETINGS 49. The business of an ordinary general meeting shall be to receive and consider the financial statements of the Company and the report of the directors and the report, if any, of the auditors, to elect directors in the place of those retiring, to appoint the auditors of the Company for the ensuing fiscal year and to transact any other business which under these Articles ought to be transacted at an ordinary general meeting. 50. No business shall be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. A corporate shareholder of the Company that has a duly authorized agent or representative present at any such meeting shall for the purpose of this Article be deemed to be personally present at such meeting. - 10 - 51. One person, being a shareholder, proxyholder or representative of a corporate shareholder, present and entitled to vote shall constitute a quorum for a general meeting, and may hold a meeting. 52. The Chair shall be entitled to take the chair at every general meeting or, if there be no Chair, or if the Chair is not present within fifteen 15 minutes after the time appointed for holding the meeting, the President or, failing the President, a vice-president shall be entitled to take the chair. If the Chair, the President or a vice-president is not present within 15 minutes after the time appointed for holding the meeting or if all such persons present decline to take the chair, the shareholders present entitled to vote at the meeting shall choose another director as chair and if no director is present or if all the directors present decline to take the chair, then such shareholders shall choose one of their number to be chair. 53. If within half an hour from the time appointed for a general meeting a quorum is not present, the meeting, if it was convened pursuant to a requisition of shareholders, shall be dissolved. If it was convened in any other way, it shall stand adjourned to the same day, in the next week, at the same time and place. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may hold the meeting. 54. Subject to the Act, at any general meeting a resolution put to the meeting shall be decided by a show of hands unless, either before or on the declaration of the result of the show of hands, a poll is demanded by the chair, a shareholder or a proxyholder; and unless a poll is so demanded, a declaration by the chair that the resolution has been carried, carried by a particular majority, lost or not carried by a particular majority and an entry to that effect in the Company's book of proceedings shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour or against such resolution. 55. When a poll is demanded, it shall be taken in such manner and at such time and place as the chair directs, and either at once or after an interval or adjournment or otherwise. The result of the poll shall be the resolution of the meeting at which the poll was demanded. The demand of a poll may be withdrawn. When any dispute occurs over the admission or rejection of a vote, it shall be resolved by the chair and such determination made in good faith shall be final and conclusive. 56. The chair shall not have a casting vote in addition to any vote or votes that the chair has as a shareholder. 57. The chair of a general meeting may with the consent of the meeting adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting that was adjourned. 58. Any poll demanded on the election of a chair or on a question of adjournment shall be taken forthwith without adjournment. 59. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. - 11 - VOTES OF SHAREHOLDERS 60. Subject to the Act and to any provisions attached to any class or series of shares concerning voting rights (1) on a show of hands every shareholder present in person, every duly authorized representative of a corporate shareholder, and, if not prevented from voting by the Act, every proxyholder, shall have one vote; and (2) on a poll every shareholder present in person, every duly authorized representative of a corporate shareholder, and every proxyholder, shall have one vote for every share held; whether or not such representative or proxyholder is a shareholder. 61. Any person entitled to transfer shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer may vote at any general meeting in respect thereof in the same manner as if such person were the registered holder of such shares so long as the directors are satisfied at least 48 hours before the time of holding the meeting of such person's right to transfer such shares. 62. Where there are joint registered holders of any share, any of such holders may vote such share at any meeting, either personally or by proxy, as if solely entitled to it. If more than one joint holder is present at any meeting, personally or by proxy, the one whose name stands first on the Register in respect of such share shall alone be entitled to vote it. Several executors or administrators of a deceased shareholder in whose name any share stands shall for the purpose of this Article be deemed joint holders thereof. 63. Votes may be cast either personally or by proxy or, in the case of a corporate shareholder by a representative duly authorized under the Act. 64. A proxy shall be in writing and executed in the manner provided in the Act. A proxy or other authority of a corporate shareholder does not require its seal. Holders of Share Warrants shall not be entitled to vote by proxy in respect of the shares included in such warrants unless otherwise expressed in such warrants. 65. A shareholder of unsound mind in respect of whom an order has been made by any court of competent jurisdiction may vote by guardian or other person in the nature of a guardian appointed by that court, and any such guardian or other person may vote by proxy. 66. A proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority shall be deposited at the Office of the Company or at such other place as the directors may direct. The directors may, by resolution, fix a time not exceeding 72 hours excluding Saturdays and holidays preceding any meeting or adjourned meeting before which time proxies to be used at that meeting must be deposited with the Company at its Office or with an agent of the Company. Notice of the requirement for depositing proxies shall be given in the notice calling the meeting. The chair of the meeting shall determine all questions as to validity of proxies and other instruments of authority. - 12 - 67. A vote given in accordance with the terms of a proxy shall be valid notwithstanding the previous death of the principal, the revocation of the proxy, or the transfer of the share in respect of which the vote is given, provided no intimation in writing of the death, revocation or transfer is received at the Office of the Company before the meeting or by the chair of the meeting before the vote is given. 68. Every form of proxy shall comply with the Act and its regulations and subject thereto may be in the following form: I, _________ of ____________ being a shareholder of _____ hereby appoint _______ of ________ (or failing him/her _____ of _____) as my proxyholder to attend and to vote for me and on my behalf at the ordinary/special general meeting of the Company, to be held on the ___ day of ____ and at any adjournment thereof, or at any meeting of the Company which may be held prior to [insert specified date or event]. [If the proxy is solicited by or behalf of the management of the Company, insert a statement to that effect.] Dated this ____ day of __________ ____. Shareholder 69. Any resolution passed by the directors, notice of which has been given to the shareholders in the manner in which notices are hereinafter directed to be given and which is, within one month after it has been passed, ratified and confirmed in writing by shareholders entitled on a poll to three-fifths of the votes, shall be as valid and effectual as a resolution of a general meeting. This Article shall not apply to a resolution for winding up the Company or to a resolution dealing with any matter that by statute or these Articles ought to be dealt with by a special resolution or other method prescribed by statute. 70. A resolution, including a special resolution, in writing and signed by every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such shareholders at a meeting and satisfies all of the requirements of the Act respecting meetings of shareholders. DIRECTORS 71. Unless otherwise determined by resolution of shareholders, the number of directors shall not be less than one or more than seventeen. 72. Notwithstanding anything herein contained the directors of the Company on the date of its continuance shall continue to be the directors of the Company until their successors are appointed or they otherwise cease to be directors in accordance with these Articles. 73. Subject to applicable law, the directors may be paid out of the funds or the capital of the Company as remuneration for their service such sums, shares or options, if any, as - 13 - the directors may determine, and such remuneration shall be divided among them in such proportions and manner as the directors determine. The directors may also be paid their reasonable travelling, hotel and other expenses incurred in attending meetings of directors and otherwise in the execution of their duties as directors. 74. The continuing directors may act notwithstanding any vacancy in their body, but if their number falls below the minimum permitted, the directors shall not, except in emergencies or for the purpose of filling vacancies, act so long as their number is below the minimum. 75. A director may, in conjunction with the office of director, and on such terms as to remuneration and otherwise as the directors arrange or determine, hold any other office or place of profit under the Company or under any company in which the Company is a shareholder or is otherwise interested. 76. The office of a director shall ipso facto be vacated, if the director: (1) becomes bankrupt or makes an assignment for the benefit of creditors; (1) is, or is found by a court of competent jurisdiction to be, of unsound mind; (2) by notice in writing to the Secretary at the Company's Office, resigns the office of director; or (3) is removed in the manner provided by these Articles. 77. It shall be the duty of a director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company to declare the nature of such interest at a meeting of the directors of the Company. In the case of a proposed contract the declaration required to be made shall be made at a meeting of the directors at which the question of entering into the contract is first taken into consideration, or if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after the director became so interested, and in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after the director becomes so interested. A general notice given to the directors of the Company by a director to the effect that such director is a member of a specified company or firm and is to be regarded as interested in any contract which may, after the date of the notice, be made with that company or firm shall be deemed to be a sufficient declaration of interest in relation to any contract so made. ELECTION OF DIRECTORS 78. At the dissolution of every ordinary general meeting at which their successors are elected, all the directors shall retire from office and be succeeded by the directors elected at such meeting. Retiring directors shall be eligible for re-election. 79. If at any ordinary general meeting at which an election of directors ought to take place no such election takes place, or if no ordinary general meeting is held in any year or period of years, the retiring directors shall continue in office until their successors are elected. - 14 - 80. The Company may by resolution of its shareholders elect any number of directors permitted by these Articles and may determine or alter their qualification. 81. The Company may, by special resolution or in any other manner permitted by statute, remove any director before the expiration of such director's period of office and may, if desired, appoint a replacement to hold office during such time only as the director so removed would have held office. 82. The directors may appoint any other person as a director so long as the total number of directors does not at any time exceed the maximum number permitted. No such appointment, except to fill a casual vacancy, shall be effective unless two-thirds of the directors concur in it. Any casual vacancy occurring among the directors may be filled by the directors, but any person so chosen shall retain office only so long as the vacating director would have retained it if the vacating director had continued as director. CHAIR OF THE BOARD 83. The directors may elect one of their number to be chair and may determine the period during which the chair is to hold office. The chair shall perform such duties and receive such special remuneration as the directors may provide. PRESIDENT, CHIEF EXECUTIVE OFFICER AND VICE-PRESIDENTS 84. The directors shall appoint the President and Chief Executive Officer of the Company, who need not be a director, and may determine the period for which the President and Chief Executive Officer is to hold office. The President and Chief Executive Officer shall have general supervision of the business of the Company and shall perform such duties as may be assigned from time to time by the directors. 85. The directors may also appoint vice-presidents, who need not be directors, and may determine the periods for which they are to hold office. A vice-president shall, at the request of the President or the directors and subject to the directions of the directors, perform the duties of the President during the absence, illness or incapacity of the President, and shall also perform such duties as may be assigned by the President or the directors. SECRETARY AND TREASURER 86. The directors shall appoint a Secretary of the Company to keep minutes of shareholders' and directors' meetings and perform such other duties as may be assigned by the directors. The directors may also appoint a temporary substitute for the Secretary who shall, for the purposes of these Articles, be deemed to be the Secretary. 87. The directors may appoint a treasurer of the Company to carry out such duties as the directors may assign. - 15 - OFFICERS 88. The directors may elect or appoint such other officers of the Company, having such powers and duties, as they think fit. 89. If the directors so decide the same person may hold more than one of the offices provided for in these Articles. 90. Notwithstanding anything herein contained the officers of the Company on the date of its continuance shall continue to hold office until their successors are appointed or they otherwise cease to hold office in accordance with these Articles. PROCEEDINGS OF DIRECTORS 91. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings and proceedings, as they think fit. Until otherwise determined, a quorum for meetings of the board shall be the number of directors then in office, less three (3), of which three (3) shall be investor designees. 92. If at a meeting of directors a quorum is not present, the directors may adjourn the meeting to a fixed time and place (provided they shall give written notice of such time and place to each director not in attendance). At the meeting immediately following the adjourned meeting, the directors present at such meeting shall constitute a quorum; provided however, that unless a full quorum is present as provided in section 91, the directors present at such meeting may not transact any business except as specifically set forth in the notice of meeting. 93. A director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed to be present at that meeting for purposes of these Articles. 94. Meetings of directors may be held either within or without the Province of Nova Scotia and the directors may from time to time make arrangements relating to the time and place of holding directors' meetings, the notices to be given for such meetings and what meetings may be held without notice. Unless otherwise provided by such arrangements: (1) A meeting of directors may be held at the close of every ordinary general meeting of the Company without notice. (2) Notice of every other directors' meeting may be given as permitted by these Articles to each director at least 48 hours before the time fixed for the meeting. (3) A meeting of directors may be held without formal notice if all the directors are present or if those absent have signified their assent to such meeting or their consent to the business transacted at such meeting. 95. The President or any director may at any time, and the Secretary, upon the request of the President or any director, shall summon a meeting of the directors to be held at the Office of - 16 - the Company. The President, the Chair or a majority of the directors may at any time, and the Secretary, upon the request of the President, the Chair or a majority of the directors, shall summon a meeting to be held elsewhere. 96. (1) Questions arising at any meeting of directors shall be decided by a majority of votes. The chair of the meeting may vote as a director but shall not have a second or casting vote. (2) At any meeting of directors the chair shall receive and count the vote of any director not present in person at such meeting on any question or matter arising at such meeting whenever such absent director has indicated by telegram, letter or other writing lodged with the chair of such meeting the manner in which the absent director desires to vote on such question or matter and such question or matter has been specifically mentioned in the notice calling the meeting as a question or matter to be discussed or decided thereat. 97. If no Chair is elected, or if at any meeting of directors the Chair is not present within five minutes after the time appointed for holding the meeting, or declines to take the chair, the President, if a director, shall preside. If the President is not a director, is not present at such time or declines to take the chair, a vice-president who is also a director shall preside. If no person described above is present at such time and willing to take the chair, the directors present shall choose some one of their number to be chair of the meeting. 98. A meeting of the directors at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the directors generally. 99. The directors may delegate any of their powers to committees consisting of such number of directors as they think fit. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on them by the directors. 100. The meetings and proceedings of any committee of directors shall be governed by the provisions contained in these Articles for regulating the meetings and proceedings of the directors insofar as they are applicable and are not superseded by any regulations made by the directors. 101. All acts done at any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of the director or person so acting, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. 102. A resolution in writing and signed by every director who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such directors at a meeting. 103. If any one or more of the directors is called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the Company or the business thereof, the Company may remunerate the director or directors so doing, either by a fixed sum or by a percentage of profits or otherwise. Such remuneration - 17 - shall be determined by the directors and may be either in addition to or in substitution for remuneration otherwise authorized by these Articles. REGISTERS 104. The directors shall cause to be kept at the Company's Office in accordance with the provisions of the Act a Register of the shareholders of the Company, a register of the holders of bonds, debentures and other securities of the Company and a register of its directors. Branch registers of the shareholders and of the holders of bonds, debentures and other securities may be kept elsewhere, either within or without the Province of Nova Scotia, in accordance with the Act. MINUTES 105. The directors shall cause minutes to be entered in books designated for the purpose: (1) of all appointments of officers; (2) of the names of directors present at each meeting of directors and of any committees of directors; and (3) of all resolutions and proceedings of meetings of shareholders and of directors. Any such minutes of any meeting of directors or of any committee of directors or of shareholders, if purporting to be signed by the chair of such meeting or by the chair of the next succeeding meeting, shall be receivable as prima facie evidence of the matters stated in such minutes. POWERS OF DIRECTORS 106. The management of the business of the Company is vested in the directors who, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the shareholders, but subject nevertheless to the provisions of any statute, the Memorandum or these Articles. No modification of the Memorandum or these Articles shall invalidate any prior act of the directors that would have been valid if such modification had not been made. 107. Without restricting the generality of the terms of any of these Articles and without prejudice to the powers conferred thereby, the directors may: (1) take such steps as they think fit to carry out any agreement or contract made by or on behalf of the Company; (2) pay costs, charges and expenses preliminary and incidental to the promotion, formation, establishment, and registration of the Company; - 18 - (3) purchase or otherwise acquire for the Company any property, rights or privileges that the Company is authorized to acquire, at such price and generally on such terms and conditions as they think fit; (4) pay for any property, rights or privileges acquired by, or services rendered to the Company either wholly or partially in cash or in shares (fully paid-up or otherwise), bonds, debentures or other securities of the Company; (5) subject to the Act, secure the fulfilment of any contracts or engagements entered into by the Company by mortgaging or charging all or any of the property of the Company and its unpaid capital for the time being, or in such other manner as they think fit; (6) appoint, remove or suspend at their discretion such experts, managers, secretaries, treasurers, officers, clerks, agents and servants for permanent, temporary or special services, as they from time to time think fit, and determine their powers and duties and fix their salaries or emoluments and require security in such instances and to such amounts as they think fit; (7) accept a surrender of shares from any shareholder insofar as the law permits and on such terms and conditions as may be agreed; (8) appoint any person or persons to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, execute and do all such deeds and things as may be required in relation to such trust, and provide for the remuneration of such trustee or trustees; (9) institute, conduct, defend, compound or abandon any legal proceedings by and against the Company, its directors or its officers or otherwise concerning the affairs of the Company, and also compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company; (10) refer any claims or demands by or against the Company to arbitration and observe and perform the awards; (11) make and give receipts, releases and other discharges for amounts payable to the Company and for claims and demands of the Company; (12) determine who may exercise the borrowing powers of the Company and sign on the Company's behalf bonds, debentures or other securities, bills, notes, receipts, acceptances, assignments, transfers, hypothecations, pledges, endorsements, cheques, drafts, releases, contracts, agreements and all other instruments and documents; (13) provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as may be thought fit; (14) invest and deal with any funds of the Company in such securities and in such manner as they think fit; and vary or realize such investments; - 19 - (15) subject to the Act, execute in the name and on behalf of the Company in favour of any director or other person who may incur or be about to incur any personal liability for the benefit of the Company such mortgages of the Company's property, present and future, as they think fit; (16) give any officer or employee of the Company a commission on the profits of any particular business or transaction or a share in the general profits of the Company; (17) set aside out of the profits of the Company before declaring any dividend such amounts as they think proper as a reserve fund to meet contingencies or provide for dividends, depreciation, repairing, improving and maintaining any of the property of the Company and such other purposes as the directors may in their absolute discretion think in the interests of the Company; and invest such amounts in such investments as they think fit, and deal with and vary such investments, and dispose of all or any part of them for the benefit of the Company, and divide the reserve fund into such special funds as they think fit, with full power to employ the assets constituting the reserve fund in the business of the Company without being bound to keep them separate from the other assets; (18) make, vary and repeal rules respecting the business of the Company, its officers and employees, the shareholders of the Company or any section or class of them; (47) enter into all such negotiations and contracts, rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the Company; (48) provide for the management of the affairs of the Company in such manner as they think fit. SOLICITORS 108. The Company may employ or retain solicitors any of whom may, at the request or on the instruction of the directors, the Chair, the President or a managing director, attend meetings of the directors or shareholders, whether or not the solicitor is a shareholder or a director of the Company. A solicitor who is also a director may nevertheless charge for services rendered to the Company as a solicitor. THE SEAL 109. The directors shall arrange for the safe custody of the common seal of the Company (the "Seal"). The Seal may be affixed to any instrument in the presence of and contemporaneously with the attesting signature of (i) any director or officer acting within such person's authority or (ii) any person under the authority of a resolution of the directors or a committee thereof. For the purpose of certifying documents or proceedings the Seal may be affixed by any director or the President, a vice-president, the Secretary, an assistant secretary or any other officer of the Company without the authorization of a resolution of the directors. - 20 - 110. The Company may have facsimiles of the Seal which may be used interchangeably with the Seal. DIVIDENDS 111. The directors may from time to time declare such dividend as they deem proper upon shares of the Company according to the rights and restrictions attached to any class or series of shares, and may determine the date upon which such dividend will be payable and that it will be payable to the persons registered as the holders of the shares on which it is declared at the close of business upon a record date. No transfer of such shares registered after the record date shall pass any right to the dividend so declared. 112. No dividends shall be payable except out of the profits, retained earnings or contributed surplus of the Company and no interest shall be payable on any dividend except insofar as the rights attached to any class or series of shares provide otherwise. 113. The declaration of the directors as to the amount of the profits, retained earnings or contributed surplus of the Company shall be conclusive. 114. The directors may from time to time pay to the shareholders such interim dividends as in their judgment the position of the Company justifies. 115. Subject to the Memorandum, these Articles and the rights and restrictions attached to any class or series of shares, dividends may be declared and paid to the shareholders in proportion to the amount of capital paid-up on the shares (not including any capital paid-up bearing interest) held by them respectively. 116. The directors may deduct from the dividends payable to any shareholder amounts due and payable by the shareholder to the Company and may apply the same in or towards satisfaction of such amounts so due and payable. 117. The directors may retain the dividends payable upon shares to which a person is entitled or entitled to transfer upon the death or bankruptcy of a shareholder or in any way other than by allotment or transfer, until such person has become registered as the holder of such shares or has duly transferred such shares. 118. The directors may declare that a dividend be paid by the distribution of cash, paid-up shares (at par or at a premium), debentures, bonds or other securities of the Company or of any other company or any other specific assets held or to be acquired by the Company or in any one or more of such ways. 119. The directors may settle any difficulty that may arise in regard to the distribution of a dividend as they think expedient, and in particular without restricting the generality of the foregoing may issue fractional certificates, may fix the value for distribution of any specific assets, may determine that cash payments will be made to any shareholders upon the footing of the value so fixed or that fractions may be disregarded in order to adjust the rights of all parties, and may vest cash or specific assets in trustees upon such trusts for the persons entitled to the dividend as may seem expedient to the directors. - 21 - 120. Any person registered as a joint holder of any share may give effectual receipts for all dividends and payments on account of dividends in respect of such share. 121. Unless otherwise determined by the directors, any dividend may be paid by a cheque or warrant delivered to or sent through the post to the registered address of the shareholder entitled, or, when there are joint holders, to the registered address of that one whose name stands first on the register for the shares jointly held. Every cheque or warrant so delivered or sent shall be made payable to the order of the person to whom it is delivered or sent. The mailing or other transmission to a shareholder at the shareholder's registered address (or, in the case of joint shareholders at the address of the holder whose name stands first on the register) of a cheque payable to the order of the person to whom it is addressed for the amount of any dividend payable in cash after the deduction of any tax which the Company has properly withheld, shall discharge the Company's liability for the dividend unless the cheque is not paid on due presentation. If any cheque for a dividend payable in cash is not received, the Company shall issue to the shareholder a replacement cheque for the same amount on such terms as to indemnity and evidence of non-receipt as the directors may impose. No shareholder may recover by action or other legal process against the Company any dividend represented by a cheque that has not been duly presented to a banker of the Company for payment or that otherwise remains unclaimed for 6 years from the date on which it was payable. ACCOUNTS 122. The directors shall cause proper books of account to be kept of the amounts received and expended by the Company, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the Company, and the assets, credits and liabilities of the Company. 123. The books of account shall be kept at the head office of the Company or at such other place or places as the directors may direct. 124. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the accounts and books of the Company or any of them shall be open to inspection of the shareholders, and no shareholder shall have any right to inspect any account or book or document of the Company except as conferred by statute or authorized by the directors or a resolution of the shareholders. 125. At the ordinary general meeting in every year the directors shall lay before the Company such financial statements and reports in connection therewith as may be required by the Act or other applicable statute or regulation thereunder and shall distribute copies thereof at such times and to such persons as may be required by statute or regulation. AUDITORS AND AUDIT 126. Except in respect of a financial year for which the Company is exempt from audit requirements in the Act, the Company shall at each ordinary general meeting appoint an auditor or auditors to hold office until the next ordinary general meeting. If at any general meeting at which the appointment of an auditor or auditors is to take place and no such - 22 - appointment takes place, or if no ordinary general meeting is held in any year or period of years, the directors shall appoint an auditor or auditors to hold office until the next ordinary general meeting. 127. The first auditors of the Company may be appointed by the directors at any time before the first ordinary general meeting and the auditors so appointed shall hold office until such meeting unless previously removed by a resolution of the shareholders, in which event the shareholders may appoint auditors. 128. The directors may fill any casual vacancy in the office of the auditor but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act. 129. The Company may appoint as auditor any person, including a shareholder, not disqualified by statute. 121. An auditor may be removed or replaced in the circumstances and in the manner specified in the Act. 122. The remuneration of the auditors shall be fixed by the shareholders, or by the directors pursuant to authorization given by the shareholders, except that the remuneration of an auditor appointed to fill a casual vacancy may be fixed by the directors. 123. The auditors shall conduct such audit as may be required by the Act and their report, if any, shall be dealt with by the Company as required by the Act. NOTICES 133. A notice (including any communication or document) shall be sufficiently given, delivered or served by the Company upon a shareholder, director, officer or auditor by personal delivery at such person's registered address (or, in the case of a director, officer or auditor, last known address) or by prepaid mail, telegraph, telex, facsimile machine or other electronic means of communication addressed to such person at such address. 134. Shareholders having no registered address shall not be entitled to receive notice. 135. The holder of a share warrant shall not, unless otherwise expressed therein, be entitled in respect thereof to notice of any general meeting of the Company. 136. All notices with respect to registered shares to which persons are jointly entitled may be sufficiently given to all joint holders thereof by notice given to whichever of such persons is named first in the Register for such shares. 137. Any notice sent by mail shall be deemed to be given, delivered or served on the earlier of actual receipt and the third business day following that upon which it is mailed, and in proving such service it shall be sufficient to prove that the notice was properly addressed and mailed with the postage prepaid thereon. Any notice given by electronic means of communication shall be deemed to be given when entered into the appropriate transmitting device for transmission. A certificate in writing signed on behalf of the Company that the notice was so addressed and mailed or transmitted shall be conclusive evidence thereof. - 23 - 138. Every person who by operation of law, transfer or other means whatsoever becomes entitled to any share shall be bound by every notice in respect of such share that prior to such person's name and address being entered on the Register was duly served in the manner hereinbefore provided upon the person from whom such person derived title to such share. 139. Any notice delivered, sent or transmitted to the registered address of any shareholder pursuant to these Articles, shall, notwithstanding that such shareholder is then deceased and that the Company has notice thereof, be deemed to have been served in respect of any registered shares, whether held by such deceased shareholder solely or jointly with other persons, until some other person is registered as the holder or joint holder thereof, and such service shall for all purposes of these Articles be deemed a sufficient service of such notice on the heirs, executors or administrators of the deceased shareholder and all joint holders of such shares. 140. Any notice may bear the name or signature, manual or reproduced, of the person giving the notice written or printed. 141. When a given number of days' notice or notice extending over any other period is required to be given, the day of service and the day upon which such notice expires shall not, unless it is otherwise provided, be counted in such number of days or other period. INDEMNITY 142. Every director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, and the heirs and legal representatives of such person, in the absence of any dishonesty on the part of such person, shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses, including an amount paid to settle an action or claim or satisfy a judgment, that such director, officer or person may incur or become liable to pay in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Company or such body corporate, partnership or other association, whether the Company is a claimant or party to such action or proceeding or otherwise; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the shareholders over all other claims. 143. No director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, in the absence of any dishonesty on such person's part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the Company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or - 24 - effects are deposited, or for any loss occasioned by error of judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto. REMINDERS 144. The directors shall comply with the following provisions of the Act or the CORPORATIONS REGISTRATION ACT (Nova Scotia) where indicated: (1) Keep a current register of shareholders (Section 42). (2) Keep a current register of directors, officers and managers, send to the Registrar a copy thereof and notice of all changes therein (Section 98). (3) Keep a current register of holders of bonds, debentures and other securities (Section 111 and Third Schedule). (4) Send notice to the Registrar of any redemption or purchase of preference shares (Section 50). (5) Send notice to the Registrar of any consolidation, division, conversion or reconversion of the share capital or stock of the Company (Section 53). (6) Send notice to the Registrar of any increase of capital (Section 55). (7) Call a general meeting every year within the proper time (Section 83). Meetings must be held not later than 15 months after the preceding general meeting. (8) Send to the Registrar copies of all special resolutions (Section 88). (9) Send to the Registrar notice of the address of the Company's registered Office and of all changes in such address (Section 79). (10) Keep proper minutes of all shareholders' meetings and directors' meetings in the Company's minute book kept at the Company's registered Office (Sections 89 and 90). (11) Obtain a certificate under the CORPORATIONS REGISTRATION ACT (Nova Scotia) as soon as business is commenced. (12) Send notice of recognized agent to the Registrar under the CORPORATIONS REGISTRATION ACT (Nova Scotia). EX-3.5 4 EXHIBIT 3.5 Exhibit 3.5 ARTICLES OF ASSOCIATION OF 360NETWORKS INC. 1. Interpretation In these Articles, unless there be something in the subject or context inconsistent therewith: (1) "Act" means the COMPANIES ACT (Nova Scotia); (2) "Articles" means these Articles of Association of the Company and all amendments hereto; (3) "Company" means the company named above; (4) "director" means a director of the Company; (5) "investor designees" means, collectively, those members of the board nominated by each of the following: DWF SRL, a Barbados Company; GS Capital Partners III, L.P., a Delaware limited partnership; Providence Equity Fiber, L.P., a Delaware limited partnership; and Tyco Group S.A.R.L., a Luxembourg corporation; (6) "Memorandum" means the Memorandum of Association of the Company and all amendments thereto; (7) "month" means calendar month; (8) "Office" means the registered office of the Company; (9) "person" includes a body corporate; (10) "proxyholder" includes an alternate proxyholder; (11) "Register" means the register of members kept pursuant to the Act, and where the context permits includes a branch register of members; (12) "Registrar" means the Registrar as defined in the Act; (13) "resolution of shareholders" means a resolution passed by those of the shareholders entitled to vote on the matters dealt with in such resolution. (14) "Secretary" includes any person appointed to perform the duties of the Secretary temporarily; - 2 - (15) "shareholder" means member as that term is used in the Act in connection with a company limited by shares; (16) "special resolution" has the meaning assigned by the Act; (17) "in writing" and "written" includes printing, lithography and other modes of representing or reproducing words in visible form; (18) words importing number or gender include all numbers and genders unless the context otherwise requires; 2. The regulations in Table A in the First Schedule to the Act shall not apply to the Company. 3. The directors may enter into and carry into effect or adopt and carry into effect any agreement made by the promoters of the Company on behalf of the Company and may agree to any modification in the terms of any such agreement, either before or after its execution. 4. The directors may, out of the funds of the Company, pay all expenses incurred for the continuance and reorganization of the Company. SHARES 5. The directors shall control the shares and, subject to the provisions of these Articles, may allot or otherwise dispose of them to such person at such times, on such terms and conditions and, if the shares have a par value, either at a premium or at par, as they think fit. 6. The directors may pay on behalf of the Company a reasonable commission to any person in consideration of subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company, or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company. Subject to the Act, the commission may be paid or satisfied in shares of the Company. 7. If the whole or part of the allotment price of any shares is, by the conditions of their allotment, payable in instalments, every such instalment shall, when due, be payable to the Company by the person who is at such time the registered holder of the shares. 8. Shares may be registered in the names of joint holders not exceeding three in number. 9. On the death of one or more joint holders of shares the survivor or survivors of them shall alone be recognized by the Company as the registered holder or holders of the shares. 10. Save as herein otherwise provided, the Company may treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or required by statute, be bound to recognize any equitable or other claim to or interest in such share on the part of any other person. - 3 - CERTIFICATES 11. Certificates of title to shares shall comply with the Act and may otherwise be in such form as the directors may from time to time determine. Unless the directors otherwise determine, every certificate of title to shares shall be signed manually by at least one of the Chair, President, Secretary, Treasurer, a vice-president, an assistant secretary, any other officer of the Company or any director of the Company or by or on behalf of a share registrar transfer agent or branch transfer agent appointed by the Company or by any other person whom the directors may designate. When signatures of more than one person appear on a certificate all but one may be printed or otherwise mechanically reproduced. All such certificates when signed as provided in this Article shall be valid and binding upon the Company. If a certificate contains a printed or mechanically reproduced signature of a person, the Company may issue the certificate, notwithstanding that the person has ceased to be a director or an officer of the Company and the certificate is as valid as if such person were a director or an officer at the date of its issue. Any certificate representing shares of a class publicly traded on any stock exchange shall be valid and binding on the Company if it complies with the rules of such exchange whether or not it otherwise complies with this Article. 12. Except as the directors may determine, each shareholder's shares may be evidenced by any number of certificates so long as the aggregate of the shares stipulated in such certificates equals the aggregate registered in the name of the shareholder. 13. Where shares are registered in the names of two or more persons, the Company shall not be bound to issue more than one certificate or set of certificates, and such certificate or set of certificates shall be delivered to the person first named on the Register. 14. Any certificate that has become worn, damaged or defaced may, upon its surrender to the directors, be cancelled and replaced by a new certificate. Any certificate that has become lost or destroyed may be replaced by a new certificate upon proof of such loss or destruction to the satisfaction of the directors and the furnishing to the Company of such undertakings of indemnity as the directors deem adequate. 15. The sum of one dollar or such other sum as the directors from time to time determine shall be paid to the Company for every certificate other than the first certificate issued to any holder in respect of any share or shares. 16. The directors may cause one or more branch Registers of shareholders to be kept in any place or places, whether inside or outside of Nova Scotia. TRANSFER OF SHARES 17. The instrument of transfer of any share in the Company shall be signed by the transferor. The transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof and shall be entitled to receive any dividend declared thereon before the registration of the transfer. - 4 - 18. The instrument of transfer of any share shall be in writing in the following form or to the following effect or in such other form as the directors may approve from time to time: For value received, _____ hereby sell, assign, and transfer unto ______, _____ shares in the capital of the Company represented by the within certificate, and do hereby irrevocably constitute and appoint _________ attorney to transfer such shares on the books of the Company with full power of substitution in the premises. Dated the ____ day of ___________, Witness:_____________________________ 19. Every instrument of transfer shall be left for registration at the Office of the Company, or at any office of its transfer agent where a Register is maintained, together with the certificate of the shares to be transferred and such other evidence as the Company may require to prove title to or the right to transfer the shares. 20. The directors may require that a fee determined by them be paid before or after registration of any transfer. 21. Every instrument of transfer shall, after its registration, remain in the custody of the Company. Any instrument of transfer that the directors decline to register shall, except in case of fraud, be returned to the person who deposited it. TRANSMISSION OF SHARES 22. The executors or administrators of a deceased shareholder (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such shareholder. When a share is registered in the names of two or more joint holders, the survivor or survivors and the executors or administrators of the deceased shareholder, shall be the only persons recognized by the Company as having any title to, or interest in, such share. 23. Notwithstanding anything in these Articles, if the Company has only one shareholder (not being one of several joint holders) and that shareholder dies, the executors or administrators of the deceased shareholder shall be entitled to register themselves in the Register as the holders of the shares registered in the name of the deceased shareholder whereupon they shall have all the rights given by these Articles and by law to shareholders. 24. Any person entitled to shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer, upon producing such evidence of entitlement as the directors require, may be registered as a shareholder in respect of such shares, or may, without being registered, transfer such shares subject to the provisions of these Articles respecting the transfer of shares. The directors shall have the same right to refuse registration as if the transferee were named in an ordinary transfer presented for registration. - 5 - SURRENDER OF SHARES 25. The directors may accept the surrender of any share by way of compromise of any question as to the holder being properly registered in respect thereof. Any share so surrendered may be disposed of in the same manner as a forfeited share. SHARE WARRANT 26. The Company, with respect to any fully paid-up shares, may issue warrants ("Share Warrants") stating that the bearer is entitled to the shares therein specified, and may provide, by coupons or otherwise, for the payment of future dividends on the shares included in the Share Warrants. 27. The directors may determine and vary the conditions upon which Share Warrants will be issued and, without limiting the generality of the foregoing, may determine the conditions upon which (1) a new Share Warrant or coupon will be issued in the place of one worn out, defaced, lost or destroyed, or (2) the bearer of a Share Warrant will be entitled to attend and vote at general meetings, or (3) a Share Warrant may be surrendered and the name of the bearer entered in the Register in respect of the shares therein specified. Subject to such conditions and to these Articles the bearer of a Share Warrant shall be a shareholder to the full extent. The bearer of a Share Warrant shall be subject to the conditions for the time being in force, whether made before or after the issue of the Share Warrant. INCREASE AND REDUCTION OF CAPITAL 28. Subject to the Act, the Company may by resolution of its shareholders increase its share capital by the creation of new shares of such amount as it thinks expedient.\ 29. Subject to the Act, the new shares may be issued upon such terms and conditions and with such rights, privileges, limitations, restrictions and conditions attached thereto as the Company by resolution of its shareholders determines or, if no direction is given, as the directors determine. 30. Except as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the provisions herein contained with reference to transfer and transmission, and otherwise. 31. The Company may, by special resolution where required, reduce its share capital in any way and with and subject to any incident authorized and consent required by law. - 6 - ALTERATION OF CAPITAL 31. Subject to the Act, the Company may by resolution of its shareholders: (1) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (2) convert all or any of its paid-up shares into stock and reconvert that stock into paid-up shares of any denomination; (3) exchange shares of one denomination for another; or (4) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. 33. Subject to the Act, the Company may by special resolution: (1) subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum, so, however, that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived and the special resolution whereby any share is subdivided may determine that as between the holders of the shares resulting from such subdivision, one or more of such shares shall have some preference or special advantage as regards dividend, capital, voting or otherwise, over, or as compared with, the others or other; (2) convert any part of its issued or unissued share capital into preference shares redeemable or purchasable by the Company; (3) provide for the issue of shares without any nominal or par value provided that, upon any such issue, a declaration executed by the Secretary must be filed with the Registrar stating the number of shares issued and the amount received therefor; (4) convert all or any of its previously authorized, unissued or issued, fully paid-up shares, other than preferred shares, with nominal or par value into the same number of shares without any nominal or par value, and reduce, maintain or increase accordingly its liability on any of its shares so converted; provided that the power to reduce its liability on any of its shares so converted may, where it results in a reduction of capital, only be exercised subject to confirmation by the court as provided by the Act; or (5) convert all or any of its previously authorized, unissued or issued, fully paid-up shares without nominal or par value into the same or a different number of shares with nominal or par value, and for such purpose the shares issued without nominal or par value and replaced by shares with a nominal or par value shall be considered as fully paid, but their aggregate par value shall not exceed the value of the net assets of the Company as represented by the shares without par value issued before the conversion. - 7 - 34. Subject to the Act and any provisions attached to such shares, the Company may redeem, purchase or acquire any of its shares and the directors may determine the manner and the terms for redeeming, purchasing or acquiring such shares and may provide a sinking fund on such terms as they think fit for the redemption, purchase or acquisition of shares of any class or series. INTEREST ON SHARE CAPITAL 35. The Company may pay interest at a rate not exceeding 6% per year on share capital issued and paid-up for the purpose of raising funds to defray the expenses of the construction of any works or buildings or the provision of any plant which cannot be operated profitably for a lengthy period of time. Such interest may be paid for such period and may be charged to capital as part of the cost of construction of the work or building or of the provision of the plant. The payment of the interest shall not operate to reduce the amount paid-up on the shares in respect of which it is paid. The accounts of the Company shall show full particulars of the payment during the period to which the accounts relate. CLASSES AND SERIES OF SHARES 36. Subject to the Act and the Memorandum, and without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights, or with such restrictions, whether in regard to dividends, voting, return of share capital or otherwise, as the Company may from time to time determine by special resolution. MEETINGS AND VOTING BY CLASS OR SERIES 37. Where the holders of shares of a class or series have, under the Act, the Memorandum, the terms or conditions attaching to such shares or otherwise, the right to vote separately as a class in respect of any matter then, except as provided in the Act, the Memorandum, these Articles or such terms or conditions, all the provisions in these Articles concerning general meetings (including, without limitation, provisions respecting notice, quorum and procedure) shall, mutatis mutandis, apply to every meeting of holders of such class or series of shares convened for the purpose of such vote. 38. Unless the rights, privileges, terms or conditions attached to a class or series of shares provided otherwise, such class or series of shares shall not have the right to vote separately as a class or series upon an amendment to the Memorandum or Articles to: (1) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series; (2) effect an exchange, reclassification or cancellation of all or part of the shares of such class or series; or - 8 - (3) create a new class or series of shares equal or superior to the shares of such class or series. BORROWING POWERS 39. The directors on behalf of the Company may: (1) raise or borrow money for the purposes of the Company or any of them; (2) secure, subject to the sanction of a special resolution where required by the Act, the repayment of funds so raised or borrowed in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the execution and delivery of mortgages of the Company's real or personal property, or by the issue of bonds, debentures or other securities of the Company secured by mortgage or other charge upon all or any part of the property of the Company, both present and future; (3) sign or endorse bills, notes, acceptances, cheques, contracts, and other evidence of or securities for funds borrowed or to be borrowed for the purposes aforesaid; (4) pledge debentures as security for loans; (5) guarantee obligations of any person. 40. Bonds, debentures and other securities may be made assignable, free from any equities between the Company and the person to whom such securities were issued. 41. Any bonds, debentures and other securities may be issued at a discount, premium or otherwise and with special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of directors and other matters. GENERAL MEETINGS 42. Ordinary general meetings of the Company shall be held at least once in every calendar year at such time and place as may be determined by the directors and not later than 15 months after the preceding ordinary general meeting. All other meetings of the Company shall be called special general meetings. Ordinary or special general meetings may be held either within or without the Province of Nova Scotia. 43. The Chair, President, Chief Financial Officer or the directors may at any time convene a special general meeting, and the directors, upon the requisition of shareholders in accordance with the Act shall forthwith proceed to convene such meeting or meetings to be held at such time and place or times and places as the directors determine. 44. The requisition shall state the objects of the meeting requested, be signed by the requisitionists and deposited at the Office of the Company. It may consist of several documents in like form each signed by one or more of the requisitionists. - 9 - 45. At least seven clear days' notice, or such longer period of notice as may be required by the Act, of every general meeting, specifying the place, day and hour of the meeting and, when special business is to be considered, the general nature of such business, shall be given to the shareholders entitled to be present at such meeting by notice given as permitted by these Articles. With the consent in writing of all the shareholders entitled to vote at such meeting, a meeting may be convened by a shorter notice and in any manner they think fit, or notice of the time, place and purpose of the meeting may be waived by all of the shareholders. 46. When it is proposed to pass a special resolution, the two meetings may be convened by the same notice, and it shall be no objection to such notice that it only convenes the second meeting contingently upon the resolution being passed by the requisite majority at the first meeting. 47. The accidental omission to give notice to a shareholder, or non-receipt of notice by a shareholder, shall not invalidate any resolution passed at any general meeting. RECORD DATES 48. (1) The directors may fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend or entitled to receive any distribution; (b) entitled to receive notice of a meeting; or (c) for any other purpose. (2) If no record date is fixed, the record date for the determination of shareholders (a) entitled to receive notice of a meeting shall be the day immediately preceding the day on which the notice is given, or, if no notice is given, the day on which the meeting is held; and (b) for any other purpose shall be the day on which the directors pass the resolution relating to the particular purpose. PROCEEDINGS AT GENERAL MEETINGS 49. The business of an ordinary general meeting shall be to receive and consider the financial statements of the Company and the report of the directors and the report, if any, of the auditors, to elect directors in the place of those retiring, to appoint the auditors of the Company for the ensuing fiscal year and to transact any other business which under these Articles ought to be transacted at an ordinary general meeting. 50. No business shall be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. A corporate shareholder of the Company that has a duly authorized agent or representative present at any such meeting shall for the purpose of this Article be deemed to be personally present at such meeting. - 10 - 51. One person, being a shareholder, proxyholder or representative of a corporate shareholder, present and entitled to vote shall constitute a quorum for a general meeting, and may hold a meeting. 52. The Chair shall be entitled to take the chair at every general meeting or, if there be no Chair, or if the Chair is not present within fifteen 15 minutes after the time appointed for holding the meeting, the President or, failing the President, a vice-president shall be entitled to take the chair. If the Chair, the President or a vice-president is not present within 15 minutes after the time appointed for holding the meeting or if all such persons present decline to take the chair, the shareholders present entitled to vote at the meeting shall choose another director as chair and if no director is present or if all the directors present decline to take the chair, then such shareholders shall choose one of their number to be chair. 53. If within half an hour from the time appointed for a general meeting a quorum is not present, the meeting, if it was convened pursuant to a requisition of shareholders, shall be dissolved. If it was convened in any other way, it shall stand adjourned to the same day, in the next week, at the same time and place. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may hold the meeting. 54. Subject to the Act, at any general meeting a resolution put to the meeting shall be decided by a show of hands unless, either before or on the declaration of the result of the show of hands, a poll is demanded by the chair, a shareholder or a proxyholder; and unless a poll is so demanded, a declaration by the chair that the resolution has been carried, carried by a particular majority, lost or not carried by a particular majority and an entry to that effect in the Company's book of proceedings shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour or against such resolution. 55. When a poll is demanded, it shall be taken in such manner and at such time and place as the chair directs, and either at once or after an interval or adjournment or otherwise. The result of the poll shall be the resolution of the meeting at which the poll was demanded. The demand of a poll may be withdrawn. When any dispute occurs over the admission or rejection of a vote, it shall be resolved by the chair and such determination made in good faith shall be final and conclusive. 56. The chair shall not have a casting vote in addition to any vote or votes that the chair has as a shareholder. 57. The chair of a general meeting may with the consent of the meeting adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting that was adjourned. 58. Any poll demanded on the election of a chair or on a question of adjournment shall be taken forthwith without adjournment. 59. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. - 11 - VOTES OF SHAREHOLDERS 60. Subject to the Act and to any provisions attached to any class or series of shares concerning voting rights (1) on a show of hands every shareholder present in person, every duly authorized representative of a corporate shareholder, and, if not prevented from voting by the Act, every proxyholder, shall have one vote; and (2) on a poll every shareholder present in person, every duly authorized representative of a corporate shareholder, and every proxyholder, shall have one vote for every share held; whether or not such representative or proxyholder is a shareholder. 61. Any person entitled to transfer shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer may vote at any general meeting in respect thereof in the same manner as if such person were the registered holder of such shares so long as the directors are satisfied at least 48 hours before the time of holding the meeting of such person's right to transfer such shares. 62. Where there are joint registered holders of any share, any of such holders may vote such share at any meeting, either personally or by proxy, as if solely entitled to it. If more than one joint holder is present at any meeting, personally or by proxy, the one whose name stands first on the Register in respect of such share shall alone be entitled to vote it. Several executors or administrators of a deceased shareholder in whose name any share stands shall for the purpose of this Article be deemed joint holders thereof. 63. Votes may be cast either personally or by proxy or, in the case of a corporate shareholder by a representative duly authorized under the Act. 64. A proxy shall be in writing and executed in the manner provided in the Act. A proxy or other authority of a corporate shareholder does not require its seal. Holders of Share Warrants shall not be entitled to vote by proxy in respect of the shares included in such warrants unless otherwise expressed in such warrants. 65. A shareholder of unsound mind in respect of whom an order has been made by any court of competent jurisdiction may vote by guardian or other person in the nature of a guardian appointed by that court, and any such guardian or other person may vote by proxy. 66. A proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority shall be deposited at the Office of the Company or at such other place as the directors may direct. The directors may, by resolution, fix a time not exceeding 72 hours excluding Saturdays and holidays preceding any meeting or adjourned meeting before which time proxies to be used at that meeting must be deposited with the Company at its Office or with an agent of the Company. Notice of the requirement for depositing proxies shall be given in the notice calling the meeting. The chair of the meeting shall determine all questions as to validity of proxies and other instruments of authority. - 12 - 67. A vote given in accordance with the terms of a proxy shall be valid notwithstanding the previous death of the principal, the revocation of the proxy, or the transfer of the share in respect of which the vote is given, provided no intimation in writing of the death, revocation or transfer is received at the Office of the Company before the meeting or by the chair of the meeting before the vote is given. 68. Every form of proxy shall comply with the Act and its regulations and subject thereto may be in the following form: I, _________ of ____________ being a shareholder of _____ hereby appoint _______ of ________ (or failing him/her _____ of _____) as my proxyholder to attend and to vote for me and on my behalf at the ordinary/special general meeting of the Company, to be held on the ___ day of ____ and at any adjournment thereof, or at any meeting of the Company which may be held prior to [insert specified date or event]. [If the proxy is solicited by or behalf of the management of the Company, insert a statement to that effect.] Dated this ____ day of __________ ____. Shareholder 69. Any resolution passed by the directors, notice of which has been given to the shareholders in the manner in which notices are hereinafter directed to be given and which is, within one month after it has been passed, ratified and confirmed in writing by shareholders entitled on a poll to three-fifths of the votes, shall be as valid and effectual as a resolution of a general meeting. This Article shall not apply to a resolution for winding up the Company or to a resolution dealing with any matter that by statute or these Articles ought to be dealt with by a special resolution or other method prescribed by statute. 70. A resolution, including a special resolution, in writing and signed by every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such shareholders at a meeting and satisfies all of the requirements of the Act respecting meetings of shareholders. DIRECTORS 71. Unless otherwise determined by resolution of shareholders, the number of directors shall not be less than one or more than seventeen. 72. Notwithstanding anything herein contained the directors of the Company on the date of its continuance shall continue to be the directors of the Company until their successors are appointed or they otherwise cease to be directors in accordance with these Articles. 73. Subject to applicable law, the directors may be paid out of the funds or the capital of the Company as remuneration for their service such sums, shares or options, if any, as - 13 - the directors may determine, and such remuneration shall be divided among them in such proportions and manner as the directors determine. The directors may also be paid their reasonable travelling, hotel and other expenses incurred in attending meetings of directors and otherwise in the execution of their duties as directors. 74. The continuing directors may act notwithstanding any vacancy in their body, but if their number falls below the minimum permitted, the directors shall not, except in emergencies or for the purpose of filling vacancies, act so long as their number is below the minimum. 75. A director may, in conjunction with the office of director, and on such terms as to remuneration and otherwise as the directors arrange or determine, hold any other office or place of profit under the Company or under any company in which the Company is a shareholder or is otherwise interested. 76. The office of a director shall ipso facto be vacated, if the director: (1) becomes bankrupt or makes an assignment for the benefit of creditors; (1) is, or is found by a court of competent jurisdiction to be, of unsound mind; (2) by notice in writing to the Secretary at the Company's Office, resigns the office of director; or (3) is removed in the manner provided by these Articles. 77. It shall be the duty of a director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company to declare the nature of such interest at a meeting of the directors of the Company. In the case of a proposed contract the declaration required to be made shall be made at a meeting of the directors at which the question of entering into the contract is first taken into consideration, or if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after the director became so interested, and in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after the director becomes so interested. A general notice given to the directors of the Company by a director to the effect that such director is a member of a specified company or firm and is to be regarded as interested in any contract which may, after the date of the notice, be made with that company or firm shall be deemed to be a sufficient declaration of interest in relation to any contract so made. ELECTION OF DIRECTORS 78. At the dissolution of every ordinary general meeting at which their successors are elected, all the directors shall retire from office and be succeeded by the directors elected at such meeting. Retiring directors shall be eligible for re-election. 79. If at any ordinary general meeting at which an election of directors ought to take place no such election takes place, or if no ordinary general meeting is held in any year or period of years, the retiring directors shall continue in office until their successors are elected. - 14 - 80. The Company may by resolution of its shareholders elect any number of directors permitted by these Articles and may determine or alter their qualification. 81. The Company may, by special resolution or in any other manner permitted by statute, remove any director before the expiration of such director's period of office and may, if desired, appoint a replacement to hold office during such time only as the director so removed would have held office. 82. The directors may appoint any other person as a director so long as the total number of directors does not at any time exceed the maximum number permitted. No such appointment, except to fill a casual vacancy, shall be effective unless two-thirds of the directors concur in it. Any casual vacancy occurring among the directors may be filled by the directors, but any person so chosen shall retain office only so long as the vacating director would have retained it if the vacating director had continued as director. CHAIR OF THE BOARD 83. The directors may elect one of their number to be chair and may determine the period during which the chair is to hold office. The chair shall perform such duties and receive such special remuneration as the directors may provide. PRESIDENT, CHIEF EXECUTIVE OFFICER AND VICE-PRESIDENTS 84. The directors shall appoint the President and Chief Executive Officer of the Company, who need not be a director, and may determine the period for which the President and Chief Executive Officer is to hold office. The President and Chief Executive Officer shall have general supervision of the business of the Company and shall perform such duties as may be assigned from time to time by the directors. 85. The directors may also appoint vice-presidents, who need not be directors, and may determine the periods for which they are to hold office. A vice-president shall, at the request of the President or the directors and subject to the directions of the directors, perform the duties of the President during the absence, illness or incapacity of the President, and shall also perform such duties as may be assigned by the President or the directors. SECRETARY AND TREASURER 86. The directors shall appoint a Secretary of the Company to keep minutes of shareholders' and directors' meetings and perform such other duties as may be assigned by the directors. The directors may also appoint a temporary substitute for the Secretary who shall, for the purposes of these Articles, be deemed to be the Secretary. 87. The directors may appoint a treasurer of the Company to carry out such duties as the directors may assign. - 15 - OFFICERS 88. The directors may elect or appoint such other officers of the Company, having such powers and duties, as they think fit. 89. If the directors so decide the same person may hold more than one of the offices provided for in these Articles. 90. Notwithstanding anything herein contained the officers of the Company on the date of its continuance shall continue to hold office until their successors are appointed or they otherwise cease to hold office in accordance with these Articles. PROCEEDINGS OF DIRECTORS 91. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings and proceedings, as they think fit. Until otherwise determined, a quorum for meetings of the board shall be the number of directors then in office, less three (3), of which three (3) shall be investor designees. 92. If at a meeting of directors a quorum is not present, the directors may adjourn the meeting to a fixed time and place (provided they shall give written notice of such time and place to each director not in attendance). At the meeting immediately following the adjourned meeting, the directors present at such meeting shall constitute a quorum; provided however, that unless a full quorum is present as provided in section 91, the directors present at such meeting may not transact any business except as specifically set forth in the notice of meeting. 93. A director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed to be present at that meeting for purposes of these Articles. 94. Meetings of directors may be held either within or without the Province of Nova Scotia and the directors may from time to time make arrangements relating to the time and place of holding directors' meetings, the notices to be given for such meetings and what meetings may be held without notice. Unless otherwise provided by such arrangements: (1) A meeting of directors may be held at the close of every ordinary general meeting of the Company without notice. (2) Notice of every other directors' meeting may be given as permitted by these Articles to each director at least 48 hours before the time fixed for the meeting. (3) A meeting of directors may be held without formal notice if all the directors are present or if those absent have signified their assent to such meeting or their consent to the business transacted at such meeting. 95. The President or any director may at any time, and the Secretary, upon the request of the President or any director, shall summon a meeting of the directors to be held at the Office of - 16 - the Company. The President, the Chair or a majority of the directors may at any time, and the Secretary, upon the request of the President, the Chair or a majority of the directors, shall summon a meeting to be held elsewhere. 96. (1) Questions arising at any meeting of directors shall be decided by a majority of votes. The chair of the meeting may vote as a director but shall not have a second or casting vote. (2) At any meeting of directors the chair shall receive and count the vote of any director not present in person at such meeting on any question or matter arising at such meeting whenever such absent director has indicated by telegram, letter or other writing lodged with the chair of such meeting the manner in which the absent director desires to vote on such question or matter and such question or matter has been specifically mentioned in the notice calling the meeting as a question or matter to be discussed or decided thereat. 97. If no Chair is elected, or if at any meeting of directors the Chair is not present within five minutes after the time appointed for holding the meeting, or declines to take the chair, the President, if a director, shall preside. If the President is not a director, is not present at such time or declines to take the chair, a vice-president who is also a director shall preside. If no person described above is present at such time and willing to take the chair, the directors present shall choose some one of their number to be chair of the meeting. 98. A meeting of the directors at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the directors generally. 99. The directors may delegate any of their powers to committees consisting of such number of directors as they think fit. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on them by the directors. 100. The meetings and proceedings of any committee of directors shall be governed by the provisions contained in these Articles for regulating the meetings and proceedings of the directors insofar as they are applicable and are not superseded by any regulations made by the directors. 101. All acts done at any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of the director or person so acting, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. 102. A resolution in writing and signed by every director who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such directors at a meeting. 103. If any one or more of the directors is called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the Company or the business thereof, the Company may remunerate the director or directors so doing, either by a fixed sum or by a percentage of profits or otherwise. Such remuneration - 17 - shall be determined by the directors and may be either in addition to or in substitution for remuneration otherwise authorized by these Articles. REGISTERS 104. The directors shall cause to be kept at the Company's Office in accordance with the provisions of the Act a Register of the shareholders of the Company, a register of the holders of bonds, debentures and other securities of the Company and a register of its directors. Branch registers of the shareholders and of the holders of bonds, debentures and other securities may be kept elsewhere, either within or without the Province of Nova Scotia, in accordance with the Act. MINUTES 105. The directors shall cause minutes to be entered in books designated for the purpose: (1) of all appointments of officers; (2) of the names of directors present at each meeting of directors and of any committees of directors; and (3) of all resolutions and proceedings of meetings of shareholders and of directors. Any such minutes of any meeting of directors or of any committee of directors or of shareholders, if purporting to be signed by the chair of such meeting or by the chair of the next succeeding meeting, shall be receivable as prima facie evidence of the matters stated in such minutes. POWERS OF DIRECTORS 106. The management of the business of the Company is vested in the directors who, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the shareholders, but subject nevertheless to the provisions of any statute, the Memorandum or these Articles. No modification of the Memorandum or these Articles shall invalidate any prior act of the directors that would have been valid if such modification had not been made. 107. Without restricting the generality of the terms of any of these Articles and without prejudice to the powers conferred thereby, the directors may: (1) take such steps as they think fit to carry out any agreement or contract made by or on behalf of the Company; (2) pay costs, charges and expenses preliminary and incidental to the promotion, formation, establishment, and registration of the Company; - 18 - (3) purchase or otherwise acquire for the Company any property, rights or privileges that the Company is authorized to acquire, at such price and generally on such terms and conditions as they think fit; (4) pay for any property, rights or privileges acquired by, or services rendered to the Company either wholly or partially in cash or in shares (fully paid-up or otherwise), bonds, debentures or other securities of the Company; (5) subject to the Act, secure the fulfilment of any contracts or engagements entered into by the Company by mortgaging or charging all or any of the property of the Company and its unpaid capital for the time being, or in such other manner as they think fit; (6) appoint, remove or suspend at their discretion such experts, managers, secretaries, treasurers, officers, clerks, agents and servants for permanent, temporary or special services, as they from time to time think fit, and determine their powers and duties and fix their salaries or emoluments and require security in such instances and to such amounts as they think fit; (7) accept a surrender of shares from any shareholder insofar as the law permits and on such terms and conditions as may be agreed; (8) appoint any person or persons to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, execute and do all such deeds and things as may be required in relation to such trust, and provide for the remuneration of such trustee or trustees; (9) institute, conduct, defend, compound or abandon any legal proceedings by and against the Company, its directors or its officers or otherwise concerning the affairs of the Company, and also compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company; (10) refer any claims or demands by or against the Company to arbitration and observe and perform the awards; (11) make and give receipts, releases and other discharges for amounts payable to the Company and for claims and demands of the Company; (12) determine who may exercise the borrowing powers of the Company and sign on the Company's behalf bonds, debentures or other securities, bills, notes, receipts, acceptances, assignments, transfers, hypothecations, pledges, endorsements, cheques, drafts, releases, contracts, agreements and all other instruments and documents; (13) provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as may be thought fit; (14) invest and deal with any funds of the Company in such securities and in such manner as they think fit; and vary or realize such investments; - 19 - (15) subject to the Act, execute in the name and on behalf of the Company in favour of any director or other person who may incur or be about to incur any personal liability for the benefit of the Company such mortgages of the Company's property, present and future, as they think fit; (16) give any officer or employee of the Company a commission on the profits of any particular business or transaction or a share in the general profits of the Company; (17) set aside out of the profits of the Company before declaring any dividend such amounts as they think proper as a reserve fund to meet contingencies or provide for dividends, depreciation, repairing, improving and maintaining any of the property of the Company and such other purposes as the directors may in their absolute discretion think in the interests of the Company; and invest such amounts in such investments as they think fit, and deal with and vary such investments, and dispose of all or any part of them for the benefit of the Company, and divide the reserve fund into such special funds as they think fit, with full power to employ the assets constituting the reserve fund in the business of the Company without being bound to keep them separate from the other assets; (18) make, vary and repeal rules respecting the business of the Company, its officers and employees, the shareholders of the Company or any section or class of them; (47) enter into all such negotiations and contracts, rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the Company; (48) provide for the management of the affairs of the Company in such manner as they think fit. SOLICITORS 108. The Company may employ or retain solicitors any of whom may, at the request or on the instruction of the directors, the Chair, the President or a managing director, attend meetings of the directors or shareholders, whether or not the solicitor is a shareholder or a director of the Company. A solicitor who is also a director may nevertheless charge for services rendered to the Company as a solicitor. THE SEAL 109. The directors shall arrange for the safe custody of the common seal of the Company (the "Seal"). The Seal may be affixed to any instrument in the presence of and contemporaneously with the attesting signature of (i) any director or officer acting within such person's authority or (ii) any person under the authority of a resolution of the directors or a committee thereof. For the purpose of certifying documents or proceedings the Seal may be affixed by any director or the President, a vice-president, the Secretary, an assistant secretary or any other officer of the Company without the authorization of a resolution of the directors. - 20 - 110. The Company may have facsimiles of the Seal which may be used interchangeably with the Seal. DIVIDENDS 111. The directors may from time to time declare such dividend as they deem proper upon shares of the Company according to the rights and restrictions attached to any class or series of shares, and may determine the date upon which such dividend will be payable and that it will be payable to the persons registered as the holders of the shares on which it is declared at the close of business upon a record date. No transfer of such shares registered after the record date shall pass any right to the dividend so declared. 112. No dividends shall be payable except out of the profits, retained earnings or contributed surplus of the Company and no interest shall be payable on any dividend except insofar as the rights attached to any class or series of shares provide otherwise. 113. The declaration of the directors as to the amount of the profits, retained earnings or contributed surplus of the Company shall be conclusive. 114. The directors may from time to time pay to the shareholders such interim dividends as in their judgment the position of the Company justifies. 115. Subject to the Memorandum, these Articles and the rights and restrictions attached to any class or series of shares, dividends may be declared and paid to the shareholders in proportion to the amount of capital paid-up on the shares (not including any capital paid-up bearing interest) held by them respectively. 116. The directors may deduct from the dividends payable to any shareholder amounts due and payable by the shareholder to the Company and may apply the same in or towards satisfaction of such amounts so due and payable. 117. The directors may retain the dividends payable upon shares to which a person is entitled or entitled to transfer upon the death or bankruptcy of a shareholder or in any way other than by allotment or transfer, until such person has become registered as the holder of such shares or has duly transferred such shares. 118. The directors may declare that a dividend be paid by the distribution of cash, paid-up shares (at par or at a premium), debentures, bonds or other securities of the Company or of any other company or any other specific assets held or to be acquired by the Company or in any one or more of such ways. 119. The directors may settle any difficulty that may arise in regard to the distribution of a dividend as they think expedient, and in particular without restricting the generality of the foregoing may issue fractional certificates, may fix the value for distribution of any specific assets, may determine that cash payments will be made to any shareholders upon the footing of the value so fixed or that fractions may be disregarded in order to adjust the rights of all parties, and may vest cash or specific assets in trustees upon such trusts for the persons entitled to the dividend as may seem expedient to the directors. - 21 - 120. Any person registered as a joint holder of any share may give effectual receipts for all dividends and payments on account of dividends in respect of such share. 121. Unless otherwise determined by the directors, any dividend may be paid by a cheque or warrant delivered to or sent through the post to the registered address of the shareholder entitled, or, when there are joint holders, to the registered address of that one whose name stands first on the register for the shares jointly held. Every cheque or warrant so delivered or sent shall be made payable to the order of the person to whom it is delivered or sent. The mailing or other transmission to a shareholder at the shareholder's registered address (or, in the case of joint shareholders at the address of the holder whose name stands first on the register) of a cheque payable to the order of the person to whom it is addressed for the amount of any dividend payable in cash after the deduction of any tax which the Company has properly withheld, shall discharge the Company's liability for the dividend unless the cheque is not paid on due presentation. If any cheque for a dividend payable in cash is not received, the Company shall issue to the shareholder a replacement cheque for the same amount on such terms as to indemnity and evidence of non-receipt as the directors may impose. No shareholder may recover by action or other legal process against the Company any dividend represented by a cheque that has not been duly presented to a banker of the Company for payment or that otherwise remains unclaimed for 6 years from the date on which it was payable. ACCOUNTS 122. The directors shall cause proper books of account to be kept of the amounts received and expended by the Company, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the Company, and the assets, credits and liabilities of the Company. 123. The books of account shall be kept at the head office of the Company or at such other place or places as the directors may direct. 124. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the accounts and books of the Company or any of them shall be open to inspection of the shareholders, and no shareholder shall have any right to inspect any account or book or document of the Company except as conferred by statute or authorized by the directors or a resolution of the shareholders. 125. At the ordinary general meeting in every year the directors shall lay before the Company such financial statements and reports in connection therewith as may be required by the Act or other applicable statute or regulation thereunder and shall distribute copies thereof at such times and to such persons as may be required by statute or regulation. AUDITORS AND AUDIT 126. Except in respect of a financial year for which the Company is exempt from audit requirements in the Act, the Company shall at each ordinary general meeting appoint an auditor or auditors to hold office until the next ordinary general meeting. If at any general meeting at which the appointment of an auditor or auditors is to take place and no such - 22 - appointment takes place, or if no ordinary general meeting is held in any year or period of years, the directors shall appoint an auditor or auditors to hold office until the next ordinary general meeting. 127. The first auditors of the Company may be appointed by the directors at any time before the first ordinary general meeting and the auditors so appointed shall hold office until such meeting unless previously removed by a resolution of the shareholders, in which event the shareholders may appoint auditors. 128. The directors may fill any casual vacancy in the office of the auditor but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act. 129. The Company may appoint as auditor any person, including a shareholder, not disqualified by statute. 121. An auditor may be removed or replaced in the circumstances and in the manner specified in the Act. 122. The remuneration of the auditors shall be fixed by the shareholders, or by the directors pursuant to authorization given by the shareholders, except that the remuneration of an auditor appointed to fill a casual vacancy may be fixed by the directors. 123. The auditors shall conduct such audit as may be required by the Act and their report, if any, shall be dealt with by the Company as required by the Act. NOTICES 133. A notice (including any communication or document) shall be sufficiently given, delivered or served by the Company upon a shareholder, director, officer or auditor by personal delivery at such person's registered address (or, in the case of a director, officer or auditor, last known address) or by prepaid mail, telegraph, telex, facsimile machine or other electronic means of communication addressed to such person at such address. 134. Shareholders having no registered address shall not be entitled to receive notice. 135. The holder of a share warrant shall not, unless otherwise expressed therein, be entitled in respect thereof to notice of any general meeting of the Company. 136. All notices with respect to registered shares to which persons are jointly entitled may be sufficiently given to all joint holders thereof by notice given to whichever of such persons is named first in the Register for such shares. 137. Any notice sent by mail shall be deemed to be given, delivered or served on the earlier of actual receipt and the third business day following that upon which it is mailed, and in proving such service it shall be sufficient to prove that the notice was properly addressed and mailed with the postage prepaid thereon. Any notice given by electronic means of communication shall be deemed to be given when entered into the appropriate transmitting device for transmission. A certificate in writing signed on behalf of the Company that the notice was so addressed and mailed or transmitted shall be conclusive evidence thereof. - 23 - 138. Every person who by operation of law, transfer or other means whatsoever becomes entitled to any share shall be bound by every notice in respect of such share that prior to such person's name and address being entered on the Register was duly served in the manner hereinbefore provided upon the person from whom such person derived title to such share. 139. Any notice delivered, sent or transmitted to the registered address of any shareholder pursuant to these Articles, shall, notwithstanding that such shareholder is then deceased and that the Company has notice thereof, be deemed to have been served in respect of any registered shares, whether held by such deceased shareholder solely or jointly with other persons, until some other person is registered as the holder or joint holder thereof, and such service shall for all purposes of these Articles be deemed a sufficient service of such notice on the heirs, executors or administrators of the deceased shareholder and all joint holders of such shares. 140. Any notice may bear the name or signature, manual or reproduced, of the person giving the notice written or printed. 141. When a given number of days' notice or notice extending over any other period is required to be given, the day of service and the day upon which such notice expires shall not, unless it is otherwise provided, be counted in such number of days or other period. INDEMNITY 142. Every director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, and the heirs and legal representatives of such person, in the absence of any dishonesty on the part of such person, shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses, including an amount paid to settle an action or claim or satisfy a judgment, that such director, officer or person may incur or become liable to pay in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Company or such body corporate, partnership or other association, whether the Company is a claimant or party to such action or proceeding or otherwise; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the shareholders over all other claims. 143. No director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, in the absence of any dishonesty on such person's part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the Company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or - 24 - effects are deposited, or for any loss occasioned by error of judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto. REMINDERS 144. The directors shall comply with the following provisions of the Act or the CORPORATIONS REGISTRATION ACT (Nova Scotia) where indicated: (1) Keep a current register of shareholders (Section 42). (2) Keep a current register of directors, officers and managers, send to the Registrar a copy thereof and notice of all changes therein (Section 98). (3) Keep a current register of holders of bonds, debentures and other securities (Section 111 and Third Schedule). (4) Send notice to the Registrar of any redemption or purchase of preference shares (Section 50). (5) Send notice to the Registrar of any consolidation, division, conversion or reconversion of the share capital or stock of the Company (Section 53). (6) Send notice to the Registrar of any increase of capital (Section 55). (7) Call a general meeting every year within the proper time (Section 83). Meetings must be held not later than 15 months after the preceding general meeting. (8) Send to the Registrar copies of all special resolutions (Section 88). (9) Send to the Registrar notice of the address of the Company's registered Office and of all changes in such address (Section 79). (10) Keep proper minutes of all shareholders' meetings and directors' meetings in the Company's minute book kept at the Company's registered Office (Sections 89 and 90). (11) Obtain a certificate under the CORPORATIONS REGISTRATION ACT (Nova Scotia) as soon as business is commenced. (12) Send notice of recognized agent to the Registrar under the CORPORATIONS REGISTRATION ACT (Nova Scotia). EX-3.6 5 EXHIBIT 3.6 Exhibit 3.6 MEMORANDUM OF ASSOCIATION OF 360NETWORKS INC. 1. The name of the Company is 360NETWORKS INC. 2. There are no restrictions on the objects and powers of the Company and the Company shall expressly have the following powers: (a) To sell or dispose of its undertaking, or a substantial part thereof; (b) To distribute any of its property IN SPECIE among its members; and (c) To amalgamate with any company or other body of persons. 3. The liability of the members is limited. 4. The capital of the Company is 500,000,000,000 Subordinate Voting Shares, 500,000,000,000 Multiple Voting Shares, and 500,000,000,000 Preferred Shares issuable in series, all without nominal or par value, and all having the rights, restrictions, conditions and limitations set out in Annex 1 hereto with power to divide the shares in the capital for the time being into several classes and to attach thereto respectively any preferred, deferred or qualified rights, privileges or conditions, including restrictions on voting rights and including redemption and purchase of such shares, subject, however, to the provisions of the COMPANIES ACT of Nova Scotia. ANNEX I The rights, privileges, restrictions and conditions attaching to each class of shares and each existing series of shares of the Company are as follows: A. SUBORDINATE VOTING SHARES AND MULTIPLE VOTING SHARES The Subordinate Voting Shares and Multiple Voting Shares shall have attached thereto the following rights, privileges, restrictions and conditions: 1. DIVIDENDS 1.1 Subject to any preference or priority as to the payment of dividends upon shares of any class or series ranking in priority to the Subordinate Voting Shares or Multiple Voting Shares in respect of the payment of dividends, the holders of Subordinate Voting Shares and Multiple Voting Shares shall, except as otherwise hereinafter provided, be entitled to participate equally with each other, share for share, as to dividends and the Company shall pay dividends thereon, as and when declared by the Board of Directors of the Company out of moneys properly applicable to the payment of dividends, in equal amounts per share and at the same time on each Subordinate Voting Share and Multiple Voting Share outstanding as at the respective record dates for the payment of such dividends. 2. DISSOLUTION 2.1 In the event of the liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company among shareholders for the purpose of winding up its affairs, all of the property and assets of the Company which remain, after payment of all amounts attributed and properly payable to the holders of any shares ranking in priority to the Subordinate Voting Shares and Multiple Voting Shares in respect of payment upon liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company among shareholders for the purpose of winding up its affairs, shall be paid or distributed equally, share for share, to the holders of the Subordinate Voting Shares and Multiple Voting Shares, without preference or distinction outstanding, as at the respective record dates for such payment. 3. SUBDIVISION OR CONSOLIDATION 3.1 Neither the Subordinate Voting Shares nor the Multiple Voting Shares shall be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the shares of the other such class is subdivided, consolidated, reclassified or otherwise changed equally, share for share, in the same proportion and in the same manner. 4. VOTING RIGHTS 4.1 The holders of the Subordinate Voting Shares shall be entitled, as such, to receive notice of and to attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of shares of any other class of shares of the Company or of shares of any series of shares of any other class of shares of the Company) and to vote at all such meetings and each holder of Subordinate Voting Shares shall be entitled 3 at any such meeting to one vote per Subordinate Voting Share held by such holder as at the record date for such meeting. 4.2 The Company shall not, without the authorization of the holders of Subordinate Voting Shares given as specified in Section 4.3 of this Article A: (a) increase or decrease the maximum number of authorized Subordinate Voting Shares, or increase any maximum number of authorized shares of any other class or series of a class having rights or privileges equal or superior to the Subordinate Voting Shares; (b) effect an exchange, reclassification or cancellation of all or part of the Subordinate Voting Shares; or (c) create a new class of shares equal or superior to the Subordinate Voting Shares. 4.3 The approval of the holders of the Subordinate Voting Shares with respect to any and all matters hereinbefore referred to in this Article A may be given in writing by the holders of not less than 2/3 of the Subordinate Voting Shares for the time being outstanding or by resolution duly passed by not less than 2/3 of the votes cast on a poll at a meeting of the holders of the Subordinate Voting Shares duly called and held for the purpose of considering the subject matter of such resolution and at which meeting the holders of at least five percent (5%) of the outstanding Subordinate Voting Shares are present in person or represented by proxy in accordance with the Articles of the Company; provided, however, that, if at any such meeting, when originally held, the holders of at least five percent (5%) of the outstanding Subordinate Voting Shares are not present in person or so represented by proxy within 30 minutes after the time fixed for the meeting, then the meeting shall be adjourned to such date, being not less than 14 days later, and to such time and place as may be fixed by the chairman of such meeting and not less than ten days' written notice shall be given of such adjourned meeting, but it shall not be necessary in such notice to specify the purpose for which the meeting was originally called. At such adjourned meeting, the holders of Subordinate Voting Shares present in person or so represented by proxy, whether or not they hold more or less than five percent (5%) of all Subordinate Voting Shares then outstanding, may transact the business for which the meeting was originally called, and a resolution duly passed and carried thereat by not less than 2/3 of the votes cast on a poll at such adjourned meeting shall constitute the approval of the holders of the Subordinate Voting Shares hereinbefore mentioned. The formalities to be observed with respect to the giving of notice of any such original meeting or adjourned meeting and the conduct thereof shall be those from time to time prescribed in the Articles of the Company with respect to meetings of shareholders or in the COMPANIES ACT (Nova Scotia). 4.4 At any meeting of the holders of Subordinate Voting Shares as a class, each holder of Subordinate Voting Shares shall be entitled to one vote in respect of each Subordinate Voting Share held by such holder. 4.5 The holders of the Multiple Voting Shares shall be entitled, as such, to receive notice of and attend (in person or by proxy) and be heard at all meetings of the shareholders of the Company (other than separate meetings of the holders of shares of any other class of shares of the Company or any series of shares of such other class of shares of the Company) and to vote 4 at all such meetings and each holder of Multiple Voting Shares shall be entitled at any such meeting to ten votes per Multiple Voting Share held by such holder as at the record date for such meeting. 5. CONVERSION OF MULTIPLE VOTING SHARES INTO SUBORDINATE VOTING SHARES 5.1 Subject to compliance with the provisions of Section 5.2 of this Article A, each holder of Multiple Voting Shares shall be entitled at any time and from time to time to have all or any part of the Multiple Voting Shares held by such holder converted into fully paid and non-assessable Subordinate Voting Shares upon the basis of one Subordinate Voting Share for each Multiple Voting Share for which the conversion right provided for in this Section 5.1 is exercised, as specified by the holder of the Multiple Voting Shares in the notice in writing given to the Company or any transfer agent in exercise of such conversion right. 5.2 Before any holder of Multiple Voting Shares shall be entitled to convert the same into Subordinate Voting Shares, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Multiple Voting Shares, together with a written notice to the Company stating therein: the name or names in which the certificate or certificates for Subordinate Voting Shares are to be issued; the number of Multiple Voting Shares to be converted; and notice of such holder's election to convert such Multiple Voting Shares. After giving such notice in writing, the election of the holder of Multiple Voting Shares shall be irrevocable. The Company shall, within three (3) days of receipt of such written notice, issue and deliver at such office to such holder of Multiple Voting Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Subordinate Voting Shares, as the case may be, to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate or certificates for the Multiple Voting Shares to be converted, and the person or persons entitled to receive the Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Subordinate Voting Shares, as of such date. The issuance of certificates for Subordinate Voting Shares, upon conversion of the Multiple Voting Shares, shall be made without charge to the holder but the holder shall pay any stamp, documentary or similar tax imposed on or in respect of such conversion. If less than all of the Multiple Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the number of Multiple Voting Shares represented by the original certificate which are not to be converted. 5.3 The Company will at no time close its transfer books against the transfer of any Multiple Voting Shares, or of any Subordinate Voting Shares issuable upon the conversion of any Multiple Voting Shares, in any manner which interferes with the timely conversion of such Multiple Voting Shares, except as may otherwise be required to comply with applicable laws. B. PREFERRED SHARES The rights, privileges, restrictions and conditions attaching to the Preferred Shares, as a class, are as follows: 5 1. DIRECTORS' AUTHORITY TO ISSUE ONE OR MORE SERIES 1.1 The Board of Directors of the Company may issue the Preferred Shares at any time and from time to time in one or more series. Before the first shares of a particular series are issued, the Board of Directors of the Company, by resolution, shall fix the number of shares in such series and shall determine, subject to the limitations set out in the Articles, the designation, rights, privileges, restrictions and conditions to attach to the shares of such series including, without limiting the generality of the foregoing, the rate or rates, amount or method or methods of calculation of preferential dividends, whether cumulative or non-cumulative or partially cumulative, and whether such rate(s), amount or method(s) of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof and the date or dates from which such preferential dividends shall accrue, the redemption price and terms and conditions of redemption (if any), the rights of retraction (if any), and the prices and other terms and conditions of any rights of retraction and whether any additional rights of retraction may be vested in such holders in the future, voting rights (if any) and conversion or exchange rights (if any) and any sinking fund, purchase fund or other provisions attaching thereto. Such resolution shall be the only authorization to fix such designation, rights, privileges, restrictions and conditions and to authorize such issuance and no approval, sanction or confirmation of such resolution by the shareholders of the Company or otherwise shall be required. Before the issue of the first shares of a series, the Board of Directors of the Company shall send to the Registrar (as defined in the COMPANIES ACT (Nova Scotia)) any necessary documentation in the prescribed form containing a description of such series including the designation, rights, privileges, restrictions and conditions determined by the directors. 2. RANKING OF PREFERRED SHARES 2.1 No rights, privileges, restrictions or conditions attaching to a series of Preferred Shares shall confer upon a series a priority in respect of dividends or return of capital over any other series of Preferred Shares then outstanding. The Preferred Shares of each series shall rank on a parity with the Preferred Shares of every other series with respect to priority in the payment of dividends and the return of capital and the distribution of assets of the Company in the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs. When any dividends or amounts payable to the holders of Preferred Shares on a return of capital are not paid in full, the Preferred Shares of all series shall participate rateably in respect of such dividends, including accumulations, if any, in accordance with the sums that would be payable on such shares if all such dividends were declared and paid in full, and in respect of any return of capital in accordance with the sums that would be payable on such return of capital if all sums so payable were paid in full; provided, however, that in the event of there being insufficient assets to satisfy in full all such claims as aforesaid, the claims of the holders of such shares with respect to the return of capital shall first be paid and satisfied and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims in respect of dividends. 2.2 The Preferred Shares shall be entitled to priority over the Subordinate Voting Shares and the Multiple Voting Shares and over any other shares of any other class of the Company ranking junior to the Preferred Shares with respect to priority in the payment of 6 dividends and the return of capital and the distribution of assets in the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs. 2.3 The Preferred Shares of any series may also be given such other preferences, not inconsistent with the provisions hereof, over the Subordinate Voting Shares and the Multiple Voting Shares and over any other shares ranking junior to the Preferred Shares as may be determined in the case of such series of Preferred Shares. 3. VOTING RIGHTS 3.1 Except as otherwise provided by law or in accordance with any voting rights which may from time to time be attached to any series of Preferred Shares, the holders of the Preferred Shares as a class shall not be entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Company. 4. AMENDMENT OF RIGHTS 4.1 The provisions of Sections 1 to 3 , inclusive, in this Article B and of this Section 4 may be deleted, varied, modified, amended or amplified in whole or in part, but only with the prior approval of the holders of the Preferred Shares given as hereinafter specified, provided that the holders of the Preferred Shares are not entitled to vote separately as a class or, subject to the COMPANIES ACT (Nova Scotia), as a series, and shall not be entitled to dissent, upon a proposal to amend these Articles to: (a) increase or decrease any maximum number of authorized Preferred Shares, or increase any maximum number of authorized shares of any other class or series of a class having rights or privileges equal or superior to the Preferred Shares; (b) effect an exchange, reclassification or cancellation of all or part of the Preferred Shares; or (c) create a new class or series of a class of series equal or superior to the Preferred Shares. 4.2 The approval of the holders of the Preferred Shares with respect to any and all matters hereinbefore referred to in this Article B may be given in writing by the holders of not less than 2/3 of the Preferred Shares for the time being outstanding or by resolution duly passed by not less than 2/3 of the votes cast on a poll at a meeting of the holders of the Preferred Shares duly called and held for the purpose of considering the subject matter of such resolution and at which meeting the holders of at least five percent (5%) of the outstanding Preferred Shares are present in person or represented by proxy in accordance with the Articles of the Company; provided, however, that, if at any such meeting, when originally held, the holders of at least five percent (5%) of the outstanding Preferred Shares are not present in person or so represented by proxy within 30 minutes after the time fixed for the meeting, then the meeting shall be adjourned to such date, being not less than 14 days later, and to such time and place as may be fixed by the chairman of such meeting and not less than ten days' written notice shall be given of such adjourned meeting, but it shall not be necessary in such notice to specify the purpose for which 7 the meeting was originally called. At such adjourned meeting, the holders of Preferred Shares present in person or so represented by proxy, whether or not they hold more or less than five percent (5%) of all Preferred Shares then outstanding, may transact the business for which the meeting was originally called, and a resolution duly passed and carried thereat by not less than 2/3 of the votes cast on a poll at such adjourned meeting shall constitute the approval of the holders of the Preferred Shares hereinbefore mentioned. The formalities to be observed with respect to the giving of notice of any such original meeting or adjourned meeting and the conduct thereof shall be those from time to time prescribed in the Articles of the Company with respect to meetings of shareholders or in the COMPANIES ACT (Nova Scotia). 4.3 If the deletion, variation, modification, amendment or amplification of the provisions hereinbefore contained especially affects the rights of the holders of Preferred Shares of any series, in a manner different from that in or to which the rights of the holders of Preferred Shares of any other series are affected, then such deletion, variation, modification, amendment or amplification shall, in addition to being approved by the holders of the Preferred Shares as hereinabove set forth, be approved by the holders of the Preferred Shares of such series so especially affected, which approval may be given in writing by the holders of not less than 2/3 of the Preferred Shares of such series or by resolution passed by not less than 2/3 of the votes cast on a poll at the meeting of the holders of the Preferred Shares of such series, and the provisions of this Section 4.3 shall apply, mutatis mutandis, with respect to the holding of such meeting. 4.4 At any meeting of the holders of Preferred Shares as a class or as a series, each holder of Preferred Shares shall be entitled to one vote in respect of each Preferred Share held by such holder. EX-3.7 6 EXHIBIT 3.7 Exhibit 3.7 ARTICLES OF ASSOCIATION OF 360NETWORKS INC. 1. Interpretation In these Articles, unless there be something in the subject or context inconsistent therewith: (1) "Act" means the COMPANIES ACT (Nova Scotia); (2) "Articles" means these Articles of Association of the Company and all amendments hereto; (3) "Company" means the company named above; (4) "director" means a director of the Company; (5) "investor designees" means, collectively, those members of the board nominated by each of the following: DWF SRL, a Barbados Company; GS Capital Partners III, L.P., a Delaware limited partnership; Providence Equity Fiber, L.P., a Delaware limited partnership; and Tyco Group S.A.R.L., a Luxembourg corporation; (6) "Memorandum" means the Memorandum of Association of the Company and all amendments thereto; (7) "month" means calendar month; (8) "Office" means the registered office of the Company; (9) "person" includes a body corporate; (10) "proxyholder" includes an alternate proxyholder; (11) "Register" means the register of members kept pursuant to the Act, and where the context permits includes a branch register of members; (12) "Registrar" means the Registrar as defined in the Act; (13) "resolution of shareholders" means a resolution passed by those of the shareholders entitled to vote on the matters dealt with in such resolution. (14) "Secretary" includes any person appointed to perform the duties of the Secretary temporarily; (15) "shareholder" means member as that term is used in the Act in connection with a company limited by shares; -2- (16) "special resolution" has the meaning assigned by the Act; (17) "in writing" and "written" includes printing, lithography and other modes of representing or reproducing words in visible form; (18) words importing number or gender include all numbers and genders unless the context otherwise requires; 2. The regulations in Table A in the First Schedule to the Act shall not apply to the Company. 3. The directors may enter into and carry into effect or adopt and carry into effect any agreement made by the promoters of the Company on behalf of the Company and may agree to any modification in the terms of any such agreement, either before or after its execution. 4. The directors may, out of the funds of the Company, pay all expenses incurred for the continuance and reorganization of the Company. SHARES 5. The directors shall control the shares and, subject to the provisions of these Articles, may allot or otherwise dispose of them to such person at such times, on such terms and conditions and, if the shares have a par value, either at a premium or at par, as they think fit. 6. The directors may pay on behalf of the Company a reasonable commission to any person in consideration of subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company, or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company. Subject to the Act, the commission may be paid or satisfied in shares of the Company. 7. If the whole or part of the allotment price of any shares is, by the conditions of their allotment, payable in instalments, every such instalment shall, when due, be payable to the Company by the person who is at such time the registered holder of the shares. 8. Shares may be registered in the names of joint holders not exceeding three in number. 9. On the death of one or more joint holders of shares the survivor or survivors of them and the executors or administrators of the deceased shareholder or shareholders, shall be the only persons recognized by the Company as the registered holder or holders of the shares. 10. Save as herein otherwise provided, the Company may treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or required by statute, be bound to recognize any equitable or other claim to or interest in such share on the part of any other person. CERTIFICATES 11. Certificates of title to shares shall comply with the Act and may otherwise be in such form as the directors may from time to time determine. Unless the directors otherwise determine, -3- every certificate of title to shares shall be signed manually by at least one of the Chair, President, Secretary, Treasurer, a vice-president, an assistant secretary, any other officer of the Company or any director of the Company or by or on behalf of a share registrar transfer agent or branch transfer agent appointed by the Company or by any other person whom the directors may designate. When signatures of more than one person appear on a certificate all but one may be printed or otherwise mechanically reproduced. All such certificates when signed as provided in this Article shall be valid and binding upon the Company. If a certificate contains a printed or mechanically reproduced signature of a person, the Company may issue the certificate, notwithstanding that the person has ceased to be a director or an officer of the Company and the certificate is as valid as if such person were a director or an officer at the date of its issue. Any certificate representing shares of a class publicly traded on any stock exchange shall be valid and binding on the Company if it complies with the rules of such exchange whether or not it otherwise complies with this Article. 12. Except as the directors may determine, each shareholder's shares may be evidenced by any number of certificates so long as the aggregate of the shares stipulated in such certificates equals the aggregate registered in the name of the shareholder. 13. Where shares are registered in the names of two or more persons, the Company shall not be bound to issue more than one certificate or set of certificates, and such certificate or set of certificates shall be delivered to the person first named on the Register. 14. Any certificate that has become worn, damaged or defaced may, upon its surrender to the directors, be cancelled and replaced by a new certificate. Any certificate that has become lost or destroyed may be replaced by a new certificate upon proof of such loss or destruction to the satisfaction of the directors and the furnishing to the Company of such undertakings of indemnity as the directors deem adequate. 15. The sum of one dollar or such other sum as the directors from time to time determine shall be paid to the Company for every certificate other than the first certificate issued to any holder in respect of any share or shares. 16. The directors may cause one or more branch Registers of shareholders to be kept in any place or places, whether inside or outside of Nova Scotia. TRANSFER OF SHARES 17. The instrument of transfer of any share in the Company shall be signed by the transferor. The transferor shall be deemed to remain the holder of such share until the name of the transferee is entered in the Register in respect thereof and shall be entitled to receive any dividend declared thereon before the registration of the transfer. 18. The instrument of transfer of any share shall be in writing in the following form or to the following effect or in such other form as the directors may approve from time to time: For value received, __________ hereby sell, assign, and transfer unto ________, shares in the capital of the Company represented by the within certificate, and do hereby irrevocably constitute and appoint -4- ____________ attorney to transfer such shares on the books of the Company with full power of substitution in the premises. Dated the ___ day of _____________, _____ Witness: ________________________________ 19. Every instrument of transfer shall be left for registration at the Office of the Company, or at any office of its transfer agent where a Register is maintained, together with the certificate of the shares to be transferred and such other evidence as the Company may require to prove title to or the right to transfer the shares. 20. The directors may require that a fee determined by them be paid before or after registration of any transfer. 21. Every instrument of transfer shall, after its registration, remain in the custody of the Company. Any instrument of transfer that the directors decline to register shall, except in case of fraud, be returned to the person who deposited it. TRANSMISSION OF SHARES 22. The executors or administrators of a deceased shareholder (not being one of several joint holders) shall be the only persons recognized by the Company as having any title to the shares registered in the name of such shareholder. When a share is registered in the names of two or more joint holders, the survivor or survivors and the executors or administrators of the deceased shareholder or shareholders, shall be the only persons recognized by the Company as having any title to, or interest in, such share. 23. Notwithstanding anything in these Articles, if the Company has only one shareholder (not being one of several joint holders) and that shareholder dies, the executors or administrators of the deceased shareholder shall be entitled to register themselves in the Register as the holders of the shares registered in the name of the deceased shareholder whereupon they shall have all the rights given by these Articles and by law to shareholders. 24. Any person entitled to shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer, upon producing such evidence of entitlement as the directors require, may be registered as a shareholder in respect of such shares, or may, without being registered, transfer such shares subject to the provisions of these Articles respecting the transfer of shares. The directors shall have the same right to refuse registration as if the transferee were named in an ordinary transfer presented for registration. SURRENDER OF SHARES 25. The directors may accept the surrender of any share by way of compromise of any question as to the holder being properly registered in respect thereof. Any share so surrendered may be disposed of in the same manner as a forfeited share. -5- SHARE WARRANT 26. The Company, with respect to any fully paid-up shares, may issue warrants ("Share Warrants") stating that the bearer is entitled to the shares therein specified, and may provide, by coupons or otherwise, for the payment of future dividends on the shares included in the Share Warrants. 27. The directors may determine and vary the conditions upon which Share Warrants will be issued and, without limiting the generality of the foregoing, may determine the conditions upon which (1) a new Share Warrant or coupon will be issued in the place of one worn out, defaced, lost or destroyed, or (2) the bearer of a Share Warrant will be entitled to attend and vote at general meetings, or (3) a Share Warrant may be surrendered and the name of the bearer entered in the Register in respect of the shares therein specified. Subject to such conditions and to these Articles the bearer of a Share Warrant shall be a shareholder to the full extent. The bearer of a Share Warrant shall be subject to the conditions for the time being in force, whether made before or after the issue of the Share Warrant. INCREASE AND REDUCTION OF CAPITAL 28. Subject to the Act, the Company may by resolution of its shareholders increase its share capital by the creation of new shares of such amount as it thinks expedient. 29. Subject to the Act, the new shares may be issued upon such terms and conditions and with such rights, privileges, limitations, restrictions and conditions attached thereto as the Company by resolution of its shareholders determines or, if no direction is given, as the directors determine. 30. Except as otherwise provided by the conditions of issue, or by these Articles, any capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the provisions herein contained with reference to transfer and transmission, and otherwise. 31. The Company may, by special resolution where required, reduce its share capital in any way and with and subject to any incident authorized and consent required by law. -6- ALTERATION OF CAPITAL 32. Subject to the Act, the Company may by resolution of its shareholders: (1) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (2) convert all or any of its paid-up shares into stock and reconvert that stock into paid-up shares of any denomination; (3) exchange shares of one denomination for another; or (4) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. 33. Subject to the Act, the Company may by special resolution: (1) subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum, so, however, that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived and the special resolution whereby any share is subdivided may determine that as between the holders of the shares resulting from such subdivision, one or more of such shares shall have some preference or special advantage as regards dividend, capital, voting or otherwise, over, or as compared with, the others or other; (2) convert any part of its issued or unissued share capital into preference shares redeemable or purchasable by the Company; (3) provide for the issue of shares without any nominal or par value provided that, upon any such issue, a declaration executed by the Secretary must be filed with the Registrar stating the number of shares issued and the amount received therefor; (4) convert all or any of its previously authorized, unissued or issued, fully paid-up shares, other than preferred shares, with nominal or par value into the same number of shares without any nominal or par value, and reduce, maintain or increase accordingly its liability on any of its shares so converted; provided that the power to reduce its liability on any of its shares so converted may, where it results in a reduction of capital, only be exercised subject to confirmation by the court as provided by the Act; or (5) convert all or any of its previously authorized, unissued or issued, fully paid-up shares without nominal or par value into the same or a different number of shares with nominal or par value, and for such purpose the shares issued without nominal or par value and replaced by shares with a nominal or par value shall be considered as fully paid, but their aggregate par value shall not exceed the value of the net assets of the Company as represented by the shares without par value issued before the conversion. -7- 34. Subject to the Act and any provisions attached to such shares, the Company may redeem, purchase or acquire any of its shares and the directors may determine the manner and the terms for redeeming, purchasing or acquiring such shares and may provide a sinking fund on such terms as they think fit for the redemption, purchase or acquisition of shares of any class or series. INTEREST ON SHARE CAPITAL 35. The Company may pay interest at a rate not exceeding 6% per year on share capital issued and paid-up for the purpose of raising funds to defray the expenses of the construction of any works or buildings or the provision of any plant which cannot be operated profitably for a lengthy period of time. Such interest may be paid for such period and may be charged to capital as part of the cost of construction of the work or building or of the provision of the plant. The payment of the interest shall not operate to reduce the amount paid-up on the shares in respect of which it is paid. The accounts of the Company shall show full particulars of the payment during the period to which the accounts relate. CLASSES AND SERIES OF SHARES 36. Subject to the Act and the Memorandum, and without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights, or with such restrictions, whether in regard to dividends, voting, return of share capital or otherwise, as the Company may from time to time determine by special resolution. MEETINGS AND VOTING BY CLASS OR SERIES 37. Where the holders of shares of a class or series have, under the Act, the Memorandum, the terms or conditions attaching to such shares or otherwise, the right to vote separately as a class in respect of any matter then, except as provided in the Act, the Memorandum, these Articles or such terms or conditions, all the provisions in these Articles concerning general meetings (including, without limitation, provisions respecting notice, quorum and procedure) shall, mutatis mutandis, apply to every meeting of holders of such class or series of shares convened for the purpose of such vote. 38. Unless the rights, privileges, terms or conditions attached to a class or series of shares provide otherwise, such class or series of shares shall not have the right to vote separately as a class or series upon an amendment to the Memorandum or Articles to: (1) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series; (2) effect an exchange, reclassification or cancellation of all or part of the shares of such class or series; or -8- (3) create a new class or series of shares equal or superior to the shares of such class or series. BORROWING POWERS 39. The directors on behalf of the Company may: (1) raise or borrow money for the purposes of the Company or any of them; (2) secure, subject to the sanction of a special resolution where required by the Act, the repayment of funds so raised or borrowed in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the execution and delivery of mortgages of the Company's real or personal property, or by the issue of bonds, debentures or other securities of the Company secured by mortgage or other charge upon all or any part of the property of the Company, both present and future; (3) sign or endorse bills, notes, acceptances, cheques, contracts, and other evidence of or securities for funds borrowed or to be borrowed for the purposes aforesaid; (4) pledge debentures as security for loans; (5) guarantee obligations of any person. 40. Bonds, debentures and other securities may be made assignable, free from any equities between the Company and the person to whom such securities were issued. 41. Any bonds, debentures and other securities may be issued at a discount, premium or otherwise and with special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of directors and other matters. GENERAL MEETINGS 42. Ordinary general meetings of the Company shall be held at least once in every calendar year at such time and place as may be determined by the directors and not later than 15 months after the preceding ordinary general meeting. All other meetings of the Company shall be called special general meetings. Ordinary or special general meetings may be held either within or without the Province of Nova Scotia. 43. The Chair, President and Chief Executive Officer, Chief Financial Officer or the directors may at any time convene a special general meeting, and the directors, upon the requisition of shareholders in accordance with the Act shall forthwith proceed to convene such meeting or meetings to be held at such time and place or times and places as the directors determine. 44. The requisition shall state the objects of the meeting requested, be signed by the requisitionists and deposited at the Office of the Company. It may consist of several documents in like form each signed by one or more of the requisitionists. -9- 45. At least seven clear days' notice, or such longer period of notice as may be required by the Act, of every general meeting, specifying the place, day and hour of the meeting and, when special business is to be considered, the general nature of such business, shall be given to the shareholders entitled to be present at such meeting by notice given as permitted by these Articles. With the consent in writing of all the shareholders entitled to vote at such meeting, a meeting may be convened by a shorter notice and in any manner they think fit, or notice of the time, place and purpose of the meeting may be waived by all of the shareholders. 46. When it is proposed to pass a special resolution, the two meetings may be convened by the same notice, and it shall be no objection to such notice that it only convenes the second meeting contingently upon the resolution being passed by the requisite majority at the first meeting. 47. The accidental omission to give notice to a shareholder, or non-receipt of notice by a shareholder, shall not invalidate any resolution passed at any general meeting. RECORD DATES 48. (1) The directors may fix in advance a date as the record date for the determination of shareholders (a) entitled to receive payment of a dividend or entitled to receive any distribution; (b) entitled to receive notice of a meeting; or (c) for any other purpose. (2) If no record date is fixed, the record date for the determination of shareholders (a) entitled to receive notice of a meeting shall be the day immediately preceding the day on which the notice is given, or, if no notice is given, the day on which the meeting is held; and (b) for any other purpose shall be the day on which the directors pass the resolution relating to the particular purpose. PROCEEDINGS AT GENERAL MEETINGS 49. The business of an ordinary general meeting shall be to receive and consider the financial statements of the Company and the report of the directors and the report, if any, of the auditors, to elect directors in the place of those retiring, to appoint the auditors of the Company for the ensuing fiscal year and to transact any other business which under these Articles ought to be transacted at an ordinary general meeting. 50. No business shall be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. A corporate shareholder of the Company that has a duly authorized agent or representative present at any such meeting shall for the purpose of this Article be deemed to be personally present at such meeting. -10- 51. Subject to the Act, if the Company has 2 or more shareholders, a quorum for the transaction of business at a general meeting shall be 2 persons present in person, or by proxy and holding or representing by proxy, not less than five percent (5%) of the shares entitled to vote at the general meeting. 52. The Chair shall be entitled to take the chair at every general meeting or, if there be no Chair, or if the Chair is not present within fifteen 15 minutes after the time appointed for holding the meeting, the President and Chief Executive Officer or, failing the President and the Chief Executive Officer, a vice-president shall be entitled to take the chair. If the Chair, the President and Chief Executive Officer or a vice-president is not present within 15 minutes after the time appointed for holding the meeting or if all such persons present decline to take the chair, the shareholders present entitled to vote at the meeting shall choose another director as chair and if no director is present or if all the directors present decline to take the chair, then such shareholders shall choose one of their number to be chair. 53. If within half an hour from the time appointed for a general meeting a quorum is not present, the meeting, if it was convened pursuant to a requisition of shareholders, shall be dissolved. If it was convened in any other way, it shall stand adjourned to the same day, in the next week, at the same time and place. If at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum and may hold the meeting. 54. Subject to the Act, at any general meeting a resolution put to the meeting shall be decided by a show of hands unless, either before or on the declaration of the result of the show of hands, a poll is demanded by the chair, a shareholder or a proxyholder; and unless a poll is so demanded, a declaration by the chair that the resolution has been carried, carried by a particular majority, lost or not carried by a particular majority and an entry to that effect in the Company's book of proceedings shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour or against such resolution. 55. When a poll is demanded, it shall be taken in such manner and at such time and place as the chair directs, and either at once or after an interval or adjournment or otherwise. The result of the poll shall be the resolution of the meeting at which the poll was demanded. The demand of a poll may be withdrawn. When any dispute occurs over the admission or rejection of a vote, it shall be resolved by the chair and such determination made in good faith shall be final and conclusive. 56. The chair shall not have a casting vote in addition to any vote or votes that the chair has as a shareholder. 57. The chair of a general meeting may with the consent of the meeting adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting that was adjourned. 58. Any poll demanded on the election of a chair or on a question of adjournment shall be taken forthwith without adjournment. 59. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. -11- VOTES OF SHAREHOLDERS 60. Subject to the Act and to any provisions attached to any class or series of shares concerning voting rights (1) on a show of hands every shareholder present in person, every duly authorized representative of a corporate shareholder, and, if not prevented from voting by the Act, every proxyholder, shall have one vote; and (2) on a poll every shareholder present in person, every duly authorized representative of a corporate shareholder, and every proxyholder, shall have one vote for every share held; whether or not such representative or proxyholder is a shareholder. 61. Any person entitled to transfer shares upon the death or bankruptcy of any shareholder or in any way other than by allotment or transfer may vote at any general meeting in respect thereof in the same manner as if such person were the registered holder of such shares so long as the directors are satisfied at least 48 hours before the time of holding the meeting of such person's right to transfer such shares. 62. Where there are joint registered holders of any share, any of such holders may vote such share at any meeting, either personally or by proxy, as if solely entitled to it. If more than one joint holder is present at any meeting, personally or by proxy, the one whose name stands first on the Register in respect of such share shall alone be entitled to vote it. Several executors or administrators of a deceased shareholder in whose name any share stands shall for the purpose of this Article be deemed joint holders thereof. 63. Votes may be cast either personally or by proxy or, in the case of a corporate shareholder by a representative duly authorized under the Act. 64. A proxy shall be in writing and executed in the manner provided in the Act. A proxy or other authority of a corporate shareholder does not require its seal. Holders of Share Warrants shall not be entitled to vote by proxy in respect of the shares included in such warrants unless otherwise expressed in such warrants. 65. A shareholder of unsound mind in respect of whom an order has been made by any court of competent jurisdiction may vote by guardian or other person in the nature of a guardian appointed by that court, and any such guardian or other person may vote by proxy. 66. A proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority shall be deposited at the Office of the Company or with an agent of the Company. The directors may, by resolution, fix a time not exceeding 72 hours excluding Saturdays and holidays preceding any meeting or adjourned meeting before which time proxies to be used at that meeting must be deposited with the Company at its Office or with an agent of the Company. Notice of the requirement for depositing proxies shall be given in the notice calling the meeting. The chair of the meeting shall determine all questions as to validity of proxies and other instruments of authority. -12- 67. A vote given in accordance with the terms of a proxy shall be valid notwithstanding the previous death of the principal, the revocation of the proxy, or the transfer of the share in respect of which the vote is given, provided no intimation in writing of the death, revocation or transfer is received at the Office of the Company before the meeting or by the chair of the meeting before the vote is given. 68. Every form of proxy shall comply with the Act and its regulations and subject thereto may be in the following form: I, __________ of __________ being a shareholder of _________ hereby appoint ___________ of _________ (or failing him/her _________ of __________) as my proxyholder to attend and to vote for me and on my behalf at the ordinary/special general meeting of the Company, to be held on the __ day _________ ____ of and at any adjournment thereof, or at any meeting of the Company which may be held prior to [insert specified date or event]. [If the proxy is solicited by or behalf of the management of the Company, insert a statement to that effect.] Dated this _________ day of _________ ____. Shareholder 69. Any resolution passed by the directors, notice of which has been given to the shareholders in the manner in which notices are hereinafter directed to be given and which is, within one month after it has been passed, ratified and confirmed in writing by shareholders entitled on a poll to three-fifths of the votes, shall be as valid and effectual as a resolution of a general meeting. This Article shall not apply to a resolution for winding up the Company or to a resolution dealing with any matter that by statute or these Articles ought to be dealt with by a special resolution or other method prescribed by statute. 70. A resolution, including a special resolution, in writing and signed by every shareholder who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such shareholders at a meeting and satisfies all of the requirements of the Act respecting meetings of shareholders. DIRECTORS 71. Unless otherwise determined by resolution of shareholders, the number of directors shall not be less than one or more than seventeen. 72. Notwithstanding anything herein contained the directors of the Company on the date of its continuance shall continue to be the directors of the Company until their successors are appointed or they otherwise cease to be directors in accordance with these Articles. 73. Subject to applicable law, the directors may be paid out of the funds or the capital of the Company as remuneration for their service such sums, shares or options, if any, as the -13- directors may determine, and such remuneration shall be divided among them in such proportions and manner as the directors determine. The directors may also be paid their reasonable travelling, hotel and other expenses incurred in attending meetings of directors and otherwise in the execution of their duties as directors. 74. The continuing directors may act notwithstanding any vacancy in their body, but if their number falls below the minimum permitted, the directors shall not, except in emergencies or for the purpose of filling vacancies, act so long as their number is below the minimum. 75 A director may, in conjunction with the office of director, and on such terms as to remuneration and otherwise as the directors arrange or determine, hold any other office or place of profit under the Company or under any company in which the Company is a shareholder or is otherwise interested. 76. The office of a director shall ipso facto be vacated, if the director: (1) becomes bankrupt or makes an assignment for the benefit of creditors; (2) is, or is found by a court of competent jurisdiction to be, of unsound mind; (3) by notice in writing to the Secretary at the Company's Office, resigns the office of director; or (4) is removed in the manner provided by these Articles. 77. It shall be the duty of a director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company to declare the nature of such interest at a meeting of the directors of the Company. In the case of a proposed contract the declaration required to be made shall be made at a meeting of the directors at which the question of entering into the contract is first taken into consideration, or if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after the director became so interested, and in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after the director becomes so interested. A general notice given to the directors of the Company by a director to the effect that such director is a member of a specified company or firm and is to be regarded as interested in any contract which may, after the date of the notice, be made with that company or firm shall be deemed to be a sufficient declaration of interest in relation to any contract so made. ELECTION OF DIRECTORS 78. At the dissolution of every ordinary general meeting at which their successors are elected, all the directors shall retire from office and be succeeded by the directors elected at such meeting. Retiring directors shall be eligible for re-election. 79. If at any ordinary general meeting at which an election of directors ought to take place no such election takes place, or if no ordinary general meeting is held in any year or period of years, the retiring directors shall continue in office until their successors are elected. -14- 80. The Company may by resolution of its shareholders elect any number of directors permitted by these Articles and may determine or alter their qualification. 81. The Company may, by special resolution or in any other manner permitted by statute, remove any director before the expiration of such director's period of office and may, if desired, appoint a replacement to hold office during such time only as the director so removed would have held office. 82. The directors may appoint any other person as a director so long as the total number of directors does not at any time exceed the maximum number permitted. No such appointment, except to fill a casual vacancy, shall be effective unless two-thirds of the directors concur in it. Any casual vacancy occurring among the directors may be filled by the directors, but any person so chosen shall retain office only so long as the vacating director would have retained it if the vacating director had continued as director. CHAIR OF THE BOARD 83. The directors may elect one of their number to be chair and may determine the period during which the chair is to hold office. The chair shall perform such duties and receive such special remuneration as the directors may provide. PRESIDENT AND CHIEF EXECUTIVE OFFICER AND VICE-PRESIDENTS 84. The directors shall appoint the President and Chief Executive Officer of the Company, who need not be a director, and may determine the period for which the President and Chief Executive Officer is to hold office. The President and Chief Executive Officer shall have general supervision of the business of the Company and shall perform such duties as may be assigned from time to time by the directors. 85. The directors may also appoint vice-presidents, who need not be directors, and may determine the periods for which they are to hold office. A vice-president shall, at the request of the President and Chief Executive Officer or the directors and subject to the directions of the directors, perform the duties of the President and Chief Executive Officer during the absence, illness or incapacity of the President and Chief Executive Officer, and shall also perform such duties as may be assigned by the President and Chief Executive Officer or the directors. SECRETARY AND TREASURER 86. The directors shall appoint a Secretary of the Company to keep minutes of shareholders' and directors' meetings and perform such other duties as may be assigned by the directors. The directors may also appoint a temporary substitute for the Secretary who shall, for the purposes of these Articles, be deemed to be the Secretary. 87. The directors may appoint a treasurer of the Company to carry out such duties as the directors may assign. -15- OFFICERS 88. The directors may elect or appoint such other officers of the Company, having such powers and duties, as they think fit. 89. If the directors so decide the same person may hold more than one of the offices provided for in these Articles. 90. Notwithstanding anything herein contained the officers of the Company on the date of its continuance shall continue to hold office until their successors are appointed or they otherwise cease to hold office in accordance with these Articles. PROCEEDINGS OF DIRECTORS 91. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings and proceedings, as they think fit. Until otherwise determined, a quorum for meetings of the board shall be: (1) in the case of notice of at least 48 hours before the time fixed for a meeting, a majority of the directors then in office; and (2) in the case of notice of least 24 hours (but less than 48 hours) before the time fixed for a meeting, the number of directors then in office, less three (3). 92. If at a meeting of directors a quorum is not present, the directors may adjourn the meeting to a fixed time and place (provided they shall give written notice of such time and place to each director not in attendance). At the meeting immediately following the adjourned meeting, the directors present at such meeting shall constitute a quorum; provided however, that unless a full quorum is present as provided in section 91, the directors present at such meeting may not transact any business except as specifically set forth in the notice of meeting. 93. A director may participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed to be present at that meeting for purposes of these Articles. 94. Meetings of directors may be held either within or without the Province of Nova Scotia and the directors may from time to time make arrangements relating to the time and place of holding directors' meetings, the notices to be given for such meetings and what meetings may be held without notice. Unless otherwise provided by such arrangements: (1) A meeting of directors may be held at the close of every ordinary general meeting of the Company without notice. (2) Notice of every other directors' meeting may be given as permitted by these Articles to each director at least 24 hours before the time fixed for the meeting. -16- (3) A meeting of directors may be held without formal notice if all the directors are present or if those absent have signified their assent to such meeting or their consent to the business transacted at such meeting. 95. The President and Chief Executive Officer or any director may at any time, and the Secretary, upon the request of the President and Chief Executive Officer or any director, shall summon a meeting of the directors to be held at the Office of the Company. The President and Chief Executive Officer, the Chair or a majority of the directors may at any time, and the Secretary, upon the request of the President and Chief Executive Officer, the Chair or a majority of the directors, shall summon a meeting to be held elsewhere. 96. (1) Questions arising at any meeting of directors shall be decided by a majority of votes. The chair of the meeting may vote as a director but shall not have a second or casting vote. (2) At any meeting of directors the chair shall receive and count the vote of any director not present in person at such meeting on any question or matter arising at such meeting whenever such absent director has indicated by telegram, letter or other writing lodged with the chair of such meeting the manner in which the absent director desires to vote on such question or matter and such question or matter has been specifically mentioned in the notice calling the meeting as a question or matter to be discussed or decided thereat. 97. If no Chair is elected, or if at any meeting of directors the Chair is not present within five minutes after the time appointed for holding the meeting, or declines to take the chair, the President and Chief Executive Officer, if a director, shall preside. If the President and Chief Executive Officer is not a director, is not present at such time or declines to take the chair, a vice-president who is also a director shall preside. If no person described above is present at such time and willing to take the chair, the directors present shall choose some one of their number to be chair of the meeting. 98. A meeting of the directors at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the directors generally. 99. The directors may delegate any of their powers to committees consisting of such number of directors as they think fit. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on them by the directors. 100. The meetings and proceedings of any committee of directors shall be governed by the provisions contained in these Articles for regulating the meetings and proceedings of the directors insofar as they are applicable and are not superseded by any regulations made by the directors. 101. All acts done at any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of the director or person so acting, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director. -17- 102. A resolution in writing and signed by every director who would be entitled to vote on the resolution at a meeting is as valid as if it were passed by such directors at a meeting. 103. If any one or more of the directors is called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the Company or the business thereof, the Company may remunerate the director or directors so doing, either by a fixed sum or by a percentage of profits or otherwise. Such remuneration shall be determined by the directors and may be either in addition to or in substitution for remuneration otherwise authorized by these Articles. REGISTERS 104. The directors shall cause to be kept at the Company's Office in accordance with the provisions of the Act a Register of the shareholders of the Company, a register of the holders of bonds, debentures and other securities of the Company and a register of its directors. Branch registers of the shareholders and of the holders of bonds, debentures and other securities may be kept elsewhere, either within or without the Province of Nova Scotia, in accordance with the Act. MINUTES 105. The directors shall cause minutes to be entered in books designated for the purpose: (1) of all appointments of officers; (2) of the names of directors present at each meeting of directors and of any committees of directors; and (3) of all resolutions and proceedings of meetings of shareholders and of directors. Any such minutes of any meeting of directors or of any committee of directors or of shareholders, if purporting to be signed by the chair of such meeting or by the chair of the next succeeding meeting, shall be receivable as prima facie evidence of the matters stated in such minutes. POWERS OF DIRECTORS 106. The management of the business of the Company is vested in the directors who, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the shareholders, but subject nevertheless to the provisions of any statute, the Memorandum or these Articles. No modification of the Memorandum or these Articles shall invalidate any prior act of the directors that would have been valid if such modification had not been made. -18- 107. Without restricting the generality of the terms of any of these Articles and without prejudice to the powers conferred thereby, the directors may: (1) take such steps as they think fit to carry out any agreement or contract made by or on behalf of the Company; (2) pay costs, charges and expenses preliminary and incidental to the promotion, formation, establishment, and registration of the Company; (3) purchase or otherwise acquire for the Company any property, rights or privileges that the Company is authorized to acquire, at such price and generally on such terms and conditions as they think fit; (4) pay for any property, rights or privileges acquired by, or services rendered to the Company either wholly or partially in cash or in shares (fully paid-up or otherwise), bonds, debentures or other securities of the Company; (5) subject to the Act, secure the fulfilment of any contracts or engagements entered into by the Company by mortgaging or charging all or any of the property of the Company and its unpaid capital for the time being, or in such other manner as they think fit; (6) appoint, remove or suspend at their discretion such experts, managers, secretaries, treasurers, officers, clerks, agents and servants for permanent, temporary or special services, as they from time to time think fit, and determine their powers and duties and fix their salaries or emoluments and require security in such instances and to such amounts as they think fit; (7) accept a surrender of shares from any shareholder insofar as the law permits and on such terms and conditions as may be agreed; (8) appoint any person or persons to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, execute and do all such deeds and things as may be required in relation to such trust, and provide for the remuneration of such trustee or trustees; (9) institute, conduct, defend, compound or abandon any legal proceedings by and against the Company, its directors or its officers or otherwise concerning the affairs of the Company, and also compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company; (10) refer any claims or demands by or against the Company to arbitration and observe and perform the awards; (11) make and give receipts, releases and other discharges for amounts payable to the Company and for claims and demands of the Company; (12) determine who may exercise the borrowing powers of the Company and sign on the Company's behalf bonds, debentures or other securities, bills, notes, receipts, -19- acceptances, assignments, transfers, hypothecations, pledges, endorsements, cheques, drafts, releases, contracts, agreements and all other instruments and documents; (13) provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular appoint any person to be the attorney or agent of the Company with such powers (including power to sub-delegate) and upon such terms as may be thought fit; (14) invest and deal with any funds of the Company in such securities and in such manner as they think fit; and vary or realize such investments; (15) subject to the Act, execute in the name and on behalf of the Company in favour of any director or other person who may incur or be about to incur any personal liability for the benefit of the Company such mortgages of the Company's property, present and future, as they think fit; (16) give any officer or employee of the Company a commission on the profits of any particular business or transaction or a share in the general profits of the Company; (17) set aside out of the profits of the Company before declaring any dividend such amounts as they think proper as a reserve fund to meet contingencies or provide for dividends, depreciation, repairing, improving and maintaining any of the property of the Company and such other purposes as the directors may in their absolute discretion think in the interests of the Company; and invest such amounts in such investments as they think fit, and deal with and vary such investments, and dispose of all or any part of them for the benefit of the Company, and divide the reserve fund into such special funds as they think fit, with full power to employ the assets constituting the reserve fund in the business of the Company without being bound to keep them separate from the other assets; (18) make, vary and repeal rules respecting the business of the Company, its officers and employees, the shareholders of the Company or any section or class of them; (19) enter into all such negotiations and contracts, rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the Company; (20) provide for the management of the affairs of the Company in such manner as they think fit. SOLICITORS 108. The Company may employ or retain solicitors any of whom may, at the request or on the instruction of the directors, the Chair, the President or a managing director, attend meetings of the directors or shareholders, whether or not the solicitor is a shareholder or a director of the Company. A solicitor who is also a director may nevertheless charge for services rendered to the Company as a solicitor. -20- THE SEAL 109. The directors shall arrange for the safe custody of the common seal of the Company (the "Seal"). The Seal may be affixed to any instrument in the presence of and contemporaneously with the attesting signature of (i) any director or officer acting within such person's authority or (ii) any person under the authority of a resolution of the directors or a committee thereof. For the purpose of certifying documents or proceedings the Seal may be affixed by any director or the President, a vice-president, the Secretary, an assistant secretary or any other officer of the Company without the authorization of a resolution of the directors. 110. The Company may have facsimiles of the Seal which may be used interchangeably with the Seal. DIVIDENDS 111. The directors may from time to time declare such dividend as they deem proper upon shares of the Company according to the rights and restrictions attached to any class or series of shares, and may determine the date upon which such dividend will be payable and that it will be payable to the persons registered as the holders of the shares on which it is declared at the close of business upon a record date. No transfer of such shares registered after the record date shall pass any right to the dividend so declared. 112. No dividends shall be payable except out of the profits, retained earnings or contributed surplus of the Company and no interest shall be payable on any dividend except insofar as the rights attached to any class or series of shares provide otherwise. 113. The declaration of the directors as to the amount of the profits, retained earnings or contributed surplus of the Company shall be conclusive. 114. The directors may from time to time pay to the shareholders such interim dividends as in their judgment the position of the Company justifies. 115. Subject to the Memorandum, these Articles and the rights and restrictions attached to any class or series of shares, dividends may be declared and paid to the shareholders in proportion to the amount of capital paid-up on the shares (not including any capital paid-up bearing interest) held by them respectively. 116. The directors may deduct from the dividends payable to any shareholder amounts due and payable by the shareholder to the Company and may apply the same in or towards satisfaction of such amounts so due and payable. 117. The directors may retain the dividends payable upon shares to which a person is entitled or entitled to transfer upon the death or bankruptcy of a shareholder or in any way other than by allotment or transfer, until such person has become registered as the holder of such shares or has duly transferred such shares. -21- 118. The directors may declare that a dividend be paid by the distribution of cash, paid-up shares (at par or at a premium), debentures, bonds or other securities of the Company or of any other company or any other specific assets held or to be acquired by the Company or in any one or more of such ways. 119. The directors may settle any difficulty that may arise in regard to the distribution of a dividend as they think expedient, and in particular without restricting the generality of the foregoing may issue fractional certificates, may fix the value for distribution of any specific assets, may determine that cash payments will be made to any shareholders upon the footing of the value so fixed or that fractions may be disregarded in order to adjust the rights of all parties, and may vest cash or specific assets in trustees upon such trusts for the persons entitled to the dividend as may seem expedient to the directors. 120. Any person registered as a joint holder of any share may give effectual receipts for all dividends and payments on account of dividends in respect of such share. 121. Unless otherwise determined by the directors, any dividend may be paid by a cheque or warrant delivered to or sent through the post to the registered address of the shareholder entitled, or, when there are joint holders, to the registered address of that one whose name stands first on the register for the shares jointly held. Every cheque or warrant so delivered or sent shall be made payable to the order of the person to whom it is delivered or sent. The mailing or other transmission to a shareholder at the shareholder's registered address (or, in the case of joint shareholders at the address of the holder whose name stands first on the register) of a cheque payable to the order of the person to whom it is addressed for the amount of any dividend payable in cash after the deduction of any tax which the Company has properly withheld, shall discharge the Company's liability for the dividend unless the cheque is not paid on due presentation. If any cheque for a dividend payable in cash is not received, the Company shall issue to the shareholder a replacement cheque for the same amount on such terms as to indemnity and evidence of non-receipt as the directors may impose. No shareholder may recover by action or other legal process against the Company any dividend represented by a cheque that has not been duly presented to a banker of the Company for payment or that otherwise remains unclaimed for 6 years from the date on which it was payable. ACCOUNTS 122. The directors shall cause proper books of account to be kept of the amounts received and expended by the Company, the matters in respect of which such receipts and expenditures take place, all sales and purchases of goods by the Company, and the assets, credits and liabilities of the Company. 123. The books of account shall be kept at the head office of the Company or at such other place or places as the directors may direct. 124. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the accounts and books of the Company or any of them shall be open to inspection of the shareholders, and no shareholder shall have any -22- right to inspect any account or book or document of the Company except as conferred by statute or authorized by the directors or a resolution of the shareholders. 125. At the ordinary general meeting in every year the directors shall lay before the Company such financial statements and reports in connection therewith as may be required by the Act or other applicable statute or regulation thereunder and shall distribute copies thereof at such times and to such persons as may be required by statute or regulation. AUDITORS AND AUDIT 126. Except in respect of a financial year for which the Company is exempt from audit requirements in the Act, the Company shall at each ordinary general meeting appoint an auditor or auditors to hold office until the next ordinary general meeting. If at any general meeting at which the appointment of an auditor or auditors is to take place and no such appointment takes place, or if no ordinary general meeting is held in any year or period of years, the directors shall appoint an auditor or auditors to hold office until the next ordinary general meeting. 127. The first auditors of the Company may be appointed by the directors at any time before the first ordinary general meeting and the auditors so appointed shall hold office until such meeting unless previously removed by a resolution of the shareholders, in which event the shareholders may appoint auditors. 128. The directors may fill any casual vacancy in the office of the auditor but while any such vacancy continues the surviving or continuing auditor or auditors, if any, may act. 129. The Company may appoint as auditor any person, including a shareholder, not disqualified by statute. 130. An auditor may be removed or replaced in the circumstances and in the manner specified in the Act. 131. The remuneration of the auditors shall be fixed by the shareholders, or by the directors pursuant to authorization given by the shareholders, except that the remuneration of an auditor appointed to fill a casual vacancy may be fixed by the directors. 132. The auditors shall conduct such audit as may be required by the Act and their report, if any, shall be dealt with by the Company as required by the Act. NOTICES 133. A notice (including any communication or document) shall be sufficiently given, delivered or served by the Company upon a shareholder, director, officer or auditor by personal delivery at such person's registered address (or, in the case of a director, officer or auditor, last known address) or by prepaid mail, telegraph, telex, facsimile machine or other electronic means of communication addressed to such person at such address. 134. Shareholders having no registered address shall not be entitled to receive notice. -23- 135. The holder of a share warrant shall not, unless otherwise expressed therein, be entitled in respect thereof to notice of any general meeting of the Company. 136. All notices with respect to registered shares to which persons are jointly entitled may be sufficiently given to all joint holders thereof by notice given to whichever of such persons is named first in the Register for such shares. 137. Any notice sent by mail shall be deemed to be given, delivered or served on the earlier of actual receipt and the third business day following that upon which it is mailed, and in proving such service it shall be sufficient to prove that the notice was properly addressed and mailed with the postage prepaid thereon. Any notice given by electronic means of communication shall be deemed to be given when entered into the appropriate transmitting device for transmission. A certificate in writing signed on behalf of the Company that the notice was so addressed and mailed or transmitted shall be conclusive evidence thereof. 138. Every person who by operation of law, transfer or other means whatsoever becomes entitled to any share shall be bound by every notice in respect of such share that prior to such person's name and address being entered on the Register was duly served in the manner hereinbefore provided upon the person from whom such person derived title to such share. 139. Any notice delivered, sent or transmitted to the registered address of any shareholder pursuant to these Articles, shall, notwithstanding that such shareholder is then deceased and that the Company has notice thereof, be deemed to have been served in respect of any registered shares, whether held by such deceased shareholder solely or jointly with other persons, until some other person is registered as the holder or joint holder thereof, and such service shall for all purposes of these Articles be deemed a sufficient service of such notice on the heirs, executors or administrators of the deceased shareholder and all joint holders of such shares. 140. Any notice may bear the name or signature, manual or reproduced, of the person giving the notice written or printed. 141. When a given number of days' notice or notice extending over any other period is required to be given, the day of service and the day upon which such notice expires shall not, unless it is otherwise provided, be counted in such number of days or other period. INDEMNITY 142. Every director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, and the heirs and legal representatives of such person, in the absence of any dishonesty on the part of such person, shall be indemnified by the Company against, and it shall be the duty of the directors out of the funds of the Company to pay, all costs, losses and expenses, including an amount paid to settle an action or claim or satisfy a judgment, that such director, officer or person may incur or become liable to pay in respect of any claim made against such person or civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Company or such body corporate, partnership or other association, whether the Company is -24- a claimant or party to such action or proceeding or otherwise; and the amount for which such indemnity is proved shall immediately attach as a lien on the property of the Company and have priority as against the shareholders over all other claims. 143. No director or officer, former director or officer, or person who acts or acted at the Company's request, as a director or officer of the Company, a body corporate, partnership or other association of which the Company is or was a shareholder, partner, member or creditor, in the absence of any dishonesty on such person's part, shall be liable for the acts, receipts, neglects or defaults of any other director, officer or such person, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company, or through the insufficiency or deficiency of any security in or upon which any of the funds of the Company are invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any funds, securities or effects are deposited, or for any loss occasioned by error of judgment or oversight on the part of such person, or for any other loss, damage or misfortune whatsoever which happens in the execution of the duties of such person or in relation thereto. REMINDERS 144. The directors shall comply with the following provisions of the Act or the CORPORATIONS REGISTRATION ACT (Nova Scotia) where indicated: (1) Keep a current register of shareholders (Section 42). (2) Keep a current register of directors, officers and managers, send to the Registrar a copy thereof and notice of all changes therein (Section 98). (3) Keep a current register of holders of bonds, debentures and other securities (Section 111 and Third Schedule). (4) Send notice to the Registrar of any redemption or purchase of preference shares (Section 50). (5) Send notice to the Registrar of any consolidation, division, conversion or reconversion of the share capital or stock of the Company (Section 53). (6) Send notice to the Registrar of any increase of c apital (Section 55). (7) Call a general meeting every year within the proper time (Section 83). Meetings must be held not later than 15 months after the preceding general meeting. (8) Send to the Registrar copies of all special resolutions (Section 88). (9) Send to the Registrar notice of the address of the Company's registered Office and of all changes in such address (Section 79). -25- (10) Keep proper minutes of all shareholders' meetings and directors' meetings in the Company's minute book kept at the Company's registered Office (Sections 89 and 90). (11) Obtain a certificate under the CORPORATIONS REGISTRATION ACT (Nova Scotia) as soon as business is commenced. (12) Send notice of recognized agent to the Registrar under the CORPORATIONS REGISTRATION ACT (Nova Scotia). (1) EX-5.1 7 EXHIBIT 5.1 Exhibit 5.1 [LETTERHEAD OF STEWART, MCKELVEY, STIRLING & SCALES] File Reference: NS1030-183 April 18, 2000 360NETWORKS INC. 1510 - 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Dear Sirs/Mesdames: RE: 360NETWORKS INC. - FORM F-1 REGISTRATION STATEMENT We are Nova Scotia counsel for 360networks inc. (the "COMPANY"). In this regard, we have been requested to provide an opinion in connection with the issue of the Company's Subordinate Voting Shares (the "SHARES") pursuant to a Form F-1 Registration Statement (the "REGISTRATION STATEMENT"), filed with the United States Securities and Exchange Commission. For the purposes of our opinion, we have examined the following: (a) an executed copy of the Registration Statement; (b) the Memorandum and Articles of the Company as attached to a resolution of the shareholders of the Company filed today with the Registrar of Joint Stock Companies for the Province of Nova Scotia (the "REGISTRAR"); (c) certificate of continuance of the Company issued by the Registrar dated April 18, 2000; (d) certified copy of resolutions of the directors of the Company providing for, among other things, the allotment and issue of the Shares subject to the actions of a Pricing Committee established thereby (the "DIRECTORS' RESOLUTIONS"). For the purposes of this opinion, we have also examined originals, facsimiles or copies certified or otherwise identified to our satisfaction, of documents and instruments, such statutes, such records of corporate proceedings, certificates of corporate officers, certificates of governmental offices and such other documents and materials as we have considered necessary or appropriate. In such examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as 360 networks inc. April 18, 2000 Page 2 originals, the completeness and conformity to the originals of all documents submitted to us as facsimiles or copies, and the authenticity of the originals of such facsimiles or copies. For the purposes of this opinion we have also assumed that : (a) the Memorandum and Articles of the Company in the form that we have reviewed are genuine and complete and will continue to be the Memorandum and Articles of the Company on the date of the issuance subject only to the amendments referred to in paragraph (b) below; (b) special resolutions effectively in the form reviewed by us amending the Memorandum and Articles of the Company of the Company to, INTER ALIA, create the Shares, will have been enacted by the shareholders of the Company (including the passing of all class votes required) prior to the issuance of the Shares and certified copies thereof will have been filed with the Registrar; and (c) the Pricing Committee takes all necessary action contemplated by, and in accordance with, the Directors' Resolutions. We are qualified to express opinions only with respect to the laws of the Province of Nova Scotia and the laws of Canada applicable therein. We are of the opinion that: 1. The Company is a corporation validly continued and existing under the laws of Nova Scotia and has the corporate power and capacity to own and lease its property and assets and to carry on its business as described in the Registration Statement. 2. The Shares, when allotted, issued and paid for pursuant to and in accordance with the transactions contemplated by the Registration Statement, will be issued and outstanding as fully paid and non-assessable shares in the capital of the Company, and such issuance has been duly authorized by the necessary corporate action on the part of the Company. 3. The Company has the corporate power and capacity to execute and deliver the certificates representing the Shares. Consent is hereby given to the use of our name under the captions "Legal Matters" in the Prospectus included in the Registration Statement and to the filing, as an exhibit to the Registration Statement, of this letter. In giving such consent we do not admit that we come within the category of persons whose consent is required under Section 7 of the United States Securities Act of 1933. Yours truly, STEWART, MCKELVEY, STIRLING & SCALES EX-10.35 8 EXHIBIT 10.35 Exhibit 10.35 URBANLINK REORGANIZATION DEFINITIVE AGREEMENT THIS AGREEMENT Dated For Reference the _____ day of April, 2000 BETWEEN: 360NETWORKS INC. ("360") AND: WORLDWIDE FIBER HOLDINGS LTD. ("WFHL") AND: WFI URBANLINK LTD. ("Urbanlink") AND: WHEREAS: A. 360 and WFHL desire to effect a reorganization, as described in this Agreement, by which certain of the Canadian assets of 360 and its Subsidiaries will be transferred to Urbanlink, and by which the shareholdings of Urbanlink will be reorganized. B. 360, WFHL and Urbanlink have entered into this Agreement to record their respective rights and obligations with respect to the reorganization, and certain incidental rights and obligations. IN CONSIDERATION of the mutual agreements in this Agreement and subject to the terms and conditions specified in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS In this Agreement, including the recitals and the schedules, the following words and expressions have the following meanings unless the context otherwise requires: "360-Holdco" means 360 Urbanlink Ltd., an Alberta corporation. "Affiliate" of any Person means any other Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, and for the purposes of this definition "control" (including correlative meanings of the terms "controlled by" and "under common control with") means the power to direct or cause the direction of the management and policies of any Person, whether through the ownership of shares or by contract or otherwise. "Assumed Contracts" means those agreements that are assigned to, and assumed by, Urbanlink as part of the Urbanlink Reorganization. "Carrier Holdco" means Urbanlink Holdings Ltd., an Alberta corporation. "Closing Date" means such date as 360 and WFHL may select, acting reasonably, prior the closing of 360's initial public offering, or such other date as may be agreed between 360 and WFHL. "FOTS3" means Worldwide Fiber (F.O.T.S.) No. 3, Ltd., an Alberta corporation. "Municipal Access Agreements" means Municipal Access Agreements entered into by Urbanlink, or assigned to Urbanlink, prior to the effective date of the Urbanlink Reorganization. "NOC" means 360's Network Operating Center located on the 14th Floor, 1066 West Hastings Street, Vancouver, British Columbia. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Services" means Worldwide Fiber Network Services Ltd., an Alberta corporation. "Subsidiary" shall have the meaning provided in the BUSINESS CORPORATIONS ACT (CANADA). "TransferCos" shall have the meaning provided in Schedule 1. "Transaction Documents" means this Agreement and all such other documents as may be executed and delivered pursuant to this Agreement or pursuant to any other Transaction Documents or that are incidental to the Urbanlink Reorganisation. "Underlying Rights" shall have the meaning provided in Schedule 2. "Urbanlink Assets" means the assets described in Schedule 2. "Urbanlink Reorganization" means the reorganization described in Schedule 1. "Urbanlink" means WFI Urbanlink Ltd., an Alberta corporation. "WFNL" means Worldwide Fiber Networks Ltd., an Alberta corporation. -2- 1.2 SCHEDULES The following schedules are attached to and form part of this Agreement: Schedule Title -------- ----- 1 Urbanlink Reorganization 2 Urbanlink Assets 3 Sublease ARTICLE 2 URBANLINK REORGANIZATION 2.1 URBANLINK REORGANIZATION 360 and WFHL shall effect the Urbanlink Reorganization, as described in Schedule 1. ARTICLE 3 INCIDENTAL OBLIGATIONS 3.1 POST CLOSING OBLIGATIONS Without limiting the generality of Section 4.9, to the extent that Schedule 1 or Schedule 2 contemplates the execution on the Closing Date of co-location agreements, subleases, sublicences and other agreements incidental to the Urbanlink Reorganization, and to the extent that consents from third parties are required for any of the transfers, assignments, sublicences or other transactions contemplated in Schedule 1 or Schedule 2, then to the extent that any of the foregoing have not been entered into or obtained prior to the Closing Date, 360 and WFHL shall use all reasonable commercial efforts, and 360 and WFHL shall cause Urbanlink to use all reasonable commercial efforts, to enter into the same or to obtain the same as soon as may be practicable after the Closing Date. 3.2 SWAPS Urbanlink and 360 acknowledge and agree that it may be necessary or desirable, from time to time, for 360 (or the Subsidiaries of 360) and Urbanlink to swap strands or other telecommunications assets. Each of 360 and Urbanlink will act reasonably and in good faith in considering a request by the other to effect such a swap. If 360 and Urbanlink agree to effect such a swap, then 360 and Urbanlink shall act reasonably and in good faith in negotiating the definitive agreements relating to such swap. If 360 and Urbanlink are unable to reach agreement on the terms of such definitive agreements, either 360 or Urbanlink may refer the matter to arbitration pursuant to Section 4.1 of this Agreement. 3.3 OTHER SERVICES 360 and Urbanlink acknowledge that it may be necessary or desirable for 360 or Subsidiaries of 360 to provide other services to Urbanlink from time to time, and that it may be necessary or desirable for Urbanlink to provide other services to 360 or Subsidiaries of 360 from time to time. -3- Each of 360 and Urbanlink agrees to act reasonably and in good faith in considering a request by the other for the provision of such services. To the extent that the terms for the provision of such services are not specifically addressed in an agreement executed and delivered pursuant to this Agreement, or otherwise specifically addressed in an agreement between Urbanlink and 360 or a Subsidiary of 360, such services shall be provided: (a) at a fee for such services equal to the cost of such services plus a markup appropriate to the telecommunications industry, considering the nature and extent of such services; and (b) otherwise on terms agreed to between 360 and Urbanlink, acting reasonably and in good faith. If 360 and Urbanlink are unable to reach agreement on such fees and such terms, either 360 or Urbanlink may refer the matter to arbitration pursuant to Section 4.1 of this Agreement. 3.4 ADJUSTMENTS Following the Closing Date, 360, the TransferCos, and Urbanlink shall make adjustments between themselves as provided below: (a) The parties confirm and declare that the purchase price for each transfer to Urbanlink is to be the fair market value thereof, as agreed between the parties pursuant to the various Transaction Documents that effect the transfers (subject to adjustment as provided therein if such fair market value is disputed by taxing authorities). It is the intention of the parties that the transfer of the assets be effected on reasonable economic terms, providing a reasonable return to each party and to each TransferCo and not imposing an unreasonable or disproportionate economic burden on any party or any TransferCo or any other Subsidiary of 360. (b) Accordingly, following the Closing Date, the parties shall adjust between themselves (and 360 shall cause the TransferCos to adjust), from time to time, with respect to the following matters: (i) The parties shall, and 360 shall cause each of the TransferCos to, adjust the terms of the Transaction Documents as may be necessary, acting reasonably, to effect the intent described in Subsection 3.5(a). (ii) Without limiting the generality of the foregoing, all costs, expenses and payments that relate to the cost of the builds (including, without limitation, charges for Underlying Rights, but only for the term expiring on the expiry of the term of the applicable Underlying Rights), construction costs, holdbacks, warranty claims and all costs of performing any assumed obligations where Urbanlink is not entitled to receive the associated revenue shall be paid by 360 or the applicable TransferCo. For greater certainty, this obligation shall continue indefinitely, but 360 shall remain -4- responsible for all payments for Underlying Rights relating to or necessary for the sale of fiber strands to Urbanlink only in respect of the initial term expiring on the expiry of the term of the applicable Underlying Rights. (iii) Except as expressly provided above, the parties shall adjust (and 360 shall cause the TransferCos to adjust) any prepaid or accrued amounts owing pursuant to the Assumed Contracts, with the TransferCos to be responsible for all costs and expenses and to receive all benefits attributable to the period prior to the Closing Date and Urbanlink to be responsible for all costs and expenses and, except as otherwise expressly provided in a Transaction Document, to receive all benefits attributable to the period as of and from the Closing Date. (iv) Except as expressly provided above, as of the Closing Date the parties shall also adjust (and 360 shall cause the TransferCos to adjust) utility rates and charges, other income from the transferred assets (unless otherwise expressly provided in a Transaction Documents), taxes, insurance, other amounts received from purchasers, licensees and tenants (unless otherwise expressly provided in a Transaction Document) deposits and interest thereon, fuel, prepaid expenses and all other items normally adjusted between a vendor and purchaser in the sale of similar assets so that Urbanlink shall pay all expenses and receive all income relative to the transferred assets (unless otherwise expressly provided in a Transaction Document) prior to the Closing Date and Urbanlink shall bear and pay all expenses and receive all income relative to the transferred assets from and including the Closing Date. (v) Urbanlink shall be responsible for payment of all taxes, rates, duties, assessments and charges levied, rated, charged or assessed in respect of the transferred assets that are payable in respect of all periods of time from and after the Closing Date, and the TransferCos shall be responsible for payment of all taxes, rates, duties, assessments and charges levied, rates, charged or assessed in respect of the transferred assets that are payable in respect of all periods of time before the Closing Date. (vi) Without limiting the generality of the foregoing, 360, WFHL and Urbanlink acknowledge and agree that certain of the expenditures that Urbanlink might be required to make under the Municipal Access Agreements relate to telecommunications facilities installed, constructed and/or owned by persons other than Urbanlink including, without limiting the generality of the foregoing, Ledcor Industries Limited (an affiliate of WFHL which was once an owner of certain strands in respect of which some of the Municipal Access Agreements were given) and Subsidiaries of 360. The parties shall adjust between themselves, from time to time, any amounts payable under the Municipal Access Agreements, to effect a just and equitable allocation of such payments among the persons -5- receiving the economic benefit of the telecommunications facilities to which the Municipal Access Agreements relate. If the parties are unable to reach agreement on the terms of any adjustment, any party may refer the matter to arbitration pursuant to Section 4.1 of this Agreement. ARTICLE 4 GENERAL 4.1 ARBITRATION All disputes arising out of or in connection with this contract, or in respect of any defined legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration under the Rules of the British Columbia International Commercial Arbitration Centre. The appointing authorities shall be the British Columbia International Commercial Arbitration Centre. The case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases Under the BCICAC Rules". The place of arbitration shall be Vancouver, British Columbia, Canada. 4.2 GOVERNING LAW AND ATTORNMENT This Agreement will be governed by and construed in accordance with the substantive laws of British Columbia and the federal laws of Canada applicable in British Columbia, without regard to the conflict of law rules of British Columbia. Subject to Section 4.1, the parties irrevocably submit to and accept generally and unconditionally the exclusive jurisdiction of the courts and appellate courts of British Columbia with respect to any legal action or proceeding which may be brought at any time relating in any way to this Agreement. Each of the parties irrevocably waives any objection it may now or in the future have to the venue of any such action or proceeding, and any claim it may now or in the future have that any such action or proceeding has been brought in an inconvenient forum. 4.3 TIME OF THE ESSENCE OF THE AGREEMENT Unless otherwise specifically provided in this Agreement, time will be of the essence of this Agreement and of the transactions contemplated by this Agreement. 4.4 REMEDIES NOT EXCLUSIVE The remedies provided to the parties under this Agreement are cumulative and not exclusive to each other, and any such remedy will not be deemed or construed to affect any right which any of the parties is entitled to seek at law, in equity or by statute. 4.5 NOTICES Any notice, direction, request or other communication required or contemplated by any provision of this Agreement will be given in writing and will be given by delivering or faxing or emailing the same to the parties as follows: -6- (a) To 360 at: Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern Fax No.: (604) 681-0994 Email: catherine.meachern@wwfiber.com (b) To WFHL at: Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Bill Ramsey Fax No.: (604) 681-5372 Email: bill.ramsey@wwfiber.com (c) To Urbanlink at: Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Bill Ramsey Fax No.: (604) 681-5372 Email: bill.ramsey@wwfiber.com Any such notice, direction, request or other communication will be deemed to have been given or made on the date on which it was delivered or, in the case of fax or email, on the next business day after receipt of transmission. Any party may change its fax number or address for service or email address from time to time by written notice in accordance with this section. 4.6 ASSIGNMENT This Agreement is not assignable by WFHL or 360 without the prior written consent of the other, such consent not to be unreasonably withheld or delayed, or by Urbanlink without the consent of 360 and WFHL. Any attempt by any party to assign any of the rights or to delegate any of the duties or obligations of this Agreement without such prior written consent is void. 4.7 FORCE MAJEURE The failure or delay of any party to this Agreement to perform any obligation under this Agreement solely by reason of acts of God, acts of civil or military authority, civil disturbance, war, strikes or other labour disputes or disturbances, fire, transportation contingencies, shortage of facilities, fuel, energy, labour or materials, or laws, regulations, acts or orders of any governmental agency or official, other catastrophes, or any other circumstance beyond its reasonable control ("Force Majeure") will be deemed not to be a breach of this Agreement so long as the party so prevented from complying with this Agreement has not contributed to such -7- Force Majeure, has used reasonable efforts to avoid such Force Majeure or to ameliorate its effects, and continues to take all actions within its power to comply as fully as possible with the terms of this Agreement. In the event of any such Force Majeure, performance of the obligations will be deferred until the Force Majeure ceases. This section will not apply to excuse a failure to make any payment when due. 4.8 COUNTERPARTS This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document. All of these counterparts will for all purposes constitute one agreement, binding on the parties, notwithstanding that all parties are not signatories to the same counterpart. A fax transcribed copy or photocopy of this Agreement executed by a party in counterpart or otherwise will constitute a properly executed, delivered and binding agreement or counterpart of the executing party. 4.9 WAIVER No failure or delay on the part of any party in exercising any power or right under this Agreement will operate as a waiver of such power or right. No single or partial exercise of any right or power under this Agreement will preclude any further or other exercise of such right or power. No modification or waiver of any provision of this Agreement and no consent to any departure by any party from any provision of this Agreement will be effective until the same is in writing. Any such waiver or consent will be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any party in any circumstances will entitle such party to any other or further notice or demand in similar or other circumstances. 4.10 FURTHER ASSURANCES Each of the parties will promptly execute and deliver to the other at the cost of the other such further documents and assurances and take such further actions as the other may from time to time request in order to more effectively carry out the intent and purpose of this Agreement and to establish and protect the rights, interests and remedies intended to be created in favour of the other. 4.11 ENTIRE AGREEMENT This Agreement and any documents and agreements to be delivered pursuant to this Agreement supersede all previous invitations, proposals, letters, correspondence, negotiations, promises, agreements, covenants, conditions, representations and warranties with respect to the subject matter of this Agreement. There is no representation, warranty, collateral term or condition or collateral agreement affecting this Agreement, other than as expressed in writing in this Agreement. No trade terms or trade usages are to be incorporated by reference implicitly or otherwise into this Agreement, unless expressly referred to in this Agreement. -8- 4.12 AMENDMENTS No change or modification of this Agreement will be valid unless it is in writing and signed by each party to this Agreement. 4.13 INVALIDITY OF PARTICULAR PROVISION If any provision of this Agreement or any part of any provision (in this section called the "Offending Provision") is declared or becomes unenforceable, invalid or illegal for any reason whatsoever including, without limiting the generality of the foregoing, a decision by any competent courts, legislation, statutes, bylaws or regulations or any other requirements having the force of law, then the remainder of this Agreement will remain in full force and effect as if this Agreement had been executed without the Offending Provision. 4.14 CURRENCY Unless otherwise specified all sums of money expressed in this Agreement are in the lawful money of Canada. 4.15 NUMBER AND GENDER Unless the context of this Agreement otherwise requires, to the extent necessary so that each clause will be given the most reasonable interpretation, the singular number will include the plural and vice versa, the verb will be construed as agreeing with the word so substituted, words importing the masculine gender will include the feminine and neuter genders, words importing persons will include firms and corporations and words importing firms and corporations will include individuals. 4.16 HEADINGS AND CAPTIONS The headings and captions of sections and paragraphs contained in this Agreement are all inserted for convenience of reference only and are not to be considered when interpreting this Agreement. 4.17 ACKNOWLEDGEMENT OF RECEIPT Each of the parties acknowledges receiving an executed copy of this Agreement. 4.18 ENUREMENT Subject to the restrictions on transfer contained in this Agreement, this Agreement will enure to the benefit of and be binding on the parties and their respective heirs, executors, administrators, successors and assigns. [THE NEXT PAGE IS THE EXECUTION PAGE] -9- IN WITNESS WHEREOF the parties have executed this Agreement as of the date stated on the first page. 360NETWORKS INC. WORLDWIDE FIBER HOLDINGS LTD. Per: Per: - ----------------------------------- ----------------------------------- Signature Signature WFI URBANLINK LTD. Per:: - ----------------------------------- Signature -10- SCHEDULE 1 URBANLINK REORGANIZATION PART 1 - STEPS COMPLETED PRIOR TO THE REORGANIZATION 1.1 The authorized share capital of Urbanlink has been amended. 1.2 360 has incorporated 360-Holdco. 1.3 360 has incorporated Carrier Holdco. 1.4 360 has obtained the fairness opinion required under its High Yield Debt Indentures. PART 2 - TRANSFERS OF ASSETS 2.1 Each of the relevant 360 Subsidiaries (collectively "TransferCos") shall transfer assets to Urbanlink in exchange for a series of Urbanlink preferred shares with a redemption amount equal to the estimated fair value of the transferred assets, reduced by the amount of any liabilities assumed by Urbanlink. A separate series of Urbanlink preferred shares shall be issued to each TransferCo. The assets to be transferred in exchange for such shares shall be those assets described in Sections 1.1, 1.2, 1.3, 1.4, 3.1, 4.1, 4.3, 4.4, 5.1 and 6.1 on Schedule 2. 2.2 Urbanlink and FOTS3 shall enter into the IRU agreement for the two marine strands in British Columbia waters, as described in Section 3.1 on Schedule 1. 2.3 360 shall transfer to Urbanlink, and Urbanlink shall assume all employment obligations in respect of, certain employees (approximately 15) to be determined by agreement between Urbanlink and 360. 2.4 360, the relevant Subsidiaries of 360, and Urbanlink shall enter into a Sublease having the terms described in Schedule 3. PART 3 - TRANSFERS TO 360-HOLDCO 3.1 The TransferCos shall transfer their Urbanlink preferred shares and Urbanlink common shares to 360-Holdco, in return for mirror image preferred shares and common shares of 360-Holdco. PART 4 - 360-HOLDCO TRANSFER TO CARRIER HOLDCO AND ISSUANCE OF SHARES TO 360-HOLDCO 4.1 360-Holdco shall subscribe for Carrier Holdco voting non-participating shares representing 1/3 of the total number of such shares to be issued, for nominal consideration. -11- 4.2 360-Holdco shall transfer its Urbanlink preferred shares and Urbanlink common shares to Carrier Holdco in return for Carrier Holdco non-voting participating shares representing 51% of the total number of such shares to be issued. PART 5 - WFHL TRANSFER TO CARRIER HOLDCO AND WFHL ISSUANCE OF SHARES TO WFHL 5.1 WFHL shall subscribe for Carrier Holdco voting non-participating shares representing 2/3 of the total number of such shares to be issued, for nominal consideration. 5.2 WFHL shall transfer to Carrier Holdco Subordinate Voting Shares of 360 having a fair market value equal to 49/51 of the fair value of the Urbanlink preferred shares and Urbanlink common shares transferred by 360-Holdco to Carrier Holdco determined using the price to the public of the Subordinate Voting Shares in 360's initial public offering (the "IPO Price"), and WFHL shall receive in return Carrier Holdco non-voting participating shares representing 49% of the total number to be issued. As the Closing Date shall occur before the IPO, the number of shares transferred on the Closing Date shall be calculated on the assumption that the IPO Price is US$17.00 and the number of transferred shares shall be adjusted as soon as practicable after the Closing Date to equal the number of shares determined using the IPO Price. PART 6 - POST CLOSING TRANSFERS 6.1 From time to time after the completion of those segments of the builds that are not complete on the Closing Date and the final allocation or designation of the specific strands to be transferred, as more particularly described in Sections 2.1 and 2.2 of Schedule 2, on a date or dates to be determined by agreement between 360 and WFHL, acting reasonably, the TransferCos shall transfer assets to 360-Holdco for a series of 360-Holdco preferred shares having a redemption amount equal to the estimated fair value of the transferred assets, reduced by the amount of any liabilities assumed by 360-Holdco. A separate series of 360-Holdco preferred shares shall be issued to each TransferCo. The assets to be transferred in exchange for such shares shall be those assets described in Sections 2.1, 2.2, 2.3 and 2.4 on Schedule 2 (collectively, the "Post-Closing Assets"). 6.2 360-Holdco shall transfer the Post-Closing Assets to Carrier Holdco for a number of common shares to be determined by considering the estimated fair value of the Post-Closing Assets (reduced by the amount of any liabilities assumed by Carrier Holdco), the estimated fair value of the then issued Carrier Holdco shares, and the estimated fair value of the subscription to be made by WFHL under Section 6.3, in return for Carrier Holdco non-voting participating shares representing 51% of the total number of shares to be issued under Sections 6.2 and 6.3. 6.3 WFHL shall transfer to Carrier Holdco additional Subordinate Voting Shares of 360 having a fair value equal to 49/51 of the estimated fair value of the Post-Closing Assets (reduced by the amount of any liabilities assumed by Carrier Holdco), determined using the then current market prices of the Subordinate Voting Shares, and WFHL shall receive in return Carrier Holdco non-voting participating shares representing 49% of the total number of shares to be issued under Sections 6.2 and 6.3. -12- 6.4 Carrier Holdco shall transfer the Post-Closing Assets to Urbanlink in return for Urbanlink preferred shares. PART 7 - GENERAL 7.1 Except where expressly provided to the contrary in the Transaction Documents, elections under Section 85 of the INCOME TAX ACT (Canada) shall be filed by the transferor and the transferee in respect of each of the transfers described in this Schedule, to the extent that such transfers are eligible, and such elections shall elect that the transfers be effected at the transferor's cost amount for the transferred assets, unless otherwise agreed between 360 and WFHL. 7.2 For the transfers described in this Schedule appropriate adjustments shall be made for deposits, prepaid amounts and receivables in respect of each of the IRU agreements and other agreements that are transferred. PART 8 - FINAL STRUCTURE 8.1 The TransferCos and WFNL shall together own 100% of the outstanding shares of 360-Holdco. 8.2 360-Holdco shall own 51% of the Carrier Holdco non-voting participating shares and 33.3% of the Carrier Holdco voting non-participating shares. 8.3 WFHL shall own 49% of the Carrier Holdco non-voting participating shares and 66.67% of the Carrier Holdco voting non-participating shares. 8.4 Carrier Holdco shall own 100% of the outstanding shares of Urbanlink. -13- SCHEDULE 2 URBANLINK ASSETS Urbanlink Assets means the assets to be transferred to Urbanlink as part of the Urbanlink Reorganization, being the following assets: PART 1 - STRANDS TO BE TRANSFERRED AT THE CLOSING 1.1 Two strands on each of the following routes shall be transferred by the applicable 360 Subsidiaries to Urbanlink at the Closing: See Exhibit 2(1.1) 1.2 The following strands on the following routes shall also be transferred at the Closing by the applicable 360 Subsidiaries to Urbanlink, in each case subject to the terms of the associated IRU agreement described below, which IRU agreement shall be assumed and performed by Urbanlink: See Exhibit 2(1.2) 1.3 Together with the above strands, the applicable 360 Subsidiaries shall transfer to Urbanlink a proportionate interest in the support structures (to the extent available for transfer). At the Closing, or as soon as practicable thereafter, the applicable 360 Subsidiaries shall also grant to Urbanlink, by sublicense, a non-exclusive right to use and enjoy, in common with all others having rights with respect to other strands forming part of the fiber optic cable containing the above strands, each license, easement, right-of-way or similar right (the "Underlying Rights") owned, held, acquired or hereafter acquired by such 360 Subsidiaries, on the same terms and conditions upon which such rights are usually granted to third parties by 360 and on and subject to the terms and conditions set out in the agreements governing such Underlying Rights, with respect to lands or buildings through which such fiber optic cable passes. If the applicable Underlying Rights do not permit a transfer of strands to Urbanlink, the applicable 360 Subsidiary and Urbanlink shall enter into an IRU agreement for such strands. 1.4 At the Closing, or as soon as practicable thereafter, the relevant 360 Subsidiaries shall grant to Urbanlink a license to use: (a) with reference to the strands referred to in Section 1.1, such co-location facilities and/or communications shelters along the applicable routes as would be granted by 360 to a third party acquiring the number of strands described in Section 1.1, on and subject to the terms and conditions that would apply to a similar grant of rights to a third party purchaser of such strands; and (b) with respect to the strands described in Section 1.2, such co-location facilities and/or communications shelters along the applicable routes as are necessary to -14- allow Urbanlink to perform its obligations in respect of such facilities and/or shelters as described in the IRU agreements assumed under Section 1.2. PART 2 - STRANDS TO BE TRANSFERRED UPON THE COMPLETION OF THE FIBER OPTIC FACILITIES OF WHICH THE STRANDS ARE A PART 2.1 Two strands on each of the following routes shall be transferred by the applicable 360 Subsidiaries to Urbanlink on the completion of the applicable segment of the build and the final allocation or designation of the specific strands to be transferred: See Exhibit 2(2.1) 2.2 The following strands on the following routes shall be transferred by the applicable 360 Subsidiary to Urbanlink on the completion of the applicable segment of the build and the final allocation or designation of the specific strands to be transferred, in each case subject to the terms of the associated IRU agreement described below, which IRU agreement shall be assumed and performed by Urbanlink: See Exhibit 2(2.2) 2.3 Together with the above strands, the applicable 360 Subsidiaries shall transfer to Urbanlink a proportionate interest in the support structures (to the extent available for transfer). On the completion of the applicable segment of the build, and the final allocation or designation of the specific strands to be transferred the applicable 360 Subsidiaries shall also grant to Urbanlink, by sublicense, a non-exclusive right to use and enjoy, in common with all others having rights with respect to other strands forming part of the fiber optic cable containing the strands, the Underlying Rights owned, held, acquired or hereafter acquired by such 360 Subsidiaries, on the same terms and conditions upon which such rights are usually granted to third parties by 360 and on and subject to the terms and conditions set out in the agreements governing such Underlying Rights, with respect to lands or buildings through which such fiber optic cable passes. If the applicable Underlying Rights do not permit a transfer of strands to Urbanlink, the applicable 360 Subsidiary and Urbanlink shall enter into an IRU agreement for such strands. 2.4 On the completion of the applicable segment of the build and the final allocation or designation of the specific strands to be transferred, the relevant 360 Subsidiaries shall grant to Urbanlink a license to use: (a) with reference to the strands referred to in Section 2.1, such co-location facilities and/or communications shelters along the applicable routes as would be granted by 360 to a third party acquiring the number of strands described in Section 2.1, on and subject to the terms and conditions that would apply to a similar grant of rights to a third party purchaser of such strands; and (b) with respect to the strands described in Section 2.2, such co-location facilities and/or communications shelters along the applicable routes as are necessary to -15- allow Urbanlink to perform its obligations in respect of such facilities and/or shelters as described in the IRU agreements assumed under Section 2.2. PART 3 - IRUS TO BE GRANTED TO URBANLINK 3.1 With reference to that portion of the Vancouver to Victoria to Seattle build that is located in a submarine cable in Canadian waters, FOTS3 shall grant to Urbanlink a sub-IRU of two strands. PART 4 - TELECOMMUNICATIONS EQUIPMENT 4.1 The following telecommunications equipment, which has been acquired and received by 360 Subsidiaries, shall be transferred by the applicable 360 Subsidiaries to Urbanlink at the Closing: See Exhibit 2(4.1) 4.2 The purchase orders and purchase agreements for the acquisition of additional telecommunications equipment shall be assigned by the applicable 360 Subsidiaries to Urbanlink at the Closing. 4.3 Together with the equipment transferred pursuant to Sections 4.1 and 4.2, the relevant 360 Subsidiaries shall, to the extent permitted by the underlying documents and agreements, transfer an applicable and appropriate interest in the underlying warranties and maintenance agreements. PART 5 - FACILITIES 5.1 At the Closing, or as soon as practicable thereafter, the relevant 360 Subsidiaries shall transfer to Urbanlink those lease and co-location agreements that relate to facilities that will be used exclusively or primarily by Urbanlink. 5.2 At the Closing, or as soon as practicable thereafter, the relevant 360 Subsidiary shall enter into a sublease with Urbanlink, by which the relevant 360 Subsidiary shall sublease to Urbanlink premises at 5500 Explorer Driver, Mississauga, Ontario. PART 6 - NOC 6.1 The relevant 360 Subsidiary shall transfer to Urbanlink the NOC assets, being an element management system consisting of hardware and software that monitor network operations. PART 7 - CONTRACTS AND INCIDENTAL ASSETS 7.1 At the Closing, the relevant 360 Subsidiaries shall transfer and assign to Urbanlink such additional equipment, furniture, agreements, license, permits, documents and ancillary rights as 360 and WFHL may determine by agreement between them. -16- SCHEDULE 3 SUBLEASE The Sublease shall be on the following terms: 1. The parties to the Sublease shall be Urbanlink and the relevant 360 Subsidiary. 2. The sublease premises shall be at 5500 Explorer Drive, Mississauga, Ontario. The precise location and area of the subleased premises shall be determined by agreement between Urbanlink and 360, acting reasonably. 3. The rent charged for the Sublease shall be calculated based on the area of the subleased premises and the rent per square foot charged under the applicable head lease. 4. The Sublease shall otherwise be on the same terms as the head lease, and Urbanlink shall pay to 360 or to the applicable 360 Subsidiary a proportionate amount of all charges payable under the head lease including, without limitation, taxes, common area expenses and utilities charges. -17- EXHIBIT 2(1.1)
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- FROM CALGARY TO EMERSON CP 1,443 Orange Brown 41-42 SMF-28 FROM CP TRACKS AT CAMBIE ST. CP 1,032 Orange Brown 41-42 SMF-28 VANCOUVER TO CALGARY FROM 301 INDUSTRIAL AVE. TO CP 3 Orange Brown 41-42 SMF-28 CP TRACKS AT CAMBIE ST. OAK STREET BRIDGE TO 301 CN 11 Orange Brown 41-42 SMF-28 INDUSTRIAL, VANCOUVER US BORDER TO VICTORIA TO OAK CN 84 Orange Brown 41-42 SMF-28 STREET BRIDGE EDMONTON CN TRACKS TO CN 11 Orange Brown 41-42 SMF-28 EDMONTON BRETTVILLE JUNCTION EDMONTON BRETVILLE JUNCTION CN 1,958 Orange Brown 41-42 SMF-28 TO THUNDER BAY THUNDER BAY TO TORONTO CN 1,402 Orange Brown 41-42 SMF-28 TORONTO TO BROCKVILLE Union Station to Parliament 333.8 to TTR 12 Orange Rose 121-122 Leaf St.(Kingston) 332.8 Parliament St to Scarborough 332.8 to CN 23 Orange Rose 121-122 Leaf (Kingston) 7.24 Scarborough to Pickering 325.56 to CN 299 Orange Rose 121-122 Leaf Jct. (Kingston) 311.4 Pickering Jct. To Brockville 311.4 to CN Orange Rose 121-122 Leaf (Kingston) 125.7 - -----------------------------------------------------------------------------------------------------------------
-18-
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- BROCKVILLE TO SMITH FALLS 27.8 to StL&H 45 Orange Rose 121-122 Leaf 0.0 SMITH FALLS TO OTTAWA (VIA) STATION Smith Falls to Alexander 34.5 to StL&H 0.2 Orange Rose 121-122 Leaf St.(Smiths Falls) 34.38 Alexander St. to CN Radio 34.38 to CN 1 Orange Rose 121-122 Leaf Site (Smiths Falls) 34.05 CN Radio Site to Richmond 34.05 to VIA 34 Orange Rose 121-122 Leaf (Smiths Falls) 13.0 Richmond to Federal (Smiths 13.0 to 0.0 CN 21 Orange Rose 121-122 Leaf Falls) Federal to Union Station 6.0 to 0.9 CN 10 Orange Rose 121-122 Leaf (Beachburg) BORDER TO TORONTO U.S. Border to Fort Erie 0.6 to 1.0 CN 1 Orange Rose 121-122 Leaf (Stamford) Fort Erie to Port Robinson 1.0 to CN 36 Orange Rose 121-122 Leaf (Stamford) 23.14 Port Robinson to Merriton 1.27 to 7.9 CN 11 Orange Rose 121-122 Leaf (Thorld Spur) Merriton to Hamilton 9.5 to CN 55 Orange Rose 121-122 Leaf (Grimsby) 43.66 Hamilton to Canpa (Oakville) 39.3 to 8.5 CN 50 Orange Rose 121-122 Leaf Canpa to Windsor St. 8.5 to 0.5 CN 13 Orange Rose 121-122 Leaf (Oakville) OTTAWA TO QUEBEC BORDER Union Station to Hawthorne 76.5 to CN 6 Temp Rose 121-122 Leaf Diamond (Alexandria) 2.72 Hawthorne Diamond to 72.72 to CN 0.4 Rose 121-122 Leaf Hawthorne (Alexandria) 72.5 Hawthorne to Quebec Border 72.5 to VIA 97 Rose 121-122 Leaf (Alexandria) 12.5 - -----------------------------------------------------------------------------------------------------------------
-19-
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- QUEBEC BORDER TO TASCHEREAU Quebec Border to Coteau 12.5 to 0.0 VIA 20.11 Orange Rose 121 - 122 Leaf Jct.(Alexandria) Coteau Jct. To Dorion 38.0 to CN 22.04 Orange Rose 121 - 122 Leaf (Kingston) 24.3 Dorion to Dorval (Kingston) 24.3 to CN 22.53 Orange Rose 121 - 122 Leaf 10.3 Dorval to Taschereau Yard 11.6 to 9.0 CN 4.18 Orange Rose 121 - 122 Leaf (Montreal) MONTREAL CENTRAL TO QUEBEC 1.28 to 1.5 CN 259.79 Orange Rose 121-122 Leaf CITY US BORDER TO CAMBRIDGE US Border to Collage Ave 226.30 to CN/StL&H 2 Orange Rose 121-122 Leaf 225.21 Collage Avenue to Hyde Park 111.8 to StL&H 174 Orange Rose 121-122 Leaf Road 3.9 Hyde Park Road to London 3.9 to 0.0 StL&H 6 Orange Rose 121-122 Leaf London to Airport Road 114.6 to StL&H 8 Orange Rose 121-122 Leaf 109.48 Airport Road to Cambridge 109.48 to StL&H 84 Orange Rose 121-122 Leaf 57.2 - -----------------------------------------------------------------------------------------------------------------
-20- EXHIBIT 2(1.2) NONE -21- EXHIBIT 2(2.1)
- -------------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - -------------------------------------------------------------------------------------------------------------------- CAMBRIDGE TO HALWEST Cambridge South Junction 0.8 to 11.2 StL&H 17 Orange Rose 121-122 Leaf (Waterloo) South Junction to Kitchener 3.5 to 0 GEX 6 Orange Rose 121-122 Leaf (Huron Park) Kitchener to Silver (Guelph) 63.05 to 29.98 GEX 53 Orange Rose 121-122 Leaf Silver to Halwest (Halton) 24.16 to 11.13 CN 21 Orange Rose 121-122 Leaf TASCHEREAU TO MONTREAL STATION Taschereau Yard to Jct. W/ N/A CN 1.22 Orange Rose 121 - 122 SMF-28 St. Laurent Sub. Taschereau Yard to Jonction 146.2 to 141.6 CN 7.40 Orange Rose 121 - 122 SMF-28 de L'Est (St. Laurent) Jonction de L'Est to 6.0 to 0.8 CN 8.37 Orange Rose 121 - 122 SMF-28 Central Station (Deux-Montagnes) MONTREAL TO US BORDER 2 strands QUEBEC CITY TO HALIFAX 2 strands - --------------------------------------------------------------------------------------------------------------------
-22- EXHIBIT 2(2.2) As may be agreed between the parties. Definitive Agreement Executed Verstion -23- EX-10.36 9 EXHIBIT 10.36 Exhibit 10.36 ASSET PURCHASE AGREEMENT (ROLL-OVER) (BANDWIDTH) THIS AGREEMENT is made effective as of the ____ day of April, 2000. BETWEEN: LEDCOR COMMUNICATIONS LTD. (the "Vendor") - and - WFI URBANLINK LTD. (the "Purchaser") WHEREAS: A. The Vendor is a subsidiary of 360. B. 360 and the Purchaser are parties to the Definitive Agreement, pursuant to which 360 has agreed to cause the Vendor to transfer the Assets to the Purchaser. C. The Vendor wishes to transfer the Assets to the Purchaser, and the Purchaser wishes to acquire the Assets from the Vendor, all as at the Effective Date for a total purchase price equal to the aggregate fair market value of the Assets, on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION OF the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1 INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2 DEFINITIONS 2.1 In this Agreement: (a) "360" means 360networks inc. -1- (b) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (c) "Adjusted Cost Base" means the aggregate cost amount of the Assets determined by the Vendor in accordance with the provisions of the Act, where "cost amount" is as defined in subsection 248(1) of the Act; (d) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (e) "Adjusted Fair Market Value" means the aggregate of the fair market value of the Assets, determined in accordance with section 5.4 to be a greater or lesser amount than the Elected Fair Market Value; (f) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (g) "Assets" has that meaning as set forth in Schedule "A" hereto; (h) "Closing Date" means the Effective Date; (i) "Definitive Agreement" means the Urbanlink Reorganization Definitive Agreement relating to the Urbanlink Reorganization dated the same date as this Agreement and made between 360, Worldwide Fiber Holdings Ltd., the Purchaser and Urbanlink Equipment Ltd.; (j) "Effective Date" means the date of this Agreement; (k) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets; (l) "Elected Fair Market Value" means the aggregate fair market value of the Assets as determined by the parties and reflected in the Election; (m) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Assets; (n) "Fair Market Value" means the fair market value of the Assets determined as the Effective Date, which shall be equal to either the Elected Fair Market Value or the Adjusted Fair Market Value, as finally determined in accordance with either section 5.3 or section 5.4 hereof, as the case may be; (o) "Redemption Amount" means the amount per share payable on the redemption of the shares forming the Share Consideration, which amount shall be equal to the -2- Fair Market Value divided by the number of shares forming the Share Consideration; (p) "Revised Adjusted Cost Base" means the adjusted cost base of the Assets determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (q) "Schedules" means any schedules which are attached to this Agreement; (r) "Share Consideration" means the number and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (s) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Fair Market Value; and (t) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3 PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Assets. ARTICLE 4 EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Assets is deemed to have occurred as of the Effective Date. ARTICLE 5 PURCHASE PRICE 5.1 The total purchase price for the Assets is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 Subject to section 5.4, the parties have determined that the fair market value of the Assets is equal to the Elected Fair Market Value, which determination is final and binding upon the parties. -3- 5.4 If: (a) the Taxing Authority at any time proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the aggregate of the fair market value of the Assets at the Effective Date is a greater or lesser amount than the Elected Fair Market Value; and (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the aggregate of the fair market value of the Assets as of the Effective Date is the Adjusted Fair Market Value; then: (c) the Fair Market Value shall be deemed to have always been, and the Fair Market Value wherever referred to in this Agreement shall be read as meaning, the Adjusted Fair Market Value. 5.5 If not all of the shares forming the Share Consideration have been redeemed or purchased by the Purchaser on or prior to the date of determination of the Adjusted Fair Market Value of the Assets, then the Redemption Amount for each of the shares forming the Share Consideration which are still outstanding at that time, shall be adjusted in accordance with section 5.7 hereof. 5.6 If the Purchaser has repurchased or redeemed all of the shares forming the Share Consideration at or before the time that the Adjusted Fair Market Value is determined, then: (a) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration exceeds the Adjusted Fair Market Value, the excess shall be a debt payable to the Purchaser by the Vendor, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Purchaser's bank, calculated from the date of default until the date payment is made; and (b) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration is less than the Adjusted Fair Market Value, the loss shall be a debt payable to the Vendor by the Purchaser, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Vendor's bank, calculated from the date of default until the date payment is made. 5.7 If, because of the operation of section 5.4, the Fair Market Value is determined at the Effective Date to be equal to the Adjusted Fair Market Value, then the Redemption Amount shall be adjusted NUNC PRO TUNC to reflect an amount equal to the Adjusted Fair Market Value, and all necessary adjustments, payments and repayments, if any, as may be required by virtue of such -4- adjustment, shall forthwith be made between the Purchaser and the Vendor in accordance with the provisions of section 5.6, MUTATIS MUTANDIS. ARTICLE 6 JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Assets, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Assets shall be equal to the Adjusted Elected Amount. ARTICLE 7 VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Assets shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever; -5- (b) no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Assets from the Vendor other than as set out in this Agreement; (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act; and (d) the distances shown on the Schedules are accurate. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within two years from the Closing Date. ARTICLE 8 PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Shares (ii) Class "I" Preferred Non-Voting Shares, authorized to be issued in series, which series shares are designated as follows: (A) Class "I" Series 1 Preferred Non-Voting Shares; (B) Class "I" Series 2 Preferred Non-Voting Shares; (C) Class "I" Series 3 Preferred Non-Voting Shares; (D) Class "I" Series 4 Preferred Non-Voting Shares; (E) Class "I" Series 5 Preferred Non-Voting Shares; (F) Class "I" Series 6 Preferred Non-Voting Shares; (G) Class "I" Series 7 Preferred Non-Voting Shares; (H) Class "I" Series 8 Preferred Non-Voting Shares; (I) Class "I" Series 9 Preferred Non-Voting Shares; -6- (J) Class "I" Series 10 Preferred Non-Voting Shares; (K) Class "I" Series 11 Preferred Non-Voting Shares; (L) Class "I" Series 12 Preferred Non-Voting Shares; (M) Class "I" Series 13 Preferred Non-Voting Shares; (N) Class "I" Series 14 Preferred Non-Voting Shares; (O) Class "I" Series 15 Preferred Non-Voting Shares; having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within two years from the Closing Date. ARTICLE 9 CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall do all things necessary to transfer to the Purchaser the Assets; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the requisite conveyances necessary to transfer ownership of the Assets in the name of the Purchaser or its nominee have not been completed on the Closing Date the Vendor agrees that, until such time as the Assets shall be transferred into the name of the Purchaser or its -7- nominee, the Vendor shall stand as owner of the Assets as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all amounts received by the Vendor as the owner of the Assets; and (b) transfer and deal with the Assets in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities that the Vendor may incur by reason of the Assets being in the name of the Vendor. ARTICLE 10 FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. Without limiting the generality of the foregoing, the Vendor shall use all commercially reasonable efforts to make, do, execute or cause to be made, done, or executed all such further and lawful acts, deeds, things, documents and assurances as may be necessary to document the sublicence referred to in the description of the Assets on Schedule "A", to obtain any required consents from the grantors of rights-of-way and, where possible, to obtain non-disturbance agreements from the grantors of rights-of-way. ARTICLE 11 NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; -8- (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12 ENTIRE AGREEMENT 12.1 This Agreement, together with the Definitive Agreement and the documents referred to in the Definitive Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. ARTICLE 13 ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14 COUNTERPARTS 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation on the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. [THE NEXT PAGE IS THE EXECUTION PAGE.] -9- IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. LEDCOR COMMUNICATIONS LTD. PER: ------------------------------ WFI URBANLINK LTD. PER: ------------------------------ -10- SCHEDULE "A" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN LEDCOR COMMUNICATIONS LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) ---------------------------------------------------- ASSETS ------ 1. ASSETS "Assets" means the Strands located in Canada that are more particularly described in Exhibit A-1, together with associated Communication Shelters and Co-Location Facilities, Support Structures Interests and ROW Rights, as described below. 2. DEFINITIONS For the purposes of this Schedule "A", except as otherwise expressly defined below, capitalized terms shall have the meanings provided for in the Agreement to which this Schedule "A" is attached: "Bundle" means a grouping of 12 continuously running Strands in the buffer tube within which such Strands are enclosed, in the Fiber Optic Cable. "Communications Shelters and Co-Location Facilities" means the communications shelters and co-location facilities associated with the Strands described in Exhibit A-1, and which are being purchased by Purchaser as part of the Assets, and which are more particularly described in Exhibit A-2. "Fiber Optic Cable" means one or more Bundles of Strands of which certain of the Assets form a part. "Initial Term" means, with respect to a particular segment described on Exhibit A-1, the time period expiring on the expiry of the Underlying Rights for such segment. "Rights" means the ROW Rights and Shelter Licenses granted by the Vendor to Purchaser under this Agreement. "ROW Rights" means a non-exclusive right to use and enjoy the Underlying Rights, in common with all others having such rights, with respect to Strands forming part of the Assets and with respect to Communications Shelters located on the Underlying Rights granted by way of a sublicense, an indefeasible right to use or other subright (subject in all respects to the terms of the applicable Underlying Rights). "Shelter License" has the meaning ascribed thereto in Section 5 of this Schedule "A". -11- "Strand" or "strand" means a strand of optical fibre. "Support Structures" means the infrastructure necessary to support the operations of the Fiber Optic Cables including, without limitation, cable sheathing (jacket, tubing, core wrap) and all associated conduit, troughing, pedestals, slack containers, Utilities Shelters, connections between the Utilities Shelters and Communications Shelters and between the Fiber Optic Cable and the Communications Shelters and related equipment, but excluding the Communications Shelters. "Support Structures Agreement" means the agreement that will be entered into by the Vendor and the Purchaser and all other owners of Strands (and, potentially, those with other rights therein) in the Fiber Optic Cable. "Support Structures Interests" has the meaning ascribed thereto in Section 4 of this Schedule "A". "Underlying Rights" means all easements, licenses of occupation, rights-of-way or other similar rights held, owned or acquired or to be held, owned or acquired, by the Vendor with respect to the land, structures, bridges, tunnels or buildings through which the Fiber Optic Cable or any of them passes and upon which certain of the Communications Shelters and Co-Location Facilities may be located; and "Right-of-Way" means one of the Rights-of-Way. "Utilities Shelters" means the utilities shelters that are part of the Support Structures. 3. ASSETS INCLUDE ROW RIGHTS (a) The Assets include the grant by the Vendor to the Purchaser with respect to the ROW Rights required for the use, operation and maintenance of the Assets and Support Structures during the Initial Term of a sublicense of the ROW Rights to be granted pursuant to a sublicense agreement to be executed and delivered as described in Section 10.1 of the Agreement (the "Sublicense Agreement"). (b) The purchase price referred to in Article 5 of the Agreement shall be inclusive of all consideration payable for applicable Underlying Rights for the Initial Term. Notwithstanding anything to the contrary contained herein, the terms of the sublicensing of ROW Rights shall be subject to the terms of such Sublicense Agreement and any Rights granted to Purchaser pursuant to the Sublicense Agreement in accordance herewith shall be subject in all respects to the terms of applicable laws and of the Underlying Rights including, without limitation, any requirements for the consent of the grantor to such grant and any limitations on the rights granted. (c) The terms of the grant of ROW Rights shall be included in a separate sublicense from the Vendor to the Purchaser to be executed and delivered as described in Section 10.1 of the Agreement. -12- 4. INTEREST IN SUPPORT STRUCTURES The Assets include the grant by the Vendor to the Purchaser, for no additional consideration, of an undivided interest in all Support Structures related thereto (including, for greater clarity, related Utilities Shelters) equal to its proportionate share in the total Strands from time to time making up the applicable segment of the Fiber Optic Cable(s) that will be shared with others (such undivided interest shall be referred to as the "Support Structures Interests"). The Purchaser acknowledges that the Support Structures will be owned by all owners of Strands permitted by the Rights-of-Way and may be used by such owners or others granted rights in the strands. 5. COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES The Assets include the Communications Shelters and Co-Location Facilities, but not any interest in the land upon which such Communication Shelters and Co-Location Facilities are located. Where Exhibit A-1 indicates that the Assets include a communications shelter, then the Assets include all right, title and interest of the Vendor in and to such communications shelter. Where Exhibit A-1 indicates that the Assets include co-location facilities, the Assets include the grant by the Vendor to the Purchaser of non-exclusive licences of occupation in respect of such co-location facilities, to be included in a co-location agreement in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith. The Assets include the grant by the Vendor to the Purchaser of non-exclusive licenses of occupation in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith (a "Shelter License") in respect of each Communications Shelter and Co-Location Facility that is not located on one of the Underlying Rights, for the Initial Term, pursuant to Shelter License agreements to be executed and delivered as described in this Section 5, and such Shelter Licenses shall entitle Purchaser (at no cost to Purchaser during the Initial Term) to keep such Communications Shelters at the location supplied and (at Purchaser's cost) to maintain, repair and improve any equipment or materials in such Communications Shelters and to have exclusive access to the interior of the Communications Shelters. -13- SCHEDULE A-1 BANDWIDTH STRANDS
- ------------------------------------------------------------------------------------------------------------------- DUCT TUBE STRAND STRAND SEGMENTS MILE POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------- US BORDER TO CAMBRIDGE US Border to Collage Ave 226.30 to CN/StL&H 2 Orange Rose 121-122 Leaf 225.21 Collage Avenue to Hyde Park Road 111.8 to 3.9 StL&H 174 Orange Rose 121-122 Leaf Hyde Park Road to London 3.9 to 0.0 StL&H 6 Orange Rose 121-122 Leaf London to Airport Road 114.6 to StL&H 8 Orange Rose 121-122 Leaf 109.48 Airport Road to Cambridge 109.48 to StL&H 84 Orange Rose 121-122 Leaf 57.2 - -------------------------------------------------------------------------------------------------------------------
-14- SCHEDULE A-2 COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES
- -------------------------------------------------------------------------------------- SITE ADDRESS ROW SHELTER TYPE - -------------------------------------------------------------------------------------- Chatham 245 Murray Street CP Line Amp London 721 Quebec Street CP ADM Cambridge 150 Samuelson Street CP Line Amp - --------------------------------------------------------------------------------------
-15- SCHEDULE "B" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN LEDCOR COMMUNICATIONS LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) --------------------------------------------------------- SHARE CONSIDERATION ------------------- 1000 Class "I" Series 1 Preferred Non-Voting Shares of the capital of the Purchaser, represented by Share Certificate No 1-I(SER-1), having a redemption price equal to the Fair Market Value of the Assets. -16- EX-10.37 10 EXHIBIT 10.37 Exhibit 10.37 ASSET PURCHASE AGREEMENT (ROLL-OVER) (BANDWIDTH) THIS AGREEMENT is made effective as of the ____ day of April, 2000. BETWEEN: WFI-CN FIBRE INC. (the "Vendor") - and - WFI URBANLINK LTD. (the "Purchaser") WHEREAS: A. The Vendor is a subsidiary of 360. B. 360 and the Purchaser are parties to the Definitive Agreement, pursuant to which 360 has agreed to cause the Vendor to transfer the Assets to the Purchaser. C. The Vendor wishes to transfer the Assets to the Purchaser, and the Purchaser wishes to acquire the Assets from the Vendor, all as at the Effective Date for a total purchase price equal to the aggregate fair market value of the Assets, on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION OF the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1 INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2 DEFINITIONS 2.1 In this Agreement: (a) "360" means 360networks inc. (b) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (c) "Adjusted Cost Base" means the aggregate cost amount of the Assets determined by the Vendor in accordance with the provisions of the Act, where "cost amount" is as defined in subsection 248(1) of the Act; (d) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (e) "Adjusted Fair Market Value" means the aggregate of the fair market value of the Assets, determined in accordance with section 5.4 to be a greater or lesser amount than the Elected Fair Market Value; (f) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (g) "Assets" has that meaning as set forth in Schedule "A" hereto; (h) "Closing Date" means the Effective Date; (i) "Definitive Agreement" means the Urbanlink Reorganization Definitive Agreement relating to the Urbanlink Reorganization dated the same date as this Agreement and made between 360, Worldwide Fiber Holdings Ltd., the Purchaser and Urbanlink Equipment Ltd.; (j) "Effective Date" means the date of this Agreement; (k) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets; (l) "Elected Fair Market Value" means the aggregate fair market value of the Assets as determined by the parties and reflected in the Election; (m) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Assets; (n) "Fair Market Value" means the fair market value of the Assets determined as the Effective Date, which shall be equal to either the Elected Fair Market Value or the Adjusted Fair Market Value, as finally determined in accordance with either section 5.3 or section 5.4 hereof, as the case may be; (o) "Redemption Amount" means the amount per share payable on the redemption of the shares forming the Share Consideration, which amount shall be equal to the -2- Fair Market Value divided by the number of shares forming the Share Consideration; (p) "Revised Adjusted Cost Base" means the adjusted cost base of the Assets determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (q) "Schedules" means any schedules which are attached to this Agreement; (r) "Share Consideration" means the number and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (s) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Fair Market Value; and (t) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3 PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Assets. ARTICLE 4 EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Assets is deemed to have occurred as of the Effective Date. ARTICLE 5 PURCHASE PRICE 5.1 The total purchase price for the Assets is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 Subject to section 5.4, the parties have determined that the fair market value of the Assets is equal to the Elected Fair Market Value, which determination is final and binding upon the parties. -3- 5.4 If: (a) the Taxing Authority at any time proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the aggregate of the fair market value of the Assets at the Effective Date is a greater or lesser amount than the Elected Fair Market Value; and (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the aggregate of the fair market value of the Assets as of the Effective Date is the Adjusted Fair Market Value; then: (c) the Fair Market Value shall be deemed to have always been, and the Fair Market Value wherever referred to in this Agreement shall be read as meaning, the Adjusted Fair Market Value. 5.5 If not all of the shares forming the Share Consideration have been redeemed or purchased by the Purchaser on or prior to the date of determination of the Adjusted Fair Market Value of the Assets, then the Redemption Amount for each of the shares forming the Share Consideration which are still outstanding at that time, shall be adjusted in accordance with section 5.7 hereof. 5.6 If the Purchaser has repurchased or redeemed all of the shares forming the Share Consideration at or before the time that the Adjusted Fair Market Value is determined, then: (a) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration exceeds the Adjusted Fair Market Value, the excess shall be a debt payable to the Purchaser by the Vendor, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Purchaser's bank, calculated from the date of default until the date payment is made; and (b) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration is less than the Adjusted Fair Market Value, the loss shall be a debt payable to the Vendor by the Purchaser, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Vendor's bank, calculated from the date of default until the date payment is made. 5.7 If, because of the operation of section 5.4, the Fair Market Value is determined at the Effective Date to be equal to the Adjusted Fair Market Value, then the Redemption Amount shall be adjusted NUNC PRO TUNC to reflect an amount equal to the Adjusted Fair Market Value, and all necessary adjustments, payments and repayments, if any, as may be required by virtue of such -4- adjustment, shall forthwith be made between the Purchaser and the Vendor in accordance with the provisions of section 5.6, MUTATIS MUTANDIS. ARTICLE 6 JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Assets, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Assets shall be equal to the Adjusted Elected Amount. ARTICLE 7 VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Assets shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever; -5- (b) no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Assets from the Vendor other than as set out in this Agreement; (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act; and (d) the distances shown on the Schedules are accurate. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within two years from the Closing Date. ARTICLE 8 PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Shares (ii) Class "I" Preferred Non-Voting Shares, authorized to be issued in series, which series shares are designated as follows: (A) Class "I" Series 1 Preferred Non-Voting Shares; (B) Class "I" Series 2 Preferred Non-Voting Shares; (C) Class "I" Series 3 Preferred Non-Voting Shares; (D) Class "I" Series 4 Preferred Non-Voting Shares; (E) Class "I" Series 5 Preferred Non-Voting Shares; (F) Class "I" Series 6 Preferred Non-Voting Shares; (G) Class "I" Series 7 Preferred Non-Voting Shares; (H) Class "I" Series 8 Preferred Non-Voting Shares; (I) Class "I" Series 9 Preferred Non-Voting Shares; -6- (J) Class "I" Series 10 Preferred Non-Voting Shares; (K) Class "I" Series 11 Preferred Non-Voting Shares; (L) Class "I" Series 12 Preferred Non-Voting Shares; (M) Class "I" Series 13 Preferred Non-Voting Shares; (N) Class "I" Series 14 Preferred Non-Voting Shares; (O) Class "I" Series 15 Preferred Non-Voting Shares; having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within two years from the Closing Date. ARTICLE 9 CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall do all things necessary to transfer to the Purchaser the Assets; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the requisite conveyances necessary to transfer ownership of the Assets in the name of the Purchaser or its nominee have not been completed on the Closing Date the Vendor agrees that, until such time as the Assets shall be transferred into the name of the Purchaser or its -7- nominee, the Vendor shall stand as owner of the Assets as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all amounts received by the Vendor as the owner of the Assets; and (b) transfer and deal with the Assets in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities that the Vendor may incur by reason of the Assets being in the name of the Vendor. ARTICLE 10 FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. Without limiting the generality of the foregoing, the Vendor shall use all commercially reasonable efforts to make, do, execute or cause to be made, done, or executed all such further and lawful acts, deeds, things, documents and assurances as may be necessary to document the sublicence referred to in the description of the Assets on Schedule "A", to obtain any required consents from the grantors of rights-of-way and, where possible, to obtain non-disturbance agreements from the grantors of rights-of-way. ARTICLE 11 NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; -8- (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12 ENTIRE AGREEMENT 12.1 This Agreement, together with the Definitive Agreement and the documents referred to in the Definitive Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. ARTICLE 13 ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14 COUNTERPARTS 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation on the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. [THE NEXT PAGE IS THE EXECUTION PAGE.] -9- IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. WFI-CN FIBRE INC. PER: ------------------------------ WFI URBANLINK LTD. PER: ------------------------------ -10- SCHEDULE "A" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WFI-CN FIBRE INC. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) ---------------------------------------------------- ASSETS ------ 1. ASSETS "Assets" means the Strands located in Canada that are more particularly described in Exhibit A-1, together with associated Communication Shelters and Co-Location Facilities, Support Structures Interests and ROW Rights, as described below. 2. DEFINITIONS For the purposes of this Schedule "A", except as otherwise expressly defined below, capitalized terms shall have the meanings provided for in the Agreement to which this Schedule "A" is attached: "Bundle" means a grouping of 12 continuously running Strands in the buffer tube within which such Strands are enclosed, in the Fiber Optic Cable. "Communications Shelters and Co-Location Facilities" means the communications shelters and co-location facilities associated with the Strands described in Exhibit A-1 and which are being purchased by Purchaser as part of the Assets, and which are more particularly described in Exhibit A-2. "Fiber Optic Cable" means one or more Bundles of Strands of which certain of the Assets form a part. "Initial Term" means, with respect to a particular segment described on Exhibit A-1, the time period expiring on the expiry of the Underlying Rights for such segment. "Rights" means the ROW Rights and Shelter Licenses granted by the Vendor to Purchaser under this Agreement. "ROW Rights" means a non-exclusive right to use and enjoy the Underlying Rights, in common with all others having such rights, with respect to Strands forming part of the Assets and with respect to Communications Shelters located on the Underlying Rights granted by way of a sublicense, an indefeasible right to use or other subright (subject in all respects to the terms of the applicable Underlying Rights). "Shelter License" has the meaning ascribed thereto in Section 5 of this Schedule "A". -11- "Strand" or "strand" means a strand of optical fibre. "Support Structures" means the infrastructure necessary to support the operations of the Fiber Optic Cables including, without limitation, cable sheathing (jacket, tubing, core wrap) and all associated conduit, troughing, pedestals, slack containers, Utilities Shelters, connections between the Utilities Shelters and Communications Shelters and between the Fiber Optic Cable and the Communications Shelters and related equipment, but excluding the Communications Shelters. "Support Structures Agreement" means the agreement that will be entered into by the Vendor and the Purchaser and all other owners of Strands (and, potentially, those with other rights therein) in the Fiber Optic Cable. "Support Structures Interests" has the meaning ascribed thereto in Section 4 of this Schedule "A". "Underlying Rights" means all easements, licenses of occupation, rights-of-way or other similar rights held, owned or acquired or to be held, owned or acquired, by the Vendor with respect to the land, structures, bridges, tunnels or buildings through which the Fiber Optic Cable or any of them passes and upon which certain of the Communications Shelters and Co-Location Facilities may be located; and "Right-of-Way" means one of the Rights-of-Way. "Utilities Shelters" means the utilities shelters that are part of the Support Structures. 3. ASSETS INCLUDE ROW RIGHTS (a) The Assets include the grant by the Vendor to the Purchaser with respect to the ROW Rights required for the use, operation and maintenance of the Assets and Support Structures during the Initial Term of a sublicense of the ROW Rights to be granted pursuant to a sublicense agreement to be executed and delivered as described in Section 10.1 of the Agreement (the "Sublicense Agreement"). (b) The purchase price referred to in Article 5 of the Agreement shall be inclusive of all consideration payable for applicable Underlying Rights for the Initial Term. Notwithstanding anything to the contrary contained herein, the terms of the sublicensing of ROW Rights shall be subject to the terms of such Sublicense Agreement and any Rights granted to Purchaser pursuant to the Sublicense Agreement in accordance herewith shall be subject in all respects to the terms of applicable laws and of the Underlying Rights including, without limitation, any requirements for the consent of the grantor to such grant and any limitations on the rights granted. (c) The terms of the grant of ROW Rights shall be included in a separate sublicense from the Vendor to the Purchaser to be executed and delivered as described in Section 10.1 of the Agreement. -12- 4. INTEREST IN SUPPORT STRUCTURES The Assets include the grant by the Vendor to the Purchaser, for no additional consideration, of an undivided interest in all Support Structures related thereto (including, for greater clarity, related Utilities Shelters) equal to its proportionate share in the total Strands from time to time making up the applicable segment of the Fiber Optic Cable(s) that will be shared with others (such undivided interest shall be referred to as the "Support Structures Interests"). The Purchaser acknowledges that the Support Structures will be owned by all owners of Strands permitted by the Rights-of-Way and may be used by such owners or others granted rights in the strands. 5. COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES The Assets include the Communications Shelters and Co-Location Facilities, but not any interest in the land upon which such Communication Shelters and Co-Location Facilities are located. Where Exhibit A-1 indicates that the Assets include a communications shelter, then the Assets include all right, title and interest of the Vendor in and to such communications shelter. Where Exhibit A-1 indicates that the Assets include co-location facilities, the Assets include the grant by the Vendor to the Purchaser of non-exclusive licences of occupation in respect of such co-location facilities, to be included in a co-location agreement in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith. The Assets include the grant by the Vendor to the Purchaser of non-exclusive licenses of occupation in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith (a "Shelter License") in respect of each Communications Shelter and Co-Location Facility that is not located on one of the Underlying Rights, for the Initial Term, pursuant to Shelter License agreements to be executed and delivered as described in this Section 5, and such Shelter Licenses shall entitle Purchaser (at no cost to Purchaser during the Initial Term) to keep such Communications Shelters at the location supplied and (at Purchaser's cost) to maintain, repair and improve any equipment or materials in such Communications Shelters and to have exclusive access to the interior of the Communications Shelters. -13- SCHEDULE A-1 BANDWIDTH STRANDS
- ------------------------------------------------------------------------------------------------------------------- DUCT TUBE STRAND STRAND SEGMENTS MILE POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------- TORONTO TO BROCKVILLE Union Station to Parliament 333.8 to TTR 12 Orange Rose 121-122 Leaf St.(Kingston) 332.8 Parliament St to Scarborough 332.8 to 7.24 CN 23 Orange Rose 121-122 Leaf (Kingston) Scarborough to Pickering Jct. 325.56 to CN 299 Orange Rose 121-122 Leaf (Kingston) 311.4 Pickering Jct. To Brockville 311.4 to CN Orange Rose 121-122 Leaf (Kingston) 125.7 BROCKVILLE TO SMITH FALLS 27.8 to 0.0 StL&H 45 Orange Rose 121-122 Leaf SMITH FALLS TO OTTAWA (VIA) STATION Smith Falls to Alexander St.(Smiths 34.5 to 34.38 StL&H 0.2 Orange Rose 121-122 Leaf Falls) Alexander st. to CN Radio Site 34.38 to CN 1 Orange Rose 121-122 Leaf (Smiths Falls) 34.05 CN Radio Site to Richmond (Smiths 34.05 to 13.0 VIA 34 Orange Rose 121-122 Leaf Falls) Richmond to Federal (Smiths Falls) 13.0 to 0.0 CN 21 Orange Rose 121-122 Leaf Federal to Union Station (Beachburg) 6.0 to 0.9 CN 10 Orange Rose 121-122 Leaf BORDER TO TORONTO U.S. Border to Fort Erie (Stamford) 0.6 to 1.0 CN 1 Orange Rose 121-122 Leaf Fort Erie to Port Robinson (Stamford) 1.0 to 23.14 CN 36 Orange Rose 121-122 Leaf Port Robinson to Merriton (Thorld 1.27 to 7.9 CN 11 Orange Rose 121-122 Leaf Spur) Merriton to Hamilton (Grimsby) 9.5 to 43.66 CN 55 Orange Rose 121-122 Leaf Hamilton to Canpa (Oakville) 39.3 to 8.5 CN 50 Orange Rose 121-122 Leaf Canpa to Windsor St. (Oakville) 8.5 to 0.5 CN 13 Orange Rose 121-122 Leaf OTTAWA TO QUEBEC BORDER Union Station to Hawthorne Diamond 76.5 to 2.72 CN 6 Temp Rose 121-122 Leaf (Alexandria) - -------------------------------------------------------------------------------------------------------------------
-14-
- ------------------------------------------------------------------------------------------------------------------- DUCT TUBE STRAND STRAND SEGMENTS MILE POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------- Hawthorne Diamond to Hawthorne 72.72 to 72.5 CN 0.4 Rose 121-122 Leaf (Alexandria) Hawthorne to Quebec Border 72.5 to 12.5 VIA 97 Rose 121-122 Leaf (Alexandria) BORDER TO QUEBEC CITY Coteau Jct. To Dorion (Kingston) 38.0 to 24.3 CN 22.04 Orange Rose 121-122 Leaf Dorion to Dorval (Kingston) 24.3 to 10.3 CN 22.53 Orange Rose 121-122 Leaf Dorval to Taschereau Yard (Montreal) 11.6 to 9.0 CN 4.18 Orange Rose 121-122 Leaf MONTREAL TO QUEBEC CITY CN 259.79 Orange Rose 121-122 Leaf - -------------------------------------------------------------------------------------------------------------------
-15- SCHEDULE A-2 COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES
- ---------------------------------------------------------------------------------------------------- SITE ADDRESS ROW RAIL MILE POINT SHELTER TYPE - ---------------------------------------------------------------------------------------------------- Cranberry 14 Concession, Lot 35, CN 205.1 Line Amp Hwy #69 - ---------------------------------------------------------------------------------------------------- Parry Sound 80 Cascade St CN 150.17 Line Amp - ---------------------------------------------------------------------------------------------------- Woodward Muskoka Rd #13, CN 104.19 Line Amp - ---------------------------------------------------------------------------------------------------- Pefferlaw Pefferlaw Rd. CN 55.5 Line Amp - ----------------------------------------------------------------------------------------------------
-16- SCHEDULE "B" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WFI-CN FIBRE INC. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) --------------------------------------------------------- SHARE CONSIDERATION ------------------- 1000 Class "I" Series 2 Preferred Non-Voting Shares of the capital of the Purchaser, represented by Share Certificate No. 1-I(SER-2) having a redemption price equal to the Fair Market Value of the Assets. -17- EX-10.38 11 EXHIBIT 10.38 Exhibit 10.38 ASSET PURCHASE AGREEMENT (ROLL-OVER) THIS AGREEMENT is made effective as of the ____ day of April, 2000. BETWEEN: WORLDWIDE FIBER (F.O.T.S.) NO. 3, LTD. (the "Vendor") - and - WFI URBANLINK LTD. (the "Purchaser") WHEREAS: A. The Vendor is a subsidiary of 360. B. 360 and the Purchaser are parties to the Definitive Agreement, pursuant to which 360 has agreed to cause the Vendor to transfer the Assets to the Purchaser. C. The Vendor wishes to transfer the Assets to the Purchaser, and the Purchaser wishes to acquire the Assets from the Vendor, all as at the Effective Date for a total purchase price equal to the aggregate fair market value of the Assets, on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION OF the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1 INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2 DEFINITIONS 2.1 In this Agreement: (a) "360" means 360networks inc. (b) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (c) "Adjusted Cost Base" means the aggregate cost amount of the Assets determined by the Vendor in accordance with the provisions of the Act, where "cost amount" is as defined in subsection 248(1) of the Act; (d) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (e) "Adjusted Fair Market Value" means the aggregate of the fair market value of the Assets, determined in accordance with section 5.4 to be a greater or lesser amount than the Elected Fair Market Value; (f) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (g) "Assets" has that meaning as set forth in Schedule "A" hereto; (h) "Closing Date" means the Effective Date; (i) "Definitive Agreement" means the Urbanlink Reorganization Definitive Agreement relating to the Urbanlink Reorganization dated the same date as this Agreement and made between 360, Worldwide Fiber Holdings Ltd., the Purchaser and Urbanlink Equipment Ltd.; (j) "Effective Date" means the date of this Agreement; (k) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets; (l) "Elected Fair Market Value" means the aggregate fair market value of the Assets as determined by the parties and reflected in the Election; (m) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Assets; (n) "Fair Market Value" means the fair market value of the Assets determined as the Effective Date, which shall be equal to either the Elected Fair Market Value or the Adjusted Fair Market Value, as finally determined in accordance with either section 5.3 or section 5.4 hereof, as the case may be; (o) "Redemption Amount" means the amount per share payable on the redemption of the shares forming the Share Consideration, which amount shall be equal to the -2- Fair Market Value divided by the number of shares forming the Share Consideration; (p) "Revised Adjusted Cost Base" means the adjusted cost base of the Assets determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (q) "Schedules" means any schedules which are attached to this Agreement; (r) "Share Consideration" means the number and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (s) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Fair Market Value; and (t) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3 PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Assets. ARTICLE 4 EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Assets is deemed to have occurred as of the Effective Date. ARTICLE 5 PURCHASE PRICE 5.1 The total purchase price for the Assets is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 Subject to section 5.4, the parties have determined that the fair market value of the Assets is equal to the Elected Fair Market Value, which determination is final and binding upon the parties. -3- 5.4 If: (a) the Taxing Authority at any time proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the aggregate of the fair market value of the Assets at the Effective Date is a greater or lesser amount than the Elected Fair Market Value; and (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the aggregate of the fair market value of the Assets as of the Effective Date is the Adjusted Fair Market Value; then: (c) the Fair Market Value shall be deemed to have always been, and the Fair Market Value wherever referred to in this Agreement shall be read as meaning, the Adjusted Fair Market Value. 5.5 If not all of the shares forming the Share Consideration have been redeemed or purchased by the Purchaser on or prior to the date of determination of the Adjusted Fair Market Value of the Assets, then the Redemption Amount for each of the shares forming the Share Consideration which are still outstanding at that time, shall be adjusted in accordance with section 5.7 hereof. 5.6 If the Purchaser has repurchased or redeemed all of the shares forming the Share Consideration at or before the time that the Adjusted Fair Market Value is determined, then: (a) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration exceeds the Adjusted Fair Market Value, the excess shall be a debt payable to the Purchaser by the Vendor, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Purchaser's bank, calculated from the date of default until the date payment is made; and (b) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration is less than the Adjusted Fair Market Value, the loss shall be a debt payable to the Vendor by the Purchaser, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Vendor's bank, calculated from the date of default until the date payment is made. 5.7 If, because of the operation of section 5.4, the Fair Market Value is determined at the Effective Date to be equal to the Adjusted Fair Market Value, then the Redemption Amount shall be adjusted NUNC PRO TUNC to reflect an amount equal to the Adjusted Fair Market Value, and all necessary adjustments, payments and repayments, if any, as may be required by virtue of such -4- adjustment, shall forthwith be made between the Purchaser and the Vendor in accordance with the provisions of section 5.6, MUTATIS MUTANDIS. ARTICLE 6 JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Assets, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Assets shall be equal to the Adjusted Elected Amount. ARTICLE 7 VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Assets shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever; -5- (b) no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Assets from the Vendor other than as set out in this Agreement; (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act; and (d) the distances shown on the Schedules are accurate. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within two years from the Closing Date. ARTICLE 8 PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Shares (ii) Class "I" Preferred Non-Voting Shares, authorized to be issued in series, which series shares are designated as follows: (A) Class "I" Series 1 Preferred Non-Voting Shares; (B) Class "I" Series 2 Preferred Non-Voting Shares; (C) Class "I" Series 3 Preferred Non-Voting Shares; (D) Class "I" Series 4 Preferred Non-Voting Shares; (E) Class "I" Series 5 Preferred Non-Voting Shares; (F) Class "I" Series 6 Preferred Non-Voting Shares; (G) Class "I" Series 7 Preferred Non-Voting Shares; (H) Class "I" Series 8 Preferred Non-Voting Shares; (I) Class "I" Series 9 Preferred Non-Voting Shares; -6- (J) Class "I" Series 10 Preferred Non-Voting Shares; (K) Class "I" Series 11 Preferred Non-Voting Shares; (L) Class "I" Series 12 Preferred Non-Voting Shares; (M) Class "I" Series 13 Preferred Non-Voting Shares; (N) Class "I" Series 14 Preferred Non-Voting Shares; (O) Class "I" Series 15 Preferred Non-Voting Shares; having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within two years from the Closing Date. ARTICLE 9 CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall do all things necessary to transfer to the Purchaser the Assets; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the requisite conveyances necessary to transfer ownership of the Assets in the name of the Purchaser or its nominee have not been completed on the Closing Date the Vendor agrees that, until such time as the Assets shall be transferred into the name of the Purchaser or its -7- nominee, the Vendor shall stand as owner of the Assets as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all amounts received by the Vendor as the owner of the Assets; and (b) transfer and deal with the Assets in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities that the Vendor may incur by reason of the Assets being in the name of the Vendor. ARTICLE 10 FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. Without limiting the generality of the foregoing, the Vendor shall use all commercially reasonable efforts to make, do, execute or cause to be made, done, or executed all such further and lawful acts, deeds, things, documents and assurances as may be necessary to document the sublicence referred to in the description of the Assets on Schedule "A", to obtain any required consents from the grantors of rights-of-way and, where possible, to obtain non-disturbance agreements from the grantors of rights-of-way. ARTICLE 11 NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; -8- (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12 ENTIRE AGREEMENT 12.1 This Agreement, together with the Definitive Agreement and the documents referred to in the Definitive Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. ARTICLE 13 ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14 COUNTERPARTS 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation on the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. [THE NEXT PAGE IS THE EXECUTION PAGE.] -9- IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. WORLDWIDE FIBER (F.O.T.S.) NO. 3, LTD. PER: ------------------------------ WFI URBANLINK LTD. PER: ------------------------------ -10- SCHEDULE "A" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WORLDWIDE FIBER (F.O.T.S.) NO. 3, LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) ---------------------------------------------------- ASSETS ------ 1. ASSETS "Assets" means the Strands located in Canada that are more particularly described in Exhibit A-1, together with associated Communication Shelters and Co-Location Facilities, Support Structures Interests and ROW Rights, as described below. 2. DEFINITIONS For the purposes of this Schedule "A", except as otherwise expressly defined below, capitalized terms shall have the meanings provided for in the Agreement to which this Schedule "A" is attached: "Bundle" means a grouping of 12 continuously running Strands in the buffer tube within which such Strands are enclosed, in the Fiber Optic Cable. "Communications Shelters and Co-Location Facilities" means the communications shelters and co-location facilities associated with the Strands described in Exhibit A-1, and which are being purchased by Purchaser as part of the Assets, and which are more particularly described in Exhibit A-2. "Fiber Optic Cable" means one or more Bundles of Strands of which certain of the Assets form a part. "Initial Term" means, with respect to a particular segment described on Exhibit A-1, the time period expiring on the expiry of the Underlying Rights for such segment. "Rights" means the ROW Rights and Shelter Licenses granted by the Vendor to Purchaser under this Agreement. "ROW Rights" means a non-exclusive right to use and enjoy the Underlying Rights, in common with all others having such rights, with respect to Strands forming part of the Assets and with respect to Communications Shelters located on the Underlying Rights granted by way of a sublicense, an indefeasible right to use or other subright (subject in all respects to the terms of the applicable Underlying Rights). "Shelter License" has the meaning ascribed thereto in Section 5 of this Schedule "A". -11- "Strand" or "strand" means a strand of optical fibre. "Support Structures" means the infrastructure necessary to support the operations of the Fiber Optic Cables including, without limitation, cable sheathing (jacket, tubing, core wrap) and all associated conduit, troughing, pedestals, slack containers, Utilities Shelters, connections between the Utilities Shelters and Communications Shelters and between the Fiber Optic Cable and the Communications Shelters and related equipment, but excluding the Communications Shelters. "Support Structures Agreement" means the agreement that will be entered into by the Vendor and the Purchaser and all other owners of Strands (and, potentially, those with other rights therein) in the Fiber Optic Cable. "Support Structures Interests" has the meaning ascribed thereto in Section 4 of this Schedule "A". "Underlying Rights" means all easements, licenses of occupation, rights-of-way or other similar rights held, owned or acquired or to be held, owned or acquired, by the Vendor with respect to the land, structures, bridges, tunnels or buildings through which the Fiber Optic Cable or any of them passes and upon which certain of the Communications Shelters and Co-Location Facilities may be located; and "Right-of-Way" means one of the Rights-of-Way. "Utilities Shelters" means the utilities shelters that are part of the Support Structures. 3. ASSETS INCLUDE ROW RIGHTS (a) The Assets include the grant by the Vendor to the Purchaser with respect to the ROW Rights required for the use, operation and maintenance of the Assets and Support Structures during the Initial Term of a sublicense of the ROW Rights to be granted pursuant to a sublicense agreement to be executed and delivered as described in Section 10.1 of the Agreement (the "Sublicense Agreement"). (b) The purchase price referred to in Article 5 of the Agreement shall be inclusive of all consideration payable for applicable Underlying Rights for the Initial Term. Notwithstanding anything to the contrary contained herein, the terms of the sublicensing of ROW Rights shall be subject to the terms of such Sublicense Agreement and any Rights granted to Purchaser pursuant to the Sublicense Agreement in accordance herewith shall be subject in all respects to the terms of applicable laws and of the Underlying Rights including, without limitation, any requirements for the consent of the grantor to such grant and any limitations on the rights granted. (c) The terms of the grant of ROW Rights shall be included in a separate sublicense from the Vendor to the Purchaser to be executed and delivered as described in Section 10.1 of the Agreement. -12- 4. INTEREST IN SUPPORT STRUCTURES The Assets include the grant by the Vendor to the Purchaser, for no additional consideration, of an undivided interest in all Support Structures related thereto (including, for greater clarity, related Utilities Shelters) equal to its proportionate share in the total Strands from time to time making up the applicable segment of the Fiber Optic Cable(s) that will be shared with others (such undivided interest shall be referred to as the "Support Structures Interests"). The Purchaser acknowledges that the Support Structures will be owned by all owners of Strands permitted by the Rights-of-Way and may be used by such owners or others granted rights in the strands. 5. COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES The Assets include the Communications Shelters and Co-Location Facilities, but not any interest in the land upon which such Communication Shelters and Co-Location Facilities are located. Where Exhibit A-1 indicates that the Assets include a communications shelter, then the Assets include all right, title and interest of the Vendor in and to such communications shelter. Where Exhibit A-1 indicates that the Assets include co-location facilities, the Assets include the grant by the Vendor to the Purchaser of non-exclusive licences of occupation in respect of such co-location facilities, to be included in a co-location agreement in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith. The Assets include the grant by the Vendor to the Purchaser of non-exclusive licenses of occupation in a form acceptable to the Purchaser and the Vendor, acting reasonably and in good faith (a "Shelter License") in respect of each Communications Shelter and Co-Location Facility that is not located on one of the Underlying Rights, for the Initial Term, pursuant to Shelter License agreements to be executed and delivered as described in this Section 5, and such Shelter Licenses shall entitle Purchaser (at no cost to Purchaser during the Initial Term) to keep such Communications Shelters at the location supplied and (at Purchaser's cost) to maintain, repair and improve any equipment or materials in such Communications Shelters and to have exclusive access to the interior of the Communications Shelters. -13- SCHEDULE A-1 BANDWIDTH STRANDS
- ------------------------------------------------------------------------------------------------------------------ TUBE STRAND STRAND SEGMENTS ROW KILOMETER DUCT COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------ From Calgary to Emerson CP 1,443 Orange Brown 41-42 SMF-28 From CP Tracks at Cambie St. CP 1,032 Orange Brown 41-42 SMF-28 Vancouver to Calgary From 301 Industrial Ave. to CP CP 3 Orange Brown 41-42 SMF-28 Tracks at Cambie St. Oak Street Bridge to 301 CN 11 Orange Brown 41-42 SMF-28 Industrial, Vancouver US Border to Victoria to Oak CN 84 Orange Brown 41-42 SMF-28 Street Bridge Edmonton CN tracks to Edmonton CN 11 Orange Brown 41-42 SMF-28 Brettville Junction Edmonton Bretville Junction to CN 1,958 Orange Brown 41-42 SMF-28 Thunder Bay Thunder Bay to Toronto CN 1,402 Orange Brown 41-42 SMF-28 - ------------------------------------------------------------------------------------------------------------------
-14- SCHEDULE A-2 COMMUNICATIONS SHELTERS AND CO-LOCATION FACILITIES
- ---------------------------------------------------------------------------------------------------------------------- RAIL MILE SITE ADDRESS ROW POINT SHELTER TYPE - ---------------------------------------------------------------------------------------------------------------------- Vancouver 175 West Cordova St. N/A N/A Co-location/ Terminal Agassiz 1913 Heath Road CP 58.5 Regen Shelter North Bend CP 0 Line Amp Basque CP 56.01 Line Amp Kamloops 95A 3rd Ave. (Lorne St) CP 0 Regen Shelter Salmon Arm 391 Lakeshore Drive NE CP 63.17 Line Amp Revelstoke Track St. East CP 125.6 Regen Shelter Glacier CP 85.5 Line Amp Golden Main St CP 34.8 Line Amp Lake Louise NE 28-28-16 W5M CP 116.44 Regen Shelter Exshaw Diamond Rd & Hwy 1A CP 57.23 Line Amp Calgary 303 9th Ave SE N/A N/A Co-location/ Terminal Gleichen 505 Crawfoot Ave CP 124.9 Line Amp Brooks 4 Centre St. CP 66.66 Line Amp Medicine Hat 540 North Railway St. E CP 147 ADM Maple Creek Pacific Ave. Bwtn Maple & CP 84.49 Line Amp Jasper Carmichael Railway Ave. btwn Webb & CP 43.39 Line Amp Lawrence Swift Current 1300 North Railway St. W CP 0.83 Regen Shelter Chaplin 4th Ave bwtn 4th & 6th St CP 53.79 Line Amp - ----------------------------------------------------------------------------------------------------------------------
-15-
- ---------------------------------------------------------------------------------------------------------------------- RAIL MILE SITE ADDRESS ROW POINT SHELTER TYPE - ---------------------------------------------------------------------------------------------------------------------- Moose Jaw 275 Manitoba Street West CP 0.31 Line Amp Regina 1250 South Railway St CP 93 ADM Wolseley 408 Poplar Street CP 30.8 Line Amp Wapella S Railway St btwn 1st & 2nd CP 102.6 Line Amp Ave Virden 406 5th Ave CP 47.24 Regen Shelter Douglas 108 Railway St. East CP 121.6 Line Amp Portage la Prairie (South 301 10th St. NW CP 56.36 Line Amp Route) Winnipeg Lizzie (South 357 Higgins Ave CP 0.35 Shelter Site Route) Winnipeg 391 Main St. N/A N/A Co-location/ Terminal Emerson Roseau St at 6th Ave CP/Illinois Central 63.51 Line Amp Victoria Line Amp OACD Holden 4740 54 St. CN 206.2 Line Amp Wainwright 102 1st St. CN 140.1 Line Amp Vera NW 1/4 24-41-24 W3M CN 68.53 Regen Shelter Biggar 902 1St Ave. W. CN 0.68 Line Amp Saskatoon 600 Ave. G South CN 190.67 ADM Watrous 101 1St Ave. CN 129.1 Line Amp Touchwood Range Rd 2161, NW 24-27-16 CN 65.74 Line Amp W2M Melville 101 1St Ave., East CN 280.2 Line Amp St. Lazarre 202 Main St. CN 204.51 Regen Shelter Brandon North Hwy #10, SW 7-12-18 CN 128.6 Line Amp Portage la Prairie (North 249 Fisher Ave. East CN 55.19 Line Amp Route) - ----------------------------------------------------------------------------------------------------------------------
-16-
- ---------------------------------------------------------------------------------------------------------------------- RAIL MILE SITE ADDRESS ROW POINT SHELTER TYPE - ---------------------------------------------------------------------------------------------------------------------- Winnipeg (North Route) 89 Main St CN 251.7 Shelter Site Badger Main St. NW 6-3-12 CN 77.38 Line Amp Rainy River 302 Atwood Ave. West CN 0.23 Line Amp Rocky Inlet George Armstron Ave. CN 81.14 Regen Shelter Elizabeth Perch Lake Rd CN 10.65 Line Amp Kabaigon Kabaigon Bay Rd. CN 75.21 Line Amp Thunder Bay 202 Waterloo St. CN 3.72 ADM Red Rock Baker Rd. (Hwy #628) CN 132.2 Line Amp Beardmore Rothwell St CN 70.28 Line Amp Longlac 1 Picnic Point Rd. CN 100.35 Regen Shelter Hillsport Hillsport Rd CN 42.42 Line Amp Macduff CN 271.15 Line Amp Peterbell CN 205.65 Regen Shelter Foleyet Railway Ave. CN 148.35 Line Amp Gogama Poupore St CN 86.7 Line Amp Laforest CN 29.86 Line Amp Sudbury Junction 2751 Lasalle Blvd CN 262.02 ADM - ----------------------------------------------------------------------------------------------------------------------
-17- SCHEDULE "B" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WORLDWIDE FIBER (F.O.T.S.) NO. 3, LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) ---------------------------------------------------------- SHARE CONSIDERATION ------------------- 1000 Class "I" Series 3 Preferred Non-Voting Shares of the capital of the Purchaser, represented by Share Certificate No.1-I (SER-3), having a redemption price equal to the Fair Market Value of the Assets. -18- EX-10.39 12 EXHIBIT 10.39 Exhibit 10.39 ASSET PURCHASE AGREEMENT (ROLL-OVER) (EQUIPMENT) THIS AGREEMENT is made effective as of the ____ day of April, 2000. BETWEEN: WORLDWIDE FIBER NETWORK SERVICES LTD. (the "Vendor") - and - WFI URBANLINK LTD. (the "Purchaser") WHEREAS: A. The Vendor is a subsidiary of 360. B. 360 and the Purchaser are parties to the Definitive Agreement, pursuant to which 360 has agreed to cause the Vendor to transfer the Assets to the Purchaser. C. The Vendor wishes to transfer the Assets to the Purchaser, and the Purchaser wishes to acquire the Assets from the Vendor, all as at the Effective Date for a total purchase price equal to the aggregate fair market value of the Assets, on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION OF the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1 INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2 DEFINITIONS 2.1 In this Agreement: (a) "360" means 360networks inc. (b) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (c) "Adjusted Cost Base" means the aggregate cost amount of the Assets determined by the Vendor in accordance with the provisions of the Act, where "cost amount" is as defined in subsection 248(1) of the Act; (d) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (e) "Adjusted Fair Market Value" means the aggregate of the fair market value of the Assets, determined in accordance with section 5.4 to be a greater or lesser amount than the Elected Fair Market Value; (f) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (g) "Assets" has that meaning as set forth in Schedule "A" hereto; (h) "Closing Date" means the Effective Date; (i) "Definitive Agreement" means the Urbanlink Reorganization Definitive Agreement relating to the Urbanlink Reorganization dated the same date as this Agreement and made between 360, Worldwide Fiber Holdings Ltd., the Purchaser and Urbanlink Equipment Ltd.; (j) "Effective Date" means the date of this Agreement; (k) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Assets; (l) "Elected Fair Market Value" means the aggregate fair market value of the Assets as determined by the parties and reflected in the Election; (m) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Assets; (n) "Fair Market Value" means the fair market value of the Assets determined as the Effective Date, which shall be equal to either the Elected Fair Market Value or the Adjusted Fair Market Value, as finally determined in accordance with either section 5.3 or section 5.4 hereof, as the case may be; (o) "Redemption Amount" means the amount per share payable on the redemption of the shares forming the Share Consideration, which amount shall be equal to the -2- Fair Market Value divided by the number of shares forming the Share Consideration; (p) "Revised Adjusted Cost Base" means the adjusted cost base of the Assets determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (q) "Schedules" means any schedules which are attached to this Agreement; (r) "Share Consideration" means the number and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (s) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Fair Market Value; and (t) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3 PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Assets. ARTICLE 4 EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Assets is deemed to have occurred as of the Effective Date. ARTICLE 5 PURCHASE PRICE 5.1 The total purchase price for the Assets is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 Subject to section 5.4, the parties have determined that the fair market value of the Assets is equal to the Elected Fair Market Value, which determination is final and binding upon the parties. -3- 5.4 If: (a) the Taxing Authority at any time proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the aggregate of the fair market value of the Assets at the Effective Date is a greater or lesser amount than the Elected Fair Market Value; and (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the aggregate of the fair market value of the Assets as of the Effective Date is the Adjusted Fair Market Value; then: (c) the Fair Market Value shall be deemed to have always been, and the Fair Market Value wherever referred to in this Agreement shall be read as meaning, the Adjusted Fair Market Value. 5.5 If not all of the shares forming the Share Consideration have been redeemed or purchased by the Purchaser on or prior to the date of determination of the Adjusted Fair Market Value of the Assets, then the Redemption Amount for each of the shares forming the Share Consideration which are still outstanding at that time, shall be adjusted in accordance with section 5.7 hereof. 5.6 If the Purchaser has repurchased or redeemed all of the shares forming the Share Consideration at or before the time that the Adjusted Fair Market Value is determined, then: (a) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration exceeds the Adjusted Fair Market Value, the excess shall be a debt payable to the Purchaser by the Vendor, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Purchaser's bank, calculated from the date of default until the date payment is made; and (b) where the aggregate of the amounts previously paid by the Purchaser on the repurchase of the Share Consideration is less than the Adjusted Fair Market Value, the loss shall be a debt payable to the Vendor by the Purchaser, on demand, without interest except in the event of default whereupon interest shall accrue on the principal amount in default at the rate of 2% per annum above the prime lending rate established from time to time by the Vancouver main branch of the Vendor's bank, calculated from the date of default until the date payment is made. 5.7 If, because of the operation of section 5.4, the Fair Market Value is determined at the Effective Date to be equal to the Adjusted Fair Market Value, then the Redemption Amount shall be adjusted NUNC PRO TUNC to reflect an amount equal to the Adjusted Fair Market Value, and all necessary adjustments, payments and repayments, if any, as may be required by virtue of such -4- adjustment, shall forthwith be made between the Purchaser and the Vendor in accordance with the provisions of section 5.6, MUTATIS MUTANDIS. ARTICLE 6 JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Assets, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any nature or kind on either of the parties on the basis that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Assets is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Assets shall be equal to the Adjusted Elected Amount. ARTICLE 7 VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Assets shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever; -5- (b) no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Assets from the Vendor other than as set out in this Agreement; and (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within two years from the Closing Date. ARTICLE 8 PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Shares (ii) Class "I" Preferred Non-Voting Shares, authorized to be issued in series, which series shares are designated as follows: (A) Class "I" Series 1 Preferred Non-Voting Shares; (B) Class "I" Series 2 Preferred Non-Voting Shares; (C) Class "I" Series 3 Preferred Non-Voting Shares; (D) Class "I" Series 4 Preferred Non-Voting Shares; (E) Class "I" Series 5 Preferred Non-Voting Shares; (F) Class "I" Series 6 Preferred Non-Voting Shares; (G) Class "I" Series 7 Preferred Non-Voting Shares; (H) Class "I" Series 8 Preferred Non-Voting Shares; (I) Class "I" Series 9 Preferred Non-Voting Shares; (J) Class "I" Series 10 Preferred Non-Voting Shares; -6- (K) Class "I" Series 11 Preferred Non-Voting Shares; (L) Class "I" Series 12 Preferred Non-Voting Shares; (M) Class "I" Series 13 Preferred Non-Voting Shares; (N) Class "I" Series 14 Preferred Non-Voting Shares; (O) Class "I" Series 15 Preferred Non-Voting Shares; having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Assets and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within two years from the Closing Date. ARTICLE 9 CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall do all things necessary to transfer to the Purchaser the Assets; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the requisite conveyances necessary to transfer ownership of the Assets in the name of the Purchaser or its nominee have not been completed on the Closing Date the Vendor agrees that, until such time as the Assets shall be transferred into the name of the Purchaser or its -7- nominee, the Vendor shall stand as owner of the Assets as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all amounts received by the Vendor as the owner of the Assets; and (b) transfer and deal with the Assets in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities that the Vendor may incur by reason of the Assets being in the name of the Vendor. ARTICLE 10 FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. Without limiting the generality of the foregoing, the Vendor shall use all commercially reasonable efforts to make, do, execute or cause to be made, done, or executed all such further and lawful acts, deeds, things, documents and assurances as may be necessary to document the sublicence referred to in the description of the Assets on Schedule "A", to obtain any required consents from the grantors of rights-of-way and, where possible, to obtain non-disturbance agreements from the grantors of rights-of-way. ARTICLE 11 NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; -8- (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12 ENTIRE AGREEMENT 12.1 This Agreement, together with the Definitive Agreement and the documents referred to in the Definitive Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. ARTICLE 13 ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14 COUNTERPARTS 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation on the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. [THE NEXT PAGE IS THE EXECUTION PAGE.] -9- IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. WORLDWIDE FIBER NETWORK SERVICES LTD. PER: ------------------------------ WFI URBANLINK LTD. PER: ------------------------------ -10- SCHEDULE "A" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WORLDWIDE FIBER NETWORK SERVICES LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) ---------------------------------------------------- ASSETS ------
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-12- SCHEDULE "B" ------------ TO THAT CERTAIN ASSET PURCHASE AGREEMENT (ROLL-OVER) MADE BETWEEN WORLDWIDE FIBER NETWORK SERVICES LTD. (AS VENDOR) AND WFI URBANLINK LTD. (AS PURCHASER) --------------------------------------------------------- SHARE CONSIDERATION ------------------- 1000 Class "I" Series 4 Preferred Non-Voting Shares of the capital of the Purchaser, represented by Share Certificate No. 1-I (SER-4) having a redemption price equal to the Fair Market Value of the Assets. -13- EX-10.40 13 EXHIBIT 10.40 Exhibit 10.40 RESELLER AGREEMENT THIS AGREEMENT Dated For Reference the _____ day of April, 2000 BETWEEN: 360NETWORKS INC. ("360") AND: WORLDWIDE FIBER NETWORKS SERVICES LTD. ("Services") AND: WFI URBANLINK LTD. ("Urbanlink") WHEREAS: A. Urbanlink has agreed to grant to Services, or to such other 360 Subsidiaries as 360 may specify from time to time, IRU capacity purchase agreements to acquire four OC-192s or the equivalent on each of the Strands, as hereinafter defined. B. 360, Services and Urbanlink have entered into this Agreement to record their respective rights and obligations with respect to the capacity purchase agreements and certain related rights and obligations. IN CONSIDERATION of the mutual agreements in this Agreement and subject to the terms and conditions specified in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS In this Agreement, including the recitals and the schedules, the following words and expressions have the following meanings unless the context otherwise requires: "Affiliate" has the meaning ascribed thereto under the CANADA BUSINESS CORPORATIONS ACT. "Capacity Purchase Agreement" shall mean a Capacity Purchase Agreement in the form attached as Schedule "C", with such amendments as may be agreed between Services and Urbanlink, acting reasonably and in good faith. "Capacity Service" means the service of providing the capacity pursuant to the Capacity Purchase Agreements that are in effect from time to time. "Co-Development Strands" shall have the meaning ascribed thereto in the recitals. "First Renewal Term" shall have the meaning provided in Section 6.2. "Initial Term" shall have the meaning provided in Section 6.1. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Phase I Strands" shall mean the Strands described in Schedule "A". "Phase II Strands" shall mean the Strands described in Schedule "B" and any strands acquired by Urbanlink pursuant to any co-development arrangements with Services or its Affiliates. "Renewal Terms" shall mean the First Renewal Term and the Second Renewal Term, as applicable. "Second Renewal Term" shall have the meaning provided in Section 6.2. "Strands" shall mean the Phase I Strands and the Phase II Strands. 1.2 SCHEDULES The following schedules are attached to and form part of this Agreement: SCHEDULE TITLE A Phase I Strands B Phase II Strands C Capacity Purchase Agreement ARTICLE 2 CAPACITY PURCHASE AGREEMENTS 2.1 PHASE I STRANDS On the execution of this document, Services and Urbanlink shall execute a Capacity Purchase Agreement in the form attached as Schedule "C" or in such other form as may be agreed between Services and Urbanlink, acting reasonably and in good faith, in relation to the Phase I Strands. -2- 2.2 ADDITIONAL STRANDS On the acquisition of any of the Phase II Strands by Urbanlink, Services (or such other Subsidiary of 360 as 360 may designate from time to time by notice in writing to Urbanlink) shall execute a Capacity Purchase Agreement in the form attached as Schedule "C" or in such other form as may then be agreed between Services (or such designated Subsidiary of 360) and Urbanlink, acting reasonably and in good faith, in relation to such Phase II Strands. 2.3 CAPACITY Unless otherwise agreed from time to time by 360 and Urbanlink, and except as specifically provided below, for each of the Strands, the Capacity Purchase Agreement shall be an IRU capacity agreement by which Services (or the designated Subsidiary of 360) shall acquire from Urbanlink an IRU capacity purchase agreement for four OC-192s or the equivalent on each such Strand, or such greater capacity as may result from the replacement or upgrading of telecommunications equipment, or the adding of telecommunications equipment, as described in Section 3.3. For each of the Strands described in Schedule A as being between Edmonton and Toronto, unless otherwise agreed from time to time by 360 and Urbanlink, the Capacity Purchase Agreement shall be an IRU capacity agreement by which Services (or the designated Subsidiary of 360) shall acquire from Urbanlink an IRU capacity agreement for eight OC-48s or the equivalent on each such Strand, or such greater capacity as may result from the replacement or upgrading of telecommunications equipment, or the adding of telecommunications equipment, as described in Section 3.3. 2.4 ELECTION TO ACCEPT REDUCED CAPACITY By notice in writing to Urbanlink, Services (or the designated Subsidiary of 360) may elect to acquire less capacity than specified above; provided however that Services (or such designated Subsidiary) shall not elect to acquire units of capacity smaller than OC-48; and provided further that if Services (or such designated Subsidiary) so elects, Services (or such designated Subsidiary) may subsequently elect to acquire the balance of the capacity specified in Section 2.3. To the extent that a Capacity Purchase Agreement is for less than four OC-192s, the amount per Strand per route kilometer specified in Section 5.1 shall be prorated accordingly. For greater clarity, Urbanlink shall have the right to lease or IRU any remaining capacity to other customers. ARTICLE 3 PROVISIONING AND EQUIPMENT 3.1 URBANLINK EQUIPMENT During the term of any Capacity Purchase Agreement, Urbanlink shall install the terminal equipment and take such additional actions as may be necessary from time to time to light these Strands to which the Capacity Purchase Agreement relates. The selection of the equipment shall be subject to the prior written approval of Services, acting reasonably, and in good faith. Without limiting the generality of the foregoing, it shall not be unreasonable for Services to consider the compatibility of such equipment with the other equipment owned or used by Services or other Subsidiaries of 360 in Canadian and other jurisdictions. -3- 3.2 PROVISIONING During the term of any Capacity Purchase Agreement: (a) Services and any designated Subsidiaries of 360 shall provide provisioning schedules to Urbanlink from time to time. (b) Services and any designated Subsidiaries of 360 shall provide notice in writing to Urbanlink within four days of receipt of a customer's request to provision the Capacity Service and shall provide not less than 30 days prior written notice before the effective date of the provisioning of such Capacity Service to a customer. (c) For greater clarity, the personnel effecting the purchasing and installation of terminal equipment shall be employees of Urbanlink or its contractors. During the term of any Capacity Purchase Agreement, from time to time at the request of 360, Urbanlink shall provide Urbanlink personnel to effect provisioning and moves, adjustments and changes ("MAC") for Services customers and any designated Subsidiaries of 360. For such services, Services (or the designated Subsidiary of 360) shall pay to Urbanlink an amount equal to Urbanlink's direct costs of providing such services plus a margin agreed to between the parties. 3.3 EQUIPMENT UPGRADES During the term of any Capacity Purchase Agreement, Services (or the designated Subsidiary of 360) shall have the option to elect from time to time to increase the capacity of all or any part of the Strands on the following terms: (a) If Services desires that Urbanlink replace or upgrade its telecommunications equipment, or add additional telecommunications equipment, in order to increase the capacity available to Services or the designated Subsidiary of 360, then Services (or the designated Subsidiary of 360) shall provide notice in writing to Urbanlink specifying its request in reasonable detail. (b) Within 15 days thereafter, representatives of 360 and Urbanlink shall meet to discuss such request, and shall negotiate reasonably and in good faith to reach mutual agreement on terms acceptable to both 360 and Urbanlink, acting reasonably, for payments and cost recovery, such terms to be consistent with the reasonable needs and requirements of Services, the designated Subsidiary of 360, Urbanlink, and the customers of Services and any designated Subsidiary of 360. 3.4 360 EQUIPMENT For greater clarity, Services and any designated Subsidiaries of 360 may install their own combiners, multiplexing equipment, racks and any other equipment that is "exempt transmission apparatus" within the meaning of the TELECOMMUNICATIONS ACT (Canada). -4- ARTICLE 4 CO-LOCATION FACILITIES AND INTERCONNECTIONS 4.1 CO-LOCATION FACILITIES FOR SERVICES During the term of any Capacity Purchase Agreement, from time to time at the request of Services, Urbanlink shall grant to Services (or the designated Subsidiary of 360) the right to co-locate the telecommunications equipment of 360 or any of the Subsidiaries of 360 or the customers of any of them on premises owned or leased by Urbanlink, pursuant to the terms of a Co-Location Agreement having terms to be agreed between 360 and Urbanlink, acting reasonably and in good faith. The fees to be charged for such co-location facility shall be the fair market value of the provision of such co-location services, as determined by agreement between 360 and Urbanlink, acting reasonably. 4.2 CO-LOCATION FACILITIES FOR URBANLINK During the term of any Capacity Purchase Agreement, from time to time at the request of Urbanlink, Services shall grant, or 360 shall cause the relevant 360 Subsidiary to grant to Urbanlink the right to co-locate Urbanlink's telecommunications equipment on premises owned or leased by 360, pursuant to the terms of a Co-Location Agreement having terms to be agreed between 360 and Urbanlink, acting reasonably and in good faith. The fees to be charged for such co-location facility shall be the fair market value of the provision of such co-location services, as determined by agreement between 360 and Urbanlink, acting reasonably. ARTICLE 5 PAYMENT 5.1 CAPACITY PURCHASE PRICE For each Capacity Purchase Agreement and subject to adjustment as provided in Section 2.4, Services (or the designated Subsidiary of 360) shall pay to Urbanlink an amount (the "Specified Amount") agreed to between the parties per Strand per route kilometer multiplied by the number of strand route kilometers, payable in five equal instalments (for greater clarity, each instalment being 20% of such amount), the first instalment payable on the commencement of the provision of capacity under the Capacity Purchase Agreement, and the remaining payments to be paid on the first, second, third and fourth anniversary of the date of commencement of the provision of capacity under the Capacity Purchase Agreement. ARTICLE 6 TERM AND TERMINATION 6.1 TERM The term of this Agreement will commence on the date of this Agreement and will continue for 5 years (the "Initial Term"). -5- 6.2 RENEWAL TERMS 360 shall have the right to renew this Reseller Agreement for two Renewal Terms of five years each, on the following terms: (a) By notice in writing to Urbanlink given on or before the expiry of the Initial Term, 360 may elect to renew this Agreement for an additional term of five years commencing on the expiry of the Initial Term (the "First Renewal Term") on all the terms contained in this Agreement except for the payment amount per Strand per route kilometer specified in Section 5.1. (b) By notice in writing to Urbanlink given on or before the expiry of the First Renewal Term, 360 may elect to renew this Agreement for an additional term of five years commencing on the expiry of the First Renewal Term (the "Second Renewal Term") on all the terms contained in this Agreement except for the payment amount per Strand per route kilometer specified in Section 5.1. (c) The payment amount per Strand per route kilometer during a Renewal Term shall be the fair market value per Strand per route kilometer for the rights granted under this Reseller Agreement on the date of commencement of the Renewal Term, as determined by agreement between 360 and Services or, failing agreement within three months after the commencement of the Renewal Term, as determined by arbitration pursuant to Section 7.1 of this Agreement. 6.3 SURVIVAL OF TERMS Sections 3.1 to 5.1, 6.3, 7.1 to 7.18, the Capacity Purchase Agreements that are executed during the Initial Term or any Renewal Term, and such other provisions as may reasonably be expected to remain in force will survive the expiration or termination of this Agreement and will remain in full force and effect following such expiration or termination. The expiration or termination of this Agreement will not affect the rights of any party to make a claim for damages arising from a breach of any provision of this Agreement which occurred prior to such expiration or termination. ARTICLE 7 GENERAL 7.1 ARBITRATION All disputes arising out of or in connection with this contract, or in respect of any defined legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration under the Rules of the British Columbia International Commercial Arbitration Centre. The appointing authorities shall be the British Columbia International Commercial Arbitration Centre. The case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases Under the BCICAC Rules". The place of arbitration shall be Vancouver, British Columbia, Canada. -6- 7.2 GOVERNING LAW AND ATTORNMENT This Agreement will be governed by and construed in accordance with the substantive laws of British Columbia and the federal laws of Canada applicable in British Columbia, without regard to the conflict of law rules of British Columbia. Subject to Section 7.1, the parties irrevocably submit to and accept generally and unconditionally the exclusive jurisdiction of the courts and appellate courts of British Columbia with respect to any legal action or proceeding which may be brought at any time relating in any way to this Agreement. Each of the parties irrevocably waives any objection it may now or in the future have to the venue of any such action or proceeding, and any claim it may now or in the future have that any such action or proceeding has been brought in an inconvenient forum. 7.3 TIME OF THE ESSENCE OF THE AGREEMENT Unless otherwise specifically provided in this Agreement, time will be of the essence of this Agreement and of the transactions contemplated by this Agreement. 7.4 REMEDIES NOT EXCLUSIVE The remedies provided to the parties under this Agreement are cumulative and not exclusive to each other, and any such remedy will not be deemed or construed to affect any right which any of the parties is entitled to seek at law, in equity or by statute. 7.5 NOTICES Any notice, direction, request or other communication required or contemplated by any provision of this Agreement will be given in writing and will be given by delivering or faxing or emailing the same to the parties as follows: (a) To 360 or Services at: Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern Fax No.: (604) 681-099 Email: catherine.mceachern@wwfiber.com (b) To Urbanlink at: Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Bill Ramsey Fax No.: (604) 681-5372 Email: bill.ramsey@wwfiber.com -7- Any such notice, direction, request or other communication will be deemed to have been given or made on the date on which it was delivered or, in the case of fax or email, on the next business day after receipt of transmission. Any party may change its fax number or address for service or email address from time to time by written notice in accordance with this section. 7.6 ASSIGNMENT (a) This Agreement is not assignable by Urbanlink in whole or in part without the prior written consent of 360, such consent not to be unreasonably delayed. This Agreement is not assignable by 360 or Services without the prior written consent of Urbanlink, such consent not to be unreasonably delayed. Any attempt by any party to assign any of the rights or to delegate any of the duties or obligations of this Agreement without such prior written consent is void. (b) Notwithstanding the foregoing, the interests of any party may be assigned by such party to an Affiliate, provided that such Affiliate delivers to the other parties a written undertaking to be bound by the provisions of this Agreement in all respects and to the same extent as the assignor is bound and provided further that the assignor will continue to be bound by all the obligations hereunder as if such assignment had not occurred and shall perform such obligations to the extent that such Affiliate fails to do so. (c) Notwithstanding the foregoing, the interests of a party under this Agreement (including, without limitation, in the case of Urbanlink, the right to receive any and all amounts payable to Urbanlink under this Agreement) may be assigned by such party by way of collateral security to a lender without the consent of the other parties, provided however that any such lender agrees in writing that: (i) the rights and interest of the lender are subject to the rights and interests of the parties other than the assignor under this Agreement; (ii) prior to realizing on such collateral security it will provide notice to the other parties giving them the opportunity to cure the default; and (iii) should such security be realized with the result that the title or interest of the assignor, as the case may be, is vested in an assignee, acquirer or other successor in title or interest (including the lender if such is the case) ("Successor"), then the lender will cause such Successor to enter into a written agreement with the other parties to be bound by the provisions of this Agreement in all respects and to the same extent as the assignor was bound and this from the date the title or interest is transferred and provided further that the assignor will continue to be bound by all the obligations under this Agreement as if such transfer of title or interest had not occurred and will perform such obligations to the extent that the Successor fails to do so. -8- 7.7 FORCE MAJEURE The failure or delay of any party to this Agreement to perform any obligation under this Agreement solely by reason of acts of God, acts of civil or military authority, civil disturbance, war, strikes or other labour disputes or disturbances, fire, transportation contingencies, shortage of facilities, fuel, energy, labour or materials, or laws, regulations, acts or orders of any governmental agency or official, other catastrophes, or any other circumstance beyond its reasonable control ("Force Majeure") will be deemed not to be a breach of this Agreement so long as the party so prevented from complying with this Agreement has not contributed to such Force Majeure, has used reasonable efforts to avoid such Force Majeure or to ameliorate its effects, and continues to take all actions within its power to comply as fully as possible with the terms of this Agreement. In the event of any such Force Majeure, performance of the obligations will be deferred until the Force Majeure ceases. This section will not apply to excuse a failure to make any payment when due. 7.8 COUNTERPARTS This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document. All of these counterparts will for all purposes constitute one agreement, binding on the parties, notwithstanding that all parties are not signatories to the same counterpart. A fax transcribed copy or photocopy of this Agreement executed by a party in counterpart or otherwise will constitute a properly executed, delivered and binding agreement or counterpart of the executing party. 7.9 WAIVER No failure or delay on the part of any party in exercising any power or right under this Agreement will operate as a waiver of such power or right. No single or partial exercise of any right or power under this Agreement will preclude any further or other exercise of such right or power. No modification or waiver of any provision of this Agreement and no consent to any departure by any party from any provision of this Agreement will be effective until the same is in writing. Any such waiver or consent will be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any party in any circumstances will entitle such party to any other or further notice or demand in similar or other circumstances. 7.10 FURTHER ASSURANCES Each of the parties will promptly execute and deliver to the other at the cost of the other such further documents and assurances and take such further actions as the other may from time to time request in order to more effectively carry out the intent and purpose of this Agreement and to establish and protect the rights, interests and remedies intended to be created in favour of the other. 7.11 ENTIRE AGREEMENT This Agreement and any other documents and agreements to be delivered pursuant to this Agreement supersede all previous invitations, proposals, letters, correspondence, negotiations, -9- promises, agreements, covenants, conditions, representations and warranties with respect to the subject matter of this Agreement. There is no representation, warranty, collateral term or condition or collateral agreement affecting this Agreement, other than as expressed in writing in this Agreement. No trade terms or trade usages are to be incorporated by reference implicitly or otherwise into this Agreement, unless expressly referred to in this Agreement. 7.12 AMENDMENTS No change or modification of this Agreement will be valid unless it is in writing and signed by each party to this Agreement. 7.13 INVALIDITY OF PARTICULAR PROVISION If any provision of this Agreement or any part of any provision (in this section called the "Offending Provision") is declared or becomes unenforceable, invalid or illegal for any reason whatsoever including, without limiting the generality of the foregoing, a decision by any competent courts, legislation, statutes, bylaws or regulations or any other requirements having the force of law, then the remainder of this Agreement will remain in full force and effect as if this Agreement had been executed without the Offending Provision. 7.14 CURRENCY Unless otherwise specified all sums of money expressed in this Agreement are in the lawful money of Canada. 7.15 NUMBER AND GENDER Unless the context of this Agreement otherwise requires, to the extent necessary so that each clause will be given the most reasonable interpretation, the singular number will include the plural and vice versa, the verb will be construed as agreeing with the word so substituted, words importing the masculine gender will include the feminine and neuter genders, words importing persons will include firms and corporations and words importing firms and corporations will include individuals. 7.16 HEADINGS AND CAPTIONS The headings and captions of sections and paragraphs contained in this Agreement are all inserted for convenience of reference only and are not to be considered when interpreting this Agreement. 7.17 ACKNOWLEDGEMENT OF RECEIPT Each of the parties acknowledges receiving an executed copy of this Agreement. -10- 7.18 ENUREMENT Subject to the restrictions on transfer contained in this Agreement, this Agreement will enure to the benefit of and be binding on the parties and their respective heirs, executors, administrators, successors and assigns. [THE NEXT PAGE IS THE EXECUTION PAGE.] -11- IN WITNESS WHEREOF the parties have executed this Agreement as of the date stated on the first page. 360NETWORKS INC. WORLDWIDE FIBER NETWORKS SERVICES LTD. Per: Per: - ------------------------------------ ------------------------------------ Signature Signature WFI URBANLINK LTD. Per: - ------------------------------------ Signature -12- SCHEDULE "A" PHASE I STRANDS
- ------------------------------------------------------------------------------------------------------------------ MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------ FROM CALGARY TO EMERSON CP 1,443 Orange Brown 41-42 SMF-28 FROM CP TRACKS AT CAMBIE ST. CP 1,032 Orange Brown 41-42 SMF-28 VANCOUVER TO CALGARY FROM 301 INDUSTRIAL AVE. TO CP 3 Orange Brown 41-42 SMF-28 CP TRACKS AT CAMBIE ST. OAK STREET BRIDGE TO 301 CN 11 Orange Brown 41-42 SMF-28 INDUSTRIAL, VANCOUVER US BORDER TO VICTORIA TO OAK CN 84 Orange Brown 41-42 SMF-28 STREET BRIDGE EDMONTON CN TRACKS TO CN 11 Orange Brown 41-42 SMF-28 EDMONTON BRETTVILLE JUNCTION EDMONTON BRETVILLE JUNCTION CN 1,958 Orange Brown 41-42 SMF-28 TO THUNDER BAY THUNDER BAY TO TORONTO CN 1,402 Orange Brown 41-42 SMF-28 TORONTO TO BROCKVILLE Union Station to Parliament 333.8 to TTR 12 Orange Rose 121-122 Leaf St.(Kingston) 332.8 Parliament St to Scarborough 332.8 to CN 23 Orange Rose 121-122 Leaf (Kingston) 7.24 Scarborough to Pickering 325.56 to CN 299 Orange Rose 121-122 Leaf Jct. (Kingston) 311.4 Pickering Jct. To Brockville 311.4 to CN Orange Rose 121-122 Leaf (Kingston) 125.7 - ------------------------------------------------------------------------------------------------------------------
-13-
- ------------------------------------------------------------------------------------------------------------------ MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------ BROCKVILLE TO SMITH FALLS 27.8 to StL&H 45 Orange Rose 121-122 Leaf 0.0 SMITH FALLS TO OTTAWA (VIA) STATION Smith Falls to Alexander 34.5 to StL&H 0.2 Orange Rose 121-122 Leaf St.(Smiths Falls) 34.38 Alexander St. to CN Radio 34.38 to CN 1 Orange Rose 121-122 Leaf Site (Smiths Falls) 34.05 CN Radio Site to Richmond 34.05 to VIA 34 Orange Rose 121-122 Leaf (Smiths Falls) 13.0 Richmond to Federal (Smiths 13.0 to 0.0 CN 21 Orange Rose 121-122 Leaf Falls) Federal to Union Station 6.0 to 0.9 CN 10 Orange Rose 121-122 Leaf (Beachburg) BORDER TO TORONTO U.S. Border to Fort Erie 0.6 to 1.0 CN 1 Orange Rose 121-122 Leaf (Stamford) Fort Erie to Port Robinson 1.0 to CN 36 Orange Rose 121-122 Leaf (Stamford) 23.14 Port Robinson to Merriton 1.27 to 7.9 CN 11 Orange Rose 121-122 Leaf (Thorld Spur) Merriton to Hamilton 9.5 to CN 55 Orange Rose 121-122 Leaf (Grimsby) 43.66 Hamilton to Canpa (Oakville) 39.3 to 8.5 CN 50 Orange Rose 121-122 Leaf Canpa to Windsor St. 8.5 to 0.5 CN 13 Orange Rose 121-122 Leaf (Oakville) OTTAWA TO QUEBEC BORDER Union Station to Hawthorne 76.5 to CN 6 Temp Rose 121-122 Leaf Diamond (Alexandria) 2.72 Hawthorne Diamond to 72.72 to CN 0.4 Rose 121-122 Leaf Hawthorne (Alexandria) 72.5 Hawthorne to Quebec Border 72.5 to VIA 97 Rose 121-122 Leaf (Alexandria) 12.5 - ------------------------------------------------------------------------------------------------------------------
-14-
- ------------------------------------------------------------------------------------------------------------------ MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------ QUEBEC BORDER TO TASCHEREAU Quebec Border to Coteau 12.5 to 0.0 VIA 20.11 Orange Rose 121 - 122 Leaf Jct.(Alexandria) Coteau Jct. To Dorion 38.0 to CN 22.04 Orange Rose 121 - 122 Leaf (Kingston) 24.3 Dorion to Dorval (Kingston) 24.3 to CN 22.53 Orange Rose 121 - 122 Leaf 10.3 Dorval to Taschereau Yard 11.6 to 9.0 CN 4.18 Orange Rose 121 - 122 Leaf (Montreal) MONTREAL CENTRAL TO QUEBEC 1.28 to 1.5 CN 259.79 Orange Rose 121-122 Leaf CITY US BORDER TO CAMBRIDGE US Border to Collage Ave 226.30 to CN/StL&H 2 Orange Rose 121-122 Leaf 225.21 Collage Avenue to Hyde Park 111.8 to StL&H 174 Orange Rose 121-122 Leaf Road 3.9 Hyde Park Road to London 3.9 to 0.0 StL&H 6 Orange Rose 121-122 Leaf London to Airport Road 114.6 to StL&H 8 Orange Rose 121-122 Leaf 109.48 Airport Road to Cambridge 109.48 to StL&H 84 Orange Rose 121-122 Leaf 57.2 - ------------------------------------------------------------------------------------------------------------------
-15- SCHEDULE "B" PHASE II STRANDS
- ------------------------------------------------------------------------------------------------------------------ MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ------------------------------------------------------------------------------------------------------------------ CAMBRIDGE TO HALWEST Cambridge South Junction 0.8 to 11.2 StL&H 17 Orange Rose 121-122 Leaf (Waterloo) South Junction to Kitchener 3.5 to 0 GEX 6 Orange Rose 121-122 Leaf (Huron Park) Kitchener to Silver (Guelph) 63.05 to 29.98 GEX 53 Orange Rose 121-122 Leaf Silver to Halwest (Halton) 24.16 to 11.13 CN 21 Orange Rose 121-122 Leaf TAXCHEREAU TO MONTREAL STATION Taschereau Yard to Jct. W/ N/A CN 1.22 Orange Rose 121-122 SMF-28 St. Laurent Sub. Taschereau Yard to Jonction 146.2 to 141.6 CN 7.40 Orange Rose 121-122 SMF-28 de L'Est (St. Laurent) Jonction de L'Est to Central 6.0 to 0.8 CN 8.37 Orange Rose 121-122 SMF-28 Station (Deux-Montagnes) MONTREAL TO US BORDER 2 strands QUEBEC CITY TO HALIFAX 2 strands - ------------------------------------------------------------------------------------------------------------------
-16- SCHEDULE "C" CAPACITY PURCHASE AGREEMENT -17- SCHEDULE "C" TO RESELLER AGREEMENT CONFIDENTIAL AND PROPRIETARY CAPACITY PURCHASE AGREEMENT BY AND BETWEEN WORLDWIDE FIBER NETWORK SERVICES LTD. AND WFI URBANLINK LTD. DATED: - TABLE OF CONTENTS Page ---- ARTICLE 1 EXHIBITS; DEFINITIONS................................................1 ARTICLE 2 IRU..................................................................3 ARTICLE 3 PAYMENT..............................................................3 ARTICLE 4 ACCEPTANCE TESTING AND DELIVERY......................................4 ARTICLE 5 TERM.................................................................5 ARTICLE 6 INTERCONNECTION......................................................5 ARTICLE 7 MAINTENANCE AND REPAIR...............................................6 ARTICLE 8 USE OF THE CAPACITY 6 ARTICLE 9 INDEMNIFICATION......................................................7 ARTICLE 10 LIMITATION OF LIABILITY.............................................8 ARTICLE 11 INSURANCE...........................................................8 ARTICLE 12 NOTICES............................................................10 ARTICLE 13 CONFIDENTIALITY....................................................10 ARTICLE 14 DEFAULT............................................................11 ARTICLE 15 TERMINATION........................................................12 ARTICLE 16 FORCE MAJEURE EVENTS...............................................12 ARTICLE 17 DISPUTE RESOLUTION.................................................13 ARTICLE 18 ASSIGNMENT AND TRANSFER RESTRICTIONS...............................13 ARTICLE 19 REPRESENTATIONS AND DISCLAIMER OF WARRANTIES.......................15 ARTICLE 20 GENERAL............................................................15 -i- CAPACITY PURCHASE AGREEMENT THIS CAPACITY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of - (the "Effective Date"), by and between Worldwide Fiber Network Services, Ltd., an Alberta corporation ("Customer"), and WFI Urbanlink Ltd., an Alberta corporation ("Urbanlink"). RECITALS A. Urbanlink, either directly or indirectly, is the holder of rights in, has constructed or is constructing a fiber optic communications network, including optronics and other facilities (the "Urbanlink System"), which connects the city pairs identified in Exhibit A (the "Endpoints"). B. Customer desires to obtain from Urbanlink certain telecommunications capacity in the Urbanlink System on the terms and conditions set forth below. Accordingly, in consideration of the mutual promises set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 EXHIBITS; DEFINITIONS 1.1 Exhibits. The following exhibits are attached hereto, incorporated herein and made a part of this Agreement by this reference: Exhibit A: Endpoints Exhibit B: Service Level Agreement 1.2 Definitions. As used in this Agreement, the capitalized terms listed in this Section 1.2 and derivatives thereof shall have the meanings respectively ascribed to them in this Section 1.2. (a) "Acceptance Date" shall have the meaning set forth in Section 4.2. (b) "Affiliate" shall have the meaning ascribed to it in the CANADA BUSINESS CORPORATION ACT, as amended. (c) "Agreement" shall have the meaning set forth in the introductory paragraph. (d) "Capacity" means a [linear/protected] dedicated telecommunications path with a bandwidth level of o between the Endpoints, provided by Urbanlink under the terms of this Agreement, which bandwidth shall be derived from a specific wavelength and specific fibers. (e) "Completion Notice" shall have the meaning set forth in Section 4.1. (f) "Confidential Information" shall have the meaning set forth in Section 13.1. (g) "Costs" means actual, direct costs paid or payable in accordance with the established accounting procedures generally used by Urbanlink and which Urbanlink utilizes in billing third parties for reimbursable projects, including without limitation the following: (i) internal labor costs, including wages, salaries and benefits, and overhead allocable to such labor costs equal to 15%, and (ii) other direct costs and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials, supplies, contract services, etc.). (h) "Delivery Date" shall have the meaning set forth in Exhibit B. (i) "Dollars" or "$"means U.S. Dollars. (j) "Effective Date" shall have the meaning set forth in the introductory paragraph to this Agreement. (k) "Endpoints" shall have the meaning set forth in Recital A. (l) "Force Majeure Events" shall have the meaning set forth in Article 16. (m) "Impositions" means all taxes, good and services taxes, sales taxes, fees, levies, imposts, duties, charges or withholdings of any nature (including, without limitation, ad valorem, real property, gross receipts, franchise, license and permit fees), together with any penalties, fines or interest thereon arising out of the transactions contemplated by this Agreement by any federal, provincial, state or local government or other public taxing authority. (n) "Interest Rate" means the lower of (i) the highest rate permitted by law, or (ii) one and one-half percent (1.5%) per month (equivalent to 19.56% per annum). (o) "IRU" shall have the meaning set forth in Section 2.1. (p) "IRU Effective Date" shall have the meaning set forth in Section 5.1. (q) "O&M Fees" shall have the meaning set forth at Section 7.2. (r) "Party" means each of Urbanlink and Customer and "Parties" shall mean Urbanlink and Customer. (s) "Permitted Assignee" shall have the meaning set forth in Section 18.2. (t) "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. (u) "Purchase Price" shall have the meaning set forth at Section 3.1. -2- (v) "Service Level Agreement" shall have the meaning set forth at Section 4.1. (w) "Term" shall have the meaning set forth at Section 5.1. (x) "Urbanlink Account" means the following bank account of Urbanlink, which may be modified or changed by Urbanlink in writing from time to time: Account Name: Account Number: Bank Name: Reference: (y) "Underlying Rights" means, with respect to particular end points, all licenses, leases, easements, rights-of-way, deeds, franchises, permits, authorizations, consents and approvals (including without limitation, any necessary local, provincial federal or First Nations authorizations and environmental permits) and other rights, titles, or interests as are necessary for the construction, installation, operation, maintenance or repair of the Urbanlink System between such end points. (z) "Urbanlink System" shall have the meaning set forth in Recital A. ARTICLE 2 IRU 2.1 As of the IRU Effective Date, Urbanlink shall deliver and provide to Customer and Customer shall receive from Urbanlink an exclusive and indefeasible right of use of the Capacity on the terms and conditions set forth in the Agreement (the "IRU"). 2.2 Urbanlink represents and warrants that it possesses those certain rights to the Capacity necessary for Urbanlink to deliver the Capacity to Customer. Urbanlink shall keep the Capacity free from all claims, liens, encumbrances, rights or claims of any third party attributable to Urbanlink which have a material adverse effect on the right of Customer to use the Capacity as contemplated by this Agreement. ARTICLE 3 PAYMENT 3.1 In consideration of the grant of the IRU hereunder by Urbanlink to Customer, Customer agrees to pay to Urbanlink a fee in the amount of $o (the "Purchase Price"). 20% of the Purchase Price is due and payable on each of (i) the date of the commencement of the provision of Capacity under this Agreement, (ii) the first anniversary of the date of the commencement of the provision of Capacity under this Agreement, (iii) the second anniversary of the commencement of the provision of Capacity under date of this Agreement, (iv) the third anniversary of the date of the commencement of the provision of Capacity under this Agreement, and (v) the fourth anniversary of the date of the commencement of the provision of Capacity under this Agreement. -3- 3.2 All payments made by Customer hereunder in excess of $100,000 shall be made by wire transfer of immediately available funds to the Urbanlink Account. Payments of all other amounts by Customer hereunder may be made by wire transfer or by company check of immediately available funds payable to Urbanlink. 3.3 If Customer fails to make any payment under this Agreement when due, then, in addition to such sum and to any other rights and remedies that Urbanlink may have, Customer shall pay interest on such unpaid amount at the Interest Rate until such sum is paid in full and such interest shall accrue both before and after judgment. Notwithstanding the foregoing, no interest shall accrue on any payment that is disputed in good faith by Customer while such dispute is pending. If such dispute is later resolved in favor of Urbanlink, such amount shall bear interest at the Interest Rate from the date when due until paid. 3.4 In addition to the amounts payable under Section 3.1, Customer shall be responsible to pay directly or reimburse Urbanlink, as requested by Urbanlink, for all other sums, costs, fees and expenses that are required to be paid under this Agreement. Urbanlink will invoice Customer for all sums, costs, fees and expenses, owed by Customer to Urbanlink, and Customer shall pay such invoices within 30 days of the invoice date, except for the Purchase Price which shall be paid in accordance with Section 3.1. 3.5 All payments made by Customer under this Agreement shall be made without any deduction or withholding for or on account of any Imposition. If Customer is required by law to make any deduction or withholding from any payment due Urbanlink, then, notwithstanding anything to the contrary contained in this Agreement, the gross amount payable by Customer to Urbanlink shall be increased so that after any such deduction or withholding for such Impositions or any additional deduction or withholding on account of any Imposition caused by such additional gross-up payment, the net amount received by Urbanlink will not be less than what Urbanlink would have received had no deduction or withholding been required. ARTICLE 4 ACCEPTANCE TESTING AND DELIVERY 4.1 When Urbanlink has determined that the Capacity is operating substantially in conformity with the applicable service levels set forth in Exhibit B (the "Service Level Agreement"), Urbanlink shall promptly provide Customer written notice of the same (a "Completion Notice"). Each Completion Notice shall set forth the date upon which Urbanlink will commence delivery of the Capacity to Customer provided that all payments due under this Agreement have been paid in full. 4.2 Within ten (10) days of receipt of a Completion Notice, Customer shall provide Urbanlink a written notice accepting or rejecting the Capacity, specifying in reasonable detail, if rejected, the defect or failure in the Capacity. If Customer fails to notify Urbanlink of its acceptance or rejection of the Completion Notice within ten (10) days following Customer's receipt of the same, Customer shall be deemed to have accepted such Capacity. Any use of Capacity by Customer other than for testing purposes shall be -4- deemed to constitute acceptance of the Capacity. The date of such notice of acceptance or deemed acceptance of the Capacity shall be the "Acceptance Date". In the event of any good-faith rejection by Customer, Urbanlink shall take such action as reasonably necessary, and as expeditiously as practicable, to correct or cure such defect or failure. Customer shall in no event be entitled to commence use of the Capacity until after Urbanlink has received payment in full. 4.3 Provided Urbanlink first obtains Customer's written consent, which consent may not be unreasonably withheld or delayed, Urbanlink may substitute, change or reconfigure the telecommunications equipment and facilities used in providing the Capacity as long as the quality and type of Capacity is not impaired or changed. In such event, the Parties shall work together in good faith to minimize any disruption of service in connection with such substitution, change or reconfiguration. ARTICLE 5 TERM 5.1 The IRU shall become effective on the first day when both the Acceptance Date has occurred, and Urbanlink has received payment in full of the Purchase Price (the "IRU Effective Date") and the IRU shall extend until the expiry of the Underlying Rights in respect of that part of the Urbanlink System that contains the specific fibres on which the Capacity is being provided by Urbanlink under the terms of this Agreement (the "Term"); provided that if the Underlying Rights for the routes described on Exhibit A expire on different dates, the Term shall expire on the expiry on the last of such Underlying Rights to expire; and provided further that if the Underlying Rights expire for some routes described on Exhibit "A" prior to the expiry of the Term, the IRU shall then expire and terminate for such route and the rights of the Customer to use the Capacity in respect of such route shall cease. 5.2 At the expiration or other termination of this Agreement, the IRU shall immediately terminate, and all rights of Customer to use the Capacity shall cease. The expiration or termination of this Agreement shall not relieve Customer from any liabilities arising prior to such termination. 5.3 If at any time Customer, in its absolute discretion, determines not to retain the IRU, Customer shall have the right to abandon the IRU by written notice to Urbanlink. In the case of such abandonment, this Agreement shall terminate and Customer shall not be entitled to a refund of any of the consideration paid. Upon such termination, all fees, costs and other expenses with respect to this Agreement shall be immediately due and payable to Urbanlink by Customer. ARTICLE 6 INTERCONNECTION 6.1 To the extent technically feasible, as determined by Urbanlink and the Customer acting reasonably and in good faith, Urbanlink shall permit Customer to interconnect its communications system with the Capacity within Urbanlink's facilities or structures at -5- the Endpoints or at such other location as may be agreed from time to time, acting reasonably. Urbanlink shall perform all work with respect to such interconnection as it relates to the Urbanlink System or any other facilities, equipment or structures of Urbanlink or its Affiliates. Customer shall pay Urbanlink for its Costs to perform such work plus a management fee equal to fifteen percent (15%) of such Costs within thirty (30) days of receiving an invoice therefor. Nothing contained in this Agreement shall obligate Customer to obtain or facilitate the provisioning of local access with respect to the Capacity. ARTICLE 7 MAINTENANCE AND REPAIR 7.1 From and after the IRU Effective Date, Urbanlink shall maintain the Capacity in good working order and in accordance with industry standards. 7.2 In consideration of the maintenance services, Customer shall pay Urbanlink the operations and maintenance fees (the "O&M Fees") with respect to the city pairs listed below (subject to adjustment as provided in Section 7.3) equal to a monthly amount determined by the Customer and Urbanlink, acting reasonably, each year as being a reasonable allocation of the costs of Urbanlink to operate, repair and maintain the Urbanlink System. 7.3 The O&M Fee shall be increased annually, beginning with the first anniversary of the Effective Date, by the increase, if any, in the Consumer Price Index - Canada - All Items ("CPI") published by Statistics Canada for the twelve (12) month period ending three months prior to such anniversary of the effective date. In the event that Statistics Canada no longer publishes the CPI, Customer and Urbanlink shall together, acting reasonably and in good faith, designate the statistical index they consider most appropriate for adjustments to a fee and, from the date the CPI ceased to be published, such index shall be used to make adjustments in a fee under this provision. 7.4 Customer shall have no right to physically access in any manner the Urbanlink System or any components thereof. ARTICLE 8 USE OF THE CAPACITY 8.1 Customer represents, warrants and covenants that it will use the Capacity in compliance with and subject to all applicable government codes, ordinances, laws, rules and regulations and will require its customers that purchase telecommunication services, circuits or capacity from the Customer or its Affiliates do the same. Customer shall not use its systems in a way that interferes in any way with or adversely affects the use of the Urbanlink System or any other Person using the Urbanlink System or Capacity thereon. The parties acknowledge that the Urbanlink System includes or will include other customers and participants, including without limitation other owners and users of telecommunication systems. -6- 8.2 Notwithstanding anything to the contrary contained herein, Customer shall secure, prior to the IRU Effective Date, and maintain in full force and effect during the Term, any and all necessary consents, franchises or similar approvals from all governmental and other authorities which are necessary or required to be obtained by Customer for Urbanlink to grant the IRU to Customer and for the use and operation of the Capacity by Customer. 8.3 Subject to Article 18, Urbanlink shall have no right to sell, lease, transfer or use the Capacity or any portion thereof. 8.4 Customer and Urbanlink each agree to cooperate with and support the other in complying with any requirements applicable to their respective rights and obligations hereunder. Customer and Urbanlink shall promptly notify each other of any matters pertaining to, or the occurrence (or impending occurrence) of, any event which would be reasonably likely to give rise to any damage or impending damage to or loss of the Urbanlink System or Capacity that are known to such Party. ARTICLE 9 INDEMNIFICATION 9.1 Subject to the provisions of Articles 10 and 19, Urbanlink hereby agrees to indemnify, defend, protect and hold harmless Customer, its Affiliates and their employees, officers and directors, from and against, and assumes liability for: (a) All suits, actions, damages or claims of any character (i) brought against Customer or its Affiliates because of any injuries or damage received or sustained by any persons or property which in whole or in part arise on account of the acts or negligent omissions of Urbanlink in the performance of construction or maintenance of the Urbanlink System or the provision of the Capacity or the performance of its obligations under this Agreement; and (ii) brought against Customer or its Affiliates under the workers compensation laws, except to the extent caused by the negligence or wilful misconduct of the parties indemnified hereunder. 9.2 Subject to the provisions of Article 10, Customer hereby agrees to indemnify, defend, protect and hold harmless Urbanlink, and its employees, officers and directors, from and against, and assumes liability for: (a) All suits, actions, damages or claims of any character (i) brought against Urbanlink or its Affiliates because of any injuries or damage received or sustained by any persons or property which in whole or in part arise on account of the acts or negligent omissions of Customer in the performance of its obligations under this Agreement; (ii) brought against Urbanlink or its Affiliates under workers compensation laws, except to the extent caused by the negligence or wilful misconduct of the parties indemnified hereunder; and (iii) brought against Urbanlink or its Affiliates because of any damage arising out of or resulting from Customer's use of the Capacity and conduct of its business, including the content -7- of any video, voice or data carried by Customer or its customers through or using the Capacity. 9.3 Nothing contained herein shall operate as a limitation on the right of either Party hereto to bring an action for damages against any third party, including indirect, special or consequential damages, based on any acts or negligent omissions of such third party as such acts or omissions may affect the construction, operation or use of the Capacity or the Urbanlink System; provided, however, that each Party hereto shall assign such rights or claims, execute such documents and do whatever else may be reasonably necessary to enable the other Party to pursue any such action against such third party. ARTICLE 10 LIMITATION OF LIABILITY 10.1 NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, EXCEPT TO THE EXTENT CAUSED BY ITS WILFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL COSTS, LIABILITIES OR DAMAGES, WHETHER FORESEEABLE OR NOT, ARISING OUT OF, OR IN CONNECTION WITH, SUCH PARTY'S PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE RELATED TO THIS AGREEMENT. 10.2 Notwithstanding anything contained in this Agreement to the contrary, the Parties acknowledge and agree that on and after the Acceptance Date, Customer's sole rights and remedies with respect to any defect in or failure of the Capacity to perform in accordance with the Service Level Agreement shall be limited to the remedies set forth in the Service Level Agreement. 10.3 The Parties expressly agree that no claim for losses or damages whatsoever in connection with this Agreement shall be made more than two years after the date that the event giving rise to such claim is known or reasonably should have been known to the Party making such claim. ARTICLE 11 INSURANCE 11.1 Throughout the term of the IRU, each Party shall procure and maintain in force, at its own expense: (a) General Liability insurance with a minimum limit of $5,000,000, including coverage for contractual liability, non-owned auto liability, Owner's & Contractor's protective liability and products and completed operations liability. Such policy shall be written on an occurrence basis and shall contain a cross liability or severability of interest clause; (b) Workers' Compensation insurance covering all employees engaged in the work in accordance with the statutory requirements of the county, state, province or -8- territory or other governmental body having jurisdiction over such employees. (c) Employers' Liability insurance with a minimum limit of $5,000,000, covering all employees engaged in the work; (d) Automobile liability insurance with a minimum limit of $5,000,000, covering all motor vehicles owned, operated and/or licensed (including owned, leased, or hired units); (e) "All Risks" Property insurance on a replacement cost basis, for damage to the system and associated property, with deductibles and limits in such amounts as would from time to time be carried by a prudent owner considering the property insured; and (f) any other insurance coverages specifically required of such Party pursuant to right-of-way agreements with railroads or other third parties. (g) Both parties shall require any contractors engaged in construction or maintenance of the system to maintain insurance in accordance with the provisions of this Article 11.1. 11.2 Both parties expressly acknowledge that a Party shall be deemed to be in compliance with the provisions of this Article if it maintains a self-insurance program providing for a retention of up to $1,000,000. Unless otherwise agreed, Customer's and Urbanlink's insurance policies shall be obtained and maintained with companies rated "A" or better by BEST'S KEY RATING GUIDE and each Party shall provide the other with an insurance certificate confirming compliance with this requirement for each policy providing such required coverage. 11.3 If either Party fails to obtain the required insurance or fails to obtain the required certificates from any contractor and a claim is made or suffered, such Party shall indemnify and hold harmless the other Party from any and all claims for which the required insurance would have provided coverage. Further, in the event of any such failure which continues after seven (7) days' written notice thereof by the other Party, such other Party may, but shall not be obligated to, obtain such insurance and will have the right to be reimbursed for the cost of such insurance by the Party failing to obtain such insurance. 11.4 In the event coverage is denied or reimbursement of a properly presented claim is disputed by the carrier for insurance provided above, the Party carrying such coverage shall make good-faith efforts to pursue such claim with its carrier. 11.5 Each party shall upon request from the other provide evidence of the insurances which it is obligated to maintain under clause 11.1. All insurance policies shall contain a provision that coverage cannot be cancelled or materially reduced until the insurer has provided at least 30 days written notice to the non-insuring party. -9- 11.6 Each party shall require all policies related to this contract be amended to include the other party as an additional named insured and shall require insurers to amend all such policies to include a waiver of subrogation in favor of the other party. ARTICLE 12 NOTICES 12.1 All notices and other communications required or permitted under this Agreement shall be in writing and shall be given by hand delivery (including by means of a professional messenger service or overnight mail) addressed as follows: If to Customer: Worldwide Fiber Network Services Ltd. Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern If to Urbanlink: WFI Urbanlink Ltd. Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: William Ramsey Any such notice or other communication shall be deemed to be effective when actually received or refused. Either Party may by similar notice given change the address to which future notices or other communications shall be sent. ARTICLE 13 CONFIDENTIALITY 13.1 This Agreement and all materials, maps, and other documents which are marked confidential and disclosed by one Party to the other in fulfilling the provisions and intent of this Agreement, are and shall be confidential (the "Confidential Information"). Neither Party shall divulge or otherwise disclose the Confidential Information to any third party without the prior written consent of the other Party, except that either Party may make disclosure to those required for the implementation or performance of this Agreement, auditors, attorneys, financial advisors, lenders and prospective lenders, funding partners and prospective funding partners, provided that in each case the permitted recipient agrees in writing to be bound by the confidentiality provisions set forth in this section. In addition, either Party may make disclosure as required by a court order or as otherwise required by law or in any legal or arbitration proceeding relating to this Agreement. If either Party is required by law or by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to -10- disclose the Confidential Information, it will provide the other Party with prompt prior written notice of such request or requirement so that such Party may seek an appropriate protective order and/or waive compliance with this Section. The Party whose consent to disclose information is requested shall respond to such request, in writing, within five (5) working days of the request by either authorizing the disclosure or advising of its election to seek a protective order, or if such Party fails to respond within the prescribed period the disclosure shall be deemed approved. 13.2 Nothing herein shall be construed as granting any right or license under any copyrights, inventions, or patents now or hereafter owned or controlled by Urbanlink. 13.3 Upon termination of this Agreement for any reason or upon request of Urbanlink, Customer shall return all Confidential Information, together with any copies of same, to Customer. The requirements of confidentiality set forth herein shall survive the return of such Confidential Information. 13.4 Customer shall not, without first obtaining the written consent of Urbanlink, use any trademark or trade name of Urbanlink or refer to the subject matter of this Agreement or Urbanlink in any promotional activity or otherwise, nor disclose to others any specific information about the subject matter of this Agreement. Neither Party shall issue any publication or press release relating directly or indirectly to this Agreement without the prior written consent of both Parties. 13.5 The provisions of this Article shall survive expiration or other termination of this Agreement. ARTICLE 14 DEFAULT 14.1 A default shall be deemed to have occurred under this Agreement if: (a) in the case of a failure to pay any amount when due under this Agreement, a Party fails to pay such amount within ten (10) days after notice specifying such breach, or (b) in the case of any other material breach of this Agreement, a Party fails to cure such material breach within thirty (30) days after notice specifying such breach, provided that if the breach is of a nature that cannot be cured within thirty (30) days, a default shall not have occurred so long as the breaching Party has commenced to cure within said time period and thereafter diligently pursues such cure to completion. (c) either of the following occur (i) a Party makes a general assignment for the benefit of its creditors, files a voluntary petition in bankruptcy or any petition or answer seeking, consenting to, or acquiescing in reorganization, arrangement, adjustment, composition, liquidation, dissolution or similar relief; or (ii) an involuntary petition in bankruptcy, other insolvency protection against either Party is filed and not dismissed within one hundred twenty days (120) days. -11- 14.2 If the default consists of a failure of Customer to pay to Urbanlink any part of the Purchase Price, Urbanlink may terminate any and all of its obligations under this Agreement, and apply any and all amounts previously paid by Customer hereunder toward the payment of any other amounts then or thereafter payable by Customer under this Agreement or suspend the provisioning of the Capacity hereunder. In the event of any other default under this Agreement the non-defaulting Party may avail itself of one or more of the following remedies: (a) take such actions as it determines, in its sole discretion, to correct the default; and (b) pursue any legal remedies it may have under applicable law or principles of equity, including specific performance. 14.3 A waiver by either Party at any time of any of its rights as to anything herein contained shall not be deemed to be a waiver of any breach of covenant or other matter subsequently occurring. 14.4 Notwithstanding anything contained in this Agreement to the contrary, Customer's sole and exclusive remedy for any failure by Urbanlink to deliver the Capacity in accordance with this Agreement shall be limited to those contained in the Service Level Agreement. ARTICLE 15 TERMINATION 15.1 This Agreement shall automatically terminate on the expiration or termination of the Term, or earlier as provided in this Agreement. Upon the expiration of the Term or other termination of this Agreement, the IRU shall immediately terminate and all rights of Customer to use the Capacity shall cease, all such rights shall revert to Urbanlink, and Urbanlink shall owe Customer no further duties, obligations or consideration. Termination of this Agreement shall not affect the rights or obligations of either Party that have arisen before the date of termination or expiration. ARTICLE 16 FORCE MAJEURE EVENTS 16.1 Neither Party shall be in default under this Agreement if and to the extent that any failure or delay in such Party's performance of one or more of its obligations hereunder is caused by any of the following conditions, and such Party's performance of such obligation or obligations shall be excused and extended for and during the period of any such delay: act of God; fire; flood; fiber, cable, equipment or other material or component failures, shortages or unavailability or other delay in delivery not resulting from the responsible Party's failure to timely place orders therefor; lack of or delay in transportation; construction or permitting delays; government codes, ordinances, laws, rules, regulations or restrictions; war or civil disorder; strikes or other labor disputes; failure of a third party to grant or recognize a required property, right of way or license right; or any other cause beyond the reasonable control of such Party (collectively, "Force Majeure Events"). The Party claiming relief under this Article shall notify the other in writing of the existence of the event relied on and the cessation or termination of said event, and the Party claiming relief shall exercise reasonable commercial efforts to minimize the time of any such delay. -12- ARTICLE 17 DISPUTE RESOLUTION 17.1 Application. The Parties will attempt to resolve any dispute arising out of this Agreement promptly through discussions at the operational level. In the event a resolution is not achieved, the disputing Party shall provide the other Party with written notice of the same and the Parties shall attempt to resolve such dispute between senior executives who have the authority to settle such dispute. If the Parties fail to resolve such dispute within thirty (30) days of the non-disputing Party's receipt of the written notice, either Party may seek arbitration as set forth below. 17.2 Arbitration. All disputes arising out of or in connection with this Agreement, or in respect of any defined legal relationship associated therewith or derived therefrom (including, without limitation, any claim, controversy or dispute, whether sounding in contract, statute, tort, fraud, misrepresentation or other legal theory, related directly or indirectly to this Agreement, and whenever brought and whether between the parties to this Agreement or between one of the parties to this Agreement and the employees, agents or affiliated businesses of the other Party), shall be referred to and finally resolved by arbitration under the Rules of the British Columbia International Commercial Arbitration Centre. The appointing authorities shall be the British Columbia International Commercial Arbitration Centre. The case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases Under the BCICAC Rules". The place of arbitration shall be Vancouver, British Columbia, Canada. The number of arbitrators shall be one. 17.3 Discovery. There shall be no discovery other than the exchange of information that is provided to the arbitrator by the parties. Each Party shall bear its own costs and attorneys' fees, and the parties shall share equally the fees and expenses of the arbitrator. The arbitrator's decision and award shall be final and binding, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 17.4 Enforcement. If any Party files a judicial or administrative action asserting claims subject to arbitration as prescribed herein, and another Party successfully stays such action or compels arbitration of said claims, the Party filing said action shall pay the other Party's costs and expenses incurred in seeking such stay or compelling arbitration, including reasonable attorneys' fees. ARTICLE 18 ASSIGNMENT AND TRANSFER RESTRICTIONS 18.1 Except as provided in Section 18.2, Customer may not transfer or assign all or any part of its interest under this Agreement, or delegate any duties, burdens, or obligations arising hereunder, without Urbanlink's consent, which consent shall not be unreasonably withheld or delayed. A transfer or assignment in violation of this Article 18 shall constitute a material breach of this Agreement. If any such consent is given, Customer nevertheless shall remain fully and primarily liable for all obligations under this Agreement. Notwithstanding anything to the contrary contained in this Article 18, -13- Customer may sell or lease any telecommunications circuits, capacity or other services comprising the Capacity to third parties. 18.2 Customer may assign this Agreement in whole, but not in part, to a Permitted Assignee. As used in this Section 18.2, the term "Permitted Assignee" shall mean (a) any Affiliate of Customer, (b) any Person that purchases all or substantially all of the assets of Customer, or any other Person formed by or surviving the merger or consolidation of Customer and any other person or (c) any institutional lender to whom this Agreement is assigned as collateral security for any indebtedness of Customer or any Affiliate of Customer, provided that such collateral assignment is subject to the terms of this Agreement. Upon any assignment to a Permitted Assignee, the assignor shall remain responsible for performance under this Agreement. Any Permitted Assignee pursuant to subparagraph (a) or (b) above shall expressly assume all obligations and liabilities with respect to the Agreement which arise after the effective date of assignment or transfer, prior to or upon the effectiveness of such assignment and, in the case of an assignment as provided in subparagraph (c) of this Section 18.2, in the event the institutional lender exercises its rights with respect to this Agreement it shall expressly assume all obligations and liabilities with respect to the Agreement which arise thereafter. 18.3 Except as provided in Section 18.4, Urbanlink may not transfer or assign all or any part of its interest under this Agreement, or delegate any duties, burdens, or obligations arising hereunder, without Customer's consent, which consent shall not be unreasonably withheld or delayed. A transfer or assignment in violation of this Article 18 shall constitute a material breach of this Agreement. If any such consent is given, Urbanlink nevertheless shall remain fully and primarily liable for all obligations under this Agreement. 18.4 Urbanlink may assign this Agreement in whole, but not in part, to a Permitted Assignee. As used in this Section 18.4, the term "Permitted Assignee" shall mean (a) any Affiliate of Customer, (b) any Person that purchases all or substantially all of the assets of Urbanlink, or any other Person formed by or surviving the merger or consolidation of Urbanlink and any other person or (c) any institutional lender to whom this Agreement is assigned as collateral security for any indebtedness Urbanlink or any Affiliate of Urbanlink, provided that such collateral assignment is subject to the terms of this Agreement. Upon any assignment to a Permitted Assignee, the assignor shall remain responsible for performance under this Agreement. Any Permitted Assignee pursuant to subparagraph (a) or (b) above shall expressly assume all obligations and liabilities with respect to the Agreement which arise after the effective date of assignment or transfer, prior to or upon the effectiveness of such assignment and, in the case of an assignment as provided in subparagraph (c) of this Section 18.4, in the event the institutional lender exercises its rights with respect to this Agreement it shall expressly assume all obligations and liabilities with respect to the Agreement which arise thereafter. 18.5 This Agreement and each of the Parties' rights and obligations under this Agreement shall be binding upon and shall inure to the benefit of the Parties, hereto and each of their respective permitted successors and assigns. -14- ARTICLE 19 REPRESENTATIONS AND DISCLAIMER OF WARRANTIES 19.1 By execution of this Agreement, each Party represents and warrants to the other: (a) That the representing Party has full right and authority to enter into and perform this Agreement in accordance with the terms hereof and thereof, and that by entering into or performing this Agreement, the representing Party is not in violation of its charter or bylaws, or any law, regulation or agreement by which it is bound or to which it is subject; (b) That the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action, that the signatories for such Party hereto are authorized to sign this Agreement, and that the joinder or consent of any other Party, including a court or trustee or referee, is not necessary to make valid and effective the execution, delivery and performance of this Agreement by such Party. 19.2 EXCEPT AS SET FORTH IN THE SERVICE LEVEL AGREEMENT, Urbanlink MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE CAPACITY, THE URBANLINK SYSTEM, OR ANY WORK PERFORMED UNDER THIS AGREEMENT INCLUDING ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE OR USE, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. THE WARRANTIES SET FORTH IN THIS AGREEMENT CONSTITUTE THE ONLY WARRANTIES MADE BY URBANLINK TO CUSTOMER WITH RESPECT TO THIS AGREEMENT AND ARE MADE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED. ARTICLE 20 GENERAL 20.1 Binding Effect. This Agreement and each of the Parties' respective rights and obligations under this Agreement, shall be binding on and shall inure to the benefit of the Parties hereto and each of their respective permitted successors and assigns. 20.2 Waiver. The failure of either Party hereto to enforce any of the provisions of this Agreement, or the waiver thereof in any instance, shall not be construed as a general waiver or relinquishment on its part of any such provision, but the same shall nevertheless be and remain in full force and effect. 20.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia and the federal law of Canada applicable therein, without giving effect to its principles of conflicts of laws. Subject to Article 17, any litigation based hereon, or arising out of or in connection with a default by either Party in the performance of its obligations hereunder, shall be brought and maintained exclusively in the courts of the Province of British Columbia, in Vancouver, British Columbia, and each Party hereby irrevocably submits to the jurisdiction of such courts -15- for the purpose of any such litigation and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation. 20.4 Rules of Construction. The captions or headings in this Agreement are strictly for convenience and shall not be considered in interpreting this Agreement or as amplifying or limiting any of its content. Words in this Agreement which import the singular connotation shall be interpreted as plural, and words which import the plural connotation shall be interpreted as singular, as the identity of the parties or objects referred to may require. (a) Unless expressly defined herein, words having well known technical or trade meanings shall be so construed. All listing of items shall not be taken to be exclusive, but shall include other items, whether similar or dissimilar to those listed, as the context reasonably requires. (b) Except as set forth to the contrary herein, any right or remedy of Customer or Urbanlink shall be cumulative and without prejudice to any other right or remedy, whether contained herein or not. (c) Nothing in this Agreement is intended to provide any legal rights to anyone not an executing party of this Agreement. (d) This Agreement has been fully negotiated between and jointly drafted by the Parties. (e) All actions, activities, consents, approvals and other undertakings of the Parties shall be performed in a reasonable and timely manner, it being expressly acknowledged and understood that time is of the essence in the performance of obligations required to be performed by a date expressly specified herein. Except as specifically set forth herein, for the purpose of this Agreement the standards and practices of performance within the telecommunications industry in the relevant market shall be the measure of a Party's performance. 20.5 Entire Agreement. This Agreement constitutes the entire and final agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements relating to the subject matter hereof, which are of no further force or effect. The Exhibits and Attachment referred to herein are integral parts hereof and are hereby made a part of this Agreement. To the extent that any of the provisions of any Exhibit hereto are inconsistent with the express terms of this Agreement, the terms of this Agreement shall prevail. This Agreement may only be modified or supplemented by an instrument in writing executed by each Party and delivered to the Party relying on the writing. 20.6 No Personal Liability. Each action or claim against any Party arising under or relating to this Agreement shall be made only against such Party as a corporation, and any liability relating thereto shall be enforceable only against the corporate assets of such Party. No Party shall seek to pierce the corporate veil or otherwise seek to impose any liability relating to, or arising from, this Agreement against any shareholder, employee, officer or -16- director of the other Party. Each of such persons is an intended beneficiary of the mutual promises set forth in this Article and shall be entitled to enforce the obligations of this Article. 20.7 Relationship of the Parties. The relationship between Customer and Urbanlink shall not be that of partners, agents, or joint venturers for one another, and nothing contained in this Agreement shall be deemed to constitute a partnership or agency agreement between them for any purposes, including, but not limited to federal income tax purposes. Customer and Urbanlink, in performing any of their obligations hereunder, shall be independent contractors or independent parties and shall discharge their contractual obligations at their own risk subject, however, to the terms and conditions hereof. 20.8 Severability. If any term, covenant or condition contained herein is, to any extent, held invalid or unenforceable in any respect under the laws governing this Agreement, the remainder of this Agreement shall not be affected thereby, and each term, covenant or condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 20.9 Legal Fees. If either Party commences an action against the other Party arising out of or related to this Agreement, the prevailing Party in such litigation shall be entitled to reasonable legal fees and costs in addition to such other relief as may be awarded. 20.10 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 20.11 Title to Equipment; Infrastructure. This Agreement shall not in any way convey title or any interest in the infrastructure, systems, equipment, facilities or other property of Urbanlink (or its Affiliates) utilized in connection with the provision of Capacity to Customer. [THE NEXT PAGE IS THE EXECUTION PAGE.] -17- In confirmation of their consent and agreement to the terms and conditions contained in this Agreement and intending to be legally bound hereby, the parties have executed this Agreement as of the date first above written. WORLDWIDE FIBER NETWORK SERVICES LTD. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- WFI URBANLINK LTD. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- -18- EXHIBIT A Capacity Endpoints City Pairs/Endpoints Endpoint Addresses Agreed Upon Mileage Purchase Price EXHIBIT B Service Level Agreement As agreed to from time to time between Urbanlink and the Customer. EX-10.41 14 EXHIBIT 10.41 Exhibit 10.41 CONFIDENTIAL AND PROPRIETARY CAPACITY PURCHASE AGREEMENT BY AND BETWEEN WORLDWIDE FIBER NETWORK SERVICES LTD. AND WFI URBANLINK LTD. DATED: April __, 2000 TABLE OF CONTENTS Page ---- ARTICLE 1 EXHIBITS; DEFINITIONS................................................1 ARTICLE 2 IRU..................................................................3 ARTICLE 3 PAYMENT..............................................................3 ARTICLE 4 ACCEPTANCE TESTING AND DELIVERY......................................4 ARTICLE 5 TERM.................................................................5 ARTICLE 6 INTERCONNECTION......................................................6 ARTICLE 7 MAINTENANCE AND REPAIR...............................................6 ARTICLE 8 USE OF THE CAPACITY..................................................6 ARTICLE 9 INDEMNIFICATION......................................................7 ARTICLE 10 LIMITATION OF LIABILITY.............................................8 ARTICLE 11 INSURANCE...........................................................8 ARTICLE 12 NOTICES............................................................10 ARTICLE 13 CONFIDENTIALITY....................................................10 ARTICLE 14 DEFAULT............................................................11 ARTICLE 15 TERMINATION........................................................12 ARTICLE 16 FORCE MAJEURE EVENTS...............................................12 ARTICLE 17 DISPUTE RESOLUTION.................................................13 ARTICLE 18 ASSIGNMENT AND TRANSFER RESTRICTIONS...............................13 ARTICLE 19 REPRESENTATIONS AND DISCLAIMER OF WARRANTIES.......................15 ARTICLE 20 GENERAL............................................................15 -i- CAPACITY PURCHASE AGREEMENT THIS CAPACITY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the ____ day of April 2000 (the "Effective Date"), by and between Worldwide Fiber Network Services, Ltd., an Alberta corporation ("Customer"), and WFI Urbanlink Ltd., an Alberta corporation ("Urbanlink"). RECITALS A. Urbanlink, either directly or indirectly, is the holder of rights in, has constructed or is constructing a fiber optic communications network, including optronics and other facilities (the "Urbanlink System"), which connects the city pairs identified in Exhibit A (the "Endpoints"). B. Customer desires to obtain from Urbanlink certain telecommunications capacity in the Urbanlink System on the terms and conditions set forth below. Accordingly, in consideration of the mutual promises set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 EXHIBITS; DEFINITIONS 1.1 Exhibits. The following exhibits are attached hereto, incorporated herein and made a part of this Agreement by this reference: Exhibit A: Endpoints Exhibit B: Service Level Agreement 1.2 Definitions. As used in this Agreement, the capitalized terms listed in this Section 1.2 and derivatives thereof shall have the meanings respectively ascribed to them in this Section 1.2. (a) "Acceptance Date" shall have the meaning set forth in Section 4.2. (b) "Affiliate" shall have the meaning ascribed to it in the CANADA BUSINESS CORPORATION ACT, as amended. (c) "Agreement" shall have the meaning set forth in the introductory paragraph. (d) "Capacity" means a linear dedicated telecommunications path with a bandwidth level of four OC-192S or equivalent between the Endpoints, except between Edmonton and Toronto, where the capacity shall be eight OC-48s or the equivalent, provided by Urbanlink under the terms of this Agreement, which bandwidth shall be derived from a specific wavelength and specific fibers. (e) "Completion Notice" shall have the meaning set forth in Section 4.1. (f) "Confidential Information" shall have the meaning set forth in Section 13.1. (g) "Costs" means actual, direct costs paid or payable in accordance with the established accounting procedures generally used by Urbanlink and which Urbanlink utilizes in billing third parties for reimbursable projects, including without limitation the following: (i) internal labor costs, including wages, salaries and benefits, and overhead allocable to such labor costs equal to 15%, and (ii) other direct costs and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials, supplies, contract services, etc.). (h) "Delivery Date" shall have the meaning set forth in Exhibit B. (i) "Dollars" or "$"means U.S. Dollars. (j) "Effective Date" shall have the meaning set forth in the introductory paragraph to this Agreement. (k) "Endpoints" shall have the meaning set forth in Recital A. (l) "Force Majeure Events" shall have the meaning set forth in Article 16. (m) "Impositions" means all taxes, good and services taxes, sales taxes, fees, levies, imposts, duties, charges or withholdings of any nature (including, without limitation, ad valorem, real property, gross receipts, franchise, license and permit fees), together with any penalties, fines or interest thereon arising out of the transactions contemplated by this Agreement by any federal, provincial, state or local government or other public taxing authority. (n) "Interest Rate" means the lower of (i) the highest rate permitted by law, or (ii) one and one-half percent (1.5%) per month (equivalent to 19.56% per annum). (o) "IRU" shall have the meaning set forth in Section 2.1. (p) "IRU Effective Date" shall have the meaning set forth in Section 5.1. (q) "O&M Fees" shall have the meaning set forth at Section 7.2. (r) "Party" means each of Urbanlink and Customer and "Parties" shall mean Urbanlink and Customer. (s) "Permitted Assignee" shall have the meaning set forth in Section 18.2. (t) "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. -2- (u) "Purchase Price" shall have the meaning set forth at Section 3.1. (v) "Service Level Agreement" shall have the meaning set forth at Section 4.1. (w) "Term" shall have the meaning set forth at Section 5.1. (x) "Urbanlink Account" means the following bank account of Urbanlink, which may be modified or changed by Urbanlink in writing from time to time: Account Name: Account Number: Bank Name: Reference: (y) "Underlying Rights" means, with respect to particular end points, all licenses, leases, easements, rights-of-way, deeds, franchises, permits, authorizations, consents and approvals (including without limitation, any necessary local, provincial federal or First Nations authorizations and environmental permits) and other rights, titles, or interests as are necessary for the construction, installation, operation, maintenance or repair of the Urbanlink System between such end points. (z) "Urbanlink System" shall have the meaning set forth in Recital A. ARTICLE 2 IRU 2.1 As of the IRU Effective Date, Urbanlink shall deliver and provide to Customer and Customer shall receive from Urbanlink an exclusive and indefeasible right of use of the Capacity on the terms and conditions set forth in the Agreement (the "IRU"). 2.2 Urbanlink represents and warrants that it possesses those certain rights to the Capacity necessary for Urbanlink to deliver the Capacity to Customer. Urbanlink shall keep the Capacity free from all claims, liens, encumbrances, rights or claims of any third party attributable to Urbanlink which have a material adverse effect on the right of Customer to use the Capacity as contemplated by this Agreement. ARTICLE 3 PAYMENT 3.1 In consideration of the grant of the IRU hereunder by Urbanlink to Customer, Customer agrees to pay to Urbanlink a fee in an amount (the "Specified Amount") as agreed between the Customer and Urbanlink per strand per route kilometer multiplied by the number of strand route kilometers (the "Purchase Price") (reduced for the strand route kilometers between Endpoints Edmonton and Toronto, by a fraction, the numerator of which is the capacity to be provided on such routes, and the denominator of which is the capacity to be provided on the other routes). 20% of the Purchase Price is due and payable on each of (i) the date of the commencement of the provision of Capacity under -3- this Agreement, (ii) the first anniversary of the date of the commencement of the provision of Capacity under this Agreement, (iii) the second anniversary of the commencement of the provision of Capacity under date of this Agreement, (iv) the third anniversary of the date of the commencement of the provision of Capacity under this Agreement, and (v) the fourth anniversary of the date of the commencement of the provision of Capacity under this Agreement. 3.2 All payments made by Customer hereunder in excess of $100,000 shall be made by wire transfer of immediately available funds to the Urbanlink Account. Payments of all other amounts by Customer hereunder may be made by wire transfer or by company check of immediately available funds payable to Urbanlink. 3.3 If Customer fails to make any payment under this Agreement when due, then, in addition to such sum and to any other rights and remedies that Urbanlink may have, Customer shall pay interest on such unpaid amount at the Interest Rate until such sum is paid in full and such interest shall accrue both before and after judgment. Notwithstanding the foregoing, no interest shall accrue on any payment that is disputed in good faith by Customer while such dispute is pending. If such dispute is later resolved in favor of Urbanlink, such amount shall bear interest at the Interest Rate from the date when due until paid. 3.4 In addition to the amounts payable under Section 3.1, Customer shall be responsible to pay directly or reimburse Urbanlink, as requested by Urbanlink, for all other sums, costs, fees and expenses that are required to be paid under this Agreement. Urbanlink will invoice Customer for all sums, costs, fees and expenses, owed by Customer to Urbanlink, and Customer shall pay such invoices within 30 days of the invoice date, except for the Purchase Price which shall be paid in accordance with Section 3.1. 3.5 All payments made by Customer under this Agreement shall be made without any deduction or withholding for or on account of any Imposition. If Customer is required by law to make any deduction or withholding from any payment due Urbanlink, then, notwithstanding anything to the contrary contained in this Agreement, the gross amount payable by Customer to Urbanlink shall be increased so that after any such deduction or withholding for such Impositions or any additional deduction or withholding on account of any Imposition caused by such additional gross-up payment, the net amount received by Urbanlink will not be less than what Urbanlink would have received had no deduction or withholding been required. ARTICLE 4 ACCEPTANCE TESTING AND DELIVERY 4.1 When Urbanlink has determined that the Capacity is operating substantially in conformity with the applicable service levels set forth in Exhibit B (the "Service Level Agreement"), Urbanlink shall promptly provide Customer written notice of the same (a "Completion Notice"). Each Completion Notice shall set forth the date upon which Urbanlink will commence delivery of the Capacity to Customer provided that all payments due under this Agreement have been paid in full. -4- 4.2 Within ten (10) days of receipt of a Completion Notice, Customer shall provide Urbanlink a written notice accepting or rejecting the Capacity, specifying in reasonable detail, if rejected, the defect or failure in the Capacity. If Customer fails to notify Urbanlink of its acceptance or rejection of the Completion Notice within ten (10) days following Customer's receipt of the same, Customer shall be deemed to have accepted such Capacity. Any use of Capacity by Customer other than for testing purposes shall be deemed to constitute acceptance of the Capacity. The date of such notice of acceptance or deemed acceptance of the Capacity shall be the "Acceptance Date". In the event of any good-faith rejection by Customer, Urbanlink shall take such action as reasonably necessary, and as expeditiously as practicable, to correct or cure such defect or failure. Customer shall in no event be entitled to commence use of the Capacity until after Urbanlink has received payment in full. 4.3 Provided Urbanlink first obtains Customer's written consent, which consent may not be unreasonably withheld or delayed, Urbanlink may substitute, change or reconfigure the telecommunications equipment and facilities used in providing the Capacity as long as the quality and type of Capacity is not impaired or changed. In such event, the Parties shall work together in good faith to minimize any disruption of service in connection with such substitution, change or reconfiguration. ARTICLE 5 TERM 5.1 The IRU shall become effective on the first day when both the Acceptance Date has occurred, and Urbanlink has received payment in full of the Purchase Price (the "IRU Effective Date") and the IRU shall extend until the expiry of the Underlying Rights in respect of that part of the Urbanlink System that contains the specific fibres on which the Capacity is being provided by Urbanlink under the terms of this Agreement (the "Term"); provided that if the Underlying Rights for the routes described on Exhibit A expire on different dates, the Term shall expire on the expiry on the last of such Underlying Rights to expire; and provided further that if the Underlying Rights expire for some routes described on Exhibit "A" prior to the expiry of the Term, the IRU shall then expire and terminate for such route and the rights of the Customer to use the Capacity in respect of such route shall cease. 5.2 At the expiration or other termination of this Agreement, the IRU shall immediately terminate, and all rights of Customer to use the Capacity shall cease. The expiration or termination of this Agreement shall not relieve Customer from any liabilities arising prior to such termination. 5.3 If at any time Customer, in its absolute discretion, determines not to retain the IRU, Customer shall have the right to abandon the IRU by written notice to Urbanlink. In the case of such abandonment, this Agreement shall terminate and Customer shall not be entitled to a refund of any of the consideration paid. Upon such termination, all fees, costs and other expenses with respect to this Agreement shall be immediately due and payable to Urbanlink by Customer. -5- ARTICLE 6 INTERCONNECTION 6.1 To the extent technically feasible, as determined by Urbanlink and the Customer acting reasonably and in good faith, Urbanlink shall permit Customer to interconnect its communications system with the Capacity within Urbanlink's facilities or structures at the Endpoints or at such other location as may be agreed from time to time, acting reasonably. Urbanlink shall perform all work with respect to such interconnection as it relates to the Urbanlink System or any other facilities, equipment or structures of Urbanlink or its Affiliates. Customer shall pay Urbanlink for its Costs to perform such work plus a management fee equal to fifteen percent (15%) of such Costs within thirty (30) days of receiving an invoice therefor. Nothing contained in this Agreement shall obligate Customer to obtain or facilitate the provisioning of local access with respect to the Capacity. ARTICLE 7 MAINTENANCE AND REPAIR 7.1 From and after the IRU Effective Date, Urbanlink shall maintain the Capacity in good working order and in accordance with industry standards. 7.2 In consideration of the maintenance services, Customer shall pay Urbanlink the operations and maintenance fees (the "O&M Fees") with respect to the city pairs listed below (subject to adjustment as provided in Section 7.3) equal to a monthly amount determined by the Customer and Urbanlink, acting reasonably, each year as being a reasonable allocation of the costs of Urbanlink to operate, repair and maintain the Urbanlink System. 7.3 The O&M Fee shall be increased annually, beginning with the first anniversary of the Effective Date, by the increase, if any, in the Consumer Price Index - Canada - All Items ("CPI") published by Statistics Canada for the twelve (12) month period ending three months prior to such anniversary of the effective date. In the event that Statistics Canada no longer publishes the CPI, Customer and Urbanlink shall together, acting reasonably and in good faith, designate the statistical index they consider most appropriate for adjustments to a fee and, from the date the CPI ceased to be published, such index shall be used to make adjustments in a fee under this provision. 7.4 Customer shall have no right to physically access in any manner the Urbanlink System or any components thereof. ARTICLE 8 USE OF THE CAPACITY 8.1 Customer represents, warrants and covenants that it will use the Capacity in compliance with and subject to all applicable government codes, ordinances, laws, rules and regulations and will require its customers that purchase telecommunication services, circuits or capacity from the Customer or its Affiliates do the same. Customer shall not use its systems in a way that interferes in any way with or adversely affects the use of the -6- Urbanlink System or any other Person using the Urbanlink System or Capacity thereon. The parties acknowledge that the Urbanlink System includes or will include other customers and participants, including without limitation, other owners and users of telecommunication systems. 8.2 Notwithstanding anything to the contrary contained herein, Customer shall secure, prior to the IRU Effective Date, and maintain in full force and effect during the Term, any and all necessary consents, franchises or similar approvals from all governmental and other authorities which are necessary or required to be obtained by Customer for Urbanlink to grant the IRU to Customer and for the use and operation of the Capacity by Customer. 8.3 Subject to Article 18, Urbanlink shall have no right to sell, lease, transfer or use the Capacity or any portion thereof. 8.4 Customer and Urbanlink each agree to cooperate with and support the other in complying with any requirements applicable to their respective rights and obligations hereunder. Customer and Urbanlink shall promptly notify each other of any matters pertaining to, or the occurrence (or impending occurrence) of, any event which would be reasonably likely to give rise to any damage or impending damage to or loss of the Urbanlink System or Capacity that are known to such Party. ARTICLE 9 INDEMNIFICATION 9.1 Subject to the provisions of Articles 10 and 19, Urbanlink hereby agrees to indemnify, defend, protect and hold harmless Customer, its Affiliates and their employees, officers and directors, from and against, and assumes liability for: (a) All suits, actions, damages or claims of any character (i) brought against Customer or its Affiliates because of any injuries or damage received or sustained by any persons or property which in whole or in part arise on account of the acts or negligent omissions of Urbanlink in the performance of construction or maintenance of the Urbanlink System or the provision of the Capacity or the performance of its obligations under this Agreement; and (ii) brought against Customer or its Affiliates under the workers compensation laws, except to the extent caused by the negligence or wilful misconduct of the parties indemnified hereunder. 9.2 Subject to the provisions of Article 10, Customer hereby agrees to indemnify, defend, protect and hold harmless Urbanlink, and its employees, officers and directors, from and against, and assumes liability for: (a) All suits, actions, damages or claims of any character (i) brought against Urbanlink or its Affiliates because of any injuries or damage received or sustained by any persons or property which in whole or in part arise on account of the acts or negligent omissions of Customer in the performance of its obligations under this Agreement; (ii) brought against Urbanlink or its Affiliates under workers compensation laws, except to the extent caused by the negligence or wilful -7- misconduct of the parties indemnified hereunder; and (iii) brought against Urbanlink or its Affiliates because of any damage arising out of or resulting from Customer's use of the Capacity and conduct of its business, including the content of any video, voice or data carried by Customer or its customers through or using the Capacity. 9.3 Nothing contained herein shall operate as a limitation on the right of either Party hereto to bring an action for damages against any third party, including indirect, special or consequential damages, based on any acts or negligent omissions of such third party as such acts or omissions may affect the construction, operation or use of the Capacity or the Urbanlink System; provided, however, that each Party hereto shall assign such rights or claims, execute such documents and do whatever else may be reasonably necessary to enable the other Party to pursue any such action against such third party. ARTICLE 10 LIMITATION OF LIABILITY 10.1 NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, EXCEPT TO THE EXTENT CAUSED BY ITS WILFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL COSTS, LIABILITIES OR DAMAGES, WHETHER FORESEEABLE OR NOT, ARISING OUT OF, OR IN CONNECTION WITH, SUCH PARTY'S PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE RELATED TO THIS AGREEMENT. 10.2 Notwithstanding anything contained in this Agreement to the contrary, the Parties acknowledge and agree that on and after the Acceptance Date, Customer's sole rights and remedies with respect to any defect in or failure of the Capacity to perform in accordance with the Service Level Agreement shall be limited to the remedies set forth in the Service Level Agreement. 10.3 The Parties expressly agree that no claim for losses or damages whatsoever in connection with this Agreement shall be made more than two years after the date that the event giving rise to such claim is known or reasonably should have been known to the Party making such claim. ARTICLE 11 INSURANCE 11.1 Throughout the term of the IRU, each Party shall procure and maintain in force, at its own expense: (a) General Liability insurance with a minimum limit of $5,000,000, including coverage for contractual liability, non-owned auto liability, Owner's & Contractor's protective liability and products and completed operations liability. Such policy shall be written on an occurrence basis and shall contain a cross liability or severability of interest clause; -8- (b) Workers' Compensation insurance covering all employees engaged in the work in accordance with the statutory requirements of the county, state, province or territory or other governmental body having jurisdiction over such employees. (c) Employers' Liability insurance with a minimum limit of $5,000,000, covering all employees engaged in the work; (d) Automobile liability insurance with a minimum limit of $5,000,000, covering all motor vehicles owned, operated and/or licensed (including owned, leased, or hired units); (e) "All Risks" Property insurance on a replacement cost basis, for damage to the system and associated property, with deductibles and limits in such amounts as would from time to time be carried by a prudent owner considering the property insured; and (f) any other insurance coverages specifically required of such Party pursuant to right-of-way agreements with railroads or other third parties. (g) Both parties shall require any contractors engaged in construction or maintenance of the system to maintain insurance in accordance with the provisions of this Article 11.1. 11.2 Both parties expressly acknowledge that a Party shall be deemed to be in compliance with the provisions of this Article if it maintains a self-insurance program providing for a retention of up to $1,000,000. Unless otherwise agreed, Customer's and Urbanlink's insurance policies shall be obtained and maintained with companies rated "A" or better by BEST'S KEY RATING GUIDE and each Party shall provide the other with an insurance certificate confirming compliance with this requirement for each policy providing such required coverage. 11.3 If either Party fails to obtain the required insurance or fails to obtain the required certificates from any contractor and a claim is made or suffered, such Party shall indemnify and hold harmless the other Party from any and all claims for which the required insurance would have provided coverage. Further, in the event of any such failure which continues after seven (7) days' written notice thereof by the other Party, such other Party may, but shall not be obligated to, obtain such insurance and will have the right to be reimbursed for the cost of such insurance by the Party failing to obtain such insurance. 11.4 In the event coverage is denied or reimbursement of a properly presented claim is disputed by the carrier for insurance provided above, the Party carrying such coverage shall make good-faith efforts to pursue such claim with its carrier. 11.5 Each party shall upon request from the other provide evidence of the insurances which it is obligated to maintain under clause 11.1. All insurance policies shall contain a provision that coverage cannot be cancelled or materially reduced until the insurer has provided at least 30 days written notice to the non-insuring party. -9- 11.6 Each party shall require all policies related to this contract be amended to include the other party as an additional named insured and shall require insurers to amend all such policies to include a waiver of subrogation in favor of the other party. ARTICLE 12 NOTICES 12.1 All notices and other communications required or permitted under this Agreement shall be in writing and shall be given by hand delivery (including by means of a professional messenger service or overnight mail) addressed as follows: If to Customer: Worldwide Fiber Network Services Ltd. Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern If to Urbanlink: WFI Urbanlink Ltd. Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: William Ramsey Any such notice or other communication shall be deemed to be effective when actually received or refused. Either Party may by similar notice given change the address to which future notices or other communications shall be sent. ARTICLE 13 CONFIDENTIALITY 13.1 This Agreement and all materials, maps, and other documents which are marked confidential and disclosed by one Party to the other in fulfilling the provisions and intent of this Agreement, are and shall be confidential (the "Confidential Information"). Neither Party shall divulge or otherwise disclose the Confidential Information to any third party without the prior written consent of the other Party, except that either Party may make disclosure to those required for the implementation or performance of this Agreement, auditors, attorneys, financial advisors, lenders and prospective lenders, funding partners and prospective funding partners, provided that in each case the permitted recipient agrees in writing to be bound by the confidentiality provisions set forth in this section. In addition, either Party may make disclosure as required by a court order or as otherwise required by law or in any legal or arbitration proceeding relating to this Agreement. If either Party is required by law or by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process to -10- disclose the Confidential Information, it will provide the other Party with prompt prior written notice of such request or requirement so that such Party may seek an appropriate protective order and/or waive compliance with this Section. The Party whose consent to disclose information is requested shall respond to such request, in writing, within five (5) working days of the request by either authorizing the disclosure or advising of its election to seek a protective order, or if such Party fails to respond within the prescribed period the disclosure shall be deemed approved. 13.2 Nothing herein shall be construed as granting any right or license under any copyrights, inventions, or patents now or hereafter owned or controlled by Urbanlink. 13.3 Upon termination of this Agreement for any reason or upon request of Urbanlink, Customer shall return all Confidential Information, together with any copies of same, to Customer. The requirements of confidentiality set forth herein shall survive the return of such Confidential Information. 13.4 Customer shall not, without first obtaining the written consent of Urbanlink, use any trademark or trade name of Urbanlink or refer to the subject matter of this Agreement or Urbanlink in any promotional activity or otherwise, nor disclose to others any specific information about the subject matter of this Agreement. Neither Party shall issue any publication or press release relating directly or indirectly to this Agreement without the prior written consent of both Parties. 13.5 The provisions of this Article shall survive expiration or other termination of this Agreement. ARTICLE 14 DEFAULT 14.1 A default shall be deemed to have occurred under this Agreement if: (a) in the case of a failure to pay any amount when due under this Agreement, a Party fails to pay such amount within ten (10) days after notice specifying such breach, or (b) in the case of any other material breach of this Agreement, a Party fails to cure such material breach within thirty (30) days after notice specifying such breach, provided that if the breach is of a nature that cannot be cured within thirty (30) days, a default shall not have occurred so long as the breaching Party has commenced to cure within said time period and thereafter diligently pursues such cure to completion. (c) either of the following occur (i) a Party makes a general assignment for the benefit of its creditors, files a voluntary petition in bankruptcy or any petition or answer seeking, consenting to, or acquiescing in reorganization, arrangement, adjustment, composition, liquidation, dissolution or similar relief; or (ii) an involuntary petition in bankruptcy, other insolvency protection against either Party is filed and not dismissed within one hundred twenty days (120) days. -11- 14.2 If the default consists of a failure of Customer to pay to Urbanlink any part of the Purchase Price, Urbanlink may terminate any and all of its obligations under this Agreement, and apply any and all amounts previously paid by Customer hereunder toward the payment of any other amounts then or thereafter payable by Customer under this Agreement or suspend the provisioning of the Capacity hereunder. In the event of any other default under this Agreement the non-defaulting Party may avail itself of one or more of the following remedies: (a) take such actions as it determines, in its sole discretion, to correct the default; and (b) pursue any legal remedies it may have under applicable law or principles of equity, including specific performance. 14.3 A waiver by either Party at any time of any of its rights as to anything herein contained shall not be deemed to be a waiver of any breach of covenant or other matter subsequently occurring. 14.4 Notwithstanding anything contained in this Agreement to the contrary, Customer's sole and exclusive remedy for any failure by Urbanlink to deliver the Capacity in accordance with this Agreement shall be limited to those contained in the Service Level Agreement. ARTICLE 15 TERMINATION 15.1 This Agreement shall automatically terminate on the expiration or termination of the Term, or earlier as provided in this Agreement. Upon the expiration of the Term or other termination of this Agreement, the IRU shall immediately terminate and all rights of Customer to use the Capacity shall cease, all such rights shall revert to Urbanlink, and Urbanlink shall owe Customer no further duties, obligations or consideration. Termination of this Agreement shall not affect the rights or obligations of either Party that have arisen before the date of termination or expiration. ARTICLE 16 FORCE MAJEURE EVENTS 16.1 Neither Party shall be in default under this Agreement if and to the extent that any failure or delay in such Party's performance of one or more of its obligations hereunder is caused by any of the following conditions, and such Party's performance of such obligation or obligations shall be excused and extended for and during the period of any such delay: act of God; fire; flood; fiber, cable, equipment or other material or component failures, shortages or unavailability or other delay in delivery not resulting from the responsible Party's failure to timely place orders therefor; lack of or delay in transportation; construction or permitting delays; government codes, ordinances, laws, rules, regulations or restrictions; war or civil disorder; strikes or other labor disputes; failure of a third party to grant or recognize a required property, right of way or license right; or any other cause beyond the reasonable control of such Party (collectively, "Force Majeure Events"). The Party claiming relief under this Article shall notify the other in writing of the existence of the event relied on and the cessation or termination of said event, and the Party claiming relief shall exercise reasonable commercial efforts to minimize the time of any such delay. -12- ARTICLE 17 DISPUTE RESOLUTION 17.1 Application. The Parties will attempt to resolve any dispute arising out of this Agreement promptly through discussions at the operational level. In the event a resolution is not achieved, the disputing Party shall provide the other Party with written notice of the same and the Parties shall attempt to resolve such dispute between senior executives who have the authority to settle such dispute. If the Parties fail to resolve such dispute within thirty (30) days of the non-disputing Party's receipt of the written notice, either Party may seek arbitration as set forth below. 17.2 Arbitration. All disputes arising out of or in connection with this Agreement, or in respect of any defined legal relationship associated therewith or derived therefrom (including, without limitation, any claim, controversy or dispute, whether sounding in contract, statute, tort, fraud, misrepresentation or other legal theory, related directly or indirectly to this Agreement, and whenever brought and whether between the parties to this Agreement or between one of the parties to this Agreement and the employees, agents or affiliated businesses of the other Party), shall be referred to and finally resolved by arbitration under the Rules of the British Columbia International Commercial Arbitration Centre. The appointing authorities shall be the British Columbia International Commercial Arbitration Centre. The case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases Under the BCICAC Rules". The place of arbitration shall be Vancouver, British Columbia, Canada. The number of arbitrators shall be one. 17.3 Discovery. There shall be no discovery other than the exchange of information that is provided to the arbitrator by the parties. Each Party shall bear its own costs and attorneys' fees, and the parties shall share equally the fees and expenses of the arbitrator. The arbitrator's decision and award shall be final and binding, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 17.4 Enforcement. If any Party files a judicial or administrative action asserting claims subject to arbitration as prescribed herein, and another Party successfully stays such action or compels arbitration of said claims, the Party filing said action shall pay the other Party's costs and expenses incurred in seeking such stay or compelling arbitration, including reasonable attorneys' fees. ARTICLE 18 ASSIGNMENT AND TRANSFER RESTRICTIONS 18.1 Except as provided in Section 18.2, Customer may not transfer or assign all or any part of its interest under this Agreement, or delegate any duties, burdens, or obligations arising hereunder, without Urbanlink's consent, which consent shall not be unreasonably withheld or delayed. A transfer or assignment in violation of this Article 18 shall constitute a material breach of this Agreement. If any such consent is given, Customer nevertheless shall remain fully and primarily liable for all obligations under this Agreement. Notwithstanding anything to the contrary contained in this Article 18, -13- Customer may sell or lease any telecommunications circuits, capacity or other services comprising the Capacity to third parties. 18.2 Customer may assign this Agreement in whole, but not in part, to a Permitted Assignee. As used in this Section 18.2, the term "Permitted Assignee" shall mean (a) any Affiliate of Customer, (b) any Person that purchases all or substantially all of the assets of Customer, or any other Person formed by or surviving the merger or consolidation of Customer and any other person or (c) any institutional lender to whom this Agreement is assigned as collateral security for any indebtedness of Customer or any Affiliate of Customer, provided that such collateral assignment is subject to the terms of this Agreement. Upon any assignment to a Permitted Assignee, the assignor shall remain responsible for performance under this Agreement. Any Permitted Assignee pursuant to subparagraph (a) or (b) above shall expressly assume all obligations and liabilities with respect to the Agreement which arise after the effective date of assignment or transfer, prior to or upon the effectiveness of such assignment and, in the case of an assignment as provided in subparagraph (c) of this Section 18.2, in the event the institutional lender exercises its rights with respect to this Agreement it shall expressly assume all obligations and liabilities with respect to the Agreement which arise thereafter. 18.3 Except as provided in Section 18.4, Urbanlink may not transfer or assign all or any part of its interest under this Agreement, or delegate any duties, burdens, or obligations arising hereunder, without Customer's consent, which consent shall not be unreasonably withheld or delayed. A transfer or assignment in violation of this Article 18 shall constitute a material breach of this Agreement. If any such consent is given, Urbanlink nevertheless shall remain fully and primarily liable for all obligations under this Agreement. 18.4 Urbanlink may assign this Agreement in whole, but not in part, to a Permitted Assignee. As used in this Section 18.4, the term "Permitted Assignee" shall mean (a) any Affiliate of Customer, (b) any Person that purchases all or substantially all of the assets of Urbanlink, or any other Person formed by or surviving the merger or consolidation of Urbanlink and any other person or (c) any institutional lender to whom this Agreement is assigned as collateral security for any indebtedness Urbanlink or any Affiliate of Urbanlink, provided that such collateral assignment is subject to the terms of this Agreement. Upon any assignment to a Permitted Assignee, the assignor shall remain responsible for performance under this Agreement. Any Permitted Assignee pursuant to subparagraph (a) or (b) above shall expressly assume all obligations and liabilities with respect to the Agreement which arise after the effective date of assignment or transfer, prior to or upon the effectiveness of such assignment and, in the case of an assignment as provided in subparagraph (c) of this Section 18.4, in the event the institutional lender exercises its rights with respect to this Agreement it shall expressly assume all obligations and liabilities with respect to the Agreement which arise thereafter. 18.5 This Agreement and each of the Parties' rights and obligations under this Agreement shall be binding upon and shall inure to the benefit of the Parties, hereto and each of their respective permitted successors and assigns. -14- ARTICLE 19 REPRESENTATIONS AND DISCLAIMER OF WARRANTIES 19.1 By execution of this Agreement, each Party represents and warrants to the other: (a) That the representing Party has full right and authority to enter into and perform this Agreement in accordance with the terms hereof and thereof, and that by entering into or performing this Agreement, the representing Party is not in violation of its charter or bylaws, or any law, regulation or agreement by which it is bound or to which it is subject; (b) That the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action, that the signatories for such Party hereto are authorized to sign this Agreement, and that the joinder or consent of any other Party, including a court or trustee or referee, is not necessary to make valid and effective the execution, delivery and performance of this Agreement by such Party. 19.2 EXCEPT AS SET FORTH IN THE SERVICE LEVEL AGREEMENT, Urbanlink MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE CAPACITY, THE URBANLINK SYSTEM, OR ANY WORK PERFORMED UNDER THIS AGREEMENT INCLUDING ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE OR USE, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. THE WARRANTIES SET FORTH IN THIS AGREEMENT CONSTITUTE THE ONLY WARRANTIES MADE BY URBANLINK TO CUSTOMER WITH RESPECT TO THIS AGREEMENT AND ARE MADE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED. ARTICLE 20 GENERAL 20.1 Binding Effect. This Agreement and each of the Parties' respective rights and obligations under this Agreement, shall be binding on and shall inure to the benefit of the Parties hereto and each of their respective permitted successors and assigns. 20.2 Waiver. The failure of either Party hereto to enforce any of the provisions of this Agreement, or the waiver thereof in any instance, shall not be construed as a general waiver or relinquishment on its part of any such provision, but the same shall nevertheless be and remain in full force and effect. 20.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia and the federal law of Canada applicable therein, without giving effect to its principles of conflicts of laws. Subject to Article 17, any litigation based hereon, or arising out of or in connection with a default by either Party in the performance of its obligations hereunder, shall be brought and maintained exclusively in the courts of the Province of British Columbia, in Vancouver, British Columbia, and each Party hereby irrevocably submits to the jurisdiction of such courts -15- for the purpose of any such litigation and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation. 20.4 Rules of Construction. The captions or headings in this Agreement are strictly for convenience and shall not be considered in interpreting this Agreement or as amplifying or limiting any of its content. Words in this Agreement which import the singular connotation shall be interpreted as plural, and words which import the plural connotation shall be interpreted as singular, as the identity of the parties or objects referred to may require. (a) Unless expressly defined herein, words having well known technical or trade meanings shall be so construed. All listing of items shall not be taken to be exclusive, but shall include other items, whether similar or dissimilar to those listed, as the context reasonably requires. (b) Except as set forth to the contrary herein, any right or remedy of Customer or Urbanlink shall be cumulative and without prejudice to any other right or remedy, whether contained herein or not. (c) Nothing in this Agreement is intended to provide any legal rights to anyone not an executing party of this Agreement. (d) This Agreement has been fully negotiated between and jointly drafted by the Parties. (e) All actions, activities, consents, approvals and other undertakings of the Parties shall be performed in a reasonable and timely manner, it being expressly acknowledged and understood that time is of the essence in the performance of obligations required to be performed by a date expressly specified herein. Except as specifically set forth herein, for the purpose of this Agreement the standards and practices of performance within the telecommunications industry in the relevant market shall be the measure of a Party's performance. 20.5 Entire Agreement. This Agreement constitutes the entire and final agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements relating to the subject matter hereof, which are of no further force or effect. The Exhibits and Attachment referred to herein are integral parts hereof and are hereby made a part of this Agreement. To the extent that any of the provisions of any Exhibit hereto are inconsistent with the express terms of this Agreement, the terms of this Agreement shall prevail. This Agreement may only be modified or supplemented by an instrument in writing executed by each Party and delivered to the Party relying on the writing. 20.6 No Personal Liability. Each action or claim against any Party arising under or relating to this Agreement shall be made only against such Party as a corporation, and any liability relating thereto shall be enforceable only against the corporate assets of such Party. No Party shall seek to pierce the corporate veil or otherwise seek to impose any liability relating to, or arising from, this Agreement against any shareholder, employee, officer or -16- director of the other Party. Each of such persons is an intended beneficiary of the mutual promises set forth in this Article and shall be entitled to enforce the obligations of this Article. 20.7 Relationship of the Parties. The relationship between Customer and Urbanlink shall not be that of partners, agents, or joint venturers for one another, and nothing contained in this Agreement shall be deemed to constitute a partnership or agency agreement between them for any purposes, including, but not limited to federal income tax purposes. Customer and Urbanlink, in performing any of their obligations hereunder, shall be independent contractors or independent parties and shall discharge their contractual obligations at their own risk subject, however, to the terms and conditions hereof. 20.8 Severability. If any term, covenant or condition contained herein is, to any extent, held invalid or unenforceable in any respect under the laws governing this Agreement, the remainder of this Agreement shall not be affected thereby, and each term, covenant or condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 20.9 Legal Fees. If either Party commences an action against the other Party arising out of or related to this Agreement, the prevailing Party in such litigation shall be entitled to reasonable legal fees and costs in addition to such other relief as may be awarded. 20.10 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 20.11 Title to Equipment; Infrastructure. This Agreement shall not in any way convey title or any interest in the infrastructure, systems, equipment, facilities or other property of Urbanlink (or its Affiliates) utilized in connection with the provision of Capacity to Customer. [THE NEXT PAGE IS THE EXECUTION PAGE.] -17- In confirmation of their consent and agreement to the terms and conditions contained in this Agreement and intending to be legally bound hereby, the parties have executed this Agreement as of the date first above written. WORLDWIDE FIBER NETWORK SERVICES LTD. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- WFI URBANLINK LTD. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- -18- EXHIBIT A CAPACITY ENDPOINTS
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- FROM CALGARY TO EMERSON CP 1,443 Orange Brown 41-42 SMF-28 FROM CP TRACKS AT CAMBIE ST. CP 1,032 Orange Brown 41-42 SMF-28 VANCOUVER TO CALGARY FROM 301 INDUSTRIAL AVE. TO CP 3 Orange Brown 41-42 SMF-28 CP TRACKS AT CAMBIE ST. OAK STREET BRIDGE TO 301 CN 11 Orange Brown 41-42 SMF-28 INDUSTRIAL, VANCOUVER US BORDER TO VICTORIA TO OAK CN 84 Orange Brown 41-42 SMF-28 STREET BRIDGE EDMONTON CN TRACKS TO CN 11 Orange Brown 41-42 SMF-28 EDMONTON BRETTVILLE JUNCTION EDMONTON BRETVILLE JUNCTION CN 1,958 Orange Brown 41-42 SMF-28 TO THUNDER BAY THUNDER BAY TO TORONTO CN 1,402 Orange Brown 41-42 SMF-28 TORONTO TO BROCKVILLE Union Station to Parliament 333.8 to TTR 12 Orange Rose 121-122 Leaf St.(Kingston) 332.8 Parliament St to Scarborough 332.8 to CN 23 Orange Rose 121-122 Leaf (Kingston) 7.24 Scarborough to Pickering 325.56 to CN 299 Orange Rose 121-122 Leaf Jct. (Kingston) 311.4 Pickering Jct. To Brockville 311.4 to CN Orange Rose 121-122 Leaf (Kingston) 125.7 - -----------------------------------------------------------------------------------------------------------------
-19-
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- BROCKVILLE TO SMITH FALLS 27.8 to StL&H 45 Orange Rose 121-122 Leaf 0.00 SMITH FALLS TO OTTAWA (VIA) STATION Smith Falls to Alexander 34.5 to StL&H 0.2 Orange Rose 121-122 Leaf St.(Smiths Falls) 34.38 Alexander St. to CN Radio 34.38 to CN 1 Orange Rose 121-122 Leaf Site (Smiths Falls) 34.05 CN Radio Site to Richmond 34.05 to VIA 34 Orange Rose 121-122 Leaf (Smiths Falls) 13.0 Richmond to Federal (Smiths 13.0 to 0.0 CN 21 Orange Rose 121-122 Leaf Falls) Federal to Union Station 6.0 to 0.9 CN 10 Orange Rose 121-122 Leaf (Beachburg) BORDER TO TORONTO U.S. Border to Fort Erie 0.6 to 1.0 CN 1 Orange Rose 121-122 Leaf (Stamford) Fort Erie to Port Robinson 1.0 to CN 36 Orange Rose 121-122 Leaf (Stamford) 23.14 Port Robinson to Merriton 1.27 to 7.9 CN 11 Orange Rose 121-122 Leaf (Thorld Spur) Merriton to Hamilton 9.5 to CN 55 Orange Rose 121-122 Leaf (Grimsby) 43.66 Hamilton to Canpa (Oakville) 39.3 to 8.5 CN 50 Orange Rose 121-122 Leaf Canpa to Windsor St. 8.5 to 0.5 CN 13 Orange Rose 121-122 Leaf (Oakville) OTTAWA TO QUEBEC BORDER Union Station to Hawthorne 76.5 to CN 6 Temp Rose 121-122 Leaf Diamond (Alexandria) 2.72 Hawthorne Diamond to 72.72 to CN 0.4 Rose 121-122 Leaf Hawthorne (Alexandria) 72.5 Hawthorne to Quebec Border 72.5 to VIA 97 Rose 121-122 Leaf (Alexandria) 12.5 - -----------------------------------------------------------------------------------------------------------------
-20-
- ----------------------------------------------------------------------------------------------------------------- MILE DUCT TUBE STRAND STRAND SEGMENTS POINTS ROW KILOMETER COLOUR COLOUR NUMBER TYPE - ----------------------------------------------------------------------------------------------------------------- QUEBEC BORDER TO TASCHEREAU Quebec Border to Coteau 12.5 to 0.0 VIA 20.11 Orange Rose 121 - 122 Leaf Jct.(Alexandria) Coteau Jct. To Dorion 38.0 to CN 22.04 Orange Rose 121 - 122 Leaf (Kingston) 24.3 Dorion to Dorval (Kingston) 24.3 to CN 22.53 Orange Rose 121 - 122 Leaf 10.3 Dorval to Taschereau Yard 11.6 to 9.0 CN 4.18 Orange Rose 121 - 122 Leaf (Montreal) MONTREAL CENTRAL TO QUEBEC 1.28 to 1.5 CN 259.79 Orange Rose 121-122 Leaf CITY US BORDER TO CAMBRIDGE US Border to Collage Ave 226.30 to CN/StL&H 2 Orange Rose 121-122 Leaf 225.21 Collage Avenue to Hyde Park 111.8 to StL&H 174 Orange Rose 121-122 Leaf Road 3.9 Hyde Park Road to London 3.9 to 0.0 StL&H 6 Orange Rose 121-122 Leaf London to Airport Road 114.6 to StL&H 8 Orange Rose 121-122 Leaf 109.48 Airport Road to Cambridge 109.48 to StL&H 84 Orange Rose 121-122 Leaf 57.2 - -----------------------------------------------------------------------------------------------------------------
-21- EXHIBIT B SERVICE LEVEL AGREEMENT As agreed to from time to time between Urbanlink and the Customer. -22- EX-10.42 15 EXHIBIT 10.42 Exhibit 10.42 NETWORK OPERATING CENTER SERVICES AGREEMENT THIS AGREEMENT Dated For Reference the _____ day of April, 2000 BETWEEN: 360NETWORKS INC. ("360") AND: WORLDWIDE FIBER NETWORKS SERVICES LTD. ("Services") AND: WFI URBANLINK LTD. ("Urbanlink") WHEREAS: A. Urbanlink has agreed to provide network operating center services to Services on the terms and subject to the conditions specified in this Agreement. IN CONSIDERATION of the mutual agreements in this Agreement and subject to the terms and conditions specified in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS In this Agreement, including the recitals and the schedules, the following words and expressions have the following meanings unless the context otherwise requires: "Affiliate" of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, and for the purposes of this definition "control" (including correlative meanings of the terms "controlled by" and "under common control with") means the power to direct or cause the direction of the management and policies of any Person, whether through the ownership of shares or by contract or otherwise. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Services Confidential Information" has the meaning provided in Section 5.1. "Subsidiary" has the meaning provided in the CANADA BUSINESS CORPORATIONS ACT in effect on the date hereof. "Urbanlink Confidential Information" has the meaning provided in Section 5.3. "NOC Services" has the meaning provided in Section 2.1. ARTICLE 2 SERVICES 2.1 THE SERVICES Services hereby retains Urbanlink to provide network operating center services including, without limitation, the monitoring, alarm and surveillance functions, relating to all networks of Services and of 360 and its Subsidiaries in Canada and relating to such other networks of 360 Subsidiaries as 360 may request from time to time (the "NOC Services") by notice in writing to Urbanlink, Urbanlink agrees to provide the NOC Services to Services. The NOC Services shall be provided in accordance with the terms and conditions contained in this Agreement. 2.2 STANDARDS Urbanlink shall provide the NOC Services in accordance with telecommunications industry standards for such services and in accordance with such policies and procedures, and to such standards, as may be specified from time to time by notice in writing from Services to Urbanlink. The NOC Services provided by Urbanlink shall be coordinated with the similar functions performed by other network operating centers operated by 360 Subsidiaries in other countries. 2.3 PROJECT DIRECTORS Each of Urbanlink and Services will appoint a Project Director whose duties will be to act as the liaison between Urbanlink and Services. 2.4 SERVICES' ASSISTANCE Services will provide to Urbanlink full, good faith co-operation to assist Urbanlink in providing the NOC Services. In particular, and without limiting the generality of the foregoing, Services will: (a) supply free of charge all pertinent data and information and give such assistance as may reasonably be requested by Urbanlink to provide the NOC Services and in particular to provide Urbanlink with such specific and detailed information regarding Services' systems, procedures and equipment as Urbanlink may reasonably request; and (b) make available to Urbanlink such employees of Services as Urbanlink may reasonably request. -2- ARTICLE 3 COMPENSATION 3.1 FEES In consideration of Urbanlink providing the NOC Services, Services will pay to Urbanlink fees for the NOC Services in an amount equal to Urbanlink's operating costs of providing such services, plus a margin as agreed to between Services and Urbanlink. 3.2 INTEREST Unless otherwise agreed between Urbanlink and Services, Urbanlink will invoice Services for such fees and expenses monthly in arrears. All such invoices will be payable by Services within 30 days of the date of each such invoice. If payment is not made when due, Services will pay to Urbanlink interest on the balance unpaid at a rate of 1.5% per month, compounded monthly (equivalent to 19.56% per annum) until paid. 3.3 TAXES The amounts specified in this Agreement are exclusive of any federal or provincial tariffs, duties, sales, use or goods and services taxes or duties, all of which will be paid by Services. ARTICLE 4 WARRANTIES AND LIMITATION OF LIABILITY 4.1 WARRANTY Urbanlink will perform the NOC Services to the same reasonable standards of professional skill and competence applicable to generally recognized providers of similar services. 4.2 OTHER WARRANTIES EXCLUDED THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES OR CONDITIONS. URBANLINK MAKES NO OTHER WARRANTY OR CONDITION, EXPRESS OR IMPLIED, AND THERE ARE EXPRESSLY EXCLUDED ALL IMPLIED OR STATUTORY WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR TITLE OR NONINFRINGEMENT AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A COURSE OF DEALING OR USAGE OF TRADE. THE STATED EXPRESS WARRANTY IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE PERFORMANCE OF THE NOC SERVICES. 4.3 NO CONSEQUENTIAL DAMAGES IN NO EVENT WHATSOEVER SHALL URBANLINK BE LIABLE FOR INDIRECT, CONSEQUENTIAL, EXEMPLARY, INCIDENTAL, SPECIAL, INDIRECT OR OTHER SIMILAR DAMAGES INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED SAVINGS, OTHER -3- COMMERCIAL OR ECONOMIC LOSS OF ANY KIND OR ANY CLAIM AGAINST SERVICES BY ANY PARTY ARISING OUT OF OR IN CONNECTION WITH THE PERFORMANCE OF THE NOC SERVICES EVEN IF URBANLINK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. LIMITATION OF LIABILITY BENEFITS EMPLOYEES Every exemption from liability, limitation and condition contained in this Agreement for the benefit of Urbanlink and every defence and immunity of whatsoever nature applicable to Urbanlink or to which Urbanlink is entitled under this Agreement will also be available and will extend to protect every director, officer, employee, agent or independent contractor from time to time of Urbanlink and, for the purpose of all such provisions and this section, Urbanlink is and will be deemed to be acting as agent and trustee on behalf of and for the benefit of all such subsidiaries, affiliates, employees, agents and independent contractors. ARTICLE 5 CONFIDENTIALITY 5.1 SERVICES CONFIDENTIAL INFORMATION During the course of its relationship with Urbanlink, Services or its subsidiaries or affiliates or their employees or agents may disclose certain proprietary or confidential information to Urbanlink or its subsidiaries or affiliates or their employees or agents. The proprietary or confidential information may be oral or written, may be of a technical or commercial nature, may take the form of plans, drawings, processes, formulae, schedules, reports, projections, analyses, programs, prints, recordings, lists or other compilations of information, and may relate to Services, its suppliers, employees, stockholders or customers. All of such proprietary information and confidential information is herein collectively called the "Services Confidential Information". 5.2 CONFIDENTIALITY OF SERVICES CONFIDENTIAL INFORMATION All Services Confidential Information obtained by Urbanlink will be considered confidential and will not be disclosed by Urbanlink to any person without the prior written consent of Services. Urbanlink will use the Services Confidential Information only for the purposes contemplated by this Agreement. Urbanlink will not obtain any interest in any Services Confidential Information by reason of this Agreement or by reason of the disclosure of such Services Confidential Information pursuant to this Agreement. Urbanlink will take the steps reasonably necessary to protect the confidentiality of the Services Confidential Information. Urbanlink will provide at least the same level of protection that it provides for its own proprietary information. Any copies of the Services Confidential Information which are made by Urbanlink will include all copyright notices and any other propriety notices contained in such Services Confidential Information, and will display such notices not less prominently than such notices are displayed in such Services Confidential Information. -4- 5.3 URBANLINK CONFIDENTIAL INFORMATION During the course of its relationship with Services, Urbanlink or its subsidiaries or affiliates or their employees or agents may disclose certain proprietary or confidential information to the Services or its subsidiaries or affiliates or their employees or agents. The proprietary or confidential information may be oral or written, may be of a technical or commercial nature, may take the form of programs, design documentation, manuals, plans, drawings, processes, formulae, schedules, reports, projections, analyses, programs, prints, recordings, lists or other compilations of information, and may relate to the Urbanlink, its suppliers, employees, stockholders or customers. All of such proprietary information and confidential information is herein collectively called the "Urbanlink Confidential Information". 5.4 CONFIDENTIALITY OF URBANLINK CONFIDENTIAL INFORMATION All Urbanlink Confidential Information obtained by Services will be considered confidential and will not be disclosed by Services to any person without the prior written consent of Urbanlink. Services will use the Urbanlink Confidential Information only for the purposes contemplated by this Agreement. Services will not obtain any interest in any Urbanlink Confidential Information by reason of this Agreement or by reason of the disclosure of such Urbanlink Confidential Information pursuant to this Agreement. Services will take the steps reasonably necessary to protect the confidentiality of the Urbanlink Confidential Information. Services will provide at least the same level of protection that it provides for its own propriety information. Any copies of the Urbanlink Confidential Information which are made by Services will include all copyright notices and any other propriety notices contained in such Urbanlink Confidential Information, and will display such notices not less prominently than such notices are displayed in such Urbanlink Confidential Information. 5.5 EXCEPTIONS The foregoing restrictions do not apply to: (a) information which at the time of disclosure was in the public domain as evidenced by a printed publication or otherwise; (b) information which after disclosure becomes part of the public domain by publication or otherwise, other than by an action in breach of this Agreement; (c) information which was in the possession of a party at the time of disclosure by the other party and was not acquired, directly or indirectly, from the other party; (d) information which the disclosing party rightfully receives from an independent third party who did not receive such information, directly or indirectly, from the other party with limitation or restriction on its use; (e) information which is independently developed by employees or agents of a party who had not had access to the other party's confidential information; -5- (f) any information which is required to be disclosed pursuant to the timely disclosure requirements imposed by law or by stock exchange policies applicable to the receiving party and, in such cases, only where the other party has been given a reasonable opportunity to review such proposed disclosure and the other party has maintained confidentiality to the greatest extent permissible under such laws and policies; or (g) such information as a party may be required to disclose by order of a court, administrative agency or other governmental body with jurisdiction over such party, provided that such party first provides to the other party prompt notice of such required disclosure and takes such steps as may be reasonable in the circumstances to allow the other party to seek a protective order with respect to the confidentiality of the information required to be disclosed. ARTICLE 6 TERM AND TERMINATION 6.1 TERM The term of this Agreement will commence on the date hereof, and will continue until April 30, 2005. 6.2 TERMINATION FOR DEFAULT Without limiting the remedies otherwise available under this Agreement or at law, either Services or Urbanlink (referred to in this section as the "Terminating Party") may terminate this Agreement by notice in writing to the other (the "Defaulting Party") on the occurrence of any one or more of the following events: (a) if the Defaulting Party is in breach of any material term of this Agreement and such breach is not cured within 30 days of the Defaulting Party receiving written notice from the Terminating Party specifying the breach in reasonable detail, or within such longer period of time as may be reasonably necessary to cure such breach provided that the Defaulting Party is acting in good faith and with all reasonable diligence to cure such breach; (b) if the Defaulting Party makes an assignment for the benefit of its creditors, is declared bankrupt, or otherwise takes advantage of provisions for relief under the Bankruptcy and Insolvency Act, the Companies Creditors Arrangement Act or similar legislation in any jurisdiction, or makes an authorized assignment, or makes a proposal under the Bankruptcy and Insolvency Act or initiates proceedings under similar legislation in any jurisdiction; (c) if a receiver, receiver and manager or receiver-manager of all or any part of the assets of the Defaulting Party is appointed and such receiver, receiver and manager or receiver-manager is not discharged within 30 days of such appointment; -6- (d) if an order is made or an effective resolution is passed for the winding-up or liquidation of the Defaulting Party; or (e) if the Defaulting Party ceases to carry on its business. 6.3 SURVIVAL OF TERMS Articles 4 and 5 and such other provisions as may reasonably be expected to remain in force will survive the expiration or termination of this Agreement and will remain in full force and effect following such expiration or termination. The expiration or termination of this Agreement will not affect the rights of any party to make a claim for damages arising from a breach of any provision of this Agreement which occurred prior to such expiration or termination. ARTICLE 7 GENERAL 7.1 GOVERNING LAW AND ATTORNMENT This Agreement will be governed by and construed in accordance with the substantive laws of British Columbia and the federal laws of Canada applicable in British Columbia, without regard to the conflict of law rules of British Columbia. The parties irrevocably submit to and accept generally and unconditionally the exclusive jurisdiction of the courts and appellate courts of British Columbia with respect to any legal action or proceeding which may be brought at any time relating in any way to this Agreement. Each of the parties irrevocably waives any objection it may now or in the future have to the venue of any such action or proceeding, and any claim it may now or in the future have that any such action or proceeding has been brought in an inconvenient forum. 7.2 TIME OF THE ESSENCE OF THE AGREEMENT Unless otherwise specifically provided in this Agreement, time will be of the essence of this Agreement and of the transactions contemplated by this Agreement. 7.3 REMEDIES NOT EXCLUSIVE The remedies provided to the parties under this Agreement are cumulative and not exclusive to each other, and any such remedy will not be deemed or construed to affect any right which any of the parties is entitled to seek at law, in equity or by statute. 7.4 NOTICES Any notice, direction, request or other communication required or contemplated by any provision of this Agreement will be given in writing and will be given by delivering or faxing or emailing the same to the parties as follows: -7- (a) To 360 at: Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern Fax No.: (604) 681-0994 Email: catherine.meachern@wwfiber.com (b) To Services at: Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern Fax No.: (604) 681-0994 Email: catherine.meachern@wwfiber.com (c) To Urbanlink at: Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Bill Ramsey Fax No.: (604) 681-5372 Email: bill.ramsey@wwfiber.com Any such notice, direction, request or other communication will be deemed to have been given or made on the date on which it was delivered or, in the case of fax or email, on the next business day after receipt of transmission. Any party may change its fax number or address for service or email address from time to time by written notice in accordance with this section. 7.5 ASSIGNMENT (a) This Agreement is not assignable by Urbanlink in whole or in part without the prior written consent of 360, such consent not to be unreasonably delayed. This Agreement is not assignable by 360 or Services without the prior written consent of Urbanlink, such consent not to be unreasonably delayed. Any attempt by any party to assign any of the rights or to delegate any of the duties or obligations of this Agreement without such prior written consent is void. (b) Notwithstanding the foregoing, the interests of any party may be assigned by such party to an Affiliate, provided that such Affiliate delivers to the other parties a written undertaking to be bound by the provisions of this Agreement in all respects and to the same extent as the assignor is bound and provided further that the assignor will continue to be bound by all the obligations hereunder as if such assignment had not occurred and shall perform such obligations to the extent that such Affiliate fails to do so. -8- (c) Notwithstanding the foregoing, the interests of a party under this Agreement (including, without limitation, in the case of Urbanlink, the right to receive any and all amounts payable to Urbanlink under this Agreement) may be assigned by such party by way of collateral security to a lender without the consent of the other parties, provided however that any such lender agrees in writing that: (i) the rights and interest of the lender are subject to the rights and interests of the parties other than the assignor under this Agreement; (ii) prior to realizing on such collateral security it will provide notice to the other parties giving them the opportunity to cure the default; and (iii) should such security be realized with the result that the title or interest of the assignor, as the case may be, is vested in an assignee, acquirer or other successor in title or interest (including the lender if such is the case) ("Successor"), then the lender will cause such Successor to enter into a written agreement with the other parties to be bound by the provisions of this Agreement in all respects and to the same extent as the assignor was bound and this from the date the title or interest is transferred and provided further that the assignor will continue to be bound by all the obligations under this Agreement as if such transfer of title or interest had not occurred and will perform such obligations to the extent that the Successor fails to do so. 7.6 FORCE MAJEURE The failure or delay of any party to this Agreement to perform any obligation under this Agreement solely by reason of acts of God, acts of civil or military authority, civil disturbance, war, strikes or other labour disputes or disturbances, fire, transportation contingencies, shortage of facilities, fuel, energy, labour or materials, or laws, regulations, acts or orders of any governmental agency or official, other catastrophes, or any other circumstance beyond its reasonable control ("Force Majeure") will be deemed not to be a breach of this Agreement so long as the party so prevented from complying with this Agreement has not contributed to such Force Majeure, has used reasonable efforts to avoid such Force Majeure or to ameliorate its effects, and continues to take all actions within its power to comply as fully as possible with the terms of this Agreement. In the event of any such Force Majeure, performance of the obligations will be deferred until the Force Majeure ceases. This section will not apply to excuse a failure to make any payment when due. 7.7 COUNTERPARTS This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document. All of these counterparts will for all purposes constitute one agreement, binding on the parties, notwithstanding that all parties are not signatories to the same counterpart. A fax transcribed copy or photocopy of this Agreement executed by a party in counterpart or otherwise will constitute a properly executed, delivered and binding agreement or counterpart of the executing party. -9- 7.8 WAIVER No failure or delay on the part of any party in exercising any power or right under this Agreement will operate as a waiver of such power or right. No single or partial exercise of any right or power under this Agreement will preclude any further or other exercise of such right or power. No modification or waiver of any provision of this Agreement and no consent to any departure by any party from any provision of this Agreement will be effective until the same is in writing. Any such waiver or consent will be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any party in any circumstances will entitle such party to any other or further notice or demand in similar or other circumstances. 7.9 FURTHER ASSURANCES Each of the parties will promptly execute and deliver to the other at the cost of the other such further documents and assurances and take such further actions as the other may from time to time request in order to more effectively carry out the intent and purpose of this Agreement and to establish and protect the rights, interests and remedies intended to be created in favour of the other. 7.10 ENTIRE AGREEMENT This Agreement and any documents and agreements to be delivered pursuant to this Agreement supersede all previous invitations, proposals, letters, correspondence, negotiations, promises, agreements, covenants, conditions, representations and warranties with respect to the subject matter of this Agreement. There is no representation, warranty, collateral term or condition or collateral agreement affecting this Agreement, other than as expressed in writing in this Agreement. No trade terms or trade usages are to be incorporated by reference implicitly or otherwise into this Agreement, unless expressly referred to in this Agreement. 7.11 AMENDMENTS No change or modification of this Agreement will be valid unless it is in writing and signed by each party to this Agreement. 7.12 INVALIDITY OF PARTICULAR PROVISION If any provision of this Agreement or any part of any provision (in this section called the "Offending Provision") is declared or becomes unenforceable, invalid or illegal for any reason whatsoever including, without limiting the generality of the foregoing, a decision by any competent courts, legislation, statutes, bylaws or regulations or any other requirements having the force of law, then the remainder of this Agreement will remain in full force and effect as if this Agreement had been executed without the Offending Provision. 7.13 CURRENCY Unless otherwise specified all sums of money expressed in this Agreement are in the lawful money of Canada. -10- 7.14 NUMBER AND GENDER Unless the context of this Agreement otherwise requires, to the extent necessary so that each clause will be given the most reasonable interpretation, the singular number will include the plural and vice versa, the verb will be construed as agreeing with the word so substituted, words importing the masculine gender will include the feminine and neuter genders, words importing persons will include firms and corporations and words importing firms and corporations will include individuals. 7.15 HEADINGS AND CAPTIONS The headings and captions of sections and paragraphs contained in this Agreement are all inserted for convenience of reference only and are not to be considered when interpreting this Agreement. 7.16 ACKNOWLEDGEMENT OF RECEIPT Each of the parties acknowledges receiving an executed copy of this Agreement. 7.17 ENUREMENT Subject to the restrictions on transfer contained in this Agreement, this Agreement will enure to the benefit of and be binding on the parties and their respective heirs, executors, administrators, successors and assigns. [THE NEXT PAGE IS THE EXECUTION PAGE.] -11- IN WITNESS WHEREOF the parties have executed this Agreement as of the date stated on the first page. 360NETWORKS INC. WORLDWIDE FIBER NETWORKS SERVICES LTD. Per: Per: - ------------------------------------ ------------------------------------ Signature Signature WFI URBANLINK LTD. Per: - ------------------------------------ Signature -12- EX-10.43 16 EXHIBIT 10.43 Exhibit 10.43 THIS AGREEMENT is made effective as of the ______ day of April, 2000. BETWEEN: WORLDWIDE FIBER HOLDINGS LTD. (the "Vendor") OF THE FIRST PART - and - URBANLINK HOLDINGS LTD. (the "Purchaser") OF THE SECOND PART ROLL-OVER AGREEMENT (SHARES) A. The Vendor is the beneficial owner of the Shares. B. The Vendor wishes to sell and the Purchaser wishes to purchase all of the Vendor's interest in the Shares as at the Effective Date for a total purchase price equal to the aggregate of the fair market values of the Shares all on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION of the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1: INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2: DEFINITIONS 2.1 In this Agreement: (a) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (b) "Adjusted Cost Base" means the aggregate cost base of the Shares determined by the Vendor in accordance with the Act, where "adjusted cost base" is as defined in subsection 248(1) of the Act; (c) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Shares, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (d) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (e) "Closing Date" means the Effective Date; (f) "Corporation" means 360networks inc.; (g) "Effective Date" means the date of this Agreement; (h) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Shares; (i) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Shares; (j) "Fair Market Value" means the actual fair market value of the Shares determined as of the Effective Date by agreement of the Vendor and Purchaser; (k) "Revised Adjusted Cost Base" means the adjusted cost base of the Shares determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (l) "Schedules" means any schedules which are attached to this Agreement; (m) "Share Consideration" means the number, series and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (n) "Shares" means those shares in the capital of the Corporation owned by the Vendor, more particularly described in Schedule "A"; -2- (o) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Elected Fair Market Value; and (p) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3: PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Shares. ARTICLE 4: EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Shares is deemed to have occurred as of the Effective Date. ARTICLE 5: PURCHASE PRICE 5.1 The total purchase price for the Shares is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 The parties' determination of the Fair Market Value is final and binding upon the parties. ARTICLE 6: JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Shares, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any -3- nature or kind on either of the parties on the basis that the adjusted cost base of the Shares is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Shares is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective, an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Shares shall be equal to the Adjusted Elected Amount. ARTICLE 7: VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Shares shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever, excepting those restrictions set forth in the articles of continuance (as amended) of the Corporation, the restrictions set forth in the Shareholders Agreement respecting the issued and outstanding shares in the capital of the Corporation and the restrictions set forth in the Amended and Restated Option Agreement dated August 1, 1999, to which the Corporation and the Vendor are parties; (b) no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Shares from the Vendor other than as set out in this Agreement, in the articles of continuance (as amended) of the Corporation, in the Shareholders Agreement respecting the issued and outstanding shares in the capital of the Corporation and in -4- the Amended and Restated Option Agreement dated August 1, 1999 to which the Corporation and the Vendor are parties; (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act; and (d) all requisite approvals of the Corporation and its directors and shareholders, as applicable, have been obtained so as to permit the transfer of the shares from the Vendor to the Purchaser in accordance with the terms hereof. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Shares and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within one (1) year from the Closing Date. ARTICLE 8: PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Non-Participating Shares (ii) Class "B" Common Non-Voting Participating Shares (iii) Class "C" Common Non-Voting Participating Shares, having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Shares and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and -5- warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within one (1) year from the Closing Date. ARTICLE 9: CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall deliver to the Purchaser, share certificates representing the Shares, duly endorsed in blank for transfer and shall cause transfers of such Shares to be duly recorded in the books of the Corporation in the name of the Purchaser or its nominee; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the corporate proceedings required to duly and validly record the Shares in the name of the Purchaser or its nominee have not been completed on the Closing Date, the Vendor agrees that, until such time as the Shares shall be recorded in the name of the Purchaser or its nominee, the Vendor shall stand as owner of the Shares as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all dividends and other amounts received by the Vendor as the recorded owner of the Shares; and (b) transfer and deal with the Shares in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities which the Vendor may incur by reason of the Shares being held in trust in the name of the Vendor for the benefit of the Purchaser. ARTICLE 10: FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, -6- things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. ARTICLE 11: NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12: ENTIRE AGREEMENT 12.1 This Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. -7- ARTICLE 13: ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14: COUNTERPART 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation in the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. WORLDWIDE FIBER HOLDINGS LTD. PER: -------------------------------- URBANLINK HOLDINGS LTD. PER: -------------------------------- -8- SCHEDULE "A" ------------ TO THAT CERTAIN ROLL-OVER AGREEMENT MADE BETWEEN WORLDWIDE FIBER HOLDINGS LTD. (AS VENDOR) AND URBANLINK HOLDINGS LTD. (AS PURCHASER) ----------------------------------------------------------- SHARES ------ Share Certificate # _____ representing ___________________________ Subordinate Voting Shares of 360networks inc. SCHEDULE "B" ------------ TO THAT CERTAIN ROLL-OVER AGREEMENT MADE BETWEEN WORLDWIDE FIBER HOLDINGS LTD. (AS VENDOR) AND URBANLINK HOLDINGS LTD. (AS PURCHASER) ----------------------------------------------------------- SHARE CONSIDERATION ------------------- Share Certificate # 1C representing 490,000 Class "C" Common Non-Voting Participating Shares in the capital of URBANLINK HOLDINGS Ltd. EX-10.44 17 EXHIBIT 10.44 Exhibit 10.44 THIS AGREEMENT is made effective as of the ______ day of April, 2000. BETWEEN: 360 URBANLINK LTD. (the "Vendor") OF THE FIRST PART - and - URBANLINK HOLDINGS LTD. (the "Purchaser") OF THE SECOND PART ROLL-OVER AGREEMENT (SHARES) A. The Vendor is the beneficial owner of the Shares. B. The Vendor wishes to sell and the Purchaser wishes to purchase all of the Vendor's interest in the Shares as at the Effective Date for a total purchase price equal to the aggregate of the fair market values of the Shares all on the terms and conditions and subject to the representations and warranties set forth in this Agreement. IN CONSIDERATION of the foregoing premises and of the mutual covenants herein contained the parties agree as follows: ARTICLE 1: INCORPORATION OF RECITALS AND SCHEDULES AND DEFINITIONS 1.1 The Recitals and all Schedules annexed to this Agreement are expressly incorporated into, and form an integral part of, this Agreement. ARTICLE 2: DEFINITIONS 2.1 In this Agreement: (a) "Act" means the Income Tax Act (Canada), as it read on the Effective Date; (b) "Adjusted Cost Base" means the aggregate cost base of the Shares determined by the Vendor in accordance with the Act, where "adjusted cost base" is as defined in subsection 248(1) of the Act; (c) "Adjusted Elected Amount" means the amount that, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Shares, determined in accordance with section 6.3 to be a greater or lesser amount than the Elected Amount; (d) "Articles" means the articles of incorporation of the Purchaser together with all amendments thereto as registered with the Registrar of Corporations for the Province of Alberta as at the Effective Date; (e) "Closing Date" means the Effective Date; (f) "Corporation" means WFI Urbanlink Ltd.; (g) "Effective Date" means the date of this Agreement; (h) "Elected Amount" means the amount agreed upon by the parties in accordance with section 6.2 hereof which, for tax purposes, is to be the Vendor's "proceeds of disposition" and the Purchaser's "cost of acquisition" of the Shares; (i) "Election" means the election made by the parties in prescribed form and within the time prescribed by subsection 85(6) of the Act that the rules set forth in subsection 85(1) of the Act shall apply to the purchase and sale of the Shares; (j) "Fair Market Value" means the actual fair market value of the Shares determined as of the Effective Date by agreement of the Vendor and Purchaser; (k) "Revised Adjusted Cost Base" means the adjusted cost base of the Shares determined in accordance with section 6.3 to be greater or lesser amounts than the Adjusted Cost Base; (l) "Schedules" means any schedules which are attached to this Agreement; (m) "Share Consideration" means the number, series and class of shares of the capital of the Purchaser having attached thereto only those rights, privileges, restrictions and limitations set forth in the Articles, which shares are more particularly described in Schedule "B"; (n) "Shares" means those shares in the capital of the Corporation owned by the Vendor, more particularly described in Schedule "A"; -2- (o) "Stated Capital Addition" means the aggregate stated capital for the shares constituting the Share Consideration that is to be added to the stated capital account maintained for such shares, which shall be equal to the Elected Fair Market Value; and (p) "Taxing Authority" means the Minister of National Revenue for Canada or any other competent authority having jurisdiction that is authorized by law to issue an assessment or reassessment in respect of the transactions herein contemplated. ARTICLE 3: PURCHASE AND SALE 3.1 Subject to the terms and conditions, and based upon the representations and warranties, contained in this Agreement, the Vendor shall sell, transfer and assign and the Purchaser shall purchase as of the Effective Date all of the Vendor's interest in the Shares. ARTICLE 4: EFFECTIVE DATE 4.1 It is acknowledged and agreed to by the parties that the purchase and sale of the Shares is deemed to have occurred as of the Effective Date. ARTICLE 5: PURCHASE PRICE 5.1 The total purchase price for the Shares is equal to the Fair Market Value and shall be paid and satisfied by the Purchaser issuing to the Vendor the Share Consideration. 5.2 The Purchaser shall add the Stated Capital Addition to the stated capital account being maintained for the class of shares of which the Share Consideration forms a part. 5.3 The parties' determination of the Fair Market Value is final and binding upon the parties. ARTICLE 6: JOINT ELECTION AND ELECTED AMOUNTS 6.1 The Vendor and Purchaser shall jointly make the Election. 6.2 Subject to the provisions of this Agreement, for purposes of the Election the parties agree that the Elected Amount shall be the Adjusted Cost Base of the Shares, which determination is final and binding on the parties. 6.3 If: (a) the Taxing Authority proposes to issue, or does issue, any assessment or reassessments that impose, or would impose, any liability for tax of any -3- nature or kind on either of the parties on the basis that the adjusted cost base of the Shares is the Revised Adjusted Cost Base; (b) the parties agree, or a Court or tribunal of competent jurisdiction finally adjudges, that the adjusted cost base of the Shares is the Revised Adjusted Cost Base; and (c) the Taxing Authority will accept as effective, an amended Election of the parties; then: (d) the Adjusted Cost Base shall be deemed to have always been, and the Adjusted Cost Base wherever referred to in this Agreement, shall be read as meaning the Revised Adjusted Cost Base; (e) the Elected Amount shall be deemed to have always been, and the Elected Amount wherever referred to in this Agreement shall be read as meaning, an amount equal to the Adjusted Elected Amount; and (f) the parties shall take all such steps and jointly execute all such documents and elections as may be required and allowed so that the aggregate of the amounts elected for purposes of subsection 85(1) of the Act with respect to the purchase and sale of the Shares shall be equal to the Adjusted Elected Amount. ARTICLE 7: VENDOR'S REPRESENTATIONS AND WARRANTIES 7.1 The Vendor represents and warrants to the Purchaser that: (a) on the Closing Date the Shares shall be beneficially owned by the Vendor free and clear of all restrictions, options, liens, charges and encumbrances, whatsoever, excepting only those restrictions set forth in the articles of incorporation (as amended) of the Corporation; (b) except as is set out in the articles of incorporation (as amended) of the Corporation, no person, firm or corporation has any written or verbal agreement, option, understanding or commitment or any right or privilege capable of becoming an agreement for the purchase of the Shares from the Vendor other than as set out in this Agreement; (c) on the Closing Date the Vendor shall not be a non-resident of Canada within the meaning of the Act; and (d) all requisite approvals of the Corporation and its directors and shareholders, as applicable, have been obtained so as to permit the transfer -4- of the shares from the Vendor to the Purchaser in accordance with the terms hereof. 7.2 The representations and warranties contained in section 7.1 shall survive the completion of the purchase and sale of the Shares and shall continue in full force and effect for the benefit of the Purchaser; provided always that no claim with respect to the representations and warranties shall be made by the Purchaser unless written notice shall have been given to the Vendor within one (1) year from the Closing Date. ARTICLE 8: PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 The Purchaser represents and warrants to the Vendor that: (a) the Purchaser is a corporation duly incorporated, validly existing and qualified to carry on business under the laws of the Province of Alberta; (b) the authorized capital of the Purchaser consists of an unlimited number of: (i) Class "A" Common Voting Non-Participating Shares (ii) Class "B" Common Non-Voting Participating Shares (iii) Class "C" Common Non-Voting Participating Shares, having attached thereto only those rights, privileges, restrictions and conditions set forth in the Articles; (c) the issuance to the Vendor of the Share Consideration is valid and in accordance with the laws of the Province of Alberta; and (d) this Agreement constitutes a valid and binding obligation of the Purchaser and the transactions contemplated by this Agreement are not in violation of any terms and conditions of the Articles or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 8.2 The representations and warranties contained in section 8.1 shall survive the completion of the purchase and sale of the Shares and shall continue in full force and effect for the benefit of the Vendor; provided always that no claim with respect to the representations and warranties shall be made by the Vendor unless written notice shall have been given to the Purchaser within one (1) year from the Closing Date. -5- ARTICLE 9: CLOSING, BENEFICIAL OWNERSHIP AND POSSESSION 9.1 Upon or prior to the Closing Date, or so soon thereafter as the parties agree upon: (a) the Vendor shall deliver to the Purchaser, share certificates representing the Shares, duly endorsed in blank for transfer and shall cause transfers of such Shares to be duly recorded in the books of the Corporation in the name of the Purchaser or its nominee; (b) the Purchaser shall: (i) issue and deliver to the Vendor the Share Consideration; and (ii) at the request of the Vendor, deliver to the Vendor a copy of the resolution of the board of directors of the Purchaser adding the Stated Capital Addition to the stated capital account maintained for the shares forming the Share Consideration, certified by the secretary of the Purchaser as a true and exact copy, where required by the Vendor. 9.2 If the corporate proceedings required to duly and validly record the Shares in the name of the Purchaser or its nominee have not been completed on the Closing Date, the Vendor agrees that, until such time as the Shares shall be recorded in the name of the Purchaser or its nominee, the Vendor shall stand as owner of the Shares as bare trustee for and on behalf of the Purchaser as the beneficial owner, and in such capacity the Vendor shall: (a) receive on behalf of, account to and forthwith pay over to the Purchaser, any and all dividends and other amounts received by the Vendor as the recorded owner of the Shares; and (b) transfer and deal with the Shares in such manner as the Purchaser may direct. The Purchaser shall at all times hereafter indemnify and keep indemnified the Vendor against all liabilities which the Vendor may incur by reason of the Shares being held in trust in the name of the Vendor for the benefit of the Purchaser. ARTICLE 10: FURTHER ACTS AND ASSURANCES 10.1 Each of the parties shall, upon the reasonable request of the other party, make, do, execute or cause to be made, done, or executed all such further and other lawful acts, deeds, things, documents and assurances of whatsoever nature and kind for the better performance of the terms and conditions of this Agreement. -6- ARTICLE 11: NOTICES 11.1 Any notice, direction or other instrument required or permitted to be given under the provisions of this Agreement shall be in writing and either delivered personally, sent by prepaid registered mail or sent by facsimile to the party to be notified. The addresses of the parties for such purpose shall respectively be: (a) to the Vendor at its registered office address; and (b) to the Purchaser at its registered office address; or to such other address in Canada of which either party may from time to time notify the other. 11.2 Any notice, direction or other instrument shall: (a) if delivered, be deemed to have been given or received on the day on which it was so delivered and if not on a business day then on the business day next following the day of delivery; (b) if sent by facsimile shall be deemed to have been given or received on the same business day as it was sent, provided facsimile confirmation of receipt is received by the sender; (c) if mailed, shall be deemed to have been given or received on the third day following the day on which it was mailed; and (d) if mailed at a time when there is an interruption or an anticipated interruption of mail service affecting the delivery of such mail, shall be deemed to have been given or received on the fifth business day after the date that normal postal service is restored. ARTICLE 12: ENTIRE AGREEMENT 12.1 This Agreement constitutes and contains the entire agreement between the parties respecting the subject matter of this Agreement and supersedes any prior agreements whether written or verbal. -7- ARTICLE 13: ENUREMENT 13.1 This Agreement shall enure to the benefit of and be binding upon the parties and their respective successors, personal representatives and assigns. ARTICLE 14: COUNTERPART 14.1 This Agreement may be executed in counterparts with the same effect as if all of the parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one and the same agreement. A facsimile transmitted copy of this Agreement signed by a party, in counterpart or otherwise, shall be deemed to be evidence of a properly executed, delivered and binding agreement of the party so signing, notwithstanding any variation in the actual dates of execution. The parties each agree to promptly return an original duly executed counterpart of this Agreement following the transmission of the facsimile transcribed copy thereof. IN WITNESS WHEREOF the parties have properly executed this Agreement, as of the Effective Date. 360 URBANLINK LTD. PER: -------------------------------- URBANLINK HOLDINGS LTD. PER: -------------------------------- -8- SCHEDULE "A" ------------ TO THAT CERTAIN ROLL-OVER AGREEMENT MADE BETWEEN 360 URBANLINK LTD. (AS VENDOR) AND URBANLINK HOLDINGS LTD. (AS PURCHASER) ---------------------------------------------------------- SHARES ------ Share Certificate #2-I (SER-1) representing 1000 shares of Series 1, being a series of Class "I" Preferred Shares of WFI Urbanlink Ltd. Share Certificate #2-I (SER-2) representing 1000 shares of Series 2, being a series of Class "I" Preferred Shares of WFI Urbanlink Ltd. Share Certificate #2-I (SER-3) representing 1000 shares of Series 3, being a series of Class "I" Preferred Shares of WFI Urbanlink Ltd. Share Certificate #2-I (SER-4) representing 1000 shares of Series 4, being a series of Class "I" Preferred Shares of WFI Urbanlink Ltd. Share Certificate #2A representing 100 Class "A" Common Voting Shares of WFI Urbanlink Ltd. SCHEDULE "B" ------------ TO THAT CERTAIN ROLL-OVER AGREEMENT MADE BETWEEN 360 URBANLINK LTD. (AS VENDOR) AND URBANLINK HOLDINGS LTD. (AS PURCHASER) ---------------------------------------------------------- SHARE CONSIDERATION ------------------- Share Certificate #1B representing 510,000 Class "B" Common Non-Voting Participating Shares in the capital of URBANLINK HOLDINGS Ltd. EX-10.45 18 EXHIBIT 10.45 Exhibit 10.45 UNANIMOUS SHAREHOLDERS AGREEMENT THIS AGREEMENT Dated For Reference the _____ day of April, 2000 BETWEEN: 360NETWORKS INC. ("360") AND: 360 URBANLINK LTD. ("360-Holdco") AND: WORLDWIDE FIBER HOLDINGS LTD. ("WFHL") AND: URBANLINK HOLDINGS LTD. (the "Corporation") AND: WFI URBANLINK LTD. ("Urbanlink") WHEREAS: A. The Corporation owns all of the issued and outstanding shares of Urbanlink. B. Urbanlink carries on business in Canada as a telecommunications common carrier. C. 360-Holdco and WFHL are the registered and beneficial holders of the numbers of issued and outstanding shares in the capital of the Corporation set out in Schedule C, which shares represent the only issued and outstanding shares of the Corporation. D. 360-Holdco is a wholly-owned indirect subsidiary of 360. E. 360-Holdco, WFHL and 360 wish to establish their respective rights and obligations in respect of their shares in the Corporation and record their agreement in respect of the other matters set out in this Agreement. SECTION 1 TERMS OF AGREEMENT In consideration of the premises and the mutual covenants contained in this Agreement, the parties to this Agreement covenant and agree each with the others as follows: 1.1 INTERPRETATION DEFINITIONS. For the purposes of this Agreement (including the recitals), the terms in Schedule A shall have the meanings given to them in that Schedule. MEANING OF CONTROL. For the purposes of this Agreement, "control" where used in connection with a corporation means: (a) the right to exercise a majority of the votes which may be voted at a general meeting of such corporation; or (b) the right to elect or appoint directly or indirectly a majority of the directors of such corporation or other persons who have the right to manage or supervise the management of the affairs and business of the corporation. ACCOUNTING TERMINOLOGY. All accounting terms not expressly defined in this Agreement shall have the respective meanings usually ascribed to them in accordance with generally accepted accounting principles in Canada. MEANING OF PRO RATA. Unless the context otherwise requires, all rights, obligations or other matters which are, under the terms of this Agreement, to be determined on a proportionate or pro rata basis shall be determined on a basis which is pro rata or proportionate to the total number of shares of the Corporation issued and outstanding as of the date of such determination. HEADINGS. The headings used in the Agreement are for convenience and reference only and shall not affect the construction or interpretation of this Agreement. SCHEDULES. The Schedules to this Agreement which are incorporated and form part of this Agreement are as follows: A--Definitions B--Matters Requiring Unanimous Consent of Directors C--Capital Contributions UNANIMOUS SHAREHOLDERS AGREEMENT. The Shareholders agree that this is a Unanimous Shareholders Agreement for the purposes of the BUSINESS CORPORATIONS ACT and will conduct -2- themselves and will cause the affairs of the Corporation to be conducted in accordance with the terms of this Agreement. SECTION 2 REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS OF 360-HOLDCO. 360-Holdco represents and warrants to each of the other parties that: (a) 360-Holdco is a corporation duly incorporated under the laws of the Province of Alberta, and is validly existing, subsisting and in good standing with respect to the filing of annual reports. (b) 360-Holdco has the corporate power to enter into this Agreement and to perform and observe its obligations and agreements set out in this Agreement. (c) This Agreement has been duly executed and delivered by 360-Holdco and is a valid and binding obligation of 360-Holdco enforceable in accordance with its terms. 2.2 REPRESENTATIONS OF WFHL. WFHL represents and warrants to each of the other parties that: (a) WFHL is a corporation duly incorporated under the laws of the Province of Alberta, and is validly existing, subsisting and in good standing with respect to the filing of annual reports. (b) WFHL has the corporate power to enter into this Agreement and to perform and observe its obligations and agreements set out in this Agreement. (c) This Agreement has been duly executed and delivered by WFHL and is a valid and binding obligation of WFHL enforceable in accordance with its terms. 2.3 REPRESENTATIONS OF 360. 360 represents and warrants to each of the other parties that: (a) 360 is a corporation duly continued under the laws of the Province of Nova Scotia, and is valid, subsisting and in good standing with respect to the filing of annual reports. (b) 360 has the corporate power to enter into this Agreement and to perform and observe its obligations and agreements set out in this Agreement; (c) This Agreement has been duly executed and delivered by 360 and is a valid and binding obligation of 360 enforceable in accordance with its terms. -3- SECTION 3 AGREEMENT ON CORPORATE MATTERS 3.1 CORPORATE MATTERS. The Shareholders and the Corporation agree that, notwithstanding any provisions to the contrary contained in the Articles of the Corporation or the Bylaws of the Corporation, the corporate matters referred to in this Section 3 shall be governed by the applicable provisions of this Section 3, and that in the case of any inconsistency or conflict between the Articles of Corporation or the Bylaws of the Corporation and the provisions of this Section 3, the provisions of this Section 3 shall govern. 3.2 DIRECTORS. Unless otherwise agreed in writing from time to time by 360-Holdco, the Shareholders shall vote their Shares so that the Board of the Corporation, the Board of Urbanlink and the Board of any other Subsidiary of the Corporation each comprise a maximum of five directors, and that each such Board shall include one nominee of 360-Holdco. Subject to the foregoing, if the position on any such Board held by the nominee of 360 becomes vacant, 360 shall be entitled to nominate a new director to fill the vacancy. 3.3 PRESIDENT The President and Chief Executive Officer of the Corporation shall be an individual selected by the Board. The President and Chief Executive Officer of the Corporation shall also be the President and Chief Executive Officer of Urbanlink and, unless otherwise approved by 360-Holdco, acting reasonably and in good faith, the President and Chief Executive Officer of every other Subsidiary of the Corporation. The President and Chief Executive Officer shall be a Canadian, shall be a full-time employee, and shall not be a director, officer or employee of 360 or any Subsidiary of 360. 3.4 FAILURE TO VOTE. In the event that a director shall fail to vote and act as a director to carry out the provisions of this Agreement, the Shareholders shall exercise their rights as shareholders of the Corporation to remove such director from the Board and, subject to Subsection 3.2, to elect in his or her place an individual who will use his or her best efforts to carry out the provisions of this Agreement. 3.5 MATTERS REQUIRING UNANIMOUS APPROVAL OF DIRECTORS. The matters set out in Schedule B shall only be undertaken with (in addition to the consents or approvals, if any, required under the BUSINESS CORPORATIONS ACT, the Articles of the Corporation or the Bylaws of the Corporation) the consent in writing of the 360-Holdco nominee to the Board of the Corporation. 3.6 EXISTING SHAREHOLDER CAPITAL. As at the date hereof, the Shares of each of the Shareholders are as set out in Schedule C. -4- SECTION 4 THE BUSINESS OF THE CORPORATION 4.1 THE BUSINESS The parties acknowledge that the businesses that they intend the Corporation and Urbanlink to carry on are the following: (a) Unless otherwise agreed between 360 and WFHL, the Corporation shall hold of the issued and outstanding shares of Urbanlink. (b) Urbanlink shall carry on business in Canada (and not elsewhere) as a telecommunications common carrier as defined in the TELECOMMUNICATIONS ACT. Unless 360 and WFHL otherwise agree in writing, the Corporation and Urbanlink shall not, either directly or indirectly, carry on any business other than a business described above or a business that is incidental to or develops out of the conduct of any business that the Corporation or Urbanlink may carry on in accordance with this Section 4.1. 4.2 TELECOMMUNICATIONS ACT The Corporation and Urbanlink and any other Subsidiaries of the Corporation shall at all times comply with all of the requirements of the TELECOMMUNICATIONS ACT including, without limiting the generality of the foregoing, those provisions relating to the ownership and control of telecommunications common carriers, as defined in the TELECOMMUNICATIONS ACT. Without limiting the generality of the foregoing, 360, 360-Holdco and WFHL shall promptly take such action as may from time to time be required in order to cause the Corporation, Urbanlink and any other Subsidiaries of the Corporation to comply with all of the requirements of the TELECOMMUNICATIONS ACT including, without limiting the generality of the foregoing, those provisions relating to the ownership and control of telecommunications common carriers as defined in the TELECOMMUNICATIONS ACT. 4.3 HIGH YIELD DEBT INDENTURES The Corporation, Urbanlink and WFHL covenant and agree with 360 and 360-Holdco that, without the prior written consent of 360, the Corporation, Urbanlink, any other Subsidiary of the Corporation and WFHL shall not take any action, or fail to take any action or fail, if such action, or failure to act: (a) would be, or with the passage of time, would be or result in, an Event of Default as defined in any of the High Yield Debt Indentures; or (b) would be permitted under one or more of the High Yield Debt Indentures only in reliance on one of the "basket" clauses in the High Yield Debt Indentures, being one of those clauses where specifically described events are permitted to a specified limit, whether such limit is an amount fixed in the High Yield Indentures or is an amount determined by reference to a formula or other determination process or conditions. -5- SECTION 5 RESTRICTIONS ON TRANSFER 5.1 RESTRICTION ON TRANSFER. No Shareholder shall Transfer all or any part of its Interest to any person, whether a Shareholder or not, except as otherwise expressly provided in this Agreement. 5.2 RIGHT OF FIRST REFUSAL. (a) A Shareholder (the "Offeror") desiring to transfer any or all of its Shares shall give written notice to the Corporation (the "Transfer Notice") specifying the number of its Shares that it desires to transfer (the "Offered Shares"), the price, in lawful money of Canada, for the Offered Shares, and the terms of payment upon which the Offeror is prepared to transfer the Offered Shares. The Transfer Notice shall constitute the Corporation as the agent of the Offeror for the sale of the Offered Shares to any other Shareholder or Shareholders at the price and upon the terms of payment specified in the Transfer Notice. The Transfer Notice shall also state whether the Offeror has received an offer to purchase (the "Third Party Offer") the Offered Shares, or any of them, from, or proposes to sell the Offered Shares, or any of them, to, any particular person or persons who are not Shareholders and, if so, the names and addresses of those persons and the price and terms in the Third Party Offer shall be specified in the Transfer Notice. The Transfer Notice shall constitute an offer by the Offeror to the other Shareholders to sell the Offered Shares to the other Shareholders and shall not be revocable. (b) The Corporation shall forthwith upon receipt of the Transfer Notice transmit a copy of it to each Shareholder other than the Offeror and shall request that each such Shareholder state in writing, within 30 days from the date of the Transfer Notice, whether it is willing to purchase any of the Offered Shares and, if so, the maximum number it is willing to purchase. (c) Upon the expiration of the 30-day notice period provided for in paragraph (b) above, if the Corporation has received from the Shareholders entitled to receive the Transfer Notice sufficient acceptances to purchase all the Offered Shares the Corporation shall thereupon apportion the Offered Shares among the Shareholders so accepting pro rata in proportion to the number of Shares held by each of them respectively up to the number of Offered Shares accepted by each of them respectively. If the Corporation did not receive sufficient acceptances to purchase all of the Offered Shares, the Corporation may, but only with the consent of the Offeror, who shall not be obliged to sell in the aggregate less than all the Offered Shares, apportion the Offered Shares among the Shareholders accepting pro rata in proportion to the number of Shares held by each of them respectively up to the number of the Offered Shares accepted by each of them respectively. (d) Upon the Corporation's receipt of an acceptance to purchase all or any part of the Offered Shares and after an apportionment has been made pursuant to -6- paragraph (c) above, if necessary, a binding contract of purchase and sale between the Offeror and the Shareholder who transmitted such acceptance shall be deemed to come into existence on the terms set out in this Agreement and the Transfer Notice, which contract will be completed in the manner provided in Section 8. (e) After an apportionment has been made pursuant to paragraph (c) above and upon payment of the price for the Offered Shares apportioned, the Offeror shall be bound to transfer those shares in accordance with that apportionment and if the Offeror fails to do so the Corporation shall cause the names of the purchasing Shareholders to be entered in the register of members of the Corporation as the holders of those shares and shall cancel the share certificates previously issued to the Offeror representing those shares whether they have been produced to the Corporation or not. Payment to the Corporation, as agent for the Offeror, of the Purchase Price shall be sufficient payment by the purchasing Shareholders and entry of the transfers in the register of members of the Corporation shall be conclusive evidence of the validity of the transfers. Upon completion of the transfers, and delivery of the share certificates duly endorsed in blank for transfer, the Corporation shall pay the Purchase Price to the Offeror. (f) The Offeror may, for a period of 60 days after the expiration of the 30-day period provided for in paragraph (b) above, transfer to any person the Offered Shares not purchased by other Shareholders pursuant to paragraphs (b), (c), (d) and (e) above, provided that: (i) if the other Shareholders did not purchase any of the Offered Shares, the Offeror may not sell less than all the Offered Shares; (ii) the Offeror shall sell the Offered Shares for cash at Closing, free and clear of encumbrances, and on terms that are otherwise identical to those specified in the Transfer Notice; (iii) the Offeror shall not sell any of the Offered Shares to any person, unless at the time of the sale that person complies with Subsection 5.5; and (iv) if the Offeror has not transferred the Offered Shares or any of them within the 60-day period, then the provisions of this Subsection 5.2 shall again become applicable to all of the Offered Shares not disposed of within the 60-day period. (g) The provisions as to transfers of Shares contained in paragraphs (a), (b), (c), (d), (e) and (f) of this Subsection 5.2 shall not apply: (i) if, before the proposed transfer of Shares is made, the other Shareholders waive their rights to receive the Transfer Notice; or (ii) to any transfer of Shares pursuant to the provisions of Section 6 or 7 of this Agreement. -7- (h) The Offeror may include all or any part of its Shareholder's Loan (if any) in the Transfer Notice, in which case the Shareholder's Loan (or part thereof) shall be included in the price of the Offered Shares, and all references to Offered Shares in Subsection 5.2 shall include the portion of the Shareholder's Loan included therein. If the Offeror does not include its Shareholder's Loan in the Transfer Notice, the Offeror shall retain its Shareholder's Loan, which shall be repaid as the Corporation's finances permit, as determined by the directors. 5.3 TRANSFER TO AFFILIATES. Notwithstanding Subsections 5.1 and 5.2, any Shareholder may sell, transfer or otherwise dispose of all, but not less than all, of its Interest to an Affiliate controlled by such Shareholder provided that, prior to any such transfer, the Shareholder and the Affiliate enter into an agreement with the other parties to this Agreement, in form and content acceptable to such parties, which provides that: (a) one hundred percent (100%) of the Shareholder's Interest will be transferred to the Affiliate; (b) the Affiliate will remain an Affiliate controlled by the Shareholder for so long as the Affiliate holds the Interest; (c) prior to the Affiliate ceasing to be an Affiliate controlled by the Shareholder, the Affiliate will transfer its Interest to the Shareholder or to another Affiliate controlled by the Shareholder, and that such other Affiliate will enter into an agreement similar to this Agreement with the other Shareholders and the Corporation; (d) the Affiliate will otherwise be bound by and have the benefit of the provisions of this Agreement; and (e) the obligations of the original Shareholder hereunder shall not in any way be released and shall continue in full force and effect. 5.4 NO TRANSFER BY DEFAULTING SHAREHOLDER. Notwithstanding any other provision of this Agreement, except as required by the terms of this Agreement, no Shareholder shall be entitled to sell, transfer, assign or otherwise dispose of its Interest, or any part thereof, without the prior written consent of the other Shareholders, if it is at that time a Defaulting Shareholder, unless prior to or concurrently with that sale, transfer or other disposition it ceases to be a Defaulting Shareholder. 5.5 FURTHER RESTRICTION OF TRANSFER. No Shareholder shall transfer all or any part of its Interest to any person, whether a Shareholder or not, who is not a party to or has not agreed to be bound by this Agreement until such person subscribes to or agrees to be bound by this Agreement. The Shareholders and the Corporation will not recognize or treat as a shareholder of the Corporation any person who acquires any -8- interest or control over any Shares or afford any such person the rights afforded by this Agreement or any of the incidents connected with being a shareholder of the Corporation until such person subscribes to or agrees to be bound by this Agreement, and the Shareholders need only deal with as a member of the Corporation persons who have subscribed to or agreed to be bound by this Agreement. SECTION 6 DEFAULT 6.1 EVENTS OF DEFAULT. An event of default (a "Default") arises if a Shareholder (a "Defaulting Shareholder"): (a) fails to observe, perform or carry out any of its obligations under this Agreement and such failure continues for 30 days after any Shareholder not in default (the "Non-defaulting Shareholder" individually and the "Non-defaulting Shareholders" collectively) gives a written notice of such default to the Defaulting Shareholder and the Corporation, which notice shall set out particulars of the Default and demand that the Default be cured; (b) fails to take reasonable actions to prevent or defend assiduously any action, proceeding, seizure, execution, or attachment which claims possession, sale, foreclosure, the appointment of a receiver or receiver manager of the Shareholder's assets, or forfeiture or termination of or against, any of the Interest of the Defaulting Shareholder, and such failure continues for 30 days after a Non-defaulting Shareholder has in writing demanded that such actions be taken or the Defaulting Shareholder fails to defend successfully any such action, proceeding, seizure, execution or attachment; or (c) commits or is the subject of an Insolvency Event. 6.2 REMEDIES. If a Default occurs under Subsection 6.1, any one or more of the Non-defaulting Shareholders may: (a) pursue any remedy available in law or in equity, each Shareholder acknowledging that specific performance, injunctive relief (mandatory or otherwise) or other equitable relief may be the only adequate remedy for a Default; (b) take all actions in their own name or in the name of the Defaulting Shareholder, the Shareholders or the Corporation as may reasonably be required to cure the Default, and all payments, costs and expenses incurred by the Non-defaulting Shareholder(s) shall be payable by the Defaulting Shareholder to the Non-defaulting Shareholder(s) on demand with interest at the Prime Rate plus 2% per annum; -9- (c) implement the buy-sell procedure set out in Subsection 6.3 by notifying the Corporation of the Default, the name of the Defaulting Shareholder and the Non-defaulting Shareholder's election to implement such procedure (the "Notice of Default"); and (d) waive the Default, provided that any waiver of a particular Default shall only be effective if it is in writing, signed by the Non-defaulting Shareholder, shall not operate as a waiver of any subsequent or continuing Default, and shall not be binding upon, or limit the remedies available to, any Non-defaulting Shareholder who has not signed such waiver. 6.3 BUY-SELL PROCEDURE ON DEFAULT. In the event the buy-sell procedure in this Subsection 6.3 is implemented pursuant to paragraph 6.2(c), the Defaulting Shareholder shall be deemed to offer to sell (the "Offer") to the Corporation and the Non-Defaulting Shareholder(s) all, but not less than all, of its Interest on the following terms and conditions: (a) the Purchase Price payable shall be equal to 85% of the fair market value of the Defaulting Shareholder's Interest determined as of the date of the Notice of Default in accordance with Subsection 9.2; (b) upon receipt of the Notice of Default, the President of the Corporation shall forthwith: (i) transmit the Notice of Default to each director of the Corporation; (ii) transmit the Notice of Default to each of the Non-defaulting Shareholder(s); and (iii) call a meeting of the Board to consider the Offer; (c) the Corporation shall have the first right to accept the Offer, in whole or in part, and to the extent that it is accepted, the Non-defaulting Shareholder(s) agree to refuse any pro rata offer by the Corporation to purchase the Interest which is required to be made by the Corporation under the BUSINESS CORPORATIONS ACT, the Articles of the Corporation, the Bylaws of the Corporation or this Agreement; (d) if the Offer is not wholly accepted by the Corporation within 30 days after the date of the Notice of Default: (i) the Secretary of the Corporation shall advise the Non-defaulting Shareholder(s) of the extent to which the Offer is still open, forthwith upon the expiration of the aforesaid 30-day period; (ii) that portion of the Offer not accepted by the Corporation shall be open for acceptance within the next 30 days by the Non-defaulting Shareholder(s) -10- pro rata in accordance with their respective shareholdings in the Corporation; (iii) acceptance by the Non-defaulting Shareholder(s) of the Offer shall be by notice to the Secretary of the Corporation and by such acceptance a Non-defaulting Shareholder may specify any additional portion of the Interest offered for sale that such Non-defaulting Shareholder is prepared to purchase in the event that any of the other Non-defaulting Shareholder(s) fails to accept such Offer, and if any of the other Non-defaulting Shareholder(s) fails to accept such Offer, such Non-defaulting Shareholder (pro rata if more than one) shall be entitled to purchase such additional portion of the Interest as shall be so available; (iv) the Secretary of the Corporation shall advise each of the directors of the Corporation of the extent to which the Offer is still open forthwith upon the expiration of the aforesaid 30-day period; (e) after compliance with paragraph 6.3(d), to the extent the Offer has not been accepted, the Corporation shall be deemed to accept the Offer with respect to such portion of the Interest as shall then be available; and (f) upon the acceptance of the Offer, a binding contract of purchase and sale for the Interest of the Defaulting Shareholder shall be deemed to be formed between the Defaulting Shareholder and the Corporation and/or the Non-defaulting Shareholder(s), as the case may be, on the terms and conditions set out in the Offer and this Agreement, which contract shall be completed in the manner provided in Section 8. 6.4 MONIES HELD. If and so long as a Shareholder is a Defaulting Shareholder, all monies payable to that Defaulting Shareholder by the Corporation by way of dividends, repayment of loans or other distributions shall be held by the Corporation until such time as the Shareholder is no longer a Defaulting Shareholder. SECTION 7 BUY SELL ON CHANGE OF TELECOMMUNICATIONS ACT OWNERSHIP REQUIREMENTS 7.1 COMPULSORY BUY SELL On the determination of 360, acting reasonably and in good faith, that the TELECOMMUNICATIONS ACT has been amended to eliminate the requirement for the Canadian ownership and control of telecommunications common carriers, as defined in the TELECOMMUNICATIONS ACT, or has otherwise been amended sufficiently to permit the transactions contemplated by this Section, then 360 shall send a notice in writing to WFHL of such determination (the "Section 7 Notice") and, on the occurrence of such event, WFHL shall be deemed to offer to sell to 360-Holdco all of its Interest on the following terms and conditions: -11- (a) the purchase price payable shall be the fair market value of WFHL's Interest determined as of the date of the Section 7 Notice in accordance with Subsection 9.2; (b) upon the giving of the Section 7 Notice, a binding contract of purchase and sale for the purchase by 360-Holdco and the sale by WFHL of the Interests of WFHL shall be deemed to be formed between 360-Holdco and WFHL on the terms and conditions set out in this Agreement, which contract shall be completed in the manner provided in Section 8. SECTION 8 COMPLETION OF TRANSFERS 8.1 TIME AND PLACE OF CLOSING. Except as otherwise expressly provided in this Agreement, or unless the Purchaser and the Vendor otherwise agree in writing, each contract of purchase and sale arising out of Sections 5, 6 or 7 shall be completed at a Closing to be held at 11:00 a.m., Vancouver time, at the office of the Corporation in Vancouver or at such other place as the parties to such contract may agree, on the day (the "Closing Date") which is the later of: (a) 60 days following the date on which such contract is formed; and (b) 30 days following the final determination of the Purchase Price thereunder; or, if such day is not a Business Day, on the next Business Day. 8.2 PARTIES TO THE CONTRACT. In this Section 8, a contract referred to in Subsection 8.1 is called a "Contract", and the Shares or Interest to be sold and purchased pursuant to a Contract are called the "Transfer Interest". 8.3 PAYMENT FOR TRANSFER INTEREST. Except as otherwise expressly provided in this Agreement, or unless the Purchaser and the Vendor otherwise agree in writing, the Purchase Price for the Transfer Interest shall be paid in full on the Closing Date. 8.4 CLOSING DOCUMENTS AND ESCROW BY CORPORATION. (a) In addition to any other documents required by this Agreement or the terms of the Contract, the Vendor shall deliver to the Corporation at the Closing, duly executed where appropriate: (i) an instrument of transfer, share certificates representing the shares being transferred, duly endorsed for transfer, and such other documents as may be necessary to assign and transfer the Transfer Interest to the Purchaser; -12- (ii) the resignation of the Vendor and any persons nominated by the Vendor as directors or officers of the Corporation from all offices and directorships in the Corporation and its Subsidiaries, effective on the Closing Date; (iii) if the Vendor is indebted to the Corporation, a certified cheque of the Vendor payable to the Corporation for the amount of such indebtedness; and (iv) all such other documents and assurances as may be required to comply with and to fulfil the intent of this Agreement and the terms of the Contract. (b) In addition to any other documents and things required by this Agreement or the terms of the Contract, the Purchaser shall deliver to the Vendor at the Closing, duly executed where appropriate, against delivery by the Vendor to the Purchaser of the documents referred to in paragraph 8.4(a): (i) the Purchase Price for the Transfer Interest payable at the Closing in cash or by certified cheque drawn on a Canadian chartered bank; and (ii) all such other documents and assurances as may be required to comply with and to fulfil the intent of this Agreement and the terms of the Contract. (c) All documents delivered by the Vendor to the Corporation at or before the Closing shall be held by the Corporation until the Purchaser has delivered all documents and paid all money required to be delivered or paid to the Vendor by the Purchaser at the Closing, at which time the Corporation shall deliver to the Purchaser the documents delivered by the Vendor pursuant to paragraph 8.4(a) and the transfer of the Transfer Interest to the Purchaser shall be completed by the Corporation and new certificates issued for the Shares included in the Transfer Interest. 8.5 TIME TO BE OF THE ESSENCE. Time shall be of the essence of each Contract and each Contract shall be binding upon the parties thereto and upon their respective heirs, executors, administrators, successors, legal representatives and assigns. 8.6 FAILURE TO COMPLETE. (a) If the Vendor fails to attend the Closing or is present but fails for any reason whatsoever to complete the sale of the Transfer Interest when the Purchaser is ready, willing and able to do so, the Purchaser may deposit the Purchase Price for the Transfer Interest into a special account at any branch in Vancouver, British Columbia of any Canadian chartered bank in trust for the Vendor and such deposit shall constitute valid and effective payment to the Vendor at the Closing even though the Vendor may have voluntarily encumbered or disposed of any of -13- the Transfer Interest and notwithstanding the fact that a certificate or certificates representing any of the Transfer Interest may have been delivered to any pledgee, transferee or other person. (b) If the Purchaser deposits the Purchase Price for the Transfer Interest into a special account pursuant to paragraph 8.6(a), then from and after the date of such deposit (even if any certificate representing any of the Transfer Interest has not been delivered to the Purchaser or the Corporation) the sale and purchase of the Transfer Interest shall be deemed to have been completed and all right, title, benefit and interest, both at law and in equity, in and to the Transfer Interest shall be conclusively deemed to have been transferred and assigned to and become vested in the Purchaser and all right, title, benefit and interest, both at law and in equity, of the Vendor, and of any other assignee, transferee or other person having any interest, legal or equitable, in or to the Transfer Interest, whether as a shareholder or creditor of the Corporation or the Vendor, or otherwise, shall cease and determine, but the Vendor shall be entitled to receive the Purchase Price for the Transfer Interest, without interest, upon completion of all acts and deeds as were required of the Vendor to complete the sale of the Transfer Interest. (c) For the purposes of this Subsection 8.6, each Shareholder hereby irrevocably constitutes and appoints each other Shareholder as its true and lawful attorney in fact and agent for, in the name of and on behalf of such first Shareholder to execute and deliver, and to receive delivery of, all such assignments, transfers, deeds, assurances and instruments as may be necessary to effectively complete the sale of any Interest pursuant to Sections 5, 6 or 7 on the records of the Corporation, and such appointment and power of attorney shall not be revoked by the bankruptcy, insolvency, winding-up, liquidation, dissolution, incapacity or death of such first Shareholder and such first Shareholder hereby ratifies and confirms and agrees to ratify and confirm all that any other Shareholder, as attorney in fact and agent for, in the name of and on behalf of such first Shareholder, may lawfully do or cause to be done by virtue of this paragraph 8.6(c). (d) If the Purchaser defaults at the Closing in paying the Purchase Price for the Transfer Interest, then the Vendor may, by delivering written notice to the Purchaser and the Corporation that the Vendor is terminating the Contract, terminate the Contract and retake possession of the Transfer Interest as the absolute owner thereof, in which event the rights of the Purchaser in respect of the Transfer Interest shall revert to the Vendor and the Vendor shall be entitled, upon delivering to the Corporation and each Shareholder its duly executed subscription to this Agreement to the return from the Corporation of the documents delivered by the Vendor to the Corporation in escrow in connection with the Contract. (e) If either the Vendor or the Purchaser fails to complete the Contract as required herein, the Contract is specifically enforceable and nothing in this Agreement shall be construed to mitigate the availability of the remedy of specific performance in respect of the Contract in a court of law. -14- 8.7 WAIVER AND CONSENTS. Each of the Shareholders hereby expressly consents to the transfer of any Shares or Interests transferred in accordance with this Agreement, agrees to execute promptly on demand specific waivers and consents if requested by another party, covenants and agrees to waive any restriction on transfer contained in the Articles of the Corporation or the Bylaws of the Corporation in order to give effect to such transfers and agrees to vote in favour of or consent in writing to resolutions of the members (if applicable) of the Corporation approving the transfer of any Shares or Interests which is not prohibited by this Agreement. In the case of any transfer of Shares in accordance with this Agreement where the Corporation is the Purchaser of such Shares, the Shareholders other than the Vendor in respect of such Contract hereby waive their rights to require the Corporation to purchase their Shares, except as expressly set forth in this Agreement and covenant to reject any pro rata offer to purchase Shares which the Corporation may be obliged to make pursuant to the provisions of the BUSINESS CORPORATIONS ACT. SECTION 9 GENERAL PROVISIONS ON TRANSFER 9.1 TRANSFER OF SHARES. The transfer of the Shares or Interest of any Shareholder pursuant to any of the terms of this Agreement shall be subject to the general provisions set out in this Section 9. In the event of any inconsistency between any of the provisions of Sections 5, 6 or 7 and any of the provisions of this Section 9, the provisions of this Section 9 shall govern. 9.2 DETERMINATION OF FAIR MARKET VALUE. (a) Where pursuant to the provisions of Sections 6 or 7 of this Agreement a determination of the fair market value of an Interest is required to be made (in this Subsection 9.2 referred to as the "Subject Interest"), a Shareholder may give written notice to the other Shareholders requesting that the Shareholders forthwith meet and attempt in good faith to agree upon the fair market value of the Subject Interest. In the event that all of the Shareholders are able to reach agreement on the fair market value of the Subject Interest, such agreed value shall be deemed to be the fair market value of the Subject Interest for the purposes of this Agreement. (b) In the event that the Shareholders are for any reason unable to reach agreement on the fair market value of the Subject Interest within 14 days of the delivery of the notice referred to in paragraph 9.2(a), then the Shareholders shall forthwith meet for the purposes of identifying and retaining a valuator (the "First Valuator") for the purpose of determining the fair market value of the Subject Interest. Unless otherwise unanimously agreed by the Shareholders, the First Valuator shall be an accountant practising with the Auditors who has at least five years' experience in valuating businesses and is accredited as a chartered business valuator. In the event that the Shareholders do not agree upon a First Valuator within 30 days of the delivery of the notice referred to in paragraph 9.2(a), then any Shareholder -15- may refer the determination of the First Valuator to arbitration pursuant to Section 11. (c) The First Valuator shall prepare and deliver to each of the Shareholders a written report (the "First Valuation Report") setting out its Valuation of the Subject Interest as soon as possible, and in any event within 45 days after being retained. (d) Any Shareholder may within 30 days of its receipt of the First Valuation Report provide written notice to the other Shareholders advising that it wishes to have a second Valuation of the Subject Interest undertaken. If no such notice is given, the First Valuation Report shall be final and binding on the parties. If such notice is given the Shareholders shall forthwith meet for the purposes of identifying and retaining a second valuator (the "Second Valuator") for the purpose of preparing a second Valuation of the Subject Interest. The Second Valuator shall be an accountant practising with a national accounting firm other than the Auditors and who has the experience and credentials referred to in paragraph 9.2(b). In the event that the Shareholders do not agree upon a Second Valuator within 14 days of the delivery of the notice referred to in this paragraph, then any Shareholder may refer the determination of the Second Valuator to arbitration pursuant to Section 11. (e) The Second Valuator shall prepare and deliver to each of the Shareholders a written report (the "Second Valuation Report") setting out its Valuation of the Subject Interest as soon as possible, and in any event within 45 days after being retained. Where a Second Valuation Report has been prepared, the fair market value of the Subject Interest for the purposes of Sections 6 and 7 of this Agreement shall be equal to the average of the fair market values of the Subject Interest as set out in the First Valuation Report and the Second Valuation Report. (f) The Corporation and each of the Shareholders shall make available to the First Valuator and the Second Valuator all books, records and other data and information in their possession or control as the First Valuator or Second Valuator may reasonably require for the purposes of its valuation. (g) In determining the fair market value of the Subject Interest under this Subsection 9.2, the First Valuator and the Second Valuator may apply such principles of valuation as each considers appropriate in the circumstances provided that: (i) there shall be no premium for a control position or discount for a minority position; (ii) the fair market value of any Shareholder Loans shall not be discounted by reason only of the fact that such Loans are not demand loans and may not bear interest; and (iii) the Corporation shall be valued on a going concern basis. -16- (h) The Corporation shall pay all fees and expenses charged by the First Valuator for preparing the First Valuation Report. The Shareholder(s) who request the Second Valuation shall pay all fees and expenses charged by the Second Valuator for preparing the Second Valuation Report. (i) The First Valuator and the Second Valuator shall be entitled to retain such qualified independent appraisers as each may deem appropriate to assist with its valuation. 9.3 PAYMENT OF LIENS ON SHARES. Notwithstanding anything in this Agreement to the contrary, if by reason of any lien, charge or encumbrance on the Interest of the Vendor, the Vendor is unable to make delivery of the Vendor's Interest free and clear of all charges, liens or encumbrances to the Purchaser within the time limited therefor, the Purchaser shall be at liberty to make payment to the holder of the lien or charge or the governmental authority imposing the duty, tax, levy or lien, which payment shall be deemed to be payment to the Vendor and shall be applied in reduction of the unpaid balance of the Purchase Price and interest accrued thereon. SECTION 10 TERMINATION OF AGREEMENT 10.1 METHOD OF TERMINATION. This Agreement shall cease and determine on the execution of an agreement of termination of this Agreement in writing by all of the Shareholders. SECTION 11 ARBITRATION 11.1 ARBITRATION. Except for any determination of the value of an Interest made in accordance with Subsection 9.2, which determination shall be final and binding on the parties, all disputes arising out of or in connection with this contract, or in respect of any defined legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration under the Rules of the British Columbia International Commercial Arbitration Centre. The appointing authorities shall be the British Columbia International Commercial Arbitration Centre. The case shall be administered by the British Columbia International Commercial Arbitration Centre in accordance with its "Procedures for Cases Under the BCICAC Rules". There shall be a single arbitrator (the "Arbitrator"). The place of arbitration shall be Vancouver, British Columbia, Canada. 11.2 FINAL AND BINDING. The decision of the Arbitrator on all issues or matters submitted to the Arbitrator for resolution shall be conclusive, final and binding on all of the parties. -17- 11.3 COSTS. The Arbitrator shall determine who shall bear the costs of arbitration pursuant to this Section 11. SECTION 12 GENERAL 12.1 LEGEND ON SHARE CERTIFICATES. All share certificates issued by the Corporation (including existing certificates) shall have typed or otherwise written thereon the following legend: "The shares represented by this certificate are subject to the provisions of a Unanimous Shareholders Agreement dated as of April ___, 2000 among 360networks inc., 360 Urbanlink Ltd., Worldwide Fiber Holdings Ltd., the Corporation and WFI Urbanlink Ltd., which agreement contains restrictions on the right of the holder hereof to sell, exchange, transfer, assign, gift, pledge, encumber, hypothecate or otherwise alienate the shares represented hereby and notice of those restrictions is hereby given." 12.2 GOVERNING LAW AND ATTORNMENT This Agreement will be governed by and construed in accordance with the substantive laws of Alberta and the federal laws of Canada applicable in Alberta, without regard to the conflict of law rules of Alberta. The parties irrevocably submit to and accept generally and unconditionally the exclusive jurisdiction of the courts and appellate courts of Alberta with respect to any legal action or proceeding which may be brought at any time relating in any way to this Agreement. Each of the parties irrevocably waives any objection it may now or in the future have to the venue of any such action or proceeding, and any claim it may now or in the future have that any such action or proceeding has been brought in an inconvenient forum. 12.3 TIME OF THE ESSENCE OF THE AGREEMENT Unless otherwise specifically provided in this Agreement, time will be of the essence of this Agreement and of the transactions contemplated by this Agreement. 12.4 REMEDIES NOT EXCLUSIVE The remedies provided to the parties under this Agreement are cumulative and not exclusive to each other, and any such remedy will not be deemed or construed to affect any right which any of the parties is entitled to seek at law, in equity or by statute. 12.5 NOTICES Any notice, direction, request or other communication required or contemplated by any provision of this Agreement will be given in writing and will be given by delivering or faxing or emailing the same to the parties as follows: -18- (a) To 360 or 360-Holdco at: Suite 1510, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Catherine McEachern Fax No.: (604) 681-0994 Email: catherine.mceachern@wwfiber.com (b) To WFHL, the Corporation or Urbanlink at: Suite 1000, 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Attention: Bill Ramsey Fax No.: (604) 681-5372 Email: bill.ramsey@wwfiber.com Any such notice, direction, request or other communication will be deemed to have been given or made on the date on which it was delivered or, in the case of fax or email, on the next business day after receipt of transmission. Any party may change its fax number or address for service or email address from time to time by written notice in accordance with this Section. 12.6 COUNTERPARTS This Agreement may be executed in any number of counterparts with the same effect as if all parties had signed the same document. All of these counterparts will for all purposes constitute one agreement, binding on the parties, notwithstanding that all parties are not signatories to the same counterpart. A fax transcribed copy or photocopy of this Agreement executed by a party in counterpart or otherwise will constitute a properly executed, delivered and binding agreement or counterpart of the executing party. 12.7 WAIVER No failure or delay on the part of any party in exercising any power or right under this Agreement will operate as a waiver of such power or right. No single or partial exercise of any right or power under this Agreement will preclude any further or other exercise of such right or power. No modification or waiver of any provision of this Agreement and no consent to any departure by any party from any provision of this Agreement will be effective until the same is in writing. Any such waiver or consent will be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any party in any circumstances will entitle such party to any other or further notice or demand in similar or other circumstances. 12.8 SHAREHOLDERS TO TAKE FURTHER STEPS Each Shareholder shall take all necessary actions (including amending the articles of the Corporation) and shall exercise that Shareholder's rights as a Shareholder of the Corporation to -19- cause the Corporation to pass all necessary resolutions and effect all necessary corporate acts to comply with the intent and provisions of this Agreement, including the convening and attending at meetings, voting approval of necessary resolutions, or otherwise as may be necessary for the purpose of this Agreement. 12.9 CORPORATION TO BE BOUND The Corporation, so far as its powers apply, shall be bound by the terms of this Agreement and shall do and perform all such acts and things and execute all such documents and assurances as it has power to do and as is necessary to fully and effectually carry out the terms of this Agreement. 12.10 ENTIRE AGREEMENT This Agreement and any documents and agreements to be delivered pursuant to this Agreement supersede all previous invitations, proposals, letters, correspondence, negotiations, promises, agreements, covenants, conditions, representations and warranties with respect to the subject matter of this Agreement. There is no representation, warranty, collateral term or condition or collateral agreement affecting this Agreement, other than as expressed in writing in this Agreement. No trade terms or trade usages are to be incorporated by reference implicitly or otherwise into this Agreement, unless expressly referred to in this Agreement. 12.11 AMENDMENTS No change or modification of this Agreement will be valid unless it is in writing and signed by each party to this Agreement. 12.12 INVALIDITY OF PARTICULAR PROVISION If any provision of this Agreement or any part of any provision (in this Section called the "Offending Provision") is declared or becomes unenforceable, invalid or illegal for any reason whatsoever including, without limiting the generality of the foregoing, a decision by any competent courts, legislation, statutes, bylaws or regulations or any other requirements having the force of law, then the remainder of this Agreement will remain in full force and effect as if this Agreement had been executed without the Offending Provision. 12.13 CURRENCY Unless otherwise specified all sums of money expressed in this Agreement are in the lawful money of Canada. 12.14 NUMBER AND GENDER Unless the context of this Agreement otherwise requires, to the extent necessary so that each clause will be given the most reasonable interpretation, the singular number will include the plural and vice versa, the verb will be construed as agreeing with the word so substituted, words importing the masculine gender will include the feminine and neuter genders, words importing -20- persons will include firms and corporations and words importing firms and corporations will include individuals. 12.15 ACKNOWLEDGEMENT OF RECEIPT Each of the parties acknowledges receiving an executed copy of this Agreement. 12.16 ENUREMENT Subject to the restrictions on transfer contained in this Agreement, this Agreement will enure to the benefit of and be binding on the parties and their respective heirs, executors, administrators, successors and assigns. [THE NEXT PAGE IS THE EXECUTION PAGE.] -21- IN WITNESS WHEREOF the parties have executed this Agreement as of the date stated on the first page. 360NETWORKS INC. 360 URBANLINK LTD. Per: Per: - ----------------------------------- ----------------------------------- Signature Signature Name Name ------------------------------- ------------------------------- Title Title ------------------------------ ------------------------------ WORLDWIDE FIBER HOLDINGS WFI URBANLINK LTD. LTD. Per: Per: - ----------------------------------- ----------------------------------- Signature Signature Name Name ------------------------------- ------------------------------- Title Title ------------------------------ ------------------------------ URBANLINK HOLDINGS LTD. Per: - ----------------------------------- Signature Name ------------------------------- Title ------------------------------ -22- SCHEDULE A DEFINITIONS The following words shall whenever used in this Agreement have the following meanings: "AFFILIATE" has the meaning given to that term in the BUSINESS CORPORATIONS ACT in effect on the date hereof; "ARBITRATOR" has the meaning given to that term in Subsection 11.1; "AUDITORS" means: (a) if the Corporation has appointed an auditor, the auditor of the Corporation most recently appointed; or (b) if the Corporation has not so appointed an auditor, the firm of chartered accountants most recently engaged by the Corporation to advise upon, or assist in the preparation of, review, or report on, its financial statements. "BANK" means The Toronto-Dominion Bank or such other bank or financial institution as the Board may from time to time determine; "BOARD" means, with respect to any corporation, the board of directors of such Corporation; "BUSINESS CORPORATIONS ACT" means the BUSINESS CORPORATIONS ACT (Alberta), as amended; "BUSINESS DAY" means any day except Saturdays, Sundays or statutory holidays in British Columbia; "CLOSING" means any closing of the purchase and sale of an Interest of a Shareholder as provided in this Agreement; "CLOSING DATE" has the meaning given to that term in Subsection 8.1; "CONTRACT" has the meaning given to that term in Subsection 8.2; "DEFAULT" has the meaning given to that term in Subsection 6.1; "DEFAULTING SHAREHOLDER" has the meaning given to that term in Subsection 6.1; "FIRST VALUATION REPORT" has the meaning given to that term in paragraph 9.2(c); "FIRST VALUATOR" has the meaning given to that term in paragraph 9.2(b); "HIGH YIELD DEBT INDENTURES" means (i) the Indenture dated as of December 23, 1998 between 360 (then called Worldwide Fiber Inc.) and HSBC Bank USA (then called Marine Midland Bank), as amended from time to time, (ii) the Indenture dated as of July 28, 1999 between 360 (then called Worldwide Fiber Inc.) and HSBC Bank USA, as amended from time to time, (iii) -23- any similar Indentures that may be entered into by 360 from time to time, as amended from time to time, and (iv) any other credit arrangements entered into by 360, as amended from time to time. "INSOLVENCY EVENT" means the winding-up or liquidation of a corporation, the institution of proceedings to be adjudicated a bankrupt or insolvent under the BANKRUPTCY AND INSOLVENCY ACT (Canada) or any analogous laws, the consenting to the institution of such proceedings, the consenting to the filing of any petition under the BANKRUPTCY AND INSOLVENCY ACT (Canada) or to the appointment of a receiver or receiver manager, the making of a general assignment for the benefit of creditors, the filing of a proposal to settle payment of creditors' liabilities under the COMPANIES' CREDITORS ARRANGEMENT ACT, the admission in writing of insolvency, the taking of any action in furtherance of any of the above, the passing of a resolution by a corporation for its winding-up or dissolution pursuant to the BUSINESS CORPORATIONS ACT; "INTEREST" means, in respect of each Shareholder, all of that Shareholder's Shares and Shareholder's Loans and any other right or claim that the Shareholder may have against the Corporation and the other Shareholders in that Shareholder's capacity as a member of the Corporation; "NON-DEFAULTING SHAREHOLDER" has the meaning given to that term in paragraph 6.1(a); "NOTICE OF DEFAULT" has the meaning given to that term in paragraph 6.2(c); "OFFER" has the meaning given to that term in Subsection 6.3; "OFFERED SHARES" has the meaning given to that term in paragraph 5.2(a); "OFFEROR" has the meaning given to that term in paragraph 5.2(a); "PRIME RATE" means the annual rate of interest designated from time to time by the Bank as its prime rate for Canadian dollar loans made in Canada; "PURCHASE PRICE" means, with respect to any sale and purchase of an Interest of a Shareholder, the amount payable to purchase such Interest as determined in accordance with the provisions of this Agreement applicable to that sale and purchase; "PURCHASER" means a Shareholder who is the purchaser of Shares or of an Interest pursuant to any of the provisions of this Agreement; "RESELLER AGREEMENT" means the Reseller Agreement dated as of the date of this Agreement and made between 360, Worldwide Fiber Network Services Ltd. and Urbanlink, as amended from time to time; "SECOND VALUATION REPORT" has the meaning given to that term in paragraph 9.2(e); "SECOND VALUATOR" has the meaning given to that term in paragraph 9.2(d); "SECTION 7 NOTICE" has the meaning given to that term in Subsection 7.1; -24- "SHAREHOLDER" means at any time a person that is (x) a party to this Agreement that is bound by this Agreement at the time and holds one or more Shares at the time or (y) a person that becomes bound by this Agreement at any time and is bound by this Agreement at the time and holds one or more Shares at the time, and "SHAREHOLDERS" means all of them; "SHAREHOLDER'S OR SHAREHOLDERS' LOANS" means, in respect of each Shareholder, the aggregate amount of money advanced from time to time as a loan by that Shareholder to the Corporation and not repaid, together with accrued and unpaid interest, if any; "SHARES" means, in respect of each Shareholder, all of the shares in the capital of the Corporation directly or indirectly owned by that Shareholder or in respect of which that Shareholder has any right to purchase (except under this Agreement); "SUBSIDIARY" has the meaning given to that term in the BUSINESS CORPORATIONS ACT in effect on the date hereof; "TELECOMMUNICATIONS ACT " means the TELECOMMUNICATIONS ACT (Canada) and the Regulations issued pursuant to such Act (including, without limiting the generality of the foregoing, the Regulations Respecting the Ownership and Control of Canadian Telecommunications Common Carriers) as amended from time to time; "THIRD PARTY OFFER" has the meaning given to that term in paragraph 5.2(a); "TRANSFER" of an Interest includes any sale, exchange, transfer, assignment, gift, pledge, encumbrance, hypothecation, alienation or other transaction, whether voluntary, involuntary or by operation of law, whether in whole or in part, by which the legal or beneficial ownership of, or any security interest or other interest in an Interest, passes from one person to another, or to the same person in a different capacity, whether or not for value, and "to transfer", "transferred" and similar expressions have corresponding meanings; "TRANSFER INTEREST" has the meaning given to that term in Subsection 8.2; "TRANSFER NOTICE" has the meaning given to that term in paragraph 5.2(a); "VALUATION" means a valuation prepared pursuant to Subsection 9.2 and which expresses the value per Share and per dollar amount of any Shareholder's Loan; and "VENDOR" means a Shareholder who is the seller of an Interest or Interests pursuant to any of the provisions of this Agreement. -25- SCHEDULE B MATTERS REQUIRING UNANIMOUS CONSENT OF DIRECTORS Pursuant to Subsection 3.5 of the Agreement, the following matters shall require the written consent of the 360 nominee to the Board of the Corporation: (a) except for any expenditures contemplated by an approved capital expenditure or operating budget, any single expenditure of the Corporation and its Subsidiaries, in excess of $20 million per year, or any series of related expenditures which exceed, in the aggregate, the sum of $20 million per year, other than expenditures that the Corporation and its Subsidiaries can recover under the Reseller Agreement; (b) the entering into, execution, acknowledgement, amendment, supplement, cancellation or termination of any Material Contract on behalf of the Corporation or any Subsidiary of the Corporation and, for this purpose, "Material Contract" means any of the following: (i) any contract, agreement or other instrument to be entered into by the Corporation or any Subsidiary of the Corporation with any Shareholder or an Affiliate of a Shareholder; and (ii) any contract, agreement or other instrument to be entered into by the Corporation or any Subsidiary of the Corporation which may in the aggregate over the term of the contract, agreement or instrument involve an obligation of the Corporation or any Subsidiary of the Corporation, to pay in excess of $20 million other than expenditures that the Corporation and its Subsidiaries can recover under the Reseller Agreement. (c) the guarantee by the Corporation or any Subsidiary of the Corporation of the debts of any person other than the Corporation, or a wholly-owned Subsidiary of the Corporation; (d) any loans by the Corporation or any Subsidiary of the Corporation to any person other than the Corporation or a wholly-owned Subsidiary of the Corporation; (e) the sale of any shares of any Subsidiary of the Corporation; (f) the sale, lease, transfer, mortgage, pledge or other disposition of all or substantially all of the undertaking of the Corporation or any Subsidiary of the Corporation; (g) any amendment to the Articles or other constating documents of the Corporation or any Subsidiary of the Corporation; (h) the consolidation, merger or amalgamation of the Corporation or any Subsidiary of the Corporation with any other corporation, association, partnership or other legal entity; (i) the creation, allotment or issuance of, or agreement to create, allot or issue, any shares or other securities of the Corporation or any Subsidiary of the Corporation, or the granting -26- of any option or right capable of becoming an option to purchase any shares or other securities of the Corporation or any Subsidiary of the Corporation; (j) the winding-up or liquidation of the Corporation or any Subsidiary of the Corporation, the institution of proceedings to be adjudicated a bankrupt or insolvent under the BANKRUPTCY AND INSOLVENCY ACT (Canada), the consenting to the institution of such proceedings against the Corporation or any Subsidiary of the Corporation, the consenting to the institution of bankruptcy or insolvency proceedings against the Corporation or any Subsidiary of the Corporation under the BANKRUPTCY AND INSOLVENCY ACT (Canada) or any other analogous laws, the consenting to the filing of any such petition or to the appointment of a receiver or receiver manager of the property of the Corporation or any Subsidiary of the Corporation, the making of a general assignment for the benefit of creditors, the filing of a proposal to settle payments of creditors' liabilities under the COMPANIES' CREDITORS ARRANGEMENT ACT, the admission in writing of the insolvency of the Corporation or any Subsidiary of the Corporation, or the taking of any corporate action in furtherance of any of the aforesaid purposes; (k) the redemption, repurchase or retirement for value of any shares or other securities of the Corporation, except under the provisions of this Agreement. -27- SCHEDULE C CAPITAL CONTRIBUTIONS The registered and beneficial holders of all the issued and outstanding shares in the capital of the Corporation are as follows: -------------------------------------------------------------- SHAREHOLDER NUMBER AND CLASS OF SHARES -------------------------------------------------------------- 360-Holdco 333 Class "A" Common Voting Non-Participating Shares 510,000 Class "B" Common Non-Voting Participating Shares -------------------------------------------------------------- WFHL 667 Class "A" Common Voting Non-Participating Shares 490,000 Class "C" Common Non-Voting Participating Shares -------------------------------------------------------------- -28- EX-23.1 19 EXHIBIT 23.1 Exhibit 23.1 [LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form F-1 of our report dated February 25, 2000, except as to the subsequent events described in note 15 which are as of March 18, 2000 relating to the consolidated financial statements of 360networks inc., which appear in such Prospectus. We also hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form F-1 of our report dated March 12, 1999 relating to the consolidated income statement and statements of changes in shareholders' equity and of cash flows of Worldwide Fiber (USA), Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts", "Summary Financial Data" and "Selected Financial Data" in such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not prepared or certified such "Summary Financial Data" and "Selected Financial Data". /s/ PricewaterhouseCoopers LLP Vancouver, Canada March 21, 2000 EX-23.2 20 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Amendment No. 1 to Registration Statement No. 333-95621 of our report dated November 30, 1998, related to the divisional balance sheet of Ledcor Industries Limited--Telecommunications Division as at May 31, 1998 and the divisional statements of operations and retained earnings and cash flows for the nine months ended May 31, 1998 and the year ended August 31, 1997, which is part of this Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Edmonton, Canada April 18, 2000 EX-23.3 21 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form F-1 of our report dated February 16, 2000 relating to the consolidated financial statements of GlobeNet Communications Group Limited, which appear in such Prospectus. We also consent to the references to us under the heading "Experts" in such Prospectus. /s/ PricewaterhouseCoopers LLP Toronto, Canada March 21, 2000 EX-23.4 22 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF PERSON ABOUT TO BECOME DIRECTOR Pursuant to Rule 438 of the Securities Act of 1933 (the "Securities Act"), I hereby consent to being named in the Form F-1 registration statement (or any registration statement for this offering that is to be effective upon the filing pursuant to rule 462(b) under the Securities Act) of 360NETWORKS INC. (the "Company"), relating to an initial public offering of stock by the Company (the "Registration Statement"), as a person who is about to become a director of the Company. In addition, I consent to the inclusion of other information about me included in the Registration Statement. I further consent to the filing of this consent as an exhibit to the Registration Statement. Date: April 11, 2000 /s/ KEVIN COMPTON -------------------------------------------- Kevin Compton
EX-23.5 23 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF PERSON ABOUT TO BECOME DIRECTOR Pursuant to Rule 438 of the Securities Act of 1933 (the "Securities Act"), I hereby consent to being named in the Form F-1 registration statement (or any registration statement for this offering that is to be effective upon the filing pursuant to rule 462(b) under the Securities Act) of 360NETWORKS INC. (the "Company"), relating to an initial public offering of stock by the Company (the "Registration Statement"), as a person who is about to become a director of the Company. In addition, I consent to the inclusion of other information about me included in the Registration Statement. I further consent to the filing of this consent as an exhibit to the Registration Statement. Date: April 17, 2000 /s/ JOHN MALONE -------------------------------------------- John Malone
EX-23.6 24 EXHIBIT 23.6 EXHIBIT 23.6 CONSENT OF PERSON ABOUT TO BECOME DIRECTOR Pursuant to Rule 438 of the Securities Act of 1933 (the "Securities Act"), I hereby consent to being named in the Form F-1 registration statement (or any registration statement for this offering that is to be effective upon the filing pursuant to rule 462(b) under the Securities Act) of 360NETWORKS INC. (the "Company"), relating to an initial public offering of stock by the Company (the "Registration Statement"), as a person who is about to become a director of the Company. In addition, I consent to the inclusion of other information about me included in the Registration Statement. I further consent to the filing of this consent as an exhibit to the Registration Statement. Date: April 17, 2000 /s/ JOHN STANTON -------------------------------------------- John Stanton
EX-23.7 25 EXHIBIT 23.7 CONSENT OF FARRIS, VAUGHAN, WILLS & MURPHY EXHIBIT 23.7 360NETWORKS INC. 1500 - 1066 West Hastings Street Vancouver, B.C. V6E 3X1 Dear Sirs/Mesdames: re: 360NETWORKS INC. Form F-1 Registration Statement Consent is hereby given to the use of our name under the captions "Legal Matters" and "Enforceability of Civil Liabilities Against Foreign Persons" in the Prospectus included in the Registration Statement on Form F-1 (the "Registration Statement") filed with the Securities and Exchange Commission, and to the filing, as an exhibit to the Registration Statement, of this letter. In giving such consent we do not admit that we come within the category of persons whose consent is requried under Section 7 of the United States Securities Act of 1933. Yours truly, /s/ Farris, Vaughan, Wills & Murphy FARRIS, VAUGHAN, WILLS & MURPHY -----END PRIVACY-ENHANCED MESSAGE-----