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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 6-K
Report of Foreign Issuer Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the Month of November 2000
----------------
Commission file number 001-15841
----------------
360NETWORKS INC.
(Exact name of Registrant)
---------------------
1500-1066 WEST HASTINGS STREET,
VANCOUVER, BRITISH COLUMBIA,
CANADA V6E 3X1
(Address of principal executive offices)
(604) 681-1994
(Registrant's telephone number)
---------------------
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F /X/ Form 40-F / /.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes / / No /X/
This Form 6-K Report of Foreign Issuer is incorporated by reference into the
Registration Statement on Form S-8 of 360networks inc. (Registration
No. 333-39774).
This document may contain statements about expected future events and
financial results that are forward looking in nature, and, as a result, are
subject to certain risks and uncertainties. These risks, uncertainties and other
factors may cause our actual results to differ materially from those projected
by management. Such factors include, among others, the following: general
economic and business conditions, both nationally and in the markets in which we
operate or will operate; competition; the loss of any significant number of
customers; changes in business strategy or development plans; technological
developments; our ability to access markets, design effective fiber optic
routes, install cable and facilities and obtain rights-of-way, building access
rights and any required governmental authorizations, franchises and permits, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions; and other factors referenced in this Form 6-K. Some examples of
forward looking statements contained in this 6-K are those regarding expected
route miles and the costs associated with building our network, financial
information regarding gross profit as a percentage of revenue, and other data
with respect to future builds. For such statements, we claim the safe harbor for
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 3
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000........................................ 8
SIGNATURES.................................................. 24
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read along with the accompanying consolidated
interim financial statements and our annual report on Form 20-F for the period
ended December 31, 1999. These reports are presented in United States dollars
and have been prepared in accordance with accounting principles generally
accepted in the United States.
OVERVIEW
We offer network infrastructure, broadband network and co-location services
to telecommunications and data-centric organizations.
By mid 2002, we expect our currently planned network to consist of
approximately 88,000 route miles linking more than 100 major cities with
terrestrial routes and submarine cables joining North America, Europe, South
America and Asia. We are also acquiring and developing approximately
3.7 million square feet of related network, co-location and Internet exchange
facilities.
The development and build-out of our network will require significant
capital expenditures until mid-2002, when the currently planned network is
scheduled to be complete. Depending upon market demand, we may expand the
network and will require additional capital if we decide to do so. See
"Liquidity and Capital Resources."
REVENUE AND COSTS
Our revenue is primarily generated from the sale, lease or grant of
indefeasible rights of use ("IRU") of network infrastructure. We anticipate a
significant amount of our future revenues will be derived from providing
bandwidth services, including optical channels, private line transmission,
virtual voice trunking and packet-based data services including Internet
protocol ("IP") transport. We anticipate that, as we proceed with the
development of our network, the percentage of revenues which we receive from
bandwidth services will increase as a percentage of our total revenue and that
by the end of 2001 our bandwidth services will provide our largest percentage of
revenue on a consolidated basis and be a significant source of income.
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 IRU's 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 IRU's, or if such transactions otherwise do
not meet the criteria in FASB Statement No. 66, we will recognize the transfer
prices as revenue over the term of the applicable agreements, rather than when
the applicable segments of our network are delivered
3
<PAGE>
to, and accepted by, the purchaser. 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 selling, maintenance and
co-location space. Indirect costs of network services are included in general
and administrative expenses and depreciation.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUE for the three months and nine months ended September 30, 2000 was
$119 million and $353 million respectively, compared with $111 million and
$235 million in the same periods of 1999. These increases, were primarily due to
additional sales of conduit and fiber optic strands along network segments in
North America. Network services are not yet a significant component of revenue
(see "Revenues and Costs" above).
COSTS for the three months and nine months ended September 30, 2000 were
$68 million and $215 million respectively, compared with $79 million and
$165 million in the same periods of 1999 and primarily reflect the costs
incurred of constructing and maintaining conduit and fiber optic strands.
GROSS PROFIT for the three months and nine months ended September 30, 2000
was $51 million (43% of revenue) and $138 million (39%) respectively, compared
with $32 million (29%) and $70 million (30%) in the same periods of 1999. The
improvement in gross margin during the current periods is attributable to lower
construction and right-of-way purchase costs in Canada, and efficiencies gained
from the use of our patented rail plow technology along railroad rights-of-way.
As segments in the United States and Europe, the majority of which are not
located along railroad rights-of-way, reach completion during the coming
periods, gross profit as a percentage of revenue is expected to be approximately
30%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three months and nine
months ended September 30, 2000 were $20 million (17% of revenue) and
$56 million (16%) respectively, compared with $6 million (5%) and $12 million
(5%) in the same periods of 1999. We are continuing to add marketing and network
services personnel as we implement our network services strategy across a
broader geographic network footprint. We are developing bandwidth and
co-location products. These type of expenses are expected to continue to
increase as hires and development continue.
STOCK-BASED COMPENSATION EXPENSE for the three months and nine months ended
September 30, 2000 was $53 million and $206 million respectively, compared with
$3 million and $5 million in the same periods of 1999. These charges, are
entirely non-cash in nature and do not change the value of
stockholders' equity.
The amounts recorded in 2000 include $59 million as a result of dispositions
of shares by principal shareholders, not transactions involving the company.
This is recorded as a requirement of FAS 123 "Accounting for Stock-based
Compensation," and related SEC Staff Accounting bulletins including
SAB 55 -- "Allocation of expenses and related disclosure in financial statements
of subsidiaries, divisions or lesser business components of another entity."
The remainder of these amounts are related to shares issued and stock
options granted by the Company prior to our initial public offering.
Additionally, $163 million of deferred stock based compensation will be
amortized over the remaining vesting term of the share and stock option
agreements.
4
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INTEREST EXPENSE for the three months and nine months ended September 30,
2000 was $30 million and $82 million, respectively, compared with $13 million
and $21 million in the same periods of 1999. The increase in interest expense is
due to the issue of senior notes in July 1999 and April 2000.
INTEREST INCOME for the three and nine months ended September 30, 2000 was
$17 million and $45 million respectively, compared with $6 million and
$8 million in the same periods in 1999. Interest income results primarily from
the investment of the proceeds of the issuance of equity and debt securities.
INCOME TAX expense for the three months and nine months ended September 30,
2000 was $2 million and $15 million respectively, compared with $9 million and
$20 million in the same periods of 1999.
MINORITY INTEREST for the three months and nine months ended September 30,
2000 was nil and $2 million respectively, compared with $3 million and
$6 million in the same periods of 1999. These amounts represent 25% of the net
income of 360networks (CN) ltd., 360networks LLC and 360networks holdings
(USA) inc., prior to the purchase of these minority interests by the Company
during 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have an aggressive business plan to build out our network. By mid-2000,
our planned network will consist of approximately 88,000 route miles in North
America, Europe, South America and Asia including the 360atlantic undersea cable
connecting North America and Europe, the 360americas undersea cable connecting
North America and South America, the 360asia undersea cable between major
population centers in Asia and the 360pacific undersea cable connecting the
United States, Canada and Japan.
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 are developing products and services that
capitalize on the convergence of telecommunications and high-bandwidth
applications and services.
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 our currently planned network
will be approximately $7.2 billion:
- $1.8 billion to complete our network in North America.
- $360 million to complete our network in Europe.
- $865 million to complete the 360atlantic undersea cable project. The
majority of this project is under fixed price contracts.
- $900 million to complete the 360americas undersea cable project. The
majority of this project is under fixed price contracts.
- $800 million for 360asia, for the purchase of fiber optic strands in the
C2C Asian undersea cable project, and associated backhaul.
- $1.6 billion to complete the 360pacific undersea cable project.
- $860 million to acquire and develop 3.7 million square feet of existing
and future co-location facilities.
5
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In order to finance the above costs of our network, we have:
- issued senior notes for proceeds of $1.3 billion.
- issued equity securities for net proceeds $1.3 billion.
- established credit facilities totaling $1.6 billion and an uncommitted
incremental credit facility of $800 million.
- agreed to issue $700 million of convertible preferred stock to Alcatel.
We anticipate that these funding sources, combined with the collection of
customer revenue, is sufficient 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 our current and
planned markets, our actual costs may vary 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.
Further, in relation to 360pacific, we have recently established a standby
capital commitment of $700 million which provides assurance that the 360pacific
project will be completed on schedule, irrespective of when we receive funds
from sales.
At September 30, our working capital totaled $753 million. Our cash
position, including balances restricted to certain capital expenditures, was
$937 million. Cash provided by operating activities for the nine months ended
September 30, 2000 was $105 million, compared with cash used in operating
activities of $38 million in the same period of 1999.
Our total capital expenditures for the nine months ended September 30, 2000
were $1.8 billion. Total capital expenditure for the year ended December 31,
2000 is estimated to be approximately $3 billion.
We anticipate that we will continue to experience negative cash flow, after
capital expenditures, through to mid-2002 as we build out the presently planned
network.
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 to enable us
to provide value added network services such as co-location 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 the completion of construction
for the remainder of our planned network development, the implementation of our
network services strategy, the undersea cable projects or for other
opportunities on a timely basis or on terms that are acceptable to us.
6
<PAGE>
MARKET RISK DISCLOSURES
We are subject to market risks arising from changes in interest rates with
respect to our variable interest rate credit facilities. The interest expense
incurred on amounts borrowed under these credit facilities will change due to
changes in: the LIBOR rate or the alternate base rate, changes in the amounts
drawn on the respective commitments and changes in financial leverage:
- Under our $1.2 billion senior credit facility, interest rates are based on
LIBOR or an alternate base rate, plus a margin ranging from 1.5% to 4.5%
depending on the type of commitment and on the financial leverage of the
Company. As at September 30, 2000, $350 million has been drawn under this
facility.
- Under our $400 million 360americas credit facility, interest rates range
from LIBOR plus 3.5% to LIBOR plus 4%. As at September 30, 2000,
$100 million has been drawn under this facility.
We are subject to market risks due to fluctuation in foreign exchange rates.
We are developing and constructing networks in Europe and South America. We have
not made significant use of financial instruments to minimize our exposure to
foreign currency fluctuations. Within North and South America, most transactions
and financial instruments are denominated in US dollars. Future results will be
affected by actual fluctuations in interest rates and foreign currency rates. We
continue to analyze risk management strategies to reduce foreign currency
exchange risk.
The following table provides additional information applicable to our credit
facilities and senior notes outstanding, as of September 30, 2000:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------------------------------------------------
THERE- FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CREDIT FACILITIES
Senior credit facility -- Due 2003 to
2007.................................. $ -- $ -- $ -- $ 2 $ 4 $344 $350 $350
360americas -- Due 2005................. -- -- -- -- -- 100 100 100
SENIOR NOTES
12.5% fixed rate -- Due 2005............ -- -- -- -- -- 175 175 171
12.0% fixed rate -- Due 2009............ -- -- -- -- -- 500 500 448
13.0% fixed rate -- Due 2008 -- (US$)... -- -- -- -- -- 600 600 549
13.0% fixed rate -- Due
2008 -- (Euro)........................ E -- E -- E -- E -- E -- E200 E200 E183
</TABLE>
OUTSTANDING SHARE DATA
At September 30, 2000, the Company has 731,946,311 Subordinate Voting Shares
and 81,840,000 Multiple Voting Shares outstanding.
At September 30, 2000, 55,978,316 Subordinate Voting Shares are issuable
upon the exercise of outstanding share options.
7
<PAGE>
360NETWORKS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE................................... $ 119 $ 111 $ 353 $ 235
COSTS..................................... 68 79 215 165
-------------- -------------- -------------- --------------
GROSS PROFIT.............................. 51 32 138 70
-------------- -------------- -------------- --------------
EXPENSES
Selling, general and administration....... 20 6 56 12
Stock-based compensation................ 53 3 206 5
Depreciation and amortization............. 14 1 22 1
-------------- -------------- -------------- --------------
87 10 284 18
-------------- -------------- -------------- --------------
(36) 22 (146) 52
INTEREST EXPENSE.......................... 30 13 82 21
INTEREST INCOME........................... 17 6 45 8
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST....................... (49) 15 (183) 39
PROVISION (RECOVERY) FOR INCOME TAXES
(Note 9)................................
Current................................... (26) 10 28 20
Deferred.................................. 28 (1) (13) --
-------------- -------------- -------------- --------------
2 9 15 20
-------------- -------------- -------------- --------------
(51) 6 (198) 19
MINORITY INTEREST......................... -- 3 2 6
-------------- -------------- -------------- --------------
NET INCOME (LOSS) FOR THE PERIOD.......... $ (51) $ 3 $ (200) $ 13
============== ============== ============== ==============
INCOME (LOSS) PER SHARE (Note 3)
Basic..................................... $ (0.06) $ (0.01) $ (0.34) $ 0.03
Diluted................................... $ (0.06) $ (0.34)
</TABLE>
See accompanying notes
8
<PAGE>
360NETWORKS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (200) $ 13
Add (deduct) items to reconcile to net cash
Stock-based compensation.................................. 206 5
Other..................................................... 9 2
Changes in operating working capital items................ 90 (58)
------------- -------------
Cash provided (used) by operating activities................ 105 (38)
------------- -------------
INVESTING ACTIVITIES
Additions to property, equipment, network assets under
construction
and network capacity...................................... (1,491) (61)
Other....................................................... 31 (169)
------------- -------------
Cash used by investing activities........................... (1,460) (230)
------------- -------------
FINANCING ACTIVITIES
Proceeds from
Issuance of equity........................................ 682 348
Issuance of debt.......................................... 1,293 500
Repayment of debt........................................... (478) --
Redemption of preferred shares.............................. -- (45)
Other....................................................... 36 (16)
------------- -------------
Cash provided by financing activities....................... 1,533 787
------------- -------------
Effect of exchange rate on cash and cash equivalents........ (1) --
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 177 519
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 521 156
------------- -------------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 698 $ 675
============= =============
</TABLE>
See accompanying notes
9
<PAGE>
360NETWORKS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 698 $ 521
Accounts receivable......................................... 141 34
Restricted cash............................................. 80 --
Unbilled revenue (Note 5)................................... 233 116
Inventory (Note 5).......................................... 243 197
Deferred tax asset.......................................... 9 9
Other....................................................... 37 22
------------- -------------
1,441 899
RESTRICTED CASH............................................. 159 --
PROPERTY AND EQUIPMENT -- net (Note 5)...................... 539 77
NETWORK ASSETS UNDER CONSTRUCTION........................... 1,555 301
GOODWILL -- net (Note 5).................................... 892 --
DEFERRED TAX ASSET.......................................... 53 12
OTHER (Note 5).............................................. 229 22
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$ 4,868 $ 1,311
============= =============
</TABLE>
See accompanying notes
10
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360NETWORKS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (Note 5)........... $ 597 $ 191
Deferred revenue............................................ 70 19
Income taxes payable........................................ 21 34
------------- -------------
688 244
DEFERRED REVENUE............................................ 38 --
DEFERRED TAX LIABILITY...................................... 30 3
LONG-TERM DEBT (Note 7)..................................... 1,883 675
------------- -------------
2,639 922
MINORITY INTEREST........................................... -- 9
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 8)
Authorized -- 500 billion Preferred Stock
Issued and outstanding
Nil (1999 -- 150,951,312) Series A Non-Voting Redeemable
Convertible Preferred Stock............................. -- 350
STOCKHOLDERS' EQUITY
COMMON STOCK (Note 8)
Authorized -- 500 billion Subordinate Voting Shares and
500 billion Multiple Voting Shares, no par value
Issued and outstanding
731,946,311 (1999 -- 436,056,000) Subordinate Voting
Shares.................................................. 2,443 247
81,840,000 Multiple Voting Shares......................... 45 45
OTHER CAPITAL ACCOUNTS...................................... 17 (221)
(DEFICIT)................................................... (276) (41)
------------- -------------
2,229 30
------------- -------------
$ 4,868 $ 1,311
============= =============
COMMITMENTS (Note 11)
SUBSEQUENT EVENTS (Note 12)
</TABLE>
11
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360NETWORKS INC.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
SUBORDINATE VOTING SHARES
(FORMERLY CLASS A NON-VOTING
AND CLASS B SUBORDINATE
VOTING SHARES) MULTIPLE VOTING SHARES
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
----------- ------ ---------- --------
BALANCE, DECEMBER 31, 1999................ 436,056,000 $ 247 81,840,000 $ 45
Accretion of Preferred Shares to
redemption value........................
Purchase price adjustment to Preferred
Shares..................................
Employee option grants....................
Amortization of deferred compensation
expense.................................
Issuance of shares for services
rendered................................ 411,214 1
Issuance of shares for 25% of
360networks-CN ltd. and 360networks LLC
(Note 6)................................ 11,428,571 160
Issuance of shares for cash net of share
issuance costs.......................... 51,566,250 682
Issuance of shares and options on
acquisition of GlobeNet (Note 6)........ 43,198,816 605
Issuance of shares for 25% of 360networks
Holdings (USA) inc. (Note 6)............ 22,285,714 312
Issuance of shares for TRES
Management LLC and Meet Me Room LLC
(Note 6)................................ 1,875,000 32
Conversion of Preferred Shares to
Subordinate Voting Shares (Note 8)...... 160,084,346 380
Issuance of shares on exercise of stock
options................................. 5,040,400 24
Contribution by principal shareholders....
Other.....................................
Comprehensive income
Net income (loss) for the period........
Other comprehensive income -- foreign
currency translation..................
Total comprehensive income................
------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000............... 731,946,311 $2,443 81,840,000 $ 45
==================================================================
</TABLE>
See accompanying notes
12
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360NETWORKS INC.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Unaudited (millions of U.S. dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
OTHER CAPITAL ACCOUNTS
--------------------------------------------------------
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
NOTE PAID IN DEFERRED COMPREHENSIVE STOCKHOLDERS'
RECEIVABLE CAPITAL COMPENSATION INCOME (DEFICIT) EQUITY
---------- ---------- ------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ (77) $ 44 $ (188) $ -- $ (41) $ 30
(6) (6)
(24) (24)
128 (128) --
148 148
1
160
682
37 642
312
32
380
(15) 9
68 68
5 (5) --
(200)
(5)
(205)
------------------------------------------------------------------------------------
$ (77) $ 262 $ (163) $ (5) $ (276) $ 2,229
====================================================================================
</TABLE>
13
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360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 1. THE COMPANY
360networks inc. (the "Company") has operations which consist of designing,
engineering, constructing, installing and operating telecommunications systems
for sale or lease to third parties. For the nine months ended September 30, 2000
and 1999, revenue is primarily generated from the sale, lease or grant of
indefeasible rights of use of network infrastructure to telecommunications
companies in North America.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited interim condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted 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 accompanying interim condensed consolidated
financial statements of the Company do not include all of the notes in annual
financial statements and therefore should be read in conjunction with the
Company's annual financial statements. The accompanying interim financial
statements include all normal recurring adjustments, which, in the opinion of
management, are necessary to present fairly the Company's financial position at
September 30, 2000, its results of operations for the three months and nine
months ended September 30, 2000 and 1999, and its cash flows for the nine months
ended September 30, 2000 and 1999.
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 periods reported. Actual results
could differ from those estimates.
RESTRICTED CASH
Restricted cash is classified as such under the terms of the 360americas
credit facility. The use of this cash is restricted to operating and capital
expenditures related to the 360americas project and other telecommunications
activities.
COMPARATIVE FINANCIAL INFORMATION
Certain prior period amounts have been reclassified to conform to the
current year presentation.
14
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360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 3. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of
Subordinate Voting Shares (formerly Class A Non-Voting Shares and Class B
Subordinate Voting Shares) and Multiple Voting Shares (formerly Class C Multiple
Voting Shares) outstanding for the period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)................................... $ (51) $ 3 $ (200) $ 13
Less:
Preferred stock accretion......................... -- (1) (6) (1)
Stock dividend.................................... -- (5) -- (5)
Purchase price adjustment to preferred shares..... -- -- (24) --
------------- ------------- ------------- -------------
Net income (loss) attributable to common
stockholders...................................... $ (51) $ (3) $ (230) $ 7
============= ============= ============= =============
Weighted average number of common
shares (millions)................................. 812 385 683 282
============= ============= ============= =============
Basic income (loss) per common share................ $ (0.06) $ (0.01) $ (0.34) $ 0.03
</TABLE>
Diluted loss per share reflects the potential dilution of securities by
including other potential common stock, including stock options, in the weighted
average number of common shares outstanding for a period, if dilutive. At
September 30, 2000, no outstanding securities are dilutive.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 2000
------------- -------------
<S> <C> <C>
Net loss attributable to common stockholders................ $ (51) $ (230)
============= =============
Diluted weighted average number of common
shares (millions)......................................... 812 683
============= =============
Diluted loss per common share............................... $ (0.06) $ (0.34)
</TABLE>
15
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash paid for income taxes.................................. $ 31 $ 13
Cash paid for interest...................................... 85 10
Supplemental non-cash investing and financing activities:
Conversion of Series A Preferred Shares to Subordinate
Voting Shares........................................... 356 --
Issuance of Subordinate Voting Shares for acquisition of:
100% interest in GlobeNet Communications Group
Limited............................................... 605 --
25% interest in 360networks (CN) ltd and
360networkS LLC....................................... 160 --
25% interest in 360networks (USA) inc................... 312 --
100% interest in TRES Management LLC and Meet Me
Room LLC.............................................. 32 --
Issuance of common shares for assets...................... -- 76
Accretion of Preferred Stock to redemption value.......... 6 2
Series C redeemable preferred stock dividend.............. -- 5
</TABLE>
NOTE 5. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------- -------------
<S> <C> <C>
UNBILLED REVENUE
Revenue earned on uncompleted contracts................... $ 487 $ 333
Less: billings to date.................................... 254 217
------------- -------------
$ 233 $ 116
============= =============
INVENTORY
Fiber optic network assets................................ $ 242 $ 188
Construction supplies, small tools and other.............. 1 9
------------- -------------
$ 243 $ 197
============= =============
PROPERTY AND EQUIPMENT
Fiber optic network assets................................ $ 322 $ 64
Buildings................................................. 88 --
Equipment................................................. 73 10
Land...................................................... 71 6
------------- -------------
554 80
Less: accumulated depreciation............................ 15 3
------------- -------------
Property and equipment -- net............................... $ 539 $ 77
============= =============
GOODWILL
Goodwill (Note 6)......................................... $ 908 $ --
Less: accumulated amortization............................ 16 --
------------- -------------
$ 892 $ --
============= =============
</TABLE>
16
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 5. BALANCE SHEET COMPONENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------- -------------
<S> <C> <C>
OTHER ASSETS
Network capacity.......................................... $ 110 $ --
Deferred financing charges................................ 80 22
Investments............................................... 30 --
Other..................................................... 9 --
------------- -------------
$ 229 $ 22
============= =============
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued liabilities....................................... $ 246 $ 36
Subcontractor and supplier costs.......................... 210 100
Subcontractor holdbacks payable........................... 83 26
Interest payable.......................................... 58 29
------------- -------------
$ 597 $ 191
============= =============
</TABLE>
NOTE 6. ACQUISITIONS
360NETWORKS (CN) LTD AND 360NETWORKS LLC
In March 2000, the Company entered into an agreement with Canadian National
Railway and Illinois Central to acquire their respective 25% interests in
360networks (CN) ltd. and 360networks LLC in exchange for 11,428,571 Subordinate
Voting Shares of the Company. 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. Goodwill, the excess of cost over fair value of net assets
acquired, applicable to this acquisition is amortized on a straight-line basis
over 25 years. The acquisition was accounted for using the purchase method and
the purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $ 160
Less fair value of net assets acquired...................... 5
----------
Goodwill.................................................... $ 155
==========
</TABLE>
360NETWORKS HOLDINGS (USA) INC.
In April 2000, the Company acquired the remaining 25% of shares of
360networks holdings (USA) inc., (formerly Worldwide Fiber Holdings
(USA) Inc.), in exchange for 22,285,714 Subordinate Voting Shares of the
Company. Goodwill, the excess of cost over fair value of net assets acquired,
17
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 6. ACQUISITIONS (CONTINUED)
applicable to this acquisition is amortized on a straight-line basis over
25 years. The acquisition was accounted for using the purchase method and the
purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $ 312
Less fair value of net assets acquired...................... 5
----------
Goodwill.................................................... $ 307
==========
</TABLE>
GLOBENET COMMUNICATIONS GROUP LIMITED
In June 2000, the Company acquired 100% of the outstanding shares of
GlobeNet Communications Group Limited, ("GlobeNet") a provider of international
telecommunications services and capacity, in exchange for
43,198,816 Subordinate Voting Shares and 4,117,454 options to purchase
Subordinate Voting Shares of the Company. The acquisition has been accounted for
using the purchase method. The total consideration was $642 million consisting
of 43,198,816 shares issued at the initial public offering price and
4,117,454 options valued at fair value. Goodwill, the excess of cost over fair
value of net assets acquired, applicable to this acquisition is amortized on a
straight-line basis over 15 years. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $ 642
Less fair value of net assets acquired...................... 211
----------
Goodwill.................................................... $ 431
==========
</TABLE>
The following unaudited condensed combined financial information of the
Company and GlobeNet shows the results of operations had the acquisition been
completed at the beginning of the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenue..................................................... $ 366 $ 255
Net loss.................................................... (236) (15)
Basic net loss per share.................................... $ (0.37) $ (0.06)
</TABLE>
TRES MANAGEMENT LLC AND MEET ME ROOM LLC
In July 2000, the Company acquired 100% of the outstanding shares of TRES
Management LLC and in September 2000, the Company acquired 100% of the
outstanding shares of Meet Me Room LLC. The total consideration was $37 million
consisting of 1,875,000 Subordinate Voting Shares of the Company and cash of
$5 million. Goodwill, the excess of cost over fair value of net assets acquired,
applicable to these
18
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 6. ACQUISITIONS (CONTINUED)
acquisitions are amortized on a straight-line basis over 25 years. The
acquisitions were accounted for using the purchase method and the purchase price
was allocated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $ 37
Less fair value of net assets acquired...................... 22
----------
Goodwill.................................................... $ 15
==========
</TABLE>
NOTE 7. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------- -------------
<S> <C> <C>
Senior credit facility due 2003 to 2007..................... $ 350 $ --
12.5% senior notes due 2005................................. 175 175
12% senior notes due 2009................................... 500 500
13% senior notes due 2008................................... 758 --
GlobeNet 360americas credit facility due 2005............... 100 --
------------- -------------
$ 1,883 $ 675
============= =============
</TABLE>
SENIOR CREDIT FACILITY DUE 2003 TO 2007
In September 2000, the Company obtained a seven-year, $1.2 billion credit
facility consisting of three commitments; a $300 million revolving credit
facility, a $550 million term loan (Tranche A), and a $350 million term loan
(Tranche B). The revolving facility is fully available until September 2003 and
at reduced amounts thereafter until September 2007. Tranche A is available until
September 2001 and at reduced amounts until September 2002. Tranche B was fully
drawn upon closing. The facility also provides for an additional $800 million of
uncommitted incremental borrowings.
Repayment of borrowings under the facility are due quarterly, commencing in
September 2003 at varying amounts. Interest rates under the facility are based
on LIBOR or an alternate base rate, plus a margin ranging from 1.5% to 4.5%
depending on the type of commitment and on the financial leverage of the
Company. The commitment fee applicable to undrawn funds is 1.25% per year, or
lower rates as borrowings increase.
13% SENIOR NOTES DUE 2008
In April 2000, the Company issued $787 million of 13% senior notes due
May 2008. These notes were issued in two tranches. The U.S. dollar tranche was
for proceeds of $586 million. The Euro tranche was for proceeds of
$185 million.
These notes are unsecured obligations of the Company. 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 proceeds from certain asset sales, as defined in the notes
indentures, exceeds $10 million the Company is required to make an offer to
repurchase the maximum amount of the notes that can be repurchased with such
excess proceeds at an offer price equal to 100% of the principal amount.
19
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 7. LONG-TERM DEBT (CONTINUED)
360ATLANTIC CREDIT FACILITY
In February 2000, the Company obtained a $565 million credit facility for
the 360atlantic cable project. The credit facility consisted of three distinct
commitments; a $365 million term loan (Tranche A), a $175 million term loan
(Tranche B) and a $25 million working capital loan. In September 2000, the
Company elected to repay the outstanding Tranche B draw of $175 million and the
credit facility was extinguished.
GLOBENET -- 360AMERICAS CREDIT FACILITY DUE 2005
In July 1999, GlobeNet obtained a $400 million credit facility consisting of
various term facilities totalling $390 million and a revolving credit facility
of $10 million. In addition, under this credit facility, GlobeNet may also
request an additional credit facility of up to $50 million subject to lender
approval and other restrictions. This credit facility matures in June 2005.
Interest rates on this credit facility are based on LIBOR plus a margin ranging
from 3.5% to 4.0% and availability of funds under the credit facility is subject
to certain terms and conditions.
GLOBENET -- 13% SENIOR NOTES DUE 2007
In July 1999, GlobeNet issued $300 million of 13% senior notes due
July 2007. In September 2000, these notes were repurchased for $303 million.
NOTE 8. SHARE CAPITAL
SERIES A NON-VOTING CONVERTIBLE PREFERRED SHARES
Prior to the conversion of the Series A Preferred Shares, the Company issued
an additional 9,133,034 shares to the holders of such shares pursuant to the
terms of their original September 1999 agreement.
SHARE SPLIT
In March 2000, the Board of Directors approved a two-for-one share split of
all classes of the Company's stock. All comparative period share amounts have
been presented on a post-share split basis.
SHARE CAPITAL REORGANIZATION
In April 2000, the Company reorganized its share capital as follows: the
holders of existing Class B Subordinate Voting Shares converted or exchanged
their shares into Class A Non-Voting Shares and all authorized but unissued
Class B Subordinate Voting Shares were cancelled; the Series A Non-Voting
Preferred Shares were 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 were cancelled; the existing
Class A Non-Voting Shares were redesignated as Subordinate Voting Shares and the
terms were amended to provide the holders with one vote per share; the existing
Class C Multiple Voting Shares were amended to provide the holders with 10 votes
per share and the Class C Multiple Voting Shares were redesignated as Multiple
Voting Shares.
20
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 8. SHARE CAPITAL (CONTINUED)
INITIAL PUBLIC OFFERING
In April 2000, the Company completed an initial public offering consisting
of 51,566,250 Subordinate Voting Shares for net proceeds of $682 million.
Concurrent with the Company's initial public offering certain principal
shareholders of the Company sold shares to certain parties at a discount to the
initial public offering price. Accordingly the Company has recorded an amount of
$68 million as additional paid in capital, charges in respect of stock-based
compensation of $59 million and charges to revenues of $9 million.
NOTE 9. INCOME TAXES
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
The components of income (loss) before income taxes and minority interest
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Canada...................................................... $ (175) $ 14
United States............................................... (4) 25
Other....................................................... (4) --
------------- -------------
$ (183) $ 39
============= =============
</TABLE>
CURRENT INCOME TAXES
The components of the provision for current income taxes consists of
the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Canada...................................................... $ 17 $ 9
United States............................................... 10 11
Other....................................................... 1 --
------------- -------------
$ 28 $ 20
============= =============
</TABLE>
21
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 10. SEGMENTED INFORMATION
The Company operates within a single operating segment being the
installation and development of telecommunications assets. These
telecommunications assets, including undersea links, are being developed
primarily in Canada, the United States, Europe and in the Atlantic.
<TABLE>
<CAPTION>
UNITED
CANADA STATES ATLANTIC EUROPE OTHER TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Three months ended
September 30, 2000...................... $ 52 $ 60 $ 7 $ -- $ -- $ 119
September 30, 1999...................... 72 39 -- -- -- 111
Nine months ended
September 30, 2000...................... 218 128 7 -- -- 353
September 30, 1999...................... 103 132 -- -- -- 235
Property and equipment -- net
September 30, 2000........................ 143 360 26 7 3 539
December 31, 1999......................... 38 34 -- 5 -- 77
Network assets under construction
September 30, 2000........................ 219 360 722 219 35 1,555
December 31, 1999......................... 47 53 170 31 -- 301
</TABLE>
The revenue allocation is based on the location of the respective
development activities.
NOTE 11. COMMITMENTS
NETWORK DEVELOPMENTS
The Company, in the normal course of business, enters into agreements to
provide construction services and telecommunications assets and services to
third parties.
360ATLANTIC
The Company has committed to construct an undersea cable linking North
America and Europe. The total cost of the project is expected to be
approximately $865 million.
360AMERICAS
The Company has committed to construct an undersea cable linking North and
South America. The total cost of the project is expected to be approximately
$900 million.
360ASIA
In July 2000, the Company signed an agreement to acquire network assets on
the C2C undersea cable linking a number of Asian locations. The Company has
agreed to pay a total of $800 million in cash for the above purchase and
associated backhaul.
22
<PAGE>
360NETWORKS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited (tabular amounts expressed in millions of U.S. dollars)
NOTE 12. SUBSEQUENT EVENTS
360PACIFIC
In October 2000, the Company committed to develop 360pacific, a transpacific
cable to connect the United States, Canada and Japan. Alcatel will be
responsible for the network design, supply and installation of submarine
transmission and related equipment. The 360pacific project is estimated to cost
approximately $1.6 billion.
Alcatel has agreed to purchase $700 million convertible preferred stock due
in 2012. These shares will accrete at 7.25% per year and are convertible into
Subordinate Voting Shares at a price of $21.72 per share.
360ATLANTIC2
Alcatel has also agreed to purchase a second tranche of up to $300 million
convertible preferred stock if the Company decides to develop 360atlantic2, an
additional transatlantic cable to mesh with its 360atlantic cable currently
under construction. The 360atlantic2 project is estimated to cost approximately
$600 million.
Upon the signing of a contract with Alcatel for the 360atlantic2 project,
and the placement of purchase orders for a minimum of $100 million of Alcatel
terrestrial products, Alcatel will purchase the convertible preferred stock.
These shares will accrete at 7.25% per year and will be convertible into
Subordinate Voting Shares at a 22.5% premium to the average market price prior
to the announcement that the Company will close on the second tranche.
STANDBY CAPITAL
In October 2000, the Company obtained a standby capital commitment of
$700 million. The eight-year facility, if needed, provides assurance that
sufficient funds are available to ensure timely construction of the
360pacific project.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
360NETWORKS INC.
By: /s/ LARRY OLSEN
-----------------------------------------
Larry Olsen
CHIEF FINANCIAL OFFICER
</TABLE>
Date: November 14, 2000
24
