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 July 2000
--------------------------------
360NETWORKS INC.
(Translation of registrant's name into English)
1500-1066 West Hastings Street, Vancouver, British Columbia, Canada V6E 3X1
(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: (604) 681-1994
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
--- ---
<PAGE>
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
in Asia. For such statements, we claim the safe harbor for "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read along with the Annual Report on
Form 20-F for the period ended December 31, 1999 and the Registration Statement
on Form F-1/A dated April 18, 2000.
General
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 70,000 route miles in North
America, Europe, South America and Asia, including undersea cables between North
America and Europe, North America and South America and across Asia. The
development and build-out of our network will require significant capital
expenditures through 2001, 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
Since January 1, 1999 our revenue has 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 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.
<PAGE>
-2-
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 over the term of the applicable agreements,
rather than when the applicable segments of our network are delivered 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.
<PAGE>
-3-
Costs 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
points-of-presence ("POP") space. Indirect costs of network services are
included in general and administrative expenses and depreciation.
Results of Operations
Three and Six Month Periods Ended June 30, 2000 and June 30, 1999
Revenue for the three months and six months ended June 30,
2000 was $158 million and $234 million, respectively, versus $81 million and
$124 million in the same periods of 1999. These significant increases, 95% and
89%, respectively, were primarily due to additional progress made towards
completion of conduit and fiber optic strands along segments in Canada. Network
services revenue is not yet significant (see "Revenues and Costs" above).
Costs for the three months and six months ended June 30, 2000
were $100 million and $147 million, respectively, versus $54 million and $86
million in the same periods of 1999 and reflect the costs incurred of
constructing the conduit and fiber optic strands for customers.
Gross profit for the three months and six months ended June
30, 2000 was $58 million (37% of revenue) and $87 million (37%), respectively,
versus $27 million (33%) and $38 million (31%) 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
<PAGE>
-4-
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 six months ended June 30, 2000 were $24 million (15% of revenue) and
$36 million (15%), respectively, versus $3 million (4%) and $6 million (5%) in
the same periods of 1999. We are continuing to add significant numbers of
marketing and network services personnel as we implement our network services
strategy across a broader geographic network footprint. We are beginning to
develop bandwidth and colocation products. These types of expenses are expected
to continue to increase as hires and development continue.
Stock-based compensation expense for the three months and six
months ended June 30, 2000 was $105 million and $153 million, respectively,
versus $1 million and $2 million for 1999. These charges are entirely non-cash
in nature, and $59 million of the total for both periods in 2000 is the result
of dispositions of shares by principal shareholders, not transactions involving
the Company. This amount 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".
<PAGE>
-5-
The remainder of these charges are related to shares issued and stock options
granted by the Company prior to our initial public offering. Additionally, $216
million of deferred compensation will be amortized over the remaining vesting
term of the share and stock option agreements.
Interest expense for the three months and six months ended
June 30, 2000 was $36 million and $52 million, respectively, versus $2 million
and $8 million for the same periods of 1999. The increase in interest expense is
principally due to the issue of senior notes issued in July 1998 and April 2000.
Interest income for the three and six months ended June 30, 2000 totaled $21
million and $28 million, respectively, versus less than $1 million and $2
million for the same periods in 1999, and arose from the investment of the
proceeds of the senior notes and initial public offering in short-term,
investment grade securities.
Income taxes expense for the three months and six months ended
June 30, 2000 totaled $10 million and $13 million, respectively, versus $9
million and $11 million in the same periods of 1999.
Minority interest for the three months and six months ended
June 30, 2000 totaled $1 million and $2 million, respectively, versus $2 million
and $3 million in the same periods of 1999. This represents 25% of the net
income of 360networks (CN) ltd., 360networks LLC and 360networks holdings (USA)
inc., prior to the closing of the purchase of these minority interests during
the current period.
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 70,000
route miles in North America, Europe, South
<PAGE>
-6-
America and Asia including an undersea cable between North America and Europe,
an undersea cable between North and South America, and an undersea cable between
the major population centers in Asia. 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.
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 $5.7 billion.
o We estimate that the total cost to complete and light our network
of 24,100 route miles in North America will be $1.8 billion.
o We estimate that the total cost to complete and light our network
of 10,600 route miles in Europe will be $360 million.
o We estimate 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.
o 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.
o We estimate the total cost of our purchase of fiber optic strands
in the C2C Asian undersea cable project, and associated backhaul
to major points-of-presence in Asia, to be approximately $800
million. We entered into a letter of intent with C2C in July 2000
for this purchase.
o We estimate the total cost to acquire and develop existing and
future colocation facilities along our entire network to be
approximately $860 million.
In order to finance the above costs of network development:
<PAGE>
-7-
o We have issued $1.45 billion of senior notes and have received net
proceeds from equity issues of approximately $1 billion.
o We have established credit facilities for 360atlantic and
360americas which provide up to $965 million. These credit
facilities require us to use the cash drawn and cash proceeds from
certain equity issues and the issue of GlobeNet's senior notes to
fund completion of the projects.
o We have entered into an agreement with a group of bank lenders to
provide up to $2 billion (including $800 million of incremental
facilities not now committed by the lenders) to us in a senior
secured credit facility. This facility is expected to close
during the third quarter ending September 30, 2000 and the
proceeds will be used, in part, to refinance the $565 million
360atlantic credit facility.
Our estimated capital expenditures for our current network
development plans for the year ending December 31, 2000 are $3.2 billion, of
which approximately $1.3 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,
approximately $300 million will be used for our network in Asia, and
approximately $400 million will be used for the acquisition and development of
colocation facilities. We anticipate that these funding sources, combined with
the collection of customer revenue, will provide us with sufficient funds 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, 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.
<PAGE>
-8-
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 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 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.
At June 30, 2000, we had working capital of $1.7 billion,
including $1.5 billion in cash or cash equivalents. Cash used in operations
during the six months ended June 30, 2000 totaled $63 million.
Market Risk Disclosures
We are subject to market risks arising from changes in
interest rates. There exists a $565 million credit facility entered into by us
in February 2000 in order to finance the 360atlantic cable project. Our exposure
to interest rate risk expanded with the addition of the $400 million credit
facility acquired through the purchase of GlobeNet in the second quarter. As of
June 30, 2000, we have drawn $100 million under the $400 million credit facility
and $175 million under the $565 million credit facility. Amounts drawn on the
credit facilities bear interest at the
<PAGE>
-9-
prime rate or LIBOR rate plus applicable margins. As the prime rate and LIBOR
rate fluctuate, so too will the interest expense on amounts borrowed under the
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 issued $185 million in Euro denominated High Yield Notes in April
2000, which serve as an economic hedge against its cash requirement in Europe.
Other than the issuance of the Euro denominated debt, we have not made
significant use of financial instruments to minimize its 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 table below provides information about our senior notes.
<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>
Senior Notes
Due December 15, 2005 $ -- $ -- $ -- $ -- $ -- $175.0 $ 175.0 $ 184.6
Fixed Rate .......... 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
Due August 1, 2009 .. -- -- -- -- -- $500.0 $ 500.0 $ 516.3
Fixed Rate .......... 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
</TABLE>
<PAGE>
-10-
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due May 1, .......... -- -- -- -- -- $ 600.0 $ 600.0 *
2008
Fixed Rate .......... 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Due May 1, .......... -- -- -- -- -- EURO 200.0 URO 200.0 *
008
Fixed Rate .......... 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Euro denominated
</TABLE>
* Fair value has not been provided, as the notes are not currently traded in the
capital markets
<PAGE>
-11-
360networks inc.
Condensed Consolidated Financial Statements
June 30, 2000 and 1999 (tabular
amounts expressed in millions of U.S. dollars)
(Unaudited)
<PAGE>
-12-
360networks inc.
Condensed Consolidated Balance Sheets
As at June 30, 2000 and December 31, 1999
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
June 30 December 31
2000 1999
$ $
Assets
Current assets
Cash and cash equivalents 1,529 521
Restricted cash 80 -
Unbilled revenue (note 4) 226 116
Inventory (note 4) 209 197
Other current assets (note 4) 57 56
Deferred tax asset 9 9
---------------------------
2,110 899
Restricted cash 275 -
Property and equipment - net (note 4) 310 77
Network assets under construction 799 301
Goodwill - net (note 5) 857 -
Deferred tax asset 53 12
Other - net 160 22
---------------------------
4,564 1,311
===========================
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
-13-
360networks inc.
Condensed Consolidated Balance Sheets
As at June 30, 2000 and December 31, 1999
(tabular amounts expressed in millions of U.S. dollars)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
$ $
<S> <C> <C>
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 4) 258 191
Deferred revenue 45 19
Income taxes payable 57 34
---------------------------------------
360 244
Deferred tax liability 3 3
Long-term debt (note 6) 2,021 675
---------------------------------------
2,384 922
Minority interest - 9
Redeemable Convertible Preferred Stock (note 7)
Issued and outstanding
Nil (1999 - 150,951,312) Series A Non-Voting Redeemable Convertible - 350
Preferred Shares including accretion of discount from redemption
value of $6 million and net of issuance costs of $2 million
Stockholders' Equity
Common stock (note 7)
Authorized
Unlimited number of Subordinate Voting Shares (formerly Class A
Non-Voting Shares and Class B Subordinate Voting Shares) and
Multiple Voting Shares, no par value
Issued and outstanding
726,895,511 (1999 - 436,056,000) Subordinate Voting Shares (formerly 2,383 247
Class A Non-Voting Shares and Class B Subordinate Voting Shares)
81,840,000 (1999 - 81,840,000) Multiple Voting Shares 45 45
Other capital accounts (23) (221)
(Deficit) (225) (41)
---------------------------------------
2,180 30
---------------------------------------
4,564 1,311
=======================================
</TABLE>
Commitments (note 10)
Subsequent events (note 11)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
-14-
360networks inc.
Condensed Consolidated Statement of Operations
For the three months and six months ended June 30, 2000 and June 30, 1999
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30 6 Months Ended June 30
2000 1999 2000 1999
$ $ $ $
<S> <C> <C> <C> <C>
Revenue 158 81 234 124
Costs 100 54 147 86
--------------------------------------------------------------------
Gross Profit 58 27 87 38
--------------------------------------------------------------------
Expenses
Selling, general and administration 24 3 36 6
Stock-based compensation 105 1 153 2
Depreciation and amortization 7 - 8 -
--------------------------------------------------------------------
136 4 197 8
--------------------------------------------------------------------
(78) 23 (110) 30
Interest expense 36 2 52 8
Interest income 21 - 28 2
--------------------------------------------------------------------
(Loss) income before income taxes and
minority interest (93) 21 (134) 24
(Recovery) provision for income taxes
(note 8)
Current 47 9 54 10
Deferred (37) - (41) 1
--------------------------------------------------------------------
10 9 13 11
--------------------------------------------------------------------
(103) 12 (147) 13
Minority interest 1 2 2 3
--------------------------------------------------------------------
Net (loss) income for the period (104) 10 (149) 10
====================================================================
Basic and fully diluted (loss) income per
share (note 2) (0.19) 0.03 (0.33) 0.04
Weighted average number of shares used to
compute basic (loss) income 644,709,000 381,496,000 542,174,000 231,429,000
Weighted average number of shares used to
compute fully diluted (loss) income per
share 644,709,000 385,198,000 542,174,000 236,921,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
-15-
360networks inc.
Condensed Consolidated Changes in Stockholders Equity
For the six months ending June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Subordinate Voting Multiple Voting Other capital accounts
Shares Shares
(formerly Class A
non-Voting and
Class B Subordinate
Voting Shares)
-------------------- ------------------- ----------------------------------------------
Number of Amount Number of Amount Note Additional Deferred Accumulated (Deficit) Total
shares $ shares $ receivable paid in Compen- other compre- $ stock-
$ capital sation hensive holders'
$ $ income equity
$ $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 436,056,000 247 81,840,000 45 (77) 44 (188) - (41) 30
31, 1999
Accretion of (6) (6)
Preferred Stock
to redemption
value
Purchase price (24) (24)
adjustment to
Preferred Shares
Employee option 128 (128) -
grants
Amortization of 95 95
deferred
compensation
expense
Issuance of shares 411,214 1 1
for services
rendered
Acquisition of 11,428,571 160 160
remaining 25%
interest not
owned by the
company in
360networks-CN
ltd. and
360networks LLC
Issuance of shares 51,566,250 682 682
for cash net of
share issuance
costs
Issuance of shares 42,822,316 600 32 632
and options on
acquisition of
GlobeNet (note 5)
Acquisition of 22,285,714 312 312
remaining 25%
interest in
360networks
Holdings (USA)
inc.
Conversion of 160,084,346 380 380
Preferred Shares
to Subordinate
Voting Shares
Issuance of shares 2,241,100 1 1
on exercise of
stock options
Contribution by 68 68
principal
shareholders
(note 7)
Other 5 (5) -
Comprehensive income -
Net (loss) for (149) -
the period
Accumulated other (2) -
comprehensive
income -
foreign
currency
translation
Total comprehensive (151)
income
----------------------------------------------------------------------------------------------------------------
Balance June 30, 726,895,511 $2,383 81,840,000 $ 45 ($ 77) $272 ($216) ($2) ($225) $ 2,180
2000
================================================================================================================
</TABLE>
<PAGE>
-16-
360networks inc.
Condensed Consolidated Statement of Cash Flows
June 30, 2000 and 1999
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Cash flows used in operating activities
Net (loss) income (149) 12
Adjustments to reconcile net (loss) income to net cash used for operating
activities
Stock-based compensation 153 -
Other 26 -
Changes in operating working capital items (93) (62)
-------------------------------------------
(63) (50)
-------------------------------------------
Cash flows used in investing activities
Additions to property, plant, equipment and network assets (535) (19)
-------------------------------------------
(535) (19)
-------------------------------------------
Cash flows used in financing activities
Proceeds from initial public offering 682 -
Proceeds from senior notes offering 768 -
Proceeds from 360atlantic credit facility 175 -
Other (18) (1)
-------------------------------------------
1,607 (1)
-------------------------------------------
Effect of exchange rate on cash and cash equivalents (1) -
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,008 (70)
Cash and cash equivalents - Beginning of period 521 156
-------------------------------------------
Cash and cash equivalents - End of period $1,529 $ 86
-------------------------------------------
</TABLE>
<PAGE>
-17-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000 and 1999
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
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
six months ended June 30, 2000 and 1999, the Company's revenue is
derived primarily from the construction and installation of fiber optic
network assets for telecommunications companies in North America.
Name change
On March 14, 2000, the Company changed its name from Worldwide Fiber
Inc. to 360networks inc.
2 Summary of significant accounting policies
Basis of presentation
These unaudited interim condensed 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
accompanying interim condensed consolidated financial statements of the
Company do not include all notes in annual financial statements and
therefore should be read in conjunction with the Company's annual
financial statements. The accompanying financial statements include all
normal recurring adjustments, which, in the opinion of management, are
necessary to present fairly the Company's financial position at June
30, 2000 and 1999, and its results of operations and cash flows for the
three month and six month periods then ended.
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 Atlantica-1 project
and other telecommunications activities.
(Loss) income per share
Basic (loss) income per share is computed by dividing net (loss) income
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. 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.
<PAGE>
-18-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
The following table sets forth the computation of (loss) income
attributable to common stockholders:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30 June 30
2000 1999 2000 1999
$ $ $ $
<S> <C> <C> <C> <C>
Net (loss) income (104) 10 (149) 10
Less:
Preferred stock accretion (1) - (6) -
Purchase price adjustment to preferred shares (15) - (24) -
------------------------------------------------
Net (loss) income attributable to common stockholders (120) 10 (179) 10
================================================
</TABLE>
The Redeemable Convertible Preferred Shares and stock options are not
included in the computation of fully diluted (loss) income per share as
their effect is anti-dilutive.
Comparative financial information
Certain prior period amounts have been reclassified to conform to the
current year presentation.
3 Supplemental cash flow information
<TABLE>
<CAPTION>
Six months ended
----------------------------------------
June 30 June 30
2000 1999
$ $
<S> <C> <C>
Cash paid for income taxes 20 1
Cash paid for interest 43 11
Issuance of common shares for certain Ledcor assets - 25
with deferred tax asset of $3,136,000
Supplemental non-cash investing and financing activities
Accretion of Preferred Stock to redemption value 6 -
Conversion of Series A Preferred Shares to Subordinate Voting 380 -
Shares
Issuance of Subordinate Voting Shares for acquisition of:
100% interest in GlobeNet Communications Group Limited 600 -
25% interest in 360networks (CN) ltd and 160 -
25% interest in 360networks (USA) inc 312 -
</TABLE>
<PAGE>
-19-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
4 Balance Sheet components
<TABLE>
<CAPTION>
June 30 December 31
-----------------------------------------
2000 1999
$ $
<S> <C> <C>
Unbilled revenue
Revenue earned on uncompleted contracts 572 333
Less: billings to date 346 217
==========================================
226 116
------------------------------------------
Inventory
Fiber optic network assets 207 188
Construction supplies, small tools and other 2 9
==========================================
209 197
------------------------------------------
Other current assets
Trade accounts receivable 56 34
Interest receivable and other 1 1
Short-term investments - 21
------------------------------------------
57 56
==========================================
Property and equipment
Land 46 6
Buildings 9 -
Fiber optic network assets 164 64
Equipment 104 10
-----------------------------------------
323 80
Less: accumulated depreciation 13 3
-----------------------------------------
Property and equipment - net 310 77
==========================================
Accounts payable and accrued liabilities
Subcontractor and supplier costs 171 100
Subcontractor holdbacks payable 37 26
Other accrued liabilities 5 36
Interest payable 45 29
-----------------------------------------
258 191
==========================================
</TABLE>
<PAGE>
-20-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
5 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. The
acquisition was accounted for using the purchase method and the
purchase price was allocated as follows:
$
Purchase Price: 160
Less:
Fair value of net assets acquired 5
--------
Excess of cost over fair value of net assets acquired 155
========
Allocation of excess of cost over fair value 155 of 155
net assets acquired, being goodwill.
========
Goodwill arising on acquisition will be amortized on a straight-line
basis over 25 years
360networks holdings (USA) inc.
In April 2000, the Company acquired the remaining 25% of shares of
360networks holdings (USA) (formerly Worldwide Fiber Holdings (USA)
Inc.), in exchange for 22,285,714 Subordinate Voting Shares of the
Company. The acquisition was accounted for using the purchase method
and the purchase price was allocated as follows:
<PAGE>
-21-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
$
Purchase Price: 312
Less:
Fair value of net assets acquired 5
------
Excess of cost over fair value of net assets acquired 307
======
Allocation of excess of cost over fair value
of net assets acquired, being goodwill. 307
=====
Goodwill arising on acquisition will be amortized on a straight-line
basis over 25 years.
GlobeNet Communications Group Limited
In June 2000, the Company acquired 100% of the outstanding shares of
GlobeNet Communications Group Limited, a provider of international
telecommunications services and capacity, in exchange for 42,822,316
Subordinate Voting Shares and 4,747,452 options to purchase Subordinate
Voting Shares of the Company. The acquisition has been accounted for
using the purchase method. The total consideration was $632 million
representing 42,822,316 shares issued at the initial public offering
price and 4,747,452 options valued at fair value. The purchase price
was allocated as follows:
$
Purchase Price: 632
Less:
Fair value of net assets acquired 229
----------
Excess of cost over fair of net assets acquired 403
==========
Allocation of excess of cost over fair value
of net assets acquired, being goodwill. 403
==========
Goodwill arising on acquisition will be amortized on a straight-line
basis over 15 years.
<PAGE>
-22-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
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.
Six months ended
------------------------
June 30 June 30
2000 1999
$ $
Revenue 247 140
(Loss) income (173) 11
Net (loss) income per share (0.30) 0.04
6 Long-term debt
June 30 December
2000 31 1999
$ $
12.5% senior notes due 2005 175 175
12% senior notes due 2009 500 500
13% senior notes due 2008 771 -
360atlantic credit facility 175 -
GlobeNet 360americas secured credit facility 100 -
GlobeNet 13% senior notes due 2007 300 -
------------------------
2,021 675
========================
13% Senior Notes due 2008
On April 20, 2000 the company issued $787,380,000 13% senior notes due
2008 (the "Notes"). The Notes were issued in two tranches. The US$
tranche was for proceeds of $586 million. The Euro tranche was for
proceeds of $185 million.
The Notes are unsecured obligations of the Company bearing interest at
13% payable semi-annually. The Notes are due May 1, 2008. 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.
<PAGE>
-23-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
The interest rate on the Notes is subject to increase if the Company
does not file a registration statement with the Securities and Exchange
Commission within a certain time period specified in the Notes
Indenture.
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 million for the 360atlantic cable project. The credit
arrangement consists 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. As at June 30, 2000, $175 million of
Tranche B loan commitment has been drawn down. The Tranche B term loan
bears interest at Base Rate plus 3.25% or a Eurodollar rate plus 4.25%.
The interest on the drawn down Tranche B loan commitment ranged from
10% to 12% in the six months and amounted to $6 million. The lenders'
security for the loan is a first priority lien on all of the assets of
the 360atlantic subsidiaries.
GlobeNet 360americas Credit Facility
On July 14, 1999, GlobeNet secured a bank credit facility ("Credit
Facility") of up to $400 million consisting of various term facilities
totalling $390 million and a revolving credit facility of $10 million.
In addition, under the Credit Facility, GlobeNet may also request an
additional facility of up to $50 million 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% and
availability of funds under the Credit Facility is subject to certain
terms and conditions.
GlobeNet 13% Senior Notes due 2007
On July 14, 1999, GlobeNet issued debt in the principal amount of $300
million 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.
7 Share Capital
Series A Non-Voting Convertible Preferred Shares
During the period the Company issued an additional 9,133,034 Series A
Preferred Shares to the holders of such shares pursuant to the terms of
their original agreement dated September 7, 1999.
<PAGE>
-24-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
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 prior 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.
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
approximately $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.
8 Income taxes
(Loss) income before income taxes and minority interest
For the six months ended June 30, 2000 and June 30, 1999, the
components of (loss) income before income taxes and minority interest
are as follows:
2000 1999
$ $
Canadian (121) 6
U.S. (19) 18
Other 6 -
---------------------------
(134) 24
---------------------------
<PAGE>
-25-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
Current income taxes
For the six months ended June 30, 2000 and 1999, the provision for
current income taxes consists of the following:
2000 1999
$ $
Canadian 53 -
Other 1 10
---------------------------
54 10
---------------------------
9 Segmented information
The Company operates within a single operating segment being the
installation and development of telecommunications assets. These
telecommunications assets are being developed in Canada, the United
States, Europe and South America including undersea links. A
significant portion of the undersea links will be owned by a subsidiary
in Barbados.
<TABLE>
<CAPTION>
Revenues Revenues Property and Assets under
three months six months equipment - net construction
ended ended
---------------------------------------------------------------------------------------
June 30 June 30 June 30 June 30 June 30 Dec 31 June 30 Dec 31
2000 1999 2000 1999 2000 1999 2000 1999
$ $ $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada 132 25 166 31 76 38 78 47
U.S 26 56 68 93 177 34 96 53
Barbados -- -- -- -- -- -- 274 170
South America -- -- -- -- 51 -- 266 --
Europe -- -- -- -- 6 5 85 31
---------------------------------------------------------------------------------------
158 81 234 124 310 77 799 301
=======================================================================================
</TABLE>
The revenues are based on the location of the development activities.
<PAGE>
-26-
360networks inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(tabular amounts expressed in millions of U.S. dollars)
(Unaudited)
10 Commitments
Network developments
The Company has, in the normal course of business, entered into
agreements to provide construction services and telecommunications
assets and services to third parties in Canada, the United States and
Europe.
Undersea networks
The Company has committed to construct an undersea cable linking North
America and Europe (360atlantic). The total cost of the project is
expected to be approximately $865 million. The Company has committed to
construct an undersea cable linking North and South America
(360americas). The total cost of the project is expected to be
approximately $900 million.
iAdvantage
The Company has entered into an agreement with iAdvantage, to provide
network services to iAdvantage in exchange for data center facilities
in Asia. The parties are committed to minimum expenditures on each
other's services for approximately $70 million. The Company has also
agreed to acquire $100 million worth of shares of iAdvantage in
exchange for $100 million worth of shares of the Company if certain
events occur.
11 Subsequent events
Acquisition of colocation facilities
In July 2000 the Company acquired the outstanding membership interest
in TRES Management L.L.C., Meet Me Room L.L.C. and associated
properties located in San Antonio, Dallas, Los Angeles and Atlanta.
The acquired companies operate as property managers. The Company has
agreed to pay a total of $144 million in shares and cash for the above
purchases. As at June 30, 2000 the Company had paid approximately $44
million for properties in San Antonio, Dallas, and Atlanta.
Acquisition of undersea network
In July 2000, the Company signed a letter of intent 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 purchases.
<PAGE>
-27-
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.
360NETWORKS INC.
By: /s/ LARRY OLSEN
---------------------------------
Name: Larry Olsen
Title: Chief Financial Officer
DATE: July 25, 2000
