<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
GLOBENET COMMUNICATIONS GROUP LIMITED
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization)
2 Carter's Bay Road
Southside, St. David's DDBX
Bermuda
(Address, including zip code, of principal executive offices)
(441) 296-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[ ] No [x]
The number of shares, $1.50 par value per share, of the registrant's common
shares outstanding as of September 30, 1999: 17,043,900 shares.
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
GlobeNet Communications Group Limited
Consolidated Balance Sheets............................................. 3
Consolidated Statements of Shareholders' Equity......................... 4
Consolidated Statements of Operations................................... 5
Consolidated Statements of Cash Flows................................... 6
Notes to Unaudited Consolidated Financial Statements.................... 7
TeleBermuda International L.L.C.
Balance Sheets.......................................................... 13
Statements of Members' Equity........................................... 14
Statements of Operations................................................ 15
Statements of Cash Flows................................................ 16
Notes to Unaudited Financial Statements................................. 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................ 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 27
Item 2. Changes in Securities and Use of Proceeds............................... 27
Item 3. Defaults Upon Senior Securities......................................... 27
Item 4. Submission of Matters to a Vote of Security Holders..................... 27
Item 5. Other Information....................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................ 28
</TABLE>
This quarterly report on Form 10-Q/A amends and supersedes the registrant's
quarterly report on Form 10-Q for the fiscal quarter ended September 30, 1999
previously filed on November 15, 1999. Certain financial and related information
has been amended and updated to conform to the interim financial information and
related discussion in amendment number five to the registrant's registration
statement on Form S-4, which was filed on January 27, 2000 and declared
effective on February 1, 2000. Among other things, these conforming changes
resulted in a restatement of the financial statements which increased net loss
for the three months and nine months ended September 30, 1999 by $1.8 million to
reflect the recognition of additional stock based compensation.
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GLOBENET COMMUNICATIONS GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
as at September 30, 1999 and 1998 and
Audited Consolidated Balance Sheet as at December 31, 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
September December September
1999 1998 1998
----------- --------- -----------
$ $ $
<S> <C> <C> <C>
Assets (unaudited) (audited) (unaudited)
Current assets
Cash.................................... -- 3,030 3,990
Restricted cash (note 3)................ 79,998 -- --
Accounts receivable (net of allowance of
$224; 1998--$80; 1998--$50)............ 2,479 1,847 1,822
Other receivables....................... 196 718 751
Due from related party.................. -- 1,363 1,312
Prepaid expenses and deposits........... 646 338 382
----------- --------- -----------
83,319 7,296 8,257
Restricted cash (note 3)................. 450,971 -- --
Capital assets........................... 90,496 26,182 26,025
Note receivable.......................... 374 350 --
Equity accounted for investments......... 20,675 21,371 21,716
Other assets............................. 24,244 1,061 1,059
----------- --------- -----------
670,079 56,260 57,057
=========== ========= ===========
Liabilities
Current liabilities
Accounts payable........................ 4,476 3,871 5,093
Accrued liabilities..................... 12,356 4,971 3,106
Current portion of long-term debt (note
4)..................................... -- 3,000 2,250
----------- --------- -----------
16,832 11,842 10,449
Long-term debt (note 4).................. 400,000 35,019 37,935
Deferred revenue......................... 6,648 2,695 2,799
----------- --------- -----------
423,480 49,556 51,183
----------- --------- -----------
Shareholders' Equity
Share capital (notes 5 and 6)
Class A shares, 100 shares authorized
Nil (1998--100) shares issued and
outstanding............................ -- -- --
Class B shares, 2,000 shares authorized
1,000 (1998--nil) shares issued and
outstanding............................ 2 -- --
Common shares, 24,000,000 authorized
17,043,900 (1998--3,515,927) shares
issued and outstanding................. 25,566 5,274 5,274
Additional paid-in capital (note 5)..... 246,228 16,377 16,377
Deficit................................. (25,197) (14,947) (15,777)
----------- --------- -----------
246,599 6,704 5,874
----------- --------- -----------
670,079 56,260 57,057
=========== ========= ===========
</TABLE>
Commitments and contingencies (notes 8 and 9)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
Class B Common Total
shares shares Additional share-
par par paid-in holders'
Class A Class B value Common value capital Deficit equity
shares shares $ shares $ $ $ $
------- ------- ------- ---------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997....... 100 -- -- 3,515,927 5,274 16,377 (10,003) 11,648
Net loss for the
period................. -- -- -- -- -- -- (5,774) (5,774)
---- ----- --- ---------- ------ ------- ------- -------
September 30, 1998...... 100 -- -- 3,515,927 5,274 16,377 (15,777) 5,874
---- ----- --- ---------- ------ ------- ------- -------
December 31, 1998....... 100 -- -- 3,515,927 5,274 16,377 (14,947) 6,704
Compensatory share
options................ -- -- -- -- -- 8,758 -- 8,758
Deferred compensation... -- -- -- -- -- (4,968) -- (4,968)
Share options
exercised.............. -- -- -- 129,041 194 754 -- 948
Unpaid share
subscription........... -- -- -- -- -- (221) -- (221)
Shares issued in private
equity financing....... -- -- -- 13,263,646 19,895 250,683 -- 270,578
Share issue costs....... -- -- -- -- -- (11,665) -- (11,665)
Shares issued........... -- 1,000 2 -- -- -- -- 2
Shares issued on
conversion of
subordinated debt and
exercise of warrants... -- -- -- 1,635,286 2,453 14,860 -- 17,313
Shares purchased and
cancelled.............. (100) -- -- (1,500,000) (2,250) (28,350) -- (30,600)
Net loss for the
period................. -- -- -- -- -- -- (10,250) (10,250)
---- ----- --- ---------- ------ ------- ------- -------
September 30, 1999...... -- 1,000 2 17,043,900 25,566 246,228 (25,197) 246,599
==== ===== === ========== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and 1998 and the nine months ended
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
---------------------------------- --------------------------------
September September September September
1999 1998 1999 1998
$ $ $ $
<S> <C> <C> <C> <C>
Revenue
Telecommunication services 6,503 6,260 19,468 16,257
IRU capacity 79 66 236 1,587
--------------------------------------------------------------------------------
6,582 6,326 19,704 17,844
--------------------------------------------------------------------------------
Expenses
Carrier charges 2,386 4,041 8,446 10,855
Cost of IRU capacity - - - 547
General and administrative expenses 8,705 2,273 13,409 6,807
Amortization of deferred financing costs 815 81 975 241
Amortization of capital assets 441 366 1,256 1,075
--------------------------------------------------------------------------------
12,347 6,761 24,086 19,525
--------------------------------------------------------------------------------
Operating loss (5,765) (435) (4,382) (1,681)
Interest on long-term debt 7,372 958 8,949 2,543
Accrued contingent interest 43 241 538 713
Interest income (5,104) (53) (5,220) (77)
--------------------------------------------------------------------------------
Loss before income taxes, minority interest,
equity accounted for investment and
extraordinary item (8,076) (1,581) (8,649) (4,860)
Provision for income taxes (77) (9) (96) (26)
--------------------------------------------------------------------------------
Loss before minority interest, equity accounted
for investment and extraordinary item (8,153) (1,590) (8,745) (4,886)
Minority interest - - - 204
Loss from equity accounted for investment (232) (405) (696) (1,092)
--------------------------------------------------------------------------------
Loss before extraordinary item (8,385) (1,995) (9,441) (5,774)
Extraordinary loss relating to extinguishment
of debt (note 4 (a)) (809) - (809) -
--------------------------------------------------------------------------------
Net loss and comprehensive loss for the period (9,194) (1,995) (10,250) (5,774)
================================================================================
Basic and fully diluted loss per common share
before extraordinary item (note 7) (0.55) (0.57) (1.26) (1.64)
================================================================================
Basic and fully diluted loss per common share
relating to the extraordinary loss from the
extinguishment of debt (note 7) (0.05) - (0.10) -
================================================================================
Basic and fully diluted loss per common share
(note 7) (0.60) (0.57) (1.36) (1.64)
================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- ------
$ $
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period.................................... (10,250) (5,774)
Items not involving cash
Amortization of capital assets............................ 1,256 1,075
Writedown of other assets................................. -- 174
Amortization of deferred financing costs.................. 975 241
Extraordinary loss--extinguishment of debt................ 809 --
Minority interest......................................... -- (204)
Loss from equity accounted for investments................ 696 1,092
Accrued contingent interest............................... 538 713
Gain on granting of indefeasible rights of use and loss on
sale of capital assets................................... -- (970)
Compensatory share options................................ 3,790 --
Net change in non-cash operating items
Accounts receivable......................................... (632) (552)
Other receivables........................................... 522 937
Prepaid expenses and deposits............................... (226) (83)
Accounts payable............................................ 605 (5,147)
Accrued liabilities......................................... 340 926
Interest payable............................................ 8,980 1,117
Deferred revenue............................................ 3,953 1,278
-------- ------
11,356 (5,177)
-------- ------
Financing activities
Exercise of common share options............................ 948 --
Issuance of common shares................................... 258,913 --
Purchase and cancellation of common shares.................. (30,600) --
Proceeds from issuance of long-term debt.................... 400,500 9,350
Repayment of long-term debt................................. (23,677) --
Deferred financing costs.................................... (25,048) --
Unpaid share subscription................................... (221) --
-------- ------
580,815 9,350
-------- ------
Investing activities
Restricted cash............................................. (530,969) --
Purchase of capital assets.................................. (65,572) (1,132)
Granting of indefeasible rights of use and proceeds on sale
of capital assets.......................................... -- 1,521
Change in other assets...................................... 1 (208)
Due from related party...................................... 1,363 (1,312)
Note receivable............................................. (24) --
Advances to equity accounted for investee................... -- (411)
-------- ------
(595,201) (1,542)
-------- ------
Increase (decrease) in cash for the period................... (3,030) 2,631
Cash--Beginning of period.................................... 3,030 1,359
-------- ------
Cash--End of period ......................................... -- 3,990
======== ======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and December 31, 1998
- -------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
1 Formation and operations
GlobeNet Communications Group Limited (the "Company") was incorporated and
registered on June 25, 1998 as a Bermuda exempt company as part of a
reorganization of the TeleBermuda group of companies. Under the
reorganization TBI became a wholly owned subsidiary of the Company and the
issued shares of TBI were exchanged on a one for one basis with
substantially the same rights and privileges as before.
The Company, through its subsidiaries, provides, maintains and operates a
public telecommunications service in Bermuda facilitated by its ownership
of its BUS-1 cable system between Bermuda and the United States. On January
10, 1997, TBI was granted, for no consideration, its public
telecommunications service licence in Bermuda under the provisions of the
Telecommunications Act, 1986 and the Public Telecommunication Service
(Licence) Regulations, 1988 for a five-year term.
In addition, TBI has an interconnection agreement with the Bermuda
Telephone Company ("BTC"), the domestic carrier, that enables the Company
to directly connect its operating facility with BTC in order to terminate
traffic in and receive traffic from Bermuda for as long as each party has
its public telecommunications service license in Bermuda. No consideration
was paid by the Company in relation to this agreement.
On June 16, 1999, the Company entered into a supply contract, subject to
certain terms and conditions, including the securing of financing, to
expand its operations by building a fibre optic submarine cable system
called Atlantica-1 linking Bermuda, North and South America. On July 14,
1999, the Company secured financing totalling $970,580 for the development
and construction of Atlantica-1. Such financing is comprised of a private
placement equity offering for aggregate net proceeds of $270,580, the
issuance of debt of $300,000 and a bank credit facility of up to $400,000.
In addition, under this bank credit facility, the Company may also request
an additional facility of up to $50,000, subject to lender approval and
other restrictions.
2 Interim unaudited consolidated financial statements
The unaudited consolidated balance sheets as at September 30, 1999,
September 30, 1998 and the unaudited consolidated statements of operations
for the nine months ended September 30, 1999 and September 30, 1998 and the
three months ended September 30, 1999 and September 30, 1998 and the
unaudited consolidated statements of shareholders' equity and cash flows
for the nine months ended September 30, 1999 and September 1998, in the
opinion of management, have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments necessary for
the fair statement of the results of the interim periods. All adjustments
reflected in the consolidated financial statements are of a normal
recurring nature. The data disclosed in the notes to the consolidated
financial statements for these periods are also unaudited. Results for the
three month and nine month periods ended September 30, 1999 and 1998 are
not necessarily indicative of the results to be expected for the full year.
7
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and 1998 and December 31, 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
3 Restricted cash
Components of restricted cash are:
<TABLE>
<CAPTION>
September December September
1999 1998 1998
----------- --------- -----------
(unaudited) (audited) (unaudited)
$ $ $
<S> <C> <C> <C>
Cash...................................... 8,015 -- --
Cash equivalents maturing within 90 days:
Commercial paper........................ 413,401 -- --
Term deposit............................ 109,553 -- --
------- --- ---
530,969 -- --
Less: Current portion..................... 79,998 -- --
------- --- ---
450,971 -- --
======= === ===
</TABLE>
The Company's use of cash is generally restricted under the terms of the
Credit Facility to operating and capital expenditures related to the Atlantica-
1 project and to other telecommunications activities. The investment of the
cash is restricted to investments with a minimum credit rating of A-1 by
Standard & Poor's or P-1 by Moody's.
4 Long-term debt
<TABLE>
<CAPTION>
September December September
1999 1998 1998
----------- --------- -----------
(unaudited) (audited) (unaudited)
$ $ $
<S> <C> <C> <C>
Term loan (a)............................ -- 21,990 23,990
Operating credit facility (a)............ -- 1,687 2,100
Subordinated debentures and retractable
warrants (a)............................ -- 13,000 13,000
Senior notes (b)......................... 300,000 -- --
Bank credit facility (c)................. 100,000 -- --
Accrued contingent interest (a).......... -- 1,342 1,095
------- ------ ------
400,000 38,019 40,185
Less: Current portion.................... -- 3,000 2,250
------- ------ ------
400,000 35,019 37,935
======= ====== ======
</TABLE>
a) On July 14, 1999, the Company repaid $21,408 for the term loan,
operating credit facility and certain accrued interest on the subordinated
debentures. As well, all of the remaining obligations to the subordinated
debentureholders were retired when the subordinated debentureholders
elected to exercise their warrants and convert the principal and remaining
accrued interest on their subordinated debt into 1,635,286 common shares.
In connection with the foregoing, deferred financing costs of $809 were
written off as a result of the debt extinguishment.
b) On July 14, 1999 the Company issued debt in the principal amount of
$300,000 in the form of 13% senior notes maturing July 15, 2007. Interest
on these notes accrues at a rate of 13% per annum, payable semi-annually in
arrears on each January 15 and July 15 commencing January 15, 2000. The
notes are unsecured. At September 30, 1999 interest of $8,450 was accrued
and recorded in accrued liabilities.
8
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and 1998 and December 31, 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
c) On July 14, 1999 the Company secured a bank credit facility ("Credit
Facility") of up to $400,000, that consists of various term facilities
totalling $390,000 and a $10,000 revolving credit facility. In addition,
under the Credit Facility, the Company may also request an additional
facility of up to $50,000, subject to lender approval and other
restrictions. All loans under the Credit Facility mature on June 30, 2005
except for one of the term facilities of $100,000 which matures on
September 30, 2005. The interest rates on the loans under the Credit
Facility range from Libor plus 3.5% to Libor plus 4.0% and availability of
funds under the Credit Facility is subject to certain terms and conditions.
Substantially all of the assets of the Company and its present and future
direct and indirect subsidiaries have been pledged as collateral for the
Credit Facility. In addition, a third party supplier has provided an
initial guarantee subject to certain conditions and adjustments of up to
$100,000 for one of the term facilities.
As at September 30, 1999 the unused facility was $300,000, the average rate
of interest was 10.37% and interest of $597 was accrued and recorded in accrued
liabilities.
The principal repayments in respect of the senior notes and the Credit
Facility are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
Fiscal year 2002.................................................... 1,000
2003.................................................... 1,000
2004.................................................... 1,000
2005.................................................... 97,000
2007.................................................... 300,000
-------
400,000
=======
</TABLE>
5 Share capital
a) Authorized
The Company is authorized to issue 24,000,000 common shares with a par value
of $1.50 per share, 100 Class A restricted voting shares with a par value of
$1.50 per share, and 2,000 Class B restricted voting shares with a par value of
$1.50 per share.
The Board of Directors has the authority to issue common shares, securities
convertible into common shares or grant options, up to a maximum of 20% of the
fully diluted shares of the Company pursuant to a general mandate of the
shareholders. This mandate will expire at the next annual meeting of the
shareholders, unless it is re-approved at that meeting.
9
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and 1998 and December 31, 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
b) Issued and outstanding shares
<TABLE>
<CAPTION>
Class B Common Additional
shares shares paid-in
Class A Class B par value Common par value capital
shares shares $ shares $ $
------- ------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997....... 100 -- -- 3,515,927 5,274 16,377
Share options
exercised.............. -- -- -- -- -- --
Shares issued........... -- -- -- -- -- --
---- ----- --- ---------- ------ -------
September 30, 1998...... 100 -- -- 3,515,927 5,274 16,377
==== ===== === ========== ====== =======
December 31, 1998....... 100 -- -- 3,515,927 5,274 16,377
Compensatory share
options (i)............ -- -- -- -- -- 8,758
Deferred
compensation(i)........ -- -- -- -- -- (4,968)
Share options exercised
(ii)................... -- -- -- 129,041 194 754
Unpaid share
subscription (ii)...... -- -- -- -- -- (221)
Shares issued (iii)..... -- -- -- 13,263,646 19,895 239,018
Shares purchased and
cancelled (iv)......... (100) -- -- -- -- --
Shares issued (v)....... -- 1,000 2 -- -- --
Shares issued on
conversion of
subordinated debt and
exercise of warrants
(vi)................... -- -- -- 1,635,286 2,453 14,860
Shares purchased and
cancelled (vii)........ -- -- -- (1,500,000) (2,250) (28,350)
---- ----- --- ---------- ------ -------
September 30, 1999...... -- 1,000 2 17,043,900 25,566 246,228
==== ===== === ========== ====== =======
</TABLE>
All issued and outstanding common shares are fully paid.
Effective June 15, 1999, the authorized common shares of the Company were
increased by 10,499,900 to an aggregate total of 17,499,800 common shares. In
addition, the Company bye-laws authorized the creation of 100 Class B shares.
On July 12, 1999, the authorized common shares and Class B shares of the
Company were increased by 6,500,200 and 1,900, respectively.
i) On December 18, 1998, the Board of Directors issued 263,000 options
to employees and certain officers and directors at an exercise price of
$9.00 per option, vesting over a three-year period, under the 1998 Share
Option and Incentive Plan. In July 1999, when these options were approved
by the shareholders, the market price of these options was $20.40. The
difference between the market price and the exercise price has been
reflected as deferred compensation in the statement of shareholders' equity
and is being amortized over the vesting period as at September 30, 1999.
Compensation expense in the amount of $1,641 has been recorded in the
financial statements.
On July 9, 1999, 35,000 options, with an exercise price of $19.00 with a
ten-year term, were granted to certain directors. The market price of these
options on the measurement date was $20.40. The vesting of these options
occurred on July 14, 1999. The difference between the exercise price and
market price at the time of vesting amounted to $49 and has been reflected
as compensation expense.
On April 12, 1999, the Company granted 540,000 options at an exercise
price of $9.00 with a ten-year term to certain officers and directors.
These options vest in three separate tranches based upon the Company
meeting certain milestones related to the Atlantica-1 project. On July 14,
1999, the first vesting
10
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and 1998 and December 31, 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
milestone occurred on 165,000 of these options, when the financing was
secured (note 4) and the vesting period for another 165,000 options was
determined. The difference between the exercise price and the market value
amortized over the vesting period amounted to $2,100 and has been reflected
as compensation expense.
ii) Share options were exercised at an average price of $7.35. As at
September 30, 1999, the Company has a receivable of $221 relating to the
exercise of these options from First Bermuda Securities Ltd., of which a
director of the Company is the Chief Executive Officer.
iii) On July 14, 1999 the Company completed a private placement equity
offering. Pursuant to the offering, the Company issued 13,263,646 shares
with a par value of $1.50 each at $20.40 per share for aggregate proceeds
of $258,913, net of expenses related to the offering of $11,665.
iv) On July 14, 1999 the Company purchased for cancellation 100 Class A
shares at par value of $1.50 per share.
v) In connection with the private placement equity offering, 1,000 Class
B shares were issued with a par value of $1.50 on July 14, 1999 to certain
shareholders. The Company must have the approval of a majority of the Class
B shareholders before entering into certain transactions, including, but
not limited to issuance of securities, incurring indebtedness, amending
material contracts, appointing or dismissing members of senior management
or terminating or suspending construction under the Alcatel contract.
vi) On July 14, 1999 the subordinated debentureholders elected to
exercise their warrants and convert the principal and remaining accrued
interest on their subordinated debt into 1,635,286 shares. The number of
shares issued in respect of the subordinated debentures and accrued
contingent interest obligation are included in equity at their carrying
amounts.
vii) On August 9, 1999 the Company purchased for cancellation 1,500,000
outstanding common shares with a par value of $1.50 each at $20.40 per
share for a total cost of $30,600. Commissions of $450 were paid to First
Bermuda Securities Ltd., of which a Director of the Company is the Chief
Executive Officer.
6 Common share options
The Company awards options to employees, officers and directors of the
Company under the terms of the 1997 and 1998 Share Option and Incentive Plans.
In addition, the Board has the authority to grant options outside of these
plans under separate stock option agreements.
At September 30, 1999 there were 1,251,448 (1998--543,489) outstanding
common share purchase options at a weighted average exercise price of $7.78
(1998--$6.73). During the nine month period ended September 30, 1999, 6,000
(1998--13,000) options were forfeited at a weighted average exercise price of
$8.67 (1998--$8.00). These options expire on various dates from 2001 to 2009
and generally vest over a three-year period.
7 Basic and fully diluted loss per common share
The basic loss per common share is calculated using the weighted average
number of common shares outstanding of 15,361,066 (1998--3,515,927) for the
three months ended September 30, 1999 and 1998, and 7,507,695 (1998--3,515,927)
for the nine months ended September 30, 1999 and 1998. The weighted average
number of common shares on a fully diluted basis is calculated on the same
basis as the basic weighted average number of shares as the Company is in a
loss position and the effects of possible conversions or exercises would be
anti-dilutive.
11
<PAGE>
GLOBENET COMMUNICATIONS GROUP LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 and 1998 and December 31, 1998
------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
8 Commitments
a) The Company has entered into operating lease agreements for its premises.
Minimum lease commitments pursuant to these leases over the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
September 30, 2000.................................................... 840
2001.................................................................. 881
2002.................................................................. 867
2003.................................................................. 879
2004.................................................................. 879
Thereafter............................................................ 12,401
------
16,747
======
</TABLE>
b) On June 16, 1999, the Company entered into a supply contract with Alcatel
Submarine Networks Inc. ("Alcatel") to construct a fibre optic submarine cable
system called Atlantica-1 linking Bermuda, North and South America for a total
contract price of $620,861 (of which $62,086 has been recorded at September 30,
1999), which amount is subject to amendment by the mutual agreement of the
parties.
Future payments are based upon a specified billing schedule and are due when
the corresponding project milestone has been achieved and engineer acceptance
has been provided. The future minimum payments, beyond the $62,086 that has
been recorded as at September 30, 1999, required as a result of this contract,
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, 2000....................................... $558,775
========
</TABLE>
c) In the normal course of business, the Company has also entered into a
number of contracts under which it is committed to the purchase and supply of
telecommunication services at fixed prices. It is not anticipated that losses
will be incurred on these contracts.
9 Contingencies
The Company is contingently liable in respect of an irrevocable standby
letter of credit issued by a bank on its behalf in the amount of $55 (1998--
$55).
10 Segmented information
The Company is in the business of international telecommunication services
and views this as one business segment.
11 Subsequent events
a) On October 7, 1999, the Company granted 429,019 options at an exercise
price of $20.40 to certain officers. Of these options, 129,019 vest immediately
and 300,000 vest over three years, although vesting on these options may be
accelerated as a result of certain events.
b) Effective November 1, 1999, all governmental approvals were obtained to
enable the Company to indirectly acquire all of the shares, that it did not
previously own, of Telebermuda International L.L.C., which holds, among other
things, the landing license for the BUS-1 cable system in the United States.
c) On December 22, 1999, the Company entered into an interest rate cap
transaction effectively capping the interest rate on $50,000 of the Credit
Facility at 7.0% for a three year term.
12
<PAGE>
TELEBERMUDA INTERNATIONAL L.L.C.
(a limited liability company)
BALANCE SHEETS
As at September 30, 1999 and 1998 and December 31, 1998
---------------------------------------------------------
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
September December September
1999 1998 1998
(unaudited) (audited) (unaudited)
---------- -------- ----------
<S> <C> <C> <C>
Assets
Current assets
Cash....................................... $ 2 $ 2 $ 2
Capital assets............................... 20,756 21,430 21,655
Other assets................................. 1 2 2
------ ------ ------
20,759 21,434 21,659
====== ====== ======
Liabilities
Current liabilities
Accrued liabilities........................ 83 62 54
Due to TeleBermuda International Limited..... 22,803 22,803 22,803
------ ------ ------
22,886 22,865 22,857
------ ------ ------
Members' Equity (Deficit)
Members' capital............................. 1 1 1
Deficit...................................... (2,128) (1,432) (1,199)
------ ------ ------
(2,127) (1,431) (1,198)
------ ------ ------
20,759 21,434 21,659
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
13
<PAGE>
TELEBERMUDA INTERNATIONAL L.L.C.
(a limited liability company)
UNAUDITED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
For the nine months ended September 30, 1999 and 1998
--------------------------------------------------------
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Total
members'
Members' Members' equity
capital deficit (deficit)
-------- -------- ---------
<S> <C> <C> <C>
December 31, 1997................................... $ 1 $ (489) $ (488)
Net loss for the period............................. -- (710) (710)
--- ------ ------
September 30, 1998.................................. 1 (1,199) (1,198)
--- ------ ------
December 31, 1998................................... 1 (1,432) (1,431)
Net loss for the period............................. -- (696) (696)
--- ------ ------
September 30, 1999.................................. 1 (2,128) (2,127)
=== ====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
14
<PAGE>
TELEBERMUDA INTERNATIONAL L.L.C.
(a limited liability company)
UNAUDITED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and 1998 and
For the nine months ended September 30, 1999 and 1998
-----------------------------------------------------------
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
September September September September
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $-- $-- $-- $--
---- ---- ---- ----
Expenses
Amortization of capital assets........................... 225 225 674 674
Interest expense......................................... 7 7 22 22
General and administrative expenses...................... -- -- -- 14
---- ---- ---- ----
232 232 696 710
---- ---- ---- ----
Net loss and comprehensive loss for the period........... (232) (232) (696) (710)
==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
15
<PAGE>
TELEBERMUDA INTERNATIONAL L.L.C.
(a limited liability company)
UNAUDITED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and 1998
------------------------------------------------------
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period........................................... $(696) $(710)
Items not involving cash
Amortization of capital assets.................................. 674 674
Net change in non-cash operating items
Decrease in other assets........................................ 1 1
Increase in accrued liabilities................................. 21 21
----- -----
-- (14)
----- -----
Financing activities
Due to TeleBermuda International Limited.......................... -- 14
----- -----
Change in cash for the period..................................... -- --
Cash--Beginning of period......................................... 2 2
----- -----
Cash--End of period .............................................. 2 2
===== =====
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
16
<PAGE>
TELEBERMUDA INTERNATIONAL L.L.C.
(a limited liability company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1999 and 1998 and December 31, 1998
-------------------------------------------------
(in thousands of U.S. dollars)
1 Interim unaudited financial statements
The unaudited balance sheets as at September 30, 1999 and September 30,
1998 and the unaudited statements of members' equity (deficit), operations,
and cash flows for the nine months ended September 30, 1999 and September
30, 1998, in the opinion of management, have been prepared on the same
basis as the audited financial statements and include all adjustments
necessary for the fair statement of the results of the interim periods. All
adjustments reflected in the financial statements are of a normal recurring
nature. The data disclosed in the notes to the unaudited financial
statements for these periods are also unaudited. Results for the nine-month
periods ended September 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year.
2 Subsequent events
Effective November 1, 1999, TeleBermuda International Limited, a member
of the Company, indirectly acquired all of the shares that it previously
did not own, and accordingly, now owns 100% of the Company.
17
<PAGE>
ITEM 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
You should read the discussion in this section in conjunction with our
unaudited interim consolidated financial statements and the notes thereto
included elsewhere in this report. Certain information contained in this
section, including information with respect to our plans and expectations for
our business, is forward-looking. You should carefully consider the factors set
forth in this section under the caption "Forward-Looking Statements" and
elsewhere in this report and in the "Risk Factors" section of the Company's
registration statement on Form S-4 (file no. 333-86461) on file with the
Securities and Exchange Commission for a discussion of important factors that
could cause actual results to differ materially from any forward-looking
statements contained in this report.
Overview
GlobeNet Communications Group Limited was incorporated and registered on
June 25, 1998 as a Bermuda exempt company as part of a reorganization of the
TeleBermuda International Limited ("TBI") group of companies. Under the
reorganization, TBI, which was incorporated on January 6, 1995, became our
wholly owned subsidiary, and the issued shares of TBI were exchanged for our
common shares on a one-for-one basis with substantially the same rights and
privileges.
Historically, through our wholly owned subsidiary TBI, we have provided retail
international telecommunications services to, from and through Bermuda. In
November 1997, we successfully completed the deployment of the BUS-1 undersea
fiber optic cable system which connects Bermuda and the United States. The BUS-1
system established us as a full-service facilities-based provider, a company
that has its own long-distance transmission and switching facilities, of
international long-distance service for traffic originating and terminating in
Bermuda.
We plan to extend our business to become a provider of city-to-city
international telecommunications network solutions on a wholesale "carriers'
carrier" basis using a combination of undersea fiber optic cable systems and
terrestrial extensions. We are currently developing the Atlantica-1 Network, an
undersea fiber optic cable system, as part of this plan. We will incorporate the
BUS-1 system into the Atlantica-1 Network.
Our international telecommunications network solutions business is in the
development stage and, accordingly, our historical consolidated financial
information relates primarily to TBI's retail international telecommunications
business and is not necessarily indicative of future results.
We report our results in U.S. dollars, although historically a significant
portion of our revenues and expenses have been settled in Bermuda dollars, which
are pegged to the U.S. dollar at par. Therefore, currency fluctuations have not
affected the results of our existing operations. Substantially all of our costs
incurred in connection with the Atlantica-1 Network will be incurred in U.S.
dollars. While we expect to invoice a majority of our customers in U.S. dollars,
we may be required to invoice certain customers in other currencies. To the
extent we receive revenues in currencies other than U.S. dollars, our results of
operations may be impacted by currency fluctuations.
Revenues
Revenues from international long-distance services are derived from the
number of minutes of use billed by us and are recorded as the services are
rendered, after deducting an estimate for the traffic for which revenue will not
be collected. Historically deductions have not been material. Revenues from
prepaid calling cards are recognized at the time of usage or upon expiration of
the card. Revenues from private line services are recognized as earned on a
monthly basis.
18
<PAGE>
Customers may enter into agreements to purchase capacity from us in the form
of the granting of indefeasible rights of use, or IRUs, portable IRUs or
capacity leases. Revenue from the sale of capacity by us is recognized at the
date a customer first has access to the capacity, provided certain conditions
are met. IRU and portable IRU sales are methods of transferring rights to fiber
optic cable capacity that grant to the purchaser an indefeasible right to use
the unit of capacity sold for the time, usually the remaining life of the
system, to which the IRU applies. Once the IRU is granted to the purchaser, the
purchase price is non-refundable and the purchaser is required to pay
operations, administration and maintenance fees for as long as connectivity is
maintained. The proceeds from the long-term operating lease of capacity are
deferred and amortized over the term of the contract.
Recent accounting pronouncements
FASB Interpretation No. 43, "Real Estate Sales - an interpretation of FASB
Statement No. 66", was issued in June 1999. It clarifies the standards for
recognition of profit on all real estate sales transactions, including those
related to fiber optic cable that cannot be removed and used separately from the
real estate without incurring significant costs. This interpretation is
effective for all applicable transactions after June 30, 1999. However, no such
transactions have been entered into after June 30, 1999 and we have not yet
completed our analysis of the applicability or the impact of this statement on
future transactions. In addition, we note that the accounting for sales of
capacity is evolving, and is currently under consideration by accounting
standard setters. Any change in accounting literature may affect the timing and
method of recognition of these revenues and related costs.
Carrier Charges and Cost of IRU Capacity
TBI's cost of services is comprised primarily of local access charges and
international termination costs. Local access charges are paid to the Bermuda
Telephone Company for each minute of traffic that we originate or terminate in
Bermuda. As of January 1, 1999, the Minister of Telecommunications and
Technology's December 1998 directive reduced TBI's local access charge to $0.15
per minute for both originating and terminating traffic. The directive mandated
a second reduction on July 1, 1999 to $0.10 per minute, with a subsequent rate
determination expected in the first half of 2000.
International terminations are completed through our correspondent carriers
and are charged to us on the basis of prevailing international settlement rates.
We receive return traffic on the major routes that effectively offset our
payments for Bermuda-originated traffic. Our primary correspondent carriers are
MCI WorldCom and British Telecom. The current settlement rates with carriers in
the United States and the United Kingdom, which comprise the largest markets for
Bermuda-originated traffic, are $0.30 per minute and the equivalent of $0.48 per
minute, respectively. The rates for international terminations have declined
recently and we expect they will continue to decline as international
conventions are modified and competition among international carriers
intensifies.
For our wholesale carriers' carrier business, costs to build our systems are
capitalized. The cost of capacity sales are calculated on a pro rata basis of
total capacity sold in relation to the estimated total capacity.
Operating Expenses
Our operating expenses include network expenses and general and administrative
costs incurred to sustain and expand our Bermuda operations, as well as to plan
and finance the intended construction of the Atlantica-1 Network. As our systems
develop, additional resources will be required to provide for operations and for
sales of capacity. Prior to the ready for service, or RFS, date for the
connection from Tuckerton, New Jersey to Fortaleza, Brazil via Bermuda, we will
enter into an agreement with a third party that will provide operation,
administration and maintenance services on our systems. Following this RFS date,
we expect to recover a substantial portion of our operating, administration and
maintenance costs from periodic payments by customers. The amounts of these
payments will be based on the pro rata capacity purchased by the customer in
relation to the total capacity of the system. Each customer's pro rata share
will be capped and therefore, our share of operation, administration and
maintenance costs will be higher at the outset and will decline over time as
capacity is sold.
Results of Operations - Three Months Ended September 30, 1999 Compared With
Three Months Ended September 30, 1998
Revenues
Revenues increased to $6.6 million for the three months ended September 30,
1999 compared to $6.3 million for the three months ended September 30, 1998, an
increase of 4.8%.
Outbound revenues increased to $5.4 million for the three months ended
September 30, 1999 compared to $5.2 million for the three months ended September
30, 1998. This increase was the result of an
19
<PAGE>
increase in traffic volume offset by a rate reduction for commercial and
residential customers introduced on April 1, 1999. The average rate per
outbound minute realized was $0.88 for the three months ended September 30, 1999
compared to $0.94 for the three months ended September 30, 1998. Outbound
traffic volumes increased to 6.1 million minutes for the three months ended
September 30, 1999 from 5.5 million minutes for the three months ended September
30, 1998. These volume increases were a response to an increase in marketing and
advertising by the Company and were reflective of a positive response to the
rate reductions.
Inbound revenue decreased to $0.6 million during the three months ended
September 30, 1999 compared to $0.7 million during the three months ended
September 30, 1998, a decrease of 14.3%. Further, revenue from TBI's debit card
product increased to $0.4 million during the three months ended September 30,
1999 compared to $0.2 million during the three months ended September 30, 1998,
an increase of 100.0%. This increase was the direct result of a distribution
arrangement for the debit cards introduced in November 1998.
Carrier Charges and Cost of IRU Capacity
Carrier Charges and Cost of IRU Capacity decreased to $2.4 million during the
three months ended September 30, 1999 compared to $4.0 million during the three
months ended September 30, 1998, a decrease of 40.0%.
This decrease was largely due to local access charges for Bermuda originating
and terminating traffic which decreased to $0.9 million for the three months
ended September 30, 1999 from $2.0 million for the three months ended September
30, 1998, a decrease of 55.0%. The decrease reflects reductions in the
settlement rates paid to the Bermuda Telephone Company. These settlement rates
were reduced from $0.27 per minute to $0.10 per minute for outbound traffic and
from $0.24 per minute to $0.10 per minute for inbound traffic.
Foreign settlements for the three months ended September 30, 1999 decreased to
$1.4 million from $2.0 million for the three months ended September 30, 1998, a
decrease of 30.0%. This decrease was largely due to reductions in costs to
terminate calls to countries other than the U.S. and the U.K. During the three
months ended September 30, 1999 and 1998, the settlement rate with U.S. carriers
and U.K. carriers was unchanged.
General and Administrative Expenses
General and Administrative Expenses increased during the three months ended
September 30, 1999 to $8.7 million compared to $2.3 million during the three
months ended September 30, 1998, an increase of 278.0%. This increase was
primarily due to an increase in compensation expense of $3.8 million resulting
from the vesting of certain stock options to the Company's directors and
officers. The increase was also due to marketing, promotions and administrative
costs associated with the Atlantica-1 Network and commitment fees related to the
Atlantica-1 Network financing.
Amortization Expense
Amortization of capital assets for the three months ended September 30,1999
increased to $0.5 million from $0.4 million for the three months ended September
30,1998, an increase of 25.0%. This increase resulted largely from the addition
of network and telecommunications equipment.
Amortization of deferred financing costs during the three months ended
September 30, 1999 increased to $0.8 million compared to $0.1 million during the
three months ended September 30, 1998, an increase of 700.0%. This increase
resulted from the amortization of deferred financing costs incurred as a result
of the financing of the Atlantica-1 Network.
20
<PAGE>
Interest on Long-Term Debt
Interest on long-term debt increased to $7.4 million for the three months
ended September 30, 1999 from $1.0 million for the three months ended September
30, 1998, an increase of 640.0%. This increase was a result of interest costs on
the debt financing for the development of the Atlantica-1 Network secured by the
Company in July 1999.
Interest income
Interest income during the three months ended September 30, 1999 increased to
$5.1 million from $53,000 during the three months ended September 30, 1998. This
increase was a result of investing certain proceeds from our July 1999 financing
for the Atlantica-1 Network.
Extraordinary loss
During July 1999, the Company recognized an extraordinary loss of $0.8 million
in connection with the re-financing comprising a write-off of unamortized
deferred financing costs.
Results of Operations - Nine Months Ended September 30, 1999 Compared With Nine
Months Ended September 30, 1998
Revenues
Revenues increased to $19.7 million for the nine months ended September 30,
1999 from $17.8 million for the nine months ended September 30, 1998, an
increase of 10.7%.
Outbound revenues increased to $15.3 million for the nine months ended
September 30, 1999 compared to $13.7 million for the nine months ended September
30, 1998, an increase of 11.7%. This increase was the result of an increase in
commercial and residential traffic but was offset by a rate reduction for
commercial and residential customers introduced on April 1, 1999. The average
rate per outbound minute realized was $0.88 for the nine months ended September
30, 1999 compared to $0.94 for the nine months ended September 30, 1998.
Outbound traffic volumes increased to 17.5 million minutes for the nine months
ended September 30, 1999 from 14.6 million minutes for the nine months ended
September 30, 1998. These volume increases were a response to an increase in
marketing and advertising by the Company and were reflective of a positive
response to the rate reductions.
Inbound revenues increased to $3.0 million for the nine months ended September
30, 1999 compared to $2.0 million for the nine months ended September 30, 1998,
an increase of 50.0%. Revenue from debit sales increased to $0.9 million for the
nine months ended September 30, 1999 compared to $0.3 million for the nine
months ended September 30, 1998, an increase of 200.0%. This increase was the
direct result of a distribution arrangement for the debit cards introduced in
November 1998.
These increases were offset by the lack of any IRU sales for the nine months
ended September 30, 1999 compared to $1.5 million for the nine months ended
September 30, 1998.
Carrier Charges and Cost of IRU Capacity
Carrier charges and Cost of IRU Capacity decreased to $8.4 million for the
nine months ended September 30, 1999 compared to $11.4 million for the nine
months ended September 30, 1998, a decrease of 26.3%. This decrease was largely
due to a reduction in local access charges for Bermuda originating and
terminating traffic. These charges decreased to $3.5 million for the nine months
ended September 30, 1999 from $5.0 million for the nine months ended September
30, 1998, a decrease of 30.0%. The decrease reflects reductions in the
settlement rates paid to the Bermuda Telephone Company. For outbound traffic
these settlement rates were reduced from $0.27 per minute in 1998 to $0.15 per
minute in January 1999 with a further reduction to $0.10 per minute in July
1999. For inbound traffic these settlement rates were reduced from $0.24 per
minute in 1998 to $0.15 per minute in January 1999 with a further reduction to
$0.10 per minute in July 1999.
Foreign settlements for the nine months ended September 30, 1999 decreased to
$4.9 million from $5.8 million for the nine months ended September 30, 1998, a
decrease of 15.5%. This decrease was largely due to reductions in costs to
terminate calls to countries other than the U.S. and the U.K. During the nine
21
<PAGE>
months ended September 30, 1999 and 1998, the settlement rate with U.S. carriers
and U.K. carriers was unchanged.
The cost of the sale of cable capacity in the nine months ended September 30,
1998 totaled $547,000. There were no capacity sales in the nine months ended
September 30, 1999.
General and Administrative Expenses
General and Administrative Expenses for the nine months ended September 30,
1999 increased to $13.4 million compared to $6.8 million for the nine months
ended September 30, 1998, an increase of 97.1%. This increase was mainly due to
an increase in compensation expense of $3.8 million resulting from the
recognition of costs related to certain stock options to the Company's
directors, officers and employees. The increase was also due to marketing,
promotions, and administrative costs associated with the Atlantica-1 Network and
commitment fees related to the Atlantica-1 Network financing.
Amortization Expense
Amortization of capital assets for the nine months ended September 30, 1999
increased to $1.3 million from $1.1 million for the nine months ended September
30, 1998, an increase of 18.2%. This increase resulted largely from the addition
of network and telecommunications equipment.
Amortization of deferred financing costs for the nine months ended September
30, 1999 increased to $1.0 million compared to $0.2 million for the nine months
ended September 30, 1998, an increase of 400.0%. This increase resulted from the
amortization of deferred financing costs incurred as a result of the financing
of the Atlantica-1 Network.
Interest on Long-Term Debt
Interest on long-term debt for the nine months ended September 30, 1999
increased to $8.9 million from $2.5 million for the nine months ended September
30, 1998, an increase of 256.0%. This increase was a result of the debt
financing for the development of the Atlantica-1 Network secured by the Company
in July 1999.
Interest income
Interest income for the nine months ended September 30, 1999 increased to $5.2
million from $77,000 for the nine months ended September 30, 1998. This increase
was a result of investing certain proceeds from our July 1999 financing for the
Atlantica-1 Network.
Extraordinary loss
During July 1999, the Company recognized an extraordinary loss of $0.8 million
in connection with the re-financing comprising a write-off of unamortized
deferred financing costs.
Liquidity and Capital Resources
On July 14, 1999, the Company secured financing totaling $986.0 million for
the development and construction of the Atlantica-1 fiber optic undersea cable
system that will link North America, Bermuda and South America. The financing is
comprised of the following components:
. A private placement of common shares issued at $20.40 per share (par value
$1.50) and Class B shares, which have special voting rights, for aggregate
proceeds of $270.6 million. The Company subsequently used $30.6 million of
these proceeds to redeem 1,500,000 common shares at an aggregate price of
$20.40 per share (less expenses) from existing shareholders.
22
<PAGE>
. The issuance of debt in the principal amount of $300.0 million in the form of
13% senior notes maturing July 15, 2007 ("Notes"). Interest on these Notes
accrues at a rate of 13% per annum, payable semi-annually in arrears on each
January 15 and July 15 commencing January 15, 2000. The notes are unsecured.
. A bank credit facility ("Credit Facility") of up to $400.0 million that
consists of various term facilities totaling $390.0 million and a $10.0
million revolving credit facility. Our subsidiary GlobeNet Communications
Holdings Ltd. ("Holdings"), the borrower under the Credit Facility, may also
request an additional facility of up to $50.0 million, subject to lender
approval and other restrictions. All loans under the Credit Facility mature
on June 30, 2005 except for one of the term facilities of $100.0 million,
which matures on September 30, 2005. The interest rates on the loans under
the Credit Facility initially range from London Interbank Offered Rate, or
LIBOR, plus 3.5% to LIBOR plus 4.0%. Availability of funds under the Credit
Facility is subject to certain terms and conditions. Substantially all of the
assets of Holdings and of its present and future direct and indirect
subsidiaries have been pledged as collateral for the Credit Facility. In
addition, the ultimate parent company of the supplier for the Atlantica-1
Network has provided an initial guarantee of $100.0 million of one of the
term facilities subject to certain conditions and adjustments.
. The retirement of subordinated loans in the principal amount of $13.5 million
when our former subordinated lenders elected to effectively convert the
principal and $1.9 million of accrued interest on their subordinated loans
into 1,635,286 common shares.
In September 1999, the Company borrowed $100 million under one of its term
facilities of the Credit Facility.
Future Capital Expenditures and Capital Resources
The development of the Atlantica-1 Network will require us to make significant
capital expenditures in connection with building the undersea cable system and
the related landing stations, and securing terrestrial capacity to connect the
landing stations with major cities. We estimate the total cost to build the
Atlantica-1 Network, including the secondary strand of the Rio extension (the
Rio extension will connect Fortaleza, Brazil and Rio de Janeiro, Brazil),
landing stations and capital contingencies, will be $825 million. We are
examining potential terrestrial alternatives that would eliminate the need for
building the secondary strand of the Rio extension and reduce costs accordingly.
This $825 million estimate does not include potential capital costs, if any,
associated with securing terrestrial capacity, including any terrestrial
extension to Buenos Aires, Argentina. We expect the primary ring of the
Atlantica-1 Network (connecting Tuckerton, New Jersey, St. David's, Bermuda,
Fortaleza, Brazil, Punta Gorda, Venezuela and Boca Raton, Florida) to be RFS in
December 2000.
We have commitments under our supply contract with Alcatel Submarine Networks
and Alcatel Submarine Networks, Inc. (collectively, "Alcatel") to make payment
installments in varying amounts as construction milestones are achieved on the
Atlantica-1 Network. The total of these payment installments for the year ending
December 31, 2000 is $558.7 million.
We expect to use the net proceeds we received from the private offering of the
Notes, the private equity financing (net of the proceeds we used to repurchase
outstanding shares of the Company from existing shareholders) and the exercise
of warrants by our former subordinated lenders, together with available funds
under the Credit Facility, to finance:
. the construction of the Atlantica-1 Network, including the secondary
strand of the Rio extension, landing stations and capital contingencies,
and
. pre-RFS working capital requirements.
We have already repaid our subordinated loans and TBI's credit facility, paid
transaction costs related to our financings, paid certain working capital
requirements, made an initial payment under our contract with Alcatel and paid
commitment fees and interest on the Credit Facility from these funds.
We expect to incur up to an additional $85 million of senior debt in the first
half of 2000 to finance the acquisition of terrestrial capacity for the
Atlantica-1 Network. We may obtain this financing through a new senior note
offering, bank loans or a combination thereof. We are currently discussing with
a financial institution various means of obtaining this financing, including
obtaining a commitment from this financial institution to provide us with an $85
million debt facility. Whether or not this commitment is obtained, we expect to
seek to obtain our financing through one of the means described above. We cannot
assure you that we will be able to successfully complete a senior note offering
or obtain any commitment for a debt facility. We may also incur further costs
for terrestrial capacity in the future.
We may in the future build an additional undersea cable system, the Atlantica-
2 Network, to connect Bermuda to the United Kingdom and Southern Europe if there
is sufficient demand and available capital. We are also considering other
potential undersea fiber optic cable system routes that we believe are currently
underserved. We have not decided whether we will build the Atlantica-2 Network
and we do not believe that building the Atlantica-2 Network is necessary for the
success of the Atlantica-1 Network. If we build the Atlantica-2 Network or
another undersea fiber optic cable system, we will require additional financing.
Our expectations of required capital expenditures are based upon our current
estimates. Our actual capital expenditures could vary from our estimates and
these variations could be material.
The Company's use of cash is generally restricted under the terms of the
Credit Facility to operating and capital expenditures related to the Atlantica-1
Network and to other telecommunications activities. The investment of the cash
is restricted to investments with a minimum credit rating of A-1 by Standard &
Poor's or P-1 by Moody's.
Historical Capital Expenditures and Capital Resources
We have incurred significant operating losses and capital expenditures related
to the development of TBI. We have financed these expenditures through a
combination of borrowings under TBI's retired credit facility and the retired
subordinated loans, and equity contributions.
Net cash provided by operating activities was $11.4 million for the nine
months ended September 30, 1999, as compared to net cash used in operating
activities of $5.2 million for the nine months ended September 30, 1998. The use
of cash by operations in 1998 was due primarily to a large increase in payables
in 1997 which was paid early in 1998. The cash provided by operations in 1998
was primarily the result of cash received from leasing capacity on the BUS-1
cable system and from the accrual of interest payable on the Notes and Credit
Facility.
Cash provided by financing activities was $580.8 million for the nine months
ended September 30, 1999 and primarily represents proceeds from the private
equity financing and issuance of the Notes in
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July 1999 and borrowings under the Credit Facility in September 1999, partially
offset by repayments of borrowings under long term debt, payments of financing
costs and the purchase and cancellation of common shares. Cash provided by
financing activities was $9.4 million for the nine months ended September 30,
1998 and relates to draws on our retired term loan and operating credit
facility.
Cash used in investing activities was $595.2 million and $1.5 million for the
nine months ended September 30, 1999 and 1998, respectively. The cash used in
investing activities for the nine months ended September 30, 1999 is largely
comprised of the first installment of $62.1 million under our supply contract
with Alcatel and reflects the Company's restricted cash and investments.
Seasonality
Our Bermuda operations experience seasonal fluctuations that are a function of
the volume of tourist traffic. Traffic declines during the winter months when
tourist traffic is low.
Year 2000 Problem
We completed our compliance process in November 1999 to resolve the potential
impact of the year 2000 problem on the processing of date-sensitive information
by our computer systems and programs. To date, we have not experienced any
material problems that we attribute to the year 2000 problem. The year 2000
problem is the result of computer programs being written using two digits,
rather than four, to indicate the year. Any of our programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or system failures and lead
to disruptions in operations.
In 1998, we formed a year 2000 task force to conduct a comprehensive review of
our computer programs and systems to ensure that these programs and systems
would function properly and be year 2000 compliant. This review included both
hardware and software systems and embedded technology systems. Remediation was
accomplished through a combination of hardware and software upgrades, program
changes and replacement of non-compliant systems. Our remediation costs were not
material.
We completed our internal compliance process in April 1999 and completed the
inter-carrier compliance process with the Bermuda Telephone Company in July
1999. We spoke with third-party vendors that supply our computer programs and
systems as well as various carrier parties that provide us services that are
reliant upon our computer programs or systems. As of April 1999, we successfully
completed all system updates and system tests on our switching equipment with
our equipment and software vendor Northern Telecom. We were advised by our
principal vendors and manufacturers of our other electronic equipment, such as
personal computers, that this equipment is year 2000 compliant. We were also
advised by Data True, the subcontractor that provides billing services for TBI's
commercial accounts, that as of November 1999, its software products were year
2000 compliant.
The Bermuda Telephone Company, the local exchange provider upon which we rely
to originate and terminate our international long-distance traffic in Bermuda
and to process billing for our residential customers, advised us that it
successfully completed system tests on its switching equipment with its
equipment and software vendor Northern Telecom, and that it is year 2000
compliant. We completed end-to-end testing with the Bermuda Telephone Company's
system in July 1999. Northern Telecom conducted the testing.
We believe that the costs of addressing potential year 2000 problems will not
have a material adverse effect on our business, financial position or results of
operations unless our vendors and certain carrier parties fail to resolve year
2000 compliance issues.
We believe that the action plans that we have developed and the implementation
time frames that we have established adequately allow for unexpected issues that
might arise. However, if the Bermuda Telephone Company is unable to provide
services because of the year 2000 problem, then our customers
24
<PAGE>
will not be able to complete their international long-distance calls. To the
extent that we experience any other year 2000 problems, we believe that these
problems would be more likely to result in errors in our billing and record-
keeping functions, rather than in the ability of the Atlantica-1 Network, which
has an RFS date in December 2000 for the primary ring, or the BUS-1 system to
provide telecommunications capacity to customers. If these billing and record-
keeping errors were to occur, we believe that we have adequate contingency plans
to determine the correct billing and other information.
Nevertheless, we cannot assure you that we will not experience any year 2000
problems, and it is difficult to predict the extent or magnitude of a year 2000
problem as it may affect us. To the extent that we experience material year 2000
problems and do not have a contingency plan in effect to remedy the problem, our
business, financial condition and results of operations could be materially
adversely affected. While we believe the occurrence of this scenario is
unlikely, a possible worst case scenario might include (1) our inability to
provide some or all of the services designed to be provided by the BUS-1 system
and the Atlantica-1 Network, (2) delays, inaccuracies or other difficulties with
respect to billing customers or the loss of customers records, and (3) our key
vendors not being able to provide goods and services on a timely basis. The
financial impact of any or all of these worst case scenarios has not been and
cannot be estimated by management with any degree of meaningful precision due to
the numerous uncertainties and variables associated with these scenarios.
Forward-Looking Statements
This report includes forward-looking statements. We may use words like
"believe," "anticipate," "expect," "estimate," "may," "will," "should" and
similar expressions to help identify these forward-looking statements. Forward-
looking statements contained in this report include, for example, statements
concerning our plans to design, construct, operate and sell capacity on our
planned cable systems, expectations as to funding our future capital
requirements and other discussions of future plans and strategies, anticipated
developments and other matters that involve predictions of future events.
We have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks and uncertainties, some of which may be outside of our control, including,
among other things:
. our failure to complete our planned cable systems within the currently
estimated time frame and budget,
. our failure to be early to market,
. our failure to sell capacity on our planned cable systems,
. our failure to obtain and maintain all necessary permits, licenses or
authorizations to construct, land and operate our planned cable systems,
. our failure to contract for or build any necessary backhaul facilities
to provide city-to-city connectivity on our planned cable systems,
. our failure to accurately project levels of demand for
telecommunications capacity,
. political, economic, legal or regulatory changes that negatively affect
our operations, and
. our failure to compete effectively in a rapidly evolving marketplace
characterized by intense price competition and incremental new capacity.
This list is only an example of some of the risks, uncertainties and
assumptions that may affect the forward-looking statements contained in this
report. In light of these and other risks, uncertainties or assumptions, the
actual events or results may be very different from those expressed or implied
in the forward-looking statements in this report or may not occur. For
additional factors that could affect the
25
<PAGE>
validity of our forward-looking statements, you should carefully consider the
risk factors in our registration statement on Form S-4 (file no. 333-86461) on
file with the Securities and Exchange Commission and the other information in
the registration statement and in this report. We do not intend to publish
updates or revisions of any forward-looking statement to reflect new
information, future events or otherwise.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk.
We are exposed to various market risks relating to changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market prices and rates, such as foreign currency
exchange and interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes.
Foreign Currency Exposure
We are exposed to fluctuations in foreign currencies relative to the U.S.
dollar. Because the Bermuda dollar is pegged to the U.S. dollar, there is no
foreign currency exposure for transactions conducted in this currency. Our
foreign currency exposures as at September 30, 1999 are as follows:
Note Receivable: We had a note receivable of (Pounds)250,000 which is non-
interest bearing and due November 20, 2000.
Account Payable: We had an account payable of 488,819 SDR's, a notional
currency tied to a basket of European currencies, to one of our carriers. This
payable is current and non-interest bearing.
Settlements on International Traffic: Settlements on international traffic are
largely made in U.S. dollars. For the nine months ended September 30, 1999,
approximately 12% of the Company's cost of sales and 2% of the Company's revenue
was denominated in a currency other than the U.S. dollar.
Interest Rate Exposure
Long-term debt: As at September 30, 1999, we owed $100.0 million of variable-
rate long-term debt which is due September 30, 2005. The interest rate on this
debt fluctuates with LIBOR. On December 22, 1999, we entered into an interest
rate cap transaction for $50.0 million of this debt, capping the interest at
7.0% for a three-year term. The interest rate exposure on this debt is also
mitigated by the fact that the proceeds from this debt are invested in short-
term investments, the return on which also fluctuates with market interest
rates. As at September 30, 1999, we also owed $300.0 million on the Notes, which
is due July 15, 2007 and has a fixed interest rate of 13%. See Note 4 to our
consolidated financial statements in this report for more information on our
debt.
Short-term investments: We held $523.0 million in money market investments at
September 30, 1999. The return on this investment portfolio fluctuates with
market interest rates.
26
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings.
We are, from time to time, a party to litigation that arises in the normal
course of our business operations. We are not a party to any litigation the
resolution of which we expect to have a material adverse effect on our business,
financial condition and results of operations.
ITEM 2. Changes In Securities And Use Of Proceeds.
On July 14, 1999, the Company issued 13,263,646 common shares at $20.40 per
share (par value $1.50) and 1,000 Class B shares, which have special voting
rights, for aggregate proceeds of $270.6 million less commission of
approximately $11.7 million. These securities were not registered under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Rule 506 of
Regulation D of the general rules and regulations under the Securities Act of
1933. These exemptions were available to the Company because the sale of these
equity securities did not involve a public offering and because the Company sold
the securities solely to accredited investors pursuant to the provisions of Rule
506. The placement agent for the issue was TD Securities Inc. The securities
were issued to the following institutional investors or their affiliates:
. Boston Ventures Management Inc.,
. Kelso & Company,
. Providence Equity Partners Inc.,
. Spectrum Equity Investors,
. TD Capital Group Limited,
. Capital Communications CDPQ Inc.,
. Sandler Capital Management,
. Ontario Municipal Employee Retirement Board, and
. Nautilus Equity Investors LLC.
We also retired subordinated loans in the principal amount of $13.5 million
when our former subordinated lenders elected to effectively convert the
principal and $1.9 million of accrued interest on their subordinated loans into
1,635,286 common shares. These common shares were not registered under the
Securities Act of 1933 pursuant to the same exemptions discussed above.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission Of Matters To A Vote Of Security Holders.
At a special general meeting of the stockholders of the Company held on July
12, 1999, the stockholders approved the following:
. amendments to our bye-laws relating to the election of directors and
board proceedings; authorizing the issuance of shares without share
certificates; exempting the Class B shareholders from the general
restriction prohibiting common share holdings in excess of 35%; and
other changes relating to certain rights of Class A and B shareholders,
including share transfer and director appointment/removal rights.
. an amendment to increase the authorized capital of the Company from
$26.3 million to $36.0 million by the creation of an additional 6.5
million common shares and an additional 1,900 Class B restricted voting
shares.
27
<PAGE>
The voting results on these amendments were the same for each and were as
follows: 2,001,078 shares in favor, no shares against, 686,617 shares withheld
and 828,232 abstentions.
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits And Reports On Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
* 3.1 Memorandum of Association of GlobeNet Communications Group
Limited.
* 3.2 Bye-Laws of GlobeNet Communications Group Limited dated July
12, 1999.
* 4.1 Indenture between GlobeNet Communications Group Limited and
Bankers Trust Company, dated as of July 14, 1999.
* 4.2 Registration Rights Agreement among GlobeNet Communications
Group Limited, TD Securities (USA) Inc. and Credit Suisse First
Boston Corporation, dated as of July 14, 1999.
* 4.3 Credit Agreement among GlobeNet Communications Holdings Ltd.,
Various Financial Institutions and Other Persons, Toronto
Dominion (Texas) Inc., Credit Suisse First Boston, and TD
Securities (USA) Inc., dated as of July 14, 1999.
* 4.4 Guaranty by Alcatel in favor of Lenders under Holdings' Bank
Credit Facility (see Exhibit 4.3) and Toronto Dominion (Texas)
Inc., dated as of July 14, 1999.
* 4.5 Reimbursement Agreement between GlobeNet Communications
Holdings Ltd. and Alcatel, dated as of July 14, 1999.
* 10.1 Indemnity Agreement dated July 14, 1999 between Anthony
Bolland and GlobeNet Communications Group Limited. (Director)
* 10.2 Indemnity Agreement dated July 14, 1999 between Sebastien
Rheaume and GlobeNet Communications Group Limited. (Director)
* 10.3 Indemnity Agreement dated July 14, 1999 between George E.
Matelich and GlobeNet Communications Group Limited. (Director)
* 10.4 Indemnity Agreement dated July 14, 1999 between Mark A. Pelson
and GlobeNet Communications Group Limited. (Director)
* 10.5 Indemnity Agreement dated July 14, 1999 between Kevin J.
Maroni and GlobeNet Communications Group Limited. (Director)
* 10.6 Indemnity Agreement dated July 15, 1999 between James
Fitzgerald and GlobeNet Communications Group Limited.
(Officer)
* 10.7 Amended & Restated Securityholders' Agreement, dated July 14,
1999.
28
<PAGE>
27.1 Financial Data Schedule
_______________
* Incorporated by reference to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461).
(b) Reports on Form 8-K
None.
29
<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.
GLOBENET COMMUNICATIONS GROUP LIMITED
February 3, 2000 By: /s/ Greg Belbeck
-------------------------------------------
Name: Greg Belbeck
Title: Executive Vice President and Chief
Financial Officer
(duly authorized officer, principal financial
officer and chief accounting officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 530,969 3,030
<SECURITIES> 0 0
<RECEIVABLES> 2,479 1,847
<ALLOWANCES> 224 80
<INVENTORY> 0 0
<CURRENT-ASSETS> 83,319 7,296
<PP&E> 90,496 26,182
<DEPRECIATION> 3,148 1,892
<TOTAL-ASSETS> 670,079 56,260
<CURRENT-LIABILITIES> 16,832 11,842
<BONDS> 400,000 36,677
2 0
0 0
<COMMON> 25,566 5,274
<OTHER-SE> 246,228 16,377
<TOTAL-LIABILITY-AND-EQUITY> 670,079 56,260
<SALES> 236 1,784
<TOTAL-REVENUES> 19,704 26,724
<CGS> 0 547
<TOTAL-COSTS> 9,702 16,631
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 202 91
<INTEREST-EXPENSE> 9,487 4,502
<INCOME-PRETAX> (9,441) (4,435)
<INCOME-TAX> 96 36
<INCOME-CONTINUING> (9,441) (4,471)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (809) 0
<CHANGES> 0 0
<NET-INCOME> (10,250) (4,944)
<EPS-BASIC> (1.36) (1.41)
<EPS-DILUTED> (1.36) (1.41)
</TABLE>
