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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number: 333-86461
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of March 17, 2000 was approximately
$937,415,000.
The number of shares, $1.50 par value per share, of the registrant's
common shares outstanding as of March 17, 2000: 17,043,900 shares.
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TABLE OF CONTENTS
Page No.
PART I
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Item 1. Business. 2
Item 2. Properties. 35
Item 3. Legal Proceedings. 35
Item 4. Submission of Matters to a Vote of Security Holders. 35
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 35
Matters.
Item 6. Selected Financial Data. 37
Item 7. Management's Discussion and Analysis of Financial Condition 39
and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 51
Item 8. Financial Statements and Supplementary Data. 53
Item 9. Changes in and Disagreements with Accountants on Accounting and 53
Financial Disclosure.
PART III
Item 10. Directors and Executive Officers of Registrant. 76
Item 11. Executive Compensation. 80
Item 12. Security Ownership of Certain Beneficial Owners and Management. 85
Item 13. Certain Relationships and Related Transactions. 89
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 91
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FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements. We 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 Form 10-K 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, developments with respect to regulatory and market conditions 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
Form 10-K. 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 Form 10-K or may not
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occur. For additional factors that could affect the validity of our
forward-looking statements, you should carefully consider the risk factors in
Part I, Item 1 of this Form 10-K and the other information in this Form 10-K. We
do not intend to publish updates or revisions of any forward-looking statement
to reflect new information, future events or otherwise.
PART I
Item 1. Business.
Business 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.
We are currently developing the Atlantica-1 Network, a high capacity
undersea fiber optic cable system that, together with terrestrial extensions
from beach landing points to city centers and from city to city, initially will
offer capacity between certain major cities in the United States, Brazil,
Venezuela, Bermuda and Argentina. We intend to expand the reach of the
Atlantica-1 Network to other countries in South America and Europe. We intend to
offer customized and flexible provisioning of capacity at competitive prices to
international telecommunications service providers, including emerging and
established carriers, Internet Services Providers, or ISPs, and value-added
resellers. We expect that initially the majority of our customers will be North
American and European telecommunications service providers or their South
American affiliates.
We are developing the Atlantica-1 Network to satisfy increasing bandwidth
requirements for the transmission of voice, data and video, particularly over
the Internet, between North America and South America. We believe that these
increasing bandwidth requirements are being driven by a combination of factors,
including:
. increasing global demand for international telecommunications
capacity,
. deregulation and privatization of South American telecommunications
industries,
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. increasing demand for telecommunications capacity between North
America and South America, and
. limited existing telecommunications capacity between North America and
South America.
In order to provide city-to-city connectivity, we will secure terrestrial
extensions, through either cash purchases or exchanges, or swaps, of capacity
with other telecommunications network providers, from each Atlantica-1 Network
landing point to certain major cities in North America and South America. If
necessary, we will secure terrestrial extensions through our own construction.
We are currently in discussions with providers of capacity from these landing
points to various cities and from city to city, referred to as backhaul
capacity, to provide connectivity between the following cities, at a minimum:
. New York City, Boston, Washington, Atlanta and Miami in the United
States,
. Sao Paulo, Rio de Janeiro, Belo Horizonte, Brasilia and Fortaleza in
Brazil,
. Buenos Aires in Argentina,
. Caracas in Venezuela, and
. Hamilton in Bermuda.
The Atlantica-1 Network will also provide interconnection with Western Europe
through a number of transatlantic cable systems, including a planned system in
which we have a minor ownership interest--TAT-14.
We currently provide international telecommunications services to both
residential and commercial customers in Bermuda through our subsidiary TBI. TBI,
which commenced service in May 1997, is one of only two carriers that the
government of Bermuda has licensed to provide international telecommunications
services to customers in 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, which we will incorporate into
the Atlantica-1 Network, 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 do not intend to offer telecommunications services to
retail customers outside of Bermuda.
TBI's products include:
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. switched international direct distance dialing,
. calling cards,
. debit/prepaid calling cards, and
. international private line services.
360networks inc. Transaction
On March 11, 2000, Worldwide Fiber, Inc. (which has since changed its name
to 360networks inc.) ("360networks") and we entered into an Agreement and Plan
of Arrangement pursuant to which 360networks will acquire us in exchange for
subordinate voting shares of 360networks. 360networks offers broadband network
services for telecommunications companies, Internet service providers,
application service providers and data-centric enterprises. 360networks is
completing a technologically advanced 90,300-kilometer (56,100 mile) network,
including a fiber optic terrestrial network in North America and Europe and
undersea cables linking North America and Europe. 360networks and its
predecessors have been developing communications networks since 1988.
The consummation of the transaction is subject to the fulfillment of a
number of conditions, including (a) approval by our shareholders, the Bermuda
Supreme Court (pursuant to Article 99 of the Companies Act 1981 of Bermuda) and
certain regulatory authorities, (b) the compliance by us and 360networks with
our respective obligations under our agreement, and (c) the completion of an
underwritten public offering of 360networks' subordinate voting shares.
360networks has announced that it plans to offer its subordinate voting
shares to the public in an underwritten public offering in the second quarter of
2000. The actual proceeds to our shareholders under our agreement with
360networks will be adjusted based, in part, on the initial public offering
share price of 360networks' subordinate voting shares. The acquisition is
subject to the approval by a majority in number representing at least 75% in
value of each of our two classes of shareholders present in person or by proxy,
with each class voting separately. Holders of more than 75% of each class of our
shares have irrevocably committed, pursuant to a voting agreement with
360networks, to vote in favor of the transaction. It is anticipated that the
transaction will be completed in the second half of this year.
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Cable System Overview
Atlantica-1 Network
The Atlantica-1 Network will be a 22,500 km four fiber pair undersea fiber
optic cable system. We have selected Alcatel Submarine Networks and Alcatel
Submarine Networks, Inc. (collectively, "Alcatel") to design, construct and
install the Atlantica-1 Network pursuant to a turnkey contract. The primary ring
of the Atlantica-1 Network will connect the United States, Bermuda, Brazil and
Venezuela. The connection from Tuckerton, New Jersey to Fortaleza, Brazil via
Bermuda is scheduled to be ready for service, or RFS, by September 2000, with
the full primary ring scheduled to be RFS by December 2000. We believe that the
deployment of the Atlantica-1 Network will position us as one of the first
private undersea fiber optic cable systems that, together with terrestrial
extensions, will offer city-to-city connectivity between the United States,
Brazil, Venezuela, Bermuda and Argentina.
The Atlantica-1 Network is being engineered and constructed using the
latest in fiber optic technology, such as self-healing ring structures, which
provide internal restoration capabilities that protect against outages caused by
equipment and cable failures; erbium doped fiber amplifier, or EDFA, repeaters
that boost signals traveling through the cables; large effective area fibers, or
LEAF, with increased capacity and other performance benefits; dense wavelength
division multiplexing, or DWDM, technology, which is a technique for increasing
the amount of information that a fiber optic cable can carry by simultaneously
transmitting multiple signals through the same fiber; system and equipment
redundancies; and a fully integrated network management system. The
incorporation of this advanced technology will allow us to offer fully
redundant, self-healing capacity to our customers at competitive prices relative
to existing and planned systems.
The Atlantica-1 Network design contemplates system interconnection with
other existing and planned cable systems at various landing points in order to
provide customers with seamless and cost-effective connectivity to major cities
in Europe, the United States, Bermuda and South America.
The initial capacity of the Atlantica-1 Network will be 40 Gigabits per
second of total capacity or 20 Gigabits per second of self-healing capacity. A
Gigabit per second is a unit of measuring the amount of information that the
network can carry and is often referred to as Gbps. The system will be
upgradeable to 1,280 Gbps of total capacity or 640 Gbps of self-healing
capacity. We will upgrade the system incrementally in advance of expected
demand. It may require up to 12 months for an upgrade to be implemented. The
Atlantica-1 Network will incorporate our existing fiber optic cable system
connecting St David's, Bermuda and Tuckerton, New Jersey, the BUS-1 system, for
that portion of the Atlantica-1 Network
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primary ring. The BUS-1 system will have an initial total capacity of 40 Gbps or
an initial self-healing capacity of 20 Gbps when incorporated into the
Atlantica-1 Network. The BUS-1 system will be upgradeable to 160 Gbps of total
capacity or 80 Gbps of self-healing capacity. We will upgrade the system
incrementally in advance of expected demand. Once demand exceeds the BUS-1
system's ultimate total capacity, we intend either to replace or supplement the
system with a new undersea cable at an anticipated cost of approximately $40
million.
The self-healing system will provide two forms of switching protection
against faults: span switching and ring switching. Span switching provides
protection between adjacent landing stations if the fault involves only one of
the two fiber strands. Ring switching provides protection if there is a fault
involving all fibers between adjacent landing stations. Self-healing capacity is
designed to protect customers against the effect of potential equipment and
cable failures. The Atlantica-1 Network's internal restoration system is
expected to react to failures in less than 300 milliseconds, with no noticeable
degradation in service or dropped calls. Without the ring configuration, users
would need to buy restoration services on alternate systems to ensure the
continuity of their network transmission. Restoration obtained on alternate
systems is subject to a delay of several hours from the time the fault occurs
until the traffic is rerouted.
As shown in the chart below, the principal components of the Atlantica-1
Network will be the primary ring and the Rio extension.
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Segment Connections RFS Dates Estimated Cost(1)
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Primary Ring Tuckerton, New Jersey September 2000 (Tuckerton to $502 million(2)
St. David's, Bermuda Fortaleza via St. David's)
Fortaleza, Brazil December 2000 (full ring)
Punta Gorda, Venezuela
Boca Raton, Florida
Rio Extension Fortaleza, Brazil February 2001 (primary strand) $119 million(2)
Rio de Janeiro, Brazil August 2001 (secondary strand) $112 million(2)
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(1) The estimated cost excludes landing station costs of approximately $50
million and capital contingencies of approximately $42 million. This
estimated cost also excludes potential costs, if any, associated with
securing terrestrial capacity, including any terrestrial extension to
Buenos Aires, Argentina.
(2) Fixed price under our turnkey contract with Alcatel.
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Atlantica-2 Network
Assuming sufficient demand and available capital, we may in the future
expand the system to provide connectivity between Bermuda and Southern Europe,
including Spain, Portugal and France, as well as the United Kingdom, with the
Atlantica-2 Network.
We expect the Atlantica-2 Network to have a lower unit cost per kilometer
to the Atlantica-1 Network, but with newer technology, and to require
substantial capital to develop. We estimate that the Atlantica-2 Network could
have a potential RFS date as early as the fourth quarter of 2002. Our demand and
feasibility analyses regarding the Atlantica-2 Network are preliminary. We will
complete a more comprehensive analysis of the Atlantica-2 Network before
committing to its construction. We have no current commitment to 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. Further, there are
viable and possibly more suitable alternatives to serve Europe through other
cable systems, including the 360atlantic system, a planned transatlantic fiber
optic cable system of 360networks, which has entered into an agreement to
acquire us. See "Business -- 360networks inc. Transaction".
Terrestrial Extensions to Key Markets
We will secure terrestrial extensions from each Atlantica-1 Network landing
point to certain major cities in North America and South America through the
purchase of capacity from domestic network providers, strategic alliances with
telecommunications service providers or other carriers or, if necessary, through
our own construction. We are currently in discussions with providers of backhaul
capacity to provide connectivity between the following cities, at a minimum: New
York City, Boston, Washington, Atlanta and Miami in the U.S.; Sao Paulo, Rio de
Janeiro, Belo Horizonte, Brasilia and Fortaleza in Brazil; Buenos Aires in
Argentina; Caracas in Venezuela; and Hamilton in Bermuda. We are also currently
in discussions with major telecommunications service providers who are
contemplating the construction of terrestrial fiber networks that, if linked
with the Atlantica-1 Network, would provide additional direct connectivity to
major cities in Chile, Peru and Colombia.
UNITED STATES: The Atlantica-1 Network will have two landing stations in
the United States. One will be near the existing landing station for the BUS-1
system in Tuckerton, New Jersey and the other will be in Boca Raton, Florida.
The introduction of numerous new undersea cable systems landing on the eastern
seaboard in recent years, along with the rapid construction of new competing
major national terrestrial networks, has resulted in the emergence of numerous
suppliers of backhaul capacity capable of connecting with the Atlantica-1
Network landing stations in the United States. We have issued a request for
proposal for the necessary terrestrial capacity to potential suppliers and are
in negotiations
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with some of these potential suppliers. In some cases we may exchange capacity
on the Atlantica-1 Network for an equivalent value of backhaul capacity in the
United States. We do not foresee any difficulties in securing backhaul capacity
in the United States.
BRAZIL: We are currently in negotiations with potential suppliers of
backhaul capacity in Brazil. We plan to purchase backhaul capacity in Brazil to
provide our customers with connectivity between Rio de Janeiro and the cities of
Sao Paulo, Belo Horizonte and Brasilia. We have committed to build the primary
strand of the Rio extension to connect Fortaleza and Rio de Janeiro at a cost of
$119 million. We also have exercised our option in our contract with Alcatel to
build the secondary strand of the Rio extension at a cost of $112 million.
We have identified several potential suppliers of backhaul capacity from
Rio de Janeiro to Sao Paulo, Belo Horizonte and Brasilia. These network
providers include both Embratel as well as the mirror licensee, Intelig. In
addition, alternative network providers including MetroRed (owned by Fidelity
and Boston Ventures, among others), Netstream (a subsidiary of AT&T Latin
America) and Pegasus have developed or are developing networks that could
provide us with our required backhaul capacity.
VENEZUELA: We are in negotiations with CANTV (the recently privatized
former monopoly) and others with regard to either the purchase of, or an
exchange for, backhaul capacity from Punta Gorda to Caracas.
ARGENTINA: We have identified several potential suppliers of backhaul
capacity between Rio de Janeiro, Brazil and Buenos Aires, Argentina. In addition
to the incumbent monopoly carrier, Telefonica Larga Distancia de Argentina,
several alternative network providers, such as Impsat and MetroRed, are building
fiber optic networks. These networks should provide connectivity not only
between Buenos Aires and Rio de Janeiro, but also to the other major cities in
Argentina. We believe that the expected deregulation of Argentina in 2000 will
result in the emergence of additional new market entrants. In the event that we
are unable to secure backhaul capacity from a third party, we are considering
developing our own undersea cable system from Rio de Janeiro to Buenos Aires.
BERMUDA: The site for our new landing station in Bermuda is located
adjacent to our St. David's network operations center that currently houses both
the BUS-1 system electronics as well as our international gateway switch. We
will secure backhaul capacity from St. David's to Hamilton that is sufficient to
meet our customers' demands.
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Alcatel Contract and Cable Deployment Strategy
We have selected Alcatel, a global leader in the construction and
installation of undersea fiber optic cables, as the supplier for the Atlantica-1
Network. We have entered into an agreement with Alcatel which provides that
Alcatel, on a turnkey basis, will:
. supply and install, at a fixed cost of approximately $502 million
(excluding landing stations), the undersea portion of the primary ring
by December 2000 (the connection from Tuckerton, New Jersey to
Fortaleza, Brazil via Bermuda is scheduled to be RFS in September 2000)
equipped with four fiber pairs and terminal equipment to support 20 Gbps
of self-healing capacity, including the upgrade of the BUS-1 system to
use 20 Gbps of self-healing capacity,
. supply and install, at a fixed cost of approximately $119 million
(excluding landing stations), the primary strand of the Rio extension by
February 2001 equipped with four fiber pairs and terminal equipment to
support 20 Gbps of self-healing capacity,
. supply and install, at a fixed cost of approximately $112 million, the
secondary strand of the Rio extension equipped with four fiber pairs and
terminal equipment to support 20 Gbps of self-healing capacity,
. seek and obtain on our behalf all permits and licenses (excluding
landing licenses) required to implement the undersea portion of the
Atlantica-1 Network,
. provide all training required for the operation and maintenance of the
Atlantica-1 Network,
. pay liquidated damages in the event of certain failures by Alcatel to
deliver the Atlantica-1 Network by the scheduled RFS date for each of
the primary ring, the connection from Tuckerton, New Jersey to
Fortaleza, Brazil via Bermuda, and the primary strand of the Rio
extension (up to 10% of the initial contract value over the first 100
days of delay), and
. at our option, which will expire on December 30, 2001, extend the
Atlantica-1 Network through additional undersea cable systems.
Certain factors may result in increased costs and later RFS dates than
discussed above. See "Business--Risk Factors--Completion of the Atlantica-1
Network" below. Pursuant to the contract, Alcatel has caused its ultimate parent
company to guarantee unconditionally, subject to certain limitations, the full
and punctual performance by Alcatel of its obligations under the
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contract. The Alcatel contract also limits the damages that we could recover in
the event of a breach by Alcatel.
On February 15, 2000, we signed a contract variation with Alcatel for the
fixed price turnkey supply of all six undersea cable stations and the associated
overland routes from the cable stations to the cable beach landing points at a
cost of approximately $50 million.
Operations, Administration and Maintenance Costs
We will provide, or contract for the provision of, operations,
administration and maintenance services for the Atlantica-1 Network. For the
undersea fiber optic cable and terrestrial extensions, we expect to enter into a
contract with a third party prior to the RFS date for the connection from
Tuckerton, New Jersey to Fortaleza, Brazil via Bermuda to provide operations,
administration and maintenance services. There are a number of potential
providers of these services, including Alcatel and ACMA. For the landing
stations, we intend to train our personnel to provide operations, administration
and maintenance services at these facilities.
Sales and Marketing
Products and Services
We will offer a flexible range of product and pricing alternatives, at
competitive prices, designed to meet the needs of both emerging and established
carriers and telecommunications services providers, including ISPs and
value-added resellers.
We intend to offer a broad range of bandwidth options, from smaller units
of capacity (E-1s, DS-3s) to larger units of capacity (STM-1s, STM-16s,
STM-64s). We believe that this broad product offering is currently unavailable
to customers seeking connectivity between North America and South America. We
will package this capacity in a variety of ways, from standard indefeasible
rights of use, or IRUs, to leases. An IRU is a method of transferring rights to
fiber optic cable capacity that grants 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. Customers purchasing standard IRUs prior to a
segment RFS date will pay a portion of the purchase price upon execution of a
contract to buy an IRU, with the balance of the purchase price due to the
Company upon the applicable RFS date for that segment. Payment plans may be made
available to qualifying purchasers, although we plan to encourage full payment
for IRUs on an up-front basis through advantageous pricing. IRU ownership
typically provides for a fixed connection on the system for the entire design
life, normally up to 25
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years. We intend to satisfy shorter term requirements for capacity through
leases, with options to convert the leases into IRUs.
In addition, we will offer our customers the ability to acquire capacity on
shorter notice than has been offered by the traditional carrier consortium
systems. This will enable customers to minimize long-term capital commitments
and reliance on long-term demand projections.
We will also provide large capacity purchasers with access to the network
management system that will enable these purchasers to monitor their network's
performance on a real-time basis from end-to-end, control their operations and
perform circuit provisioning as needed.
Purchasers of IRU capacity will pay their pro rata share of operations,
administration and maintenance charges based upon the level of expenses we
incur, or expect to incur, in the operation, administration and maintenance of
our systems. For customers purchasing capacity under a lease agreement,
operations, administration and maintenance costs will be included in the lease
payments.
Our billing will be denominated in U.S. dollars whenever possible to
decrease our exposure to foreign currency risks. However, we might be required
to accept payment in local currencies for certain backhaul and other revenues we
receive from operations in certain foreign jurisdictions.
We intend to promote various value-added offerings through which a customer
could utilize our Bermuda network and network operations center to generate cost
savings and optimize its income tax planning. These offerings include providing
(1) turnkey e-commerce and web hosting services, including systems for order
processing, financial transactions, and network-based fulfillment of digital
product, (2) broadband transmission capacity and hosting facilities for (i) web
sites utilizing the customer's own e-commerce systems or (ii) databases
providing service such as disaster recovery backup protection, and (3)
collocation of switches or other equipment to perform traditional
circuit-switched least-cost routing or Internet protocol, or IP, based routing,
including emerging international IP-based voice services. Internet protocol
refers to the set of rules and standards used to exchange data over the
Internet.
We believe that our infrastructure and operating presence in Bermuda should
attract a wholesale segment of the international telecommunications community to
utilize our switching gateway facilities, in conjunction with our Atlantica-1
Network capacity, as part of a turnkey services and back office solution that is
more cost effective than existing options. With additional traffic volumes from
incremental hubbing activities, combined with our existing base of traffic, we
expect to negotiate favorable terms for international traffic delivery
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and to reflect those low costs in rates to our collocated carrier customers. We
intend to be an international gateway in Bermuda for our target customers.
Target Customers
We are focusing on providing capacity on our system to international
telecommunications service providers. Our target customer base includes many of
the larger North American carriers, South American carriers and new
telecommunications market entrants. We expect that initially the majority of our
customers will be North American and European telecommunication carriers or
their South American affiliates. Our target customers include, among others:
. incumbent long-distance carriers,
. competitive long-distance carriers,
. regional Bell operating companies, or RBOCs,
. competitive local exchange carriers,
. former state owned monopoly carriers,
. new South American entrants,
. ISPs and data competitive local exchange carriers, or CLECs, which are
carriers that compete in the local service markets,
. wireless telephone companies,
. cable and telephony providers, and
. existing undersea cable systems in the region that require
restoration.
We expect that many of our potential customers that do not currently offer
international long-distance services will obtain an international long-distance
license or be allowed to offer these services as a result of deregulation. We
also expect existing international long-distance carriers to expand the areas
for which they offer service. We believe that international connectivity will
become increasingly important to telecommunications service providers and their
customers.
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Marketing Strategy
We intend to develop our own sales and marketing organization to promote
sales of capacity on the Atlantica-1 Network. We intend to have a senior sales
manager overseeing regional sales operations in the United States, Venezuela,
Brazil and Argentina. Each regional operation will handle the direct sales
within its geographic territory, consistent with our overall pricing strategy.
We may supplement our own sales force during our initial marketing effort, and
use third party sales agents that can function in a complementary manner. We may
enter into arrangements with operators of other new cable systems to develop
joint marketing programs that would enable us to expand the reach of our
respective systems by marketing and promoting capacity on each other's systems.
We will utilize our long standing relationships, our own sales force and
our third party sales agents to identify and encourage early potential
purchasers. Our marketing strategy includes organizing capacity purchase
meetings with potential customers to elicit interest in our systems and identify
and respond to customer demands. In May 1999, we conducted an initial
information meeting in Washington, D.C., providing system features and
preliminary pricing, which attracted over 100 attendees from over 30 companies.
A subsequent session was hosted in Bermuda in November 1999 with participation
from over 60 attendees. Additional meetings may be organized during our system
development period to build further relationships with our potential customers,
and to encourage focused one-on-one meetings to understand fully each potential
customer's needs.
Network Operations Center
We currently operate a network operations center in Bermuda to support the
BUS-1 system. In connection with the Atlantica-1 Network, we will develop an
additional network operations center in Bermuda to provide total customer
support and be responsible for the overall operation and maintenance of the
Atlantica-1 Network. We expect to provide dedicated network operations center
personnel to support capacity purchasers in all aspects of capacity usage,
performance and maintenance. Additionally, the network operations center
personnel will provide interconnection coordination and support, both
administrative and technical, and will directly manage capacity provisioning,
network performance, network maintenance and repair, and network restoration.
Network operations center personnel also will serve as a single point of contact
for customer service provisioning, interconnect coordination support, and any
billing inquiry items. The network operations center personnel will also provide
assistance to
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customers to resolve issues with their applications and interconnect
arrangements. We intend to staff the network operations center seven days a week
and 24 hours per day.
Competition
The international telecommunications industry is extremely competitive. We
face competition from existing and planned undersea fiber optic cable systems
along each of our planned routes. We will also compete with satellite providers
and land-based cable systems. We will compete primarily on the basis of price,
availability, flexible provisioning, collocation, transmission quality and
reliability, customer service and the location of our systems. See
"Business--Risk Factors--Competition" below.
Existing and Planned Cable Systems
Americas-1 is currently the only undersea cable system in service that
directly connects North America and South America. Americas-1 is a fully
utilized non-self-healing consortium cable system that uses other systems for
its restoration. Americas-2, a consortium cable system currently under
construction, will connect various sites in the Caribbean, North America and
South America. Americas-2 is a non-self-healing collapsed ring system and has an
expected RFS date in the first half of 2000. The system is already fully
committed for its initial capacity and allocation of its upgrade capacity is
limited to consortium members. Unlike the Atlantica-1 Network, Americas-2 will
not offer city-to-city connectivity and will have limited upgrade capability.
In addition, we are aware of carrier discussions regarding a possible new
carrier's consortium cable system, Americas-3, that would involve a ring system
connecting the United States, Puerto Rico, Venezuela, Argentina, Brazil, Chile,
Ecuador, Colombia, Uruguay, Peru, Panama, Barbados, Jamaica and the Dominican
Republic with a potential design capacity of up to 2,560 Gbps. We believe that
the first quarter 2002 is the target completion date for this system.
There are also two other announced undersea cable systems that intend to
provide connectivity between North America and South America:
. South American Crossing, or SAC, is a new cable system being developed
by Global Crossing Ltd. that will link coastal countries in South
America to Global Crossing's Mid-Atlantic Crossing in St. Croix,
U.S.V.I. and Global Crossing's Pan American Crossing in Ft. Amador,
Panama. Global Crossing has stated that the South American Crossing
system is scheduled for completion in the first quarter of 2001 and
will be capable of providing up to 1,280 Gbps of total capacity.
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. The SAm-I cable system is being developed by Telefonica Internacional
S.A. and Tyco International Ltd. and will connect South America,
Central America and the United States. Telefonica Internacional S.A.
and Tyco International Ltd. have stated that the SAm-I system is
scheduled for completion in December 2000 and will be capable of
providing up to 1,280 Gbps of total capacity.
SAC is expected to be constructed by Alcatel or one of its affiliates, and
the SAM-I cable system is expected to be constructed by Tyco Submarine Systems
Ltd. Both of these announced systems are expected to have capacity and
technology similar to ours, although neither competitor will be operated as an
independent carriers' carrier. We believe that there will be sufficient demand
in the region to support the Atlantica-1 Network and the other undersea cable
systems described above. In particular, we believe there will be demand for
capacity from an independent carriers' carrier. However, we expect these other
systems to receive commitments for capacity that we would have received in their
absence and we cannot assure you that there will be sufficient demand to support
all of these systems. See "Business--Risk Factors--Competition," "--Sales of
Capacity," and "--Realization of Other Revenues."
Satellite Transmission
The Atlantica-1 Network will also face competition from existing and
planned satellite systems. When comparing cable transmission against satellite
transmission for high bandwidth and fixed network uses, we believe that cable
has several distinct advantages with respect to transmission delay and quality.
Cable transmission has a lower cost per circuit, higher capacity and longer
expected service life than satellite transmission. Satellite transmission is
generally considered to have some advantages over cable transmission with
respect to point-to-multipoint broadcast and "thin route" transmission, as
opposed to the more common point-to-point, high volume transmission for which
cable usage is considered to be preferable. Based on satellite transmission cost
and quality characteristics, we believe that satellite transmission does not
represent a viable competitor to a large capacity undersea cable system such as
the Atlantica-1 Network.
Bermuda Telecommunications Competition
The provision of retail telecommunications services in Bermuda is also very
competitive. Although TBI has gained market share in its first two years of
operations, our principal competitor in this market, Cable & Wireless, has
substantially greater financial, technical and marketing resources, access to
larger networks through inter-company relationships, a broader portfolio of
services, stronger name recognition and long-standing customer relationships. In
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the third quarter of 1999, a Bermuda ISP filed for declaratory relief following
the Bermuda Government's refusal to permit it to provide voice over Internet
service under the terms of the ISP's data only service license. TBI intervened
and was joined as a party to the lawsuit on January 21, 2000. The lawsuit was
dismissed as a result of a preliminary application made by the Bermuda
Government and TBI on February 15, 2000. On March 24, 2000, the Bermuda ISP
applied for leave to appeal the dismissal to the Court of Appeal for Bermuda.
The Bermuda ISP's application for leave to appeal is scheduled to be heard in
June of this year. In addition, the Bermuda Government is currently reviewing
whether the license terms of ISPs should be amended to permit them to provide
voice over Internet service. If ISPs are permitted to provide voice over
Internet service, this service would compete with TBI's international voice
service. See "Business--Risk Factors--Competition."
TBI/E-Commerce Business
TBI Overview
TBI is licensed to provide a broad range of international
telecommunications services, including voice, data, video and Internet, to
business, residential and government customers in Bermuda. TBI began commercial
operations in May 1997, initially providing service via satellite pending the
November 1997 completion of the BUS-1 system. All services are now carried
exclusively over the BUS-1 system using satellite for restoration. In 1998, TBI
became our wholly owned subsidiary as part of a reorganization.
In two and one-half years of operation, TBI has successfully achieved a
market share in excess of one-third of the Bermuda outbound long-distance
market. TBI believes that recent regulatory and commercial developments,
including the reduction in the local access charges levied by the Bermuda
Telephone Company to the international carriers and the trend to lower
international settlement rates, will result in improved operating margins going
forward.
We believe that the prospect for growth in Bermuda is significant based on
the expected continued expansion of the reinsurance and financial business
sectors, each of which are high volume consumers of international
telecommunications services. TBI's high quality network, combined with the
introduction of enhanced data and Internet services, is expected to fuel
continued growth in higher bandwidth applications.
We believe that we can successfully leverage our Bermuda-based facilities
by, among other things, utilizing our server farm facilities to host Internet
and e-commerce applications in a secure, tax advantageous offshore environment.
We launched our corporate calling card service in May 1999, and we launched a
calling card service targeted at the residential market in November 1999. Growth
in sales of TBI's debit card product is being facilitated through a
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distribution agreement with the largest distributor of debit cards in Bermuda.
Affinity programs have been introduced that will leverage working relationships
with various businesses and organizations to extend attractive packages to their
members and employees, with the benefit of encouraging new growth as well as
long-term retention. TBI's customer retention rate has been over 96% per annum
since commencement of commercial service in May 1997.
Historically, the Bermuda Telephone Company's access charges were among the
highest in the world, at $0.27 per minute and $0.24 per minute for outgoing
calls and incoming calls, respectively. TBI's interconnection expense was
recently reduced as a result of a rate reduction mandated by the Bermuda
Minister of Telecommunications and Technology to a flat rate of $0.15 per minute
as of January 1, 1999. A further reduction to $0.10 per minute became effective
on July 1, 1999, with a subsequent rate determination expected in the first half
of 2000 based on a thorough cost study of the Bermuda Telephone Company's
operations. Significant rate rebalancing is causing a commensurate increase in
local rates to offset some of the loss in revenues from the international
carriers.
Business Lines and Products
TBI provides international telecommunications services for traffic
originating and terminating in Bermuda using the BUS-1 system. We offer services
similar to those available from Cable & Wireless, the incumbent carrier. We
believe that our services provide a higher technical quality at competitive
prices to consumers and businesses. TBI also offers other products and services
that were previously not available in Bermuda and supports all products and
services with strong marketing and customer service. Unlike Cable & Wireless,
TBI provides direct billing to all of its commercial customers. TBI's product
offerings include:
PRIVATE LINE DATA AND VOICE SERVICES: TBI provides dedicated point-to-point
circuits, which connect two locations, for lease on a full-time basis to
commercial customers in Bermuda. As a supplement to its traditional dedicated
private line service offerings, TBI is implementing a private line and
long-distance bundled service offering which will provide high volume users with
private lines at very competitive rates. In addition, TBI intends to provide
Direct Access Lines, which connect the customer directly to TBI's network, to
large commercial customers for the provision of high quality access to Internet
services and videoconferencing.
CARD SERVICE: Prepaid and rechargeable card services were launched in the
summer of 1998 and can be utilized on and off Bermuda. A corporate calling card
was launched in May 1999, and we launched a residential calling card in November
1999.
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HUBBING: TBI plans to promote additional hubbing activities through its
Bermuda gateway operations by providing worldwide low cost traffic delivery via
economical satellite access to operators in more remote locations not readily
served by undersea fiber cable systems. TBI also will promote least-cost routing
services to carriers in North America and South America on terms comparable to
those available in the United States, with the additional potential to achieve
greater savings based on Bermuda's favorable tax regime.
The Bermuda Advantage
We believe that Bermuda's strategic offshore location and favorable
regulatory and low-tax environment will make it a preferred operational base for
carriers and ISPs. As such, we see particular benefits of doing business in
Bermuda that enhance our strategic plan and create important competitive
advantages for our customers.
Bermuda does not currently levy sales, income or capital gains taxes. We
believe that the tax advantages of doing business in Bermuda are significant
enough to present a competitive advantage and encourage businesses to migrate
and establish an operating presence there. With the accelerating globalization
of business and heightened competitive pressures, we believe this business
strategy will be attractive to carrier customers, particularly larger carriers
with substantial traffic volumes, as well as companies offering Internet
services, including e-commerce and web hosting services.
BULK CAPACITY SALES: We believe that certain multinational customers could
achieve tax benefits by establishing a Bermuda domiciled company to buy
transmission capacity on the Atlantica-1 Network (and other systems) and then
reselling this capacity to its affiliates on an arms' length basis. The benefits
of this arrangement will depend upon the factual circumstances and tax planning
strategies of each customer. We intend to offer these customers capacity on
Atlantica-1 and to supplement it with TBI's value-added services.
VALUE-ADDED SERVICES: We intend to promote various value-added offerings
through which a customer could utilize our Bermuda network and network
operations center to generate cost savings and minimize income taxes. These
offerings include e-commerce and web hosting services as well as collocation of
switches and other equipment for least-cost routing and IP-based routing.
Specific services we plan to offer are:
. turnkey e-commerce and web hosting services, including systems for order
processing, financial transactions, and network-based fulfillment of
digital product,
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. broadband transmission capacity and world-class hosting facilities for
web sites utilizing the customer's own e-commerce systems or databases
providing service such as disaster recovery backup protection,
. collocation of switches or other equipment to perform traditional
circuit-switched least cost routing or IP-based routing, including
emerging international IP-based voice services. Least-cost routing takes
advantage of the international settlement system to identify low cost
solutions for the one-way delivery of voice traffic made possible by the
liberalization and deregulation of many telecommunications markets
around the world, and
. down-linking international satellite traffic through Bermuda, rather
than the United States, to the same ultimate destination at substantial
cost savings, along with the availability of other value-added services.
Regulation
Our undersea fiber optic cable facilities and telecommunications services,
including backhaul services, may be subject to regulation in each jurisdiction
where the Atlantica-1 Network and the BUS-1 system land. We currently have in
place all of the necessary licenses to land and provide services from the BUS-1
system. In order to implement fully the Atlantica-1 Network, it may be necessary
for us to obtain authority to land the cable and to offer telecommunications
services, including backhaul, to our customers in each jurisdiction in which the
cable lands. See "Business--Risk Factors--Government Regulation."
United States
In the United States, the laws and regulations pertaining to undersea cable
systems and telecommunications services are well developed and an established
set of rules and procedures exists. We have reviewed with Alcatel our various
options with respect to the most optimal landing locations. On June 2, 1999, we
submitted a cable landing license application to the FCC seeking authority to
land and operate the Atlantica-1 Network in Tuckerton, New Jersey (near the
landing stations for the BUS-1 system) and Boca Raton, Florida. On December 10,
1999, the FCC granted Atlantica USA L.L.C., a wholly owned subsidiary of the
Company, a landing license for the Atlantica-1 Network.
TBI's U.S. affiliate, TBI L.L.C., was formed in May 1996 as a limited
liability company under the laws of the State of Delaware. TBI L.L.C. holds the
landing license for the BUS-1 system in the United States issued by the FCC, as
well as certain ownership and leasehold
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rights with respect to BUS-1 system assets located in the United States. TBI
L.L.C. is a wholly owned subsidiary of TBI.
TBI is authorized to operate in the United States as a common carrier
pursuant to Section 214 of the Communications Act of 1934, as amended. This
allows TBI to provide any telecommunications service, including backhaul
services, to or from the United States via any means, including our current and
future undersea fiber optic cable systems.
Brazil and Venezuela
In countries such as Brazil and Venezuela with recently privatized
telecommunications industries, many of the telecommunications laws and
regulations are relatively new and still evolving. In both of these countries,
there are no current statutes or regulations regarding the landing of undersea
fiber optic cable facilities. Accordingly, we have consulted with the
appropriate regulatory authorities in Brazil (ANATEL) and Venezuela (CONATEL).
Based on these consultations, we believe that we are the first private undersea
fiber optic cable operator to request governmental approval to land an
international fiber optic cable system in either jurisdiction. These
consultations have indicated to us that the pro-competitive effects of
deregulation and the desire to attract foreign investment have created flexible
regulatory environments in Brazil and Venezuela that are receptive to projects
such as the Atlantica-1 Network.
The need for new undersea fiber optic cable systems is particularly strong
in these countries where former monopoly providers previously controlled access
to and from the country through their ownership of international capacity on
traditional consortium cable systems. Although competition in the provision of
telecommunications services has begun to be introduced in both jurisdictions,
the former monopoly carriers continue to control the existing inventory of
available undersea fiber optic capacity that lands in each country. Accordingly,
capacity remains scarce and very expensive.
BRAZIL: On March 2, 1999, we submitted a request to ANATEL seeking
authority to construct, land and operate the Atlantica-1 Network in Brazil. On
October 13, 1999, in response to this request, ANATEL indicated that the
provision of submarine cable infrastructure does not constitute a
telecommunications service and therefore no ANATEL license is necessary to
construct, own and operate the Atlantica-1 Network.
Established regulations and procedures exist for obtaining
telecommunications services licenses in Brazil. Our operating subsidiary in
Brazil has received the necessary telecommunications services licenses from
ANATEL to provide backhaul services in Brazil. It is our expectation that we
will be able to sell or lease submarine cable fiber optic facilities to
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all entities with authority to provide telecommunication services in Brazil.
Under the current regulatory regime in Brazil only Embratel and INTELIG have the
appropriate authority to offer long-distance and international switched voice
telephony services in Brazil. ANATEL is currently providing licenses on a
routine basis for companies seeking to offer international private network
services. We do not expect regulatory authority to be required for
carrier-to-carrier contracts or the offering of value-added services. Thus,
today we should be able to sell our facilities to the two public switched
telephony licensees, all private line licensees and value-added service
providers. The government of Brazil has announced that in January 2002, it will
lift current restrictions on the number of licensees in Brazil who may provide
switched voice telephony. At that time, we should also be able to offer our
facilities to new competitive switched voice telephony providers.
VENEZUELA: On March 16, 1999, we submitted a letter to CONATEL seeking
guidance on what licenses or permits from CONATEL may be necessary to land the
Atlantica-1 Network in Venezuela. In response to this letter, CONATEL informed
us in writing that no authorization or permit from CONATEL is required to
construct and land the Atlantica-1 Network in Venezuela. Based on advice
provided to us by CONATEL, we do not believe that any CONATEL permits or
concessions are necessary to operate the cable or sell capacity on the cable. In
order to provide backhaul services in Venezuela, we must obtain a Private
Network Concession, which is required under Venezuelan law to install and
operate a telecommunications network for commercial purposes. We shortly plan to
submit an application to CONATEL for this license. Although we cannot assure you
that we will be granted this license, we have no reason to believe that we will
not be successful in obtaining it.
It is our expectation that we will be able to sell or lease submarine cable
fiber optic facilities to all entities with authority to provide
telecommunications and value added network services in Venezuela. Under the
existing regulatory framework in Venezuela, only CANTV can offer international
public switched telephony services in Venezuela. However, the Concession
Agreement between the Republic of Venezuela and CANTV provides that in November
2000 the telecommunications market will be open for additional competition and
the appropriate authority will be granted to a number of companies seeking to
offer switched voice telephony services. Currently, CONATEL is issuing authority
on a routine basis to companies seeking to offer international or domestic
private network services. Thus, today we can sell our facilities to CANTV and
private network and value added service providers. Additionally, in November
2000 we will be able to sell facilities to newly licensed switched voice
telephony providers.
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Bermuda
On January 10, 1997, TBI was granted an international carrier license under
which it is authorized to provide a broad range of international
telecommunications services in, from, to and in transit through Bermuda. The
license is for a term of five years and is subject to renewal. In connection
with this arrangement, the Bermuda Government requires TBI to annually pay an
equalization fee based on the greater of 6% of TBI's total revenues (net of
carrier settlements) in Bermuda or 20% of TBI's profit in Bermuda. Although TBI
believes it will be able to obtain a renewal of TBI's international carrier
license, the failure to secure this renewal could have a material adverse effect
on our business, financial condition and results of operations. TBI's
international carrier license also permits TBI to land additional cables in
Bermuda subject to the prior consent of the Minister of Telecommunications and
Technology. On March 31, 1999, TBI applied for the Minister's consent to land
the Atlantica-1 Network in Bermuda. On April 7, 1999, TBI received formal
written approval from the Minister to land the Atlantica-1 Network in Bermuda.
The Minister's consent is subject to receipt of various construction licenses
and permits which are required in the ordinary course of business.
Intellectual Property and Research and Development
We have no patents or registered trademarks. We claim trademark rights to
the following marks: "GlobeNet," "TeleBermuda," "TBI," "Atlantica," "GlobeNet
Communications" and "GeoReach." The TBI logo, GlobeNet logo and the Atlantica
logo are our service marks. We have filed trademark applications with respect to
some or all of these trademarks in the United States and Bermuda.
We are not currently conducting any material research and development
activities.
Employees
As of December 31, 1999, we had 54 employees. We believe that our workforce
is highly capable and motivated and that our relations with our employees are
good. There have been no material changes in the number of our employees during
the past fiscal year.
Risk Factors
You should carefully consider the following risk factors and the other
information in this Form 10-K. The risks that we have described below are not
the only ones facing us. This Form 10-K also contains forward-looking statements
that involve risks and uncertainties. See "Forward-Looking Statements." Our
actual results could differ materially from those
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anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this Form 10-K.
Substantial Leverage--Our substantial indebtedness could limit our ability
to manage our business effectively.
We have substantial debt and debt service requirements. As of December 31,
1999, we had consolidated indebtedness of approximately $400 million. Our
subsidiary GlobeNet Communications Holdings Ltd. ("Holdings") may be able to
borrow up to an additional $350 million under its credit facility. Further, the
indenture under which we issued our outstanding 13% senior notes and Holdings'
bank credit facility may permit us to incur additional debt, including secured
debt, subject to certain limitations. 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.
The amount of our debt could have important consequences. For example, it
could:
. increase our vulnerability to general adverse economic and industry
conditions,
. limit our ability to fund future capital expenditures, research and
development costs, working capital and other general corporate
requirements,
. require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our
indebtedness,
. limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate, and
. place us at a competitive disadvantage compared to competitors that
have less debt.
Covenant Restrictions--Holding's bank credit facility, the related
security, pledge, guarantee and other documents and the indenture governing
our outstanding 13% senior notes impose significant restrictions on our
ability to take certain actions.
These restrictions will significantly limit or prohibit, among other
things, our ability and our subsidiaries' ability to:
. engage in unrelated business activities,
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. incur additional indebtedness,
. repay indebtedness prior to stated maturities,
. sell assets,
. make investments,
. engage in transactions with shareholders and affiliates,
. issue capital stock,
. create liens, or
. engage in mergers, amalgamations or acquisitions.
These restrictions could also limit our ability and our subsidiaries'
ability to:
. obtain financing in the future,
. make needed capital expenditures,
. withstand a future downturn in our business or the economy in general,
or
. otherwise conduct necessary corporate activities.
Events beyond our control, including prevailing economic and financial
conditions, may affect our ability and our subsidiaries' ability to comply with
these covenants and restrictions. If we or our subsidiaries fail to comply with
these restrictions, a default may occur under the terms of Holdings' bank credit
facility and the related documents or the indenture notwithstanding our ability
and the ability of our subsidiaries to meet our respective debt service
obligations.
Limited Operating History--Because of our limited operating history and
negative cash flow, it may be difficult for you to evaluate our business
and predict our future success.
We began providing telecommunications services in Bermuda in May 1997
through TBI. We have accumulated losses as of December 31, 1999 of $30.9 million
and have never earned a profit. In addition, our historical financial
information relates primarily to TBI's retail
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international telecommunications business and not the international
telecommunications network solutions business we are entering with the
construction of the Atlantica-1 Network. Accordingly, you have very limited
historical financial information upon which to base your evaluation of our
performance. You should consider our prospects in light of the risks, expenses
and difficulties that companies in an early stage of development frequently
encounter.
We intend to use a significant amount of capital to develop the Atlantica-1
Network and terrestrial extensions. Until we complete the principal segments of
the network, we will continue to spend more building the network than we will
earn from selling capacity on it. Accordingly, we expect to experience negative
cash flows after capital expenditures while we are developing our network. Our
future success will depend substantially on sales of capacity on the Atlantica-1
Network and any subsequent systems. We may be unable to realize our business
plan, achieve operating profitability or generate sufficient cash flow to
service our debt, capital expenditures or working capital requirements.
Substantial Future Capital Requirements--Our future growth will require
substantial additional capital requirements that may exceed our budgeted
amounts and for which we may need to incur additional indebtedness.
Although we expect the net proceeds we received from the private offering
of our 13% senior notes, the net proceeds we received from the private equity
financing (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" below) and borrowings
under Holdings' bank credit facility to be sufficient to complete the
development of the Atlantica-1 Network, we expect to need significant amounts of
additional capital to implement our business plan. 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, and we may
incur further costs for terrestrial capacity in the future. In addition to
building the Atlantica-1 Network, we may in the future expand our undersea fiber
optic cable systems through the development of the Atlantica-2 Network. We
expect the Atlantica-2 Network to have a lower unit price per kilometer to the
Atlantica-1 Network and to require substantial capital to develop.
If we cannot generate sufficient funds from operations, we may issue
additional debt or equity capital. The provisions of the indenture, Holdings'
bank credit facility and the related security, pledge, guarantee and other
documents, however, may restrict our ability to issue debt or equity. We may be
unable to arrange financing in the future or, if we are able to do so, we may be
unable to arrange financing on terms that are favorable to us. Our ability to
arrange financing and the cost of the financing will depend on many factors
including:
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. general economic and capital markets conditions and particular
conditions in the non-investment grade debt market,
. conditions in the telecommunications industry,
. regulatory developments,
. investor confidence and credit availability from banks and other
lenders,
. the success of the Atlantica-1 Network, and
. tax and securities laws that affect raising capital.
Completion of the Atlantica-1 Network--If we fail to complete our network
within our estimated cost and time-frame, we may be unable to provide our
network services competitively.
In order to implement our business strategy, we must successfully complete
the Atlantica-1 Network at the cost and in the time-frame that we currently
estimate. We have entered into a contract with Alcatel to design, engineer and
construct the Atlantica-1 Network on a turnkey basis. A wide variety of factors,
uncertainties and contingencies, many of which are beyond our or Alcatel's
control, including inclement weather and adverse changes in government
regulations, may affect the construction of the Atlantica-1 Network. Alcatel
also may suspend its work on the network if we fail to make the requisite
periodic payments. Any suspension could result in a failure to meet a scheduled
completion date. In addition, our contract with Alcatel limits the damages that
we could recover in the event of a breach by Alcatel.
There are few manufacturers of materials used to build undersea fiber optic
cable systems and these manufacturers have a limited capacity that network
developers reserve in advance. Alcatel has reserved capacity for the Atlantica-1
Network. A significant delay in our time-frame could cause us to be unable to
obtain the manufacturing capacity necessary to complete the network.
Our successful completion of the Atlantica-1 Network at the cost and in the
time-frame that we currently estimate will also depend, among other things, upon
our ability to manage its construction effectively and Alcatel's ability to
obtain all construction permits and licenses.
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Sales of Capacity--If we are unable to sell sufficient capacity on our
cable systems or to sell capacity on favorable terms, then we may be unable
to generate sufficient revenues and cash flows to implement our business
plan.
As of the date of this Form 10-K, we have only sold limited capacity on the
BUS-1 system and have not sold any capacity on the Atlantica-1 Network. There
may not be sufficient demand to support our network, we may not be able to sell
capacity on our cable systems and any sales may not be on favorable terms.
Several competitors have announced other undersea fiber optic cable systems with
capacity, technology and scheduled completion dates that we expect to be similar
to our network. These other systems may adversely affect our ability to sell our
capacity.
Realization of Other Revenues--If we fail to increase our revenues beyond
initial capacity sales, we may be unable to implement our business plan.
We intend to increase our revenues and profits by:
. upgrading capacity on the Atlantica-1 Network,
. developing or acquiring additional undersea fiber optic cable
capacity,
. developing or purchasing terrestrial extensions in a cost effective
manner to connect landing stations to major city centers,
. introducing new products and services such as value-added offerings
through which a customer could use our Bermuda base of network
operations to generate cost-savings and minimize income taxes, and
. increasing TBI's market share in Bermuda through the introduction of
innovative product and service offerings at competitive prices.
Operations Risks--If our systems fail to operate properly or are damaged,
we may be unable to provide our intended network services and to implement
our business plan.
Our success depends on our systems providing competitive reliability,
capacity and security. The operation, administration, maintenance and repair of
a large-scale, complex telecommunications network, however, requires the
coordination and integration of sophisticated and highly specialized hardware
and software technologies and equipment. The
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Atlantica-1 Network will employ certain components that no one has used before
in an undersea fiber optic cable system. The BUS-1 system also is subject to
operational risks. The failure of the hardware or software to function as
required could render an undersea fiber optic cable system unable to perform at
design specifications. Even if built to specifications, our systems may not
function as expected in a cost-effective manner. Additional operational risks
include physical damage, power loss, capacity limitations, breaches of security
and disruptions beyond our control.
Both the Atlantica-1 Network and the BUS-1 system are covered by a limited
manufacturer's warranty for a limited period of time intended to ensure that the
system as installed meets the design specifications. A third party maintains the
BUS-1 system under a contract with us. We expect to enter into a contract with a
third party to provide maintenance and other services on the Atlantica-1 Network
prior to the RFS date. We expect that purchasers of IRU capacity will pay their
pro rata share of maintenance expenses, including repair costs. If our systems
fail to operate properly or are damaged, and the problem is either not covered
by the manufacturer's warranty or applicable insurance coverage or we have not
sold a sufficient amount of IRU capacity to absorb the repair cost, we may incur
a material repair expense.
We expect each of our systems to have a design life of not less than 25
years; however, the actual useful life of any of these systems may be shorter. A
number of factors will affect the useful life of each of our systems, including,
among other things:
. quality of construction,
. unexpected deterioration, and
. technological or economic obsolescence.
Competition--We may be unable to compete with our larger and better
financed competitors.
The international telecommunications industry is extremely competitive. We
face competition from existing and planned systems along each of our planned
routes. We will also compete with satellite providers and land-based cable
systems. Most of our competitors have substantially greater financial, technical
and marketing resources than we do. We will compete primarily on the basis of
price, availability, flexible provisioning, colocation services, transmission
quality and reliability, customer service and the locations our systems connect.
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Future sources of competition for the Atlantica-1 Network include:
. Americas-2, a new carriers' consortium cable system with a scheduled
RFS date in the first half of 2000 that will connect Brazil,
Venezuela, Florida and the Caribbean,
. South American Crossing, a new self-healing ring cable system being
developed by Global Crossing Ltd. that will link coastal countries in
South America to Global Crossing's planned Mid-Atlantic Crossing in
St. Croix, U.S.V.I. and Global Crossing's planned Pan American
Crossing in Ft. Amador, Panama, and
. the SAm-I cable system, a self-healing ring cable system being
developed by Telefonica Internacional S.A. and Tyco International Ltd.
that will connect the United States, Guatemala, Brazil, Argentina,
Chile, Peru and Colombia.
Global Crossing Ltd. has stated that South American Crossing is scheduled
to be available for service in the first quarter of 2001 and will be capable of
providing up to 1,280 Gbps of total capacity. Telefonica Internacional S.A. and
Tyco International Ltd. have stated that SAm-1 is scheduled to be available for
service in December 2000 and will be capable of providing up to 1,280 Gbps of
total capacity. In addition, we are aware of carrier discussions regarding a
possible new carrier's consortium cable system, Americas-3, that would involve a
ring system connecting the United States, Puerto Rico, Venezuela, Argentina,
Brazil, Chile, Ecuador, Colombia, Uruguay, Peru, Panama, Barbados, Jamaica and
the Dominican Republic with a potential design capacity of up to 2,560 Gbps. We
believe that the first quarter 2002 is the target completion date for this
system. There may not be sufficient demand to support all of these systems or
additional systems that these or other competitors may build.
Our existing business, the provision of retail telecommunications services
in Bermuda, is also very competitive. Our only licensed competitor in this
market, Cable & Wireless, has:
. substantially greater financial, technical and marketing resources,
. access to larger networks through inter-company relationships,
. a broader portfolio of services,
. stronger name recognition, and
. long-standing customer relationships.
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In August 1999, an ISP in Bermuda filed for declaratory relief following
the Bermuda Government's refusal to permit it to provide voice over Internet
service under the terms of its data only service license. TBI intervened and was
joined as a party to the lawsuit on January 21, 2000. The lawsuit was dismissed
as a result of a preliminary application made by the Bermuda Government and TBI
on February 15, 2000. On March 24, 2000, the Bermuda ISP applied for leave to
appeal the dismissal to the Court of Appeal for Bermuda. The Bermuda ISP's
application for leave to appeal is scheduled to be heard in June of this year.
In addition, in October 1999, the Minister of Telecommunications & E-Commerce
Affairs initiated a reconsideration of whether the license terms of ISPs should
be amended to permit them to provide voice over Internet service and to broaden
the class of carriers authorized to provide Internet services. Further to this
initiative, in December 1999, the Minister requested the Telecommunications
Commission to conduct an inquiry into the Bermuda ISP industry's financial and
cost structure. Accordingly, the Bermuda Government may change its current
policy and permit ISPs to provide voice over Internet, which would constitute a
competitive service to TBI's long-distance services. In addition, the Bermuda
Government may license additional parties to provide long-distance service in
Bermuda. These developments may adversely impact our revenues from TBI's Bermuda
long-distance business.
Dependence on Senior Management--If we lose members of our senior
management team, we may be unable to implement our business plan.
We are dependent on the continued employment of our senior management team
in order to implement our business plan. A small number of key management and
operating personnel who have been extensively involved in our formation and the
establishment of our key business relationships manage our business. Among other
things, we rely on specific individuals to supervise the construction of our
undersea cable network, to negotiate strategic alliances with telecommunications
service providers and other carriers, to sell capacity on the network and to
oversee and implement other aspects of our business plan. The loss of any member
of our management team could delay or prevent us from achieving these aspects of
our business plan. Competition for management-level individuals in the
telecommunications industry is intense, and we may not be able to attract,
motivate and retain highly skilled qualified personnel. We do not maintain any
key person life insurance on the lives of any of our management personnel.
Ability to Manage Growth--If we are unable to effectively manage our growth
and transition from a development company to an operating company, we may
not be successful in developing and operating our network.
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Our planned growth and expansion will place significant demands on our
management and operations. Our ability to manage this growth successfully will
depend on, among other things:
. expanding our management resources, network infrastructure,
information and reporting systems and controls,
. expansion, training and management of our employee base, including
attracting and retaining skilled personnel,
. evaluating new markets,
. monitoring operations,
. controlling costs, and
. obtaining satisfactory interconnection agreements with other network
providers.
Dependence on Third Parties--If the third parties upon whom we depend do
not perform their contractual obligations, we will be unable to provide our
network services.
We and our customers depend and will continue to depend upon third parties,
such as carriers, Post, Telephone and Telegraph companies, or PTTs,
telecommunications facilities providers and suppliers, and local operating
companies, including the Bermuda Telephone Company, to:
. construct and maintain systems and provide equipment,
. provide access to certain origination and termination points of our
systems in various jurisdictions,
. construct and operate landing stations in certain of these
jurisdictions,
. acquire rights of way, licenses and permits, and
. provide terrestrial capacity.
These third parties may not perform their contractual obligations.
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<PAGE>
Tax Matters--We have assumed that a significant portion of our income will
not be subject to certain taxes. If our assumption is incorrect or if there
are changes in the prevailing tax laws, it could adversely impact our
revenues and our cash flow.
We believe that a significant portion of the income derived from our
undersea fiber optic systems will not be subject to tax by any of (1) Bermuda,
which currently does not have a corporate income tax, (2) Brazil, (3) Venezuela,
or (4) certain other countries in which we will conduct activities or in which
our target customers will be located, including the United States. However, we
base our belief upon the anticipated nature and conduct of our business, which
may change, and upon our understanding of the tax laws of the various countries
in which we expect to have assets or conduct activities. Our position is subject
to review and possible challenge by taxing authorities and to possible changes
in law, which may have retroactive effect. We cannot predict the amount of tax
to which we may become subject.
Demand for Fiber Optic Capacity--If fiber optic cable technology becomes
obsolete or is replaced by newer competing technologies, we may be unable
to implement our business plan.
The international telecommunications industry is changing rapidly due to,
among other things:
. the easing of regulatory constraints,
. the privatization of established carriers and PTTs,
. the expansion of telecommunications infrastructure,
. economic globalization, and
. the changing technology for all telecommunications industry sectors,
including cable, wireless and satellite.
Our business strategy and much of our planned growth is predicated upon the
continuation of the growth in demand for international telecommunications
capacity that has occurred over the past several decades and the continued
viability of fiber optic cable networks as a preferred means of transmitting
voice and data. This may not occur.
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Declining Prices Per Circuit--If prices for circuits decline more than we
expect, we may not generate sufficient revenues to implement our business
plan.
The fiber optic cable transmission industry has realized significant per
unit cost reductions over the past several years resulting from technological
advances in fiber optics. These advances have caused prices for circuits to
decline. We anticipate that prices for our products and services specifically,
and network transmission capacity in general, will continue to decline over the
next several years, due primarily to the following:
. price competition as various network providers continue to install
networks that might compete with the Atlantica-1 Network,
. recent technological advances that result in substantial increases in
the transmission capacity of both new and, to a lesser extent,
existing fiber optic telecommunications networks, and
. strategic alliances or similar transactions, such as long-distance
capacity purchasing alliances among groups of carriers, that could
increase the parties' purchasing power.
There may, however, be a bigger decline in prices per circuit than we
expect.
Risks Associated with International Markets--We will operate in many
foreign markets and these foreign operations will expose us to risks that
may prevent us from providing our network services or may adversely affect
our ability to do so profitably.
Our foreign operations will expose us to certain risks inherent in doing
business on an international level. These risks include:
. regulatory limitations restricting or prohibiting us from providing
our services,
. unexpected changes in regulatory requirements, tariffs, customs,
duties and other trade barriers,
. difficulties in staffing and managing foreign operations,
. political risks,
. fluctuations in currency exchange rates and restrictions on
repatriation of earnings, and other exchange control regulations,
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<PAGE>
. delays from customers, brokers or government agencies,
. potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws, and
. an economic downturn in the countries in which we expect to do
business.
Government Regulation--We and our customers are subject to substantial
government regulation in the United States and several other jurisdictions.
These regulations may affect our ability to operate our systems or offer
certain of our products.
Government regulations may require us, in the ordinary course of
development, construction and operation of our network, to obtain and maintain
various permits, licenses and other authorizations including undersea cable
landing licenses (and environmental and natural resources licenses or permits)
in the United States, Brazil, Bermuda, Venezuela and in any other foreign
jurisdictions where our cables may land and exist. If we are unable to obtain
and maintain necessary permits, licenses and other authorizations, we will be
unable to operate our systems.
BRAZIL: On March 2, 1999, we submitted a written request to the Agencia
Nacional de Telecomunicacoes, or ANATEL, the telecommunications regulatory
authority in Brazil, seeking a determination as to the scope and nature of
ANATEL's authority to regulate undersea cable systems such as the Atlantica-1
Network. On October 13, 1999, ANATEL, in a response to this request, indicated
that the provision of submarine cable infrastructure does not constitute a
telecommunications service and therefore no ANATEL license is necessary to
construct, own and operate the Atlantica-1 Network.
VENEZUELA: The Comision Nacional de Telecomunicaciones, or CONATEL, the
telecommunications regulatory agency in Venezuela, has provided us with written
confirmation that we may construct and land the Atlantica-1 cable in Venezuela
without formal regulatory approval from CONATEL. Additionally, based on advice
provided to us by CONATEL, we do not believe that any CONATEL permits or
concessions are necessary to operate the cable or sell capacity on the cable.
Our inability to secure any necessary approvals in the required time frame could
prevent us from providing our intended network services.
We intend to submit to CONATEL an application for the appropriate licenses
that will permit us to provide backhaul services in Venezuela. While we expect
CONATEL to grant us these licenses, CONATEL may not do so, or it may not do so
within our time schedule.
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<PAGE>
BERMUDA: On January 10, 1997, the government of Bermuda granted TBI an
international carrier license. The license is for a term of five years and is
subject to renewal. The government may not renew our license. If the government
fails to renew our license, we will no longer be able to provide
telecommunications services in Bermuda and will be required to sell TBI's
telecommunications business.
Item 2. Properties.
We lease executive and administrative office space at our headquarters at 2
Carter's Bay Road, Southside, St. David's DDBX, Bermuda. We lease cable station
space in St. David's, Bermuda under a 12-year lease, which is renewable for an
additional nine-year term. We also lease cable station space in Tuckerton, New
Jersey under a lease that will expire when the BUS-1 system is retired from
service, which is expected to occur in 2022. In addition, we lease office space
in Hamilton, Bermuda, White Plains, New York, and in Canada in Concord, Ontario
and Montreal.
We have purchased property in (1) Fortaleza, Brazil, (2) Rio de Janeiro,
Brazil, (3) Tuckerton, New Jersey and (4) Boca Raton, Florida, and have leased
property in St. David's, Bermuda to build new cable landing stations for the
Atlantica-1 Network. In addition, we intend to purchase property in Punta Gorda,
Venezuela to build a new cable landing station.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Sales of Unregistered Equity Securities
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
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<PAGE>
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.,
. Capital Communications CDPQ Inc.,
. Kelso & Company,
. Nautilus Equity Investors LLC,
. Ontario Municipal Employee Retirement Board,
. Providence Equity Partners Inc.,
. Sandler Capital Management,
. Spectrum Equity Investors, and
. TD Capital Group Limited.
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.
Market Information
There is no established public trading market for our common shares in the
United States. Our common shares trade on the Bermuda Stock Exchange under the
symbol "GLOCOM." The following table sets forth, for the periods indicated, the
high and low sales prices of our common shares. These prices are stated in
Bermuda dollars, which are pegged to the United States dollar at par.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1998
1st Quarter $8 1/4 $8
2nd Quarter 7 1/2 7
3rd Quarter 7 1/2 5
4th Quarter 5 4 1/2
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
1999
1st Quarter $4 1/2 $3
2nd Quarter 5 3
3rd Quarter 19 1/2 14
4th Quarter 23 18 1/4
</TABLE>
Holders
As of March 15, 2000, there were approximately 220 holders of record of our
common shares.
Dividends
We have not declared cash dividends on our common shares since our
inception and we do not anticipate paying any cash dividends in the foreseeable
future, but intend instead to retain any future earnings for reinvestment in our
business. Any future determination as to the payment of dividends will be made
at the discretion of our board of directors and will depend on our operating
results, financial condition, capital requirements, general business conditions
and such other factors as the board of directors deems relevant.
Our ability to pay dividends may also be restricted by the indenture under
which we issued our 13% senior notes and by our holding company structure. Our
only material asset is our ownership of the capital stock of Holdings. As a
result, our ability to pay dividends depends on the performance of the
businesses owned by our subsidiaries and our subsidiaries' ability to distribute
funds to us. Holdings' bank credit facility and the related security, pledge,
guarantee and other documents will restrict our subsidiaries' ability to pay
dividends, make distributions or otherwise transfer funds to us.
Bermuda Law Considerations
Under existing Bermuda law, no income, withholding or other taxes or stamp
or other duties are imposed on United States holders upon the issue, transfer or
sale of our common shares or on any payments thereunder. There is no reciprocal
tax treaty between Bermuda and the United States regarding withholding taxes.
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data for the
Company. We have derived the selected consolidated statement of operations data
for the fiscal years ended
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December 31, 1999, 1998, 1997 and for the ten months ended December 31, 1996 and
the selected consolidated balance sheet data as at December 31, 1999, 1998, 1997
and 1996 from our consolidated financial statements that PricewaterhouseCoopers
LLP, Chartered Accountants, has audited. We have prepared this selected
consolidated statement of operations data and balance sheet data in accordance
with United States generally accepted accounting principles.
We are substantially increasing the scope and scale of our business with
the development of the Atlantica-1 Network. Accordingly, the selected
consolidated financial data presented below may not be indicative of our
financial position or results of operations in the future. You should read the
selected consolidated financial data in conjunction with our consolidated
financial statements and the notes thereto that are included elsewhere in this
Form 10-K. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
Ten Months Fiscal Year Ended
---------- -----------------
Ended December 31,
----- ------------
December 31,
-----------
1996
---------- 1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Telecommunications services .................................................... $ -- $ 4,962 $ 24,940 $ 26,033
IRU capacity ................................................................... -- -- 1,784 315
--------- --------- --------- ---------
HOLD ........................................................................... -- 4,962 26,724 26,348
--------- --------- --------- ---------
Expenses
Carrier charges ................................................................ -- 3,559 15,129 10,989
Cost of IRU capacity ........................................................... -- -- 547 --
General and administrative expenses ............................................ 3,158 4,961 9,328 19,311
Amortization of capital assets ................................................. 1 429 1,502 1,854
Interest on long-term debt ..................................................... -- 1,055 3,863 20,427
Accrued contingent interest(1) ................................................. -- 382 960 538
Interest income ................................................................ (141) (193) (170) (12,588)
Provision for income taxes ..................................................... 14 53 36 141
Minority interest .............................................................. -- (249) (204) --
Loss from equity accounted for investments ..................................... 228 261 677 773
Extraordinary loss relating to extinguishment of debt .......................... -- -- -- 809
--------- --------- --------- ---------
Net loss ....................................................................... $ (3,260) $ (5,296) $ (4,944) $ (15,906)
========= ========= ========= =========
Basic and fully diluted loss per common share before extraordinary item ........ $ (1.89) $ (1.52) $ (1.41) $ (1.52)
========= ========= ========= =========
Basic and fully diluted loss per common share relating to the
extraordinary loss from the debt extinguishment .............................. -- -- -- (0.08)
========= ========= ========= =========
Basic and fully diluted loss per common share .................................. $ (1.89) $ (1.52) $ (1.41) $ (1.60)
========= ========= ========= =========
Balance Sheet Data (at period end):
Current assets including cash .................................................. $ 12,520 $ 4,517 $ 7,296 $ 83,876
Capital assets, net ............................................................ 4,731 26,970 26,182 49,148
Total assets ................................................................... 17,418 55,152 56,260 705,332
Total long-term debt (including current portion) ............................... -- 30,122 38,019 400,000
Shareholders' equity ........................................................... 16,725 11,648 6,704 241,581
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures ....................................................... $ 4,728 $ 22,662 $ 1,791 $ 4,139
Ratio of earnings to fixed charges ......................................... --(2) --(2) --(2) --(2)
Cash provided by (used in):
Operating activities ....................................................... $ (1,359) $ 5,447 $ (3,489) $ 12,020
Financing activities ....................................................... 17,594 29,159 6,937 578,917
Investing activities ....................................................... (6,898) (43,128) (1,777) (593,967)
Earnings (loss) before interest, amortization, income taxes, minority
interest, equity accounted for investments and extraordinary item(3) ..... (3,158) (3,558) 1,720 (3,952)
</TABLE>
(1) Accrued contingent interest represents the payment that we would have had
to make if the warrant holders had not exercised the warrants that we
issued in connection with our retired subordinated loans by July 28, 2002.
We calculated it at 7% per annum on the gross exercise price for the
unexercised warrants from the date of issue to the date of expiration.
(2) Earnings were inadequate to cover fixed charges and accordingly the
deficiency of earnings available to cover fixed charges is as follows:
$3,246 for the ten months ended December 31, 1996, $5,243 for the year
ended December 31, 1997, $4,908 for the year ended December 31, 1998, and
$14,956 for the year ended December 31, 1999. For the purposes of
calculating the deficiency of earnings available to cover fixed charges,
earnings consists of earnings (loss) before income taxes, minority
interest, equity accounted for investment and extraordinary item adjusted
for minority interest, earnings (loss) from equity accounted for
investments and fixed charges. Fixed charges consist of interest on
long-term debt, amortization of deferred financing costs, accrued
contingent interest and the interest component of rental expense.
(3) Earnings (loss) before interest, amortization, income taxes, minority
interest, equity accounted for investments and extraordinary item is not a
measure of performance under U.S. GAAP, but we present it because we
believe it is a measure of performance that analysts, investors and other
interested parties in our industry commonly report and widely use. You
should not consider it an alternative to net loss as a measure of operating
performance or cash provided by (used in) operations as a measure of
liquidity.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the discussion in this section in conjunction with our
audited 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
39
<PAGE>
and expectations for our business, is forward-looking. You should carefully
consider the factors set forth under the caption "Forward-Looking Statements,"
"Business-Risk Factors" and elsewhere in this report for a discussion of
important factors that could cause actual results to differ materially from any
forward-looking statements contained in this report.
Overview
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
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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.
Customers may enter into agreements to purchase capacity from us in the
form of the granting of 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. 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
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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 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 - Year Ended December 31, 1999 Compared With Year Ended
December 31, 1998
Revenues
Revenues decreased to $26.3 million for the year ended December 31, 1999
from $26.7 million for the year ended December 31, 1998, a decrease of 1.5%.
Outbound revenues increased to $20.3 million for the year ended December
31, 1999 compared to $18.8 million for the year ended December 31, 1998, an
increase of 8.0%. 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 $0.87 for the year ended December 31, 1999 compared to $0.94
for the year ended December 31, 1998. Outbound traffic volumes increased to 23.3
million minutes for the year ended December 31, 1999 from 17.3 million minutes
for the year ended December 31, 1998. These volume increases were a response to
an increase in
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<PAGE>
marketing and advertising by the Company and were reflective of a positive
response to the rate reductions.
Inbound revenues decreased to $4.0 million for the year ended December 31,
1999 compared to $5.3 million for the year ended December 31, 1998, a decrease
of 24.5%. Revenue from debit sales increased to $1.2 million for the year ended
December 31, 1999 compared to $0.4 million for the year ended December 31, 1998,
an increase of 200.0%. This increase was the direct result of a distribution
arrangement for the debit cards introduced in November 1998.
IRU capacity revenue decreased to $0.3 million for the year ended December
31, 1999 compared to $1.8 million for the year ended December 31, 1998, a
decrease of 83.3%. There were no capacity sales in the year ended December 31,
1999.
Carrier Charges and Cost of IRU Capacity
Carrier charges and Cost of IRU Capacity decreased to $11.0 million for the
year ended December 31, 1999 compared to $15.7 million for the year ended
December 31, 1998, a decrease of 29.9%. This decrease was largely due to a
reduction in local access charges for Bermuda originating and terminating
traffic. These charges decreased to $4.7 million for the year ended December 31,
1999 from $7.3 million for the year ended December 31, 1998, a decrease of
35.6%. 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 year ended December 31, 1999 decreased to $6.3
million from $7.8 million for the year ended December 31, 1998, a decrease of
19.2%. 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 year ended December 31,
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 year ended December 31, 1998
totaled $547,000.
43
<PAGE>
General and Administrative Expenses
General and Administrative Expenses for the year ended December 31, 1999
increased to $19.3 million compared to $9.3 million for the year ended December
31, 1998, an increase of 107.5%. This increase was mainly due to an increase in
compensation expense of $4.2 million resulting from the recognition of costs
related to certain stock options granted 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 year ended December 31, 1999
increased to $1.9 million from $1.5 million for the year ended December 31,
1998, an increase of 26.7%. This increase resulted largely from the addition of
network and telecommunications equipment.
Interest on Long-Term Debt
Interest on long-term debt for the year ended December 31, 1999 increased
to $20.4 million from $3.9 million for the year ended December 31, 1998, an
increase of 423.1%. This increase was a result of the debt financing for the
development of the Atlantica-1 Network secured by the Company in July 1999 net
of amounts capitalized.
Interest income
Interest income for the year ended December 31, 1999 increased to $12.6
million from $0.2 million for the year ended December 31, 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 and write-off of unamortized
deferred financing costs.
Result of Operations - Year Ended December 31, 1998 Compared With Year Ended
December 31, 1997
We began commercial operations in May 1997, initially providing service via
satellite pending the completion of the BUS-1 system in November 1997.
Accordingly, our results of
44
<PAGE>
operations for 1997 reflect only seven full months of operation, as compared to
the twelve months of operation in the 1998 results.
Revenues
Revenues increased to $26.7 million in 1998 compared to $5.0 million in
1997, an increase of 434.0%. This increase resulted primarily from an increase
in our market share in Bermuda and the sale of undersea fiber optic cable
capacity in 1998. Outbound revenues for 1998 increased to $18.4 million compared
to $4.5 million for 1997, an increase of 308.9%. Inbound revenues increased to
$5.7 million in 1998 compared to $0.4 million in 1997, an increase of 1,325.0%.
The average rate per outbound minute realized was $0.94 in 1998 and 1997.
Bulk capacity sales on the BUS-1 system to two major international
carriers, in the form of IRUs, were completed in 1998 for aggregate proceeds of
$1.5 million. In addition, a Bermuda-based ISP leased bulk capacity on the BUS-1
system, for a 10- to 25-year term, at a total price of $8.0 million. The
proceeds from the IRU sales were recognized in 1998 while the proceeds from the
leased capacity are deferred and amortized over 25 years.
Carrier Charges and Cost of IRU Capacity
Carrier charges and cost of IRU capacity increased to $15.7 million in 1998
compared to $3.6 million in the previous year, an increase of 336.1%. This
increase resulted primarily from higher traffic in 1998, partially offset by the
impact of reduced settlement rates with foreign carriers.
Local access charges for Bermuda originating and terminating traffic
increased to $7.3 million in 1998 compared to $1.5 million in 1997, an increase
of 386.7%. Local access charges for 1998 were levied on the basis of a
government approved tariff of $0.27 per minute for originating traffic and $0.24
per minute for terminating traffic. These rates remained unchanged from the
previous year. The increase in the charges resulted from an increase in traffic
on our system.
Foreign settlements for 1998 totaled $7.6 million compared to $2.1 million
for the previous year, an increase of 261.9%. During 1998, the settlement rate
with U.S. carriers was reduced from $0.51 to $0.35 per minute and the U.K. rate
was reduced from the equivalent of $0.62 to $0.48 per minute. The increase in
the amount of charges resulted from an increase in traffic on our system.
45
<PAGE>
The cost of IRU capacity sold in 1998 totaled $547,000. There were no
capacity sales in 1997.
General and Administrative Expenses
General and administrative expenses in 1998 increased to $9.3 million
compared to $5.0 million for the previous year, an increase of 86.0%. This
increase resulted primarily from the cost of additional staff and marketing
expenditures required to acquire market share in Bermuda. Significant additional
staffing should not be required to expand and maintain the Bermuda business.
However, as the Atlantica-1 Network develops, staffing levels for selling and
network operations will be increased substantially.
Amortization Expense
Amortization expense increased to $1.5 million in 1998 compared to $0.4
million in the previous year, an increase of 275.0%. This increase is primarily
attributable to the addition of the BUS-1 system in November 1997. Amortization
expense related to the BUS-1 system was $0.9 million in 1998 compared to $0.1
million in the previous year, an increase of 800.0%.
Interest on Long-Term Debt
Interest on long-term debt increased to $3.9 million in 1998 compared to
$1.1 million in 1997, an increase of 254.5%. This increase resulted primarily
from higher average borrowings in 1998.
Results of Operations - Year Ended December 31, 1997 Compared With Ten Months
Ended December 31, 1996
We did not provide telecommunications services prior to 1997. Therefore, we
did not have any revenues or carrier charges and other cost of sales in the ten
months ended December 31, 1996. In addition, the periods are not directly
comparable because the period ended December 31, 1997 was for 12 months while
the period ended December 31, 1996 was for only 10 months.
Revenues
Revenues increased to $5.0 million in 1997. We had no revenues in 1996. On
a monthly basis outbound revenue increased from $0.3 million in June 1997 to
$1.0 million in December 1997. Inbound traffic from MCI Worldcom and British
Telecom began in August 1997 and
46
<PAGE>
contributed to approximately 7% of the revenue for the 1997 year. At December
1997, inbound traffic represented 10% of revenue for the month.
Carrier Charges and Cost of IRU Capacity
Carrier charges and cost of IRU capacity increased to $3.6 million in 1997.
We had no carrier charges and other costs of sales in 1996. The cost of services
was relatively high in 1997 because the BUS-1 system did not become operational
until November 1997 and traffic was carried via satellite until that time. Also,
settlement rates with foreign carriers were relatively high in 1997 until
volume-related price reductions were established with these carriers.
General and Administrative Expenses
General and administrative expenses increased to $5.0 million in 1997
compared to $3.2 million in 1996, an increase of 56.3%. This increase resulted
largely from the development of network, sales and customer service
infrastructure to support our service offerings and operations.
Amortization Expense
Amortization expense increased to $429,000 in 1997 compared to $1,000 in
1996 as the BUS-1 system became operational.
Interest on Long-Term Debt
Interest on long-term debt increased to $1.1 million in 1997 as our retired
subordinated loans and TBI's retired credit facility were obtained to finance
the BUS-1 system, and funds were drawn from these facilities. We had no interest
on long-term debt in 1996.
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
47
<PAGE>
1,500,000 common shares at an aggregate price of $20.40 per share
(less expenses) from existing shareholders.
. The issuance of debt in the principal amount of $300.0 million 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.
. A bank 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 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 Holdings' bank 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 Holdings' bank 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, landing stations and capital contingencies, will be $825 million.
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 to be RFS in December 2000.
48
<PAGE>
We have commitments under our supply contract with 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 years
ending December 31, 2000 and December 31, 2001 are $465.6 million and $62.1
million, respectively.
We expect to use the net proceeds we received from the private offering of
our 13% senior 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 Holdings' bank 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 Holdings' bank 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 have obtained a commitment
from a financial institution to provide us with an $85 million debt facility in
the event that we are unable to consummate a senior note offering. This
commitment is subject to various terms and conditions. We cannot assure you that
we will be able to raise successfully necessary capital. 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.
49
<PAGE>
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
Holdings' bank 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 $12.0 million for the year
ended December 31, 1999, as compared to net cash used in operating activities of
$3.5 million for the year ended December 31, 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 1999 was primarily the result
of cash received from leasing capacity on the BUS-1 cable system and from the
accrual of interest payable on our 13% senior notes which was not payable until
January 15, 2000.
Cash provided by financing activities was $578.9 million for the year ended
December 31, 1999 and primarily represents proceeds from the private equity
financing and issuance of the 13% senior notes in July 1999 and borrowings under
Holdings' bank 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
$6.9 million for the year ended December 31,1998 and relates to draws on our
retired term loan and operating credit facility.
Cash used in investing activities was $594.0 million and $1.8 million for
the year ended December 31, 1999 and 1998, respectively. The cash used in
investing activities for the year ended December 31, 1999 is largely comprised
of the first installment of $62.8 million under our supply contract with Alcatel
and reflects the Company's restricted cash and investments.
50
<PAGE>
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.
Item 7A. 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 December 31, 1999 are as follows:
Note Receivable: We had a note receivable of (British Pounds)250,000 which
is non-interest bearing and due November 20, 2000.
Account Payable: We had an account payable of 900,591 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 year ended December 31, 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 December 31, 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 December 31, 1999, we also owed $300.0 million on our outstanding
senior notes, which is
51
<PAGE>
due July 15, 2007 and has a fixed interest rate of 13%. See Note 9 to our
consolidated financial statements in this report for more information on our
debt.
Short-term investments: We held $522.0 million in money market investments
at December 31, 1999. The return on this investment portfolio fluctuates with
market interest rates.
The table below provides information about the interest rates of our debt
obligations and the interest rate cap transaction. The table shows the amount of
debt and average interest rates as of December 31, 1999, by expected maturity
dates.
<TABLE>
<CAPTION>
Expected maturity dates 2000 2001 2002 2003 2004 Thereafter Total Fair Value
12/31/1999 12/31/1998
---------------------------------------------------------------------------------------
(in thousands)
US Dollar
Debt
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13% Series B Senior Notes -- -- -- -- -- 300,000 300,000 300,000 N/A
due 2007
Average interest rates - fixed 13%
Bank Credit Facility due 2005 -- -- -- -- -- 100,000 100,000 100,000 N/A
Average interest rates - variable (1)
Derivative Instruments
Interest Rate Cap for -- -- 50,000(2) -- -- -- 50,000 50,647 N/A
contract notional amount
</TABLE>
- ------------------------------
(1) The interest rate is calculated at LIBOR plus 4.0%. The interest rate as of
December 31, 1999 was 10.19%.
(2) The interest rate cap fixes the interest rate at 7% for $50,000 of the Bank
Credit Facility.
52
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The Company's financial statements and the notes thereto appear beginning
on the next page.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
53
<PAGE>
February 16, 2000
Auditors' Report
To the Directors and Shareholders of
GlobeNet Communications Group Limited
We have audited the accompanying consolidated balance sheets of GlobeNet
Communications Group Limited as of December 31, 1999 and 1998 and the related
consolidated statements of shareholders' equity, operations and cash flows for
the years ended December 31, 1999, 1998 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GlobeNet
Communications Group Limited at December 31, 1999 and 1998 and the results of
its operations and its cash flows for the years ended December 31, 1999, 1998
and 1997 in conformity with accounting principles generally accepted in the
United States.
/s/ PricewaterhouseCoopers L.L.P.
Chartered Accountants
Toronto, Canada
54
<PAGE>
GlobeNet Communications Group Limited
Consolidated Balance Sheets
As of December 31, 1999 and 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998
$ $
Assets
<S> <C> <C>
Current assets
Cash - 3,030
Restricted cash (note 3) 79,998 -
Accounts receivable (net of allowance of $224; 1998 - $80) 2,096 1,847
Other receivables 150 718
Due from related party (note 4) - 1,363
Prepaid expenses and deposits 1,632 338
-----------------------------------------
83,876 7,296
Restricted cash (note 3) 448,399 -
Fixed assets (note 5) 49,148 26,182
Construction in progress (note 6) 98,062 -
Other assets (note 7) 25,847 1,411
Equity accounted for investments - 21,371
-----------------------------------------
705,332 56,260
-----------------------------------------
Liabilities
Current liabilities
Accounts payable (note 8 ) 36,179 3,871
Accrued liabilities (note 8) 21,117 4,971
Current portion of long-term debt (note 9) - 3,000
-----------------------------------------
57,296 11,842
Long-term debt (note 9) 400,000 35,019
Deferred revenue (note 10) 6,455 2,695
-----------------------------------------
463,751 49,556
-----------------------------------------
Shareholders' Equity
Share capital (notes 12 and 13)
Class A shares, 100 shares authorized, par value $1.50 each
nil (1998 - 100) shares issued and outstanding - -
Class B shares, 2,000 shares authorized, par value $1.50 each
1,000 (1998 - nil) shares issued and outstanding 2 -
Common shares, 24,000,000 authorized, par value $1.50 each
17,043,900 (1998 - 3,515,927) shares issued and outstanding 25,566 5,274
Additional paid-in capital 246,866 16,377
Deficit (30,853) (14,947)
-----------------------------------------
241,581 6,704
-----------------------------------------
705,332 56,260
-----------------------------------------
Commitments (note 16)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE>
GlobeNet Communications Group Limited
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
Par Par Total
value of value of Additional share-
Class A Class B Class B Common common paid in holders'
shares shares shares shares shares capital Deficit equity
$ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 -- -- -- 3,487,916 5,232 16,200 (4,707) 16,725
Shares options exercised -- -- -- 28,011 42 42 -- 84
Share options issued -- -- -- -- -- 135 -- 135
Shares issued 100 -- -- -- -- -- -- --
Net loss for the year -- -- -- -- -- -- (5,296) (5,296)
---------------------------------------------- -----------------------------------------------
December 31, 1997 100 -- -- 3,515,927 5,274 16,377 (10,003) 11,648
Net loss for the year -- -- -- -- -- -- (4,944) (4,944)
---------------------------------------------- -----------------------------------------------
December 31, 1998 100 -- -- 3,515,927 5,274 16,377 (14,947) 6,704
---------------------------------------------- -----------------------------------------------
Compensatory share
options -- -- -- -- 8,758 -- 8,758
Deferred compensation -- -- -- -- -- (4,551) -- (4,551)
Share options exercised -- -- -- 129,041 194 754 -- 948
Shares issued in private equity
financing -- -- -- 13,263,646 19,895 250,683 -- 270,578
Share issue costs -- -- -- -- -- (11,665) -- (11,665)
Shares issued -- 1,000 2 -- -- -- -- 2
Shares issued on conversion of
subordinated debt and
exercise of warrants -- -- -- 1,635,286 2,453 14,860 -- 17,313
Shares purchased and cancelled (100) -- -- (1,500,000) (2,250) (28,350) -- (30,600)
Net loss for the year -- -- -- -- -- -- (15,906) (15,906)
---------------------------------------------- -----------------------------------------------
December 31, 1999 -- 1,000 $2 17,043,900 $ 25,566 $ 246,866 $ (30,853) $ 241,581
---------------------------------------------- -----------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE>
GlobeNet Communications Group Limited
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Revenues
Telecommunications services 26,033 24,940 4,962
IRU capacity (note 10) 315 1,784 -
-------------------------------------------------
26,348 26,724 4,962
-------------------------------------------------
Expenses
Carrier charges 10,989 15,129 3,559
Cost of IRU capacity - 547 -
General and administrative expenses (notes 4 and 15) 19,311 9,328 4,961
Amortization of fixed assets 1,854 1,502 429
-------------------------------------------------
32,154 26,506 8,949
-------------------------------------------------
Operating loss (5,806) 218 (3,987)
Interest on long-term debt 20,427 3,863 1,055
Accrued contingent interest (note 9) 538 960 382
Interest income (12,588) (170) (193)
-------------------------------------------------
Loss before income taxes, minority interest, equity accounted
for investments and extraordinary item (14,183) (4,435) (5,231)
Provision for income taxes (141) (36) (53)
-------------------------------------------------
Loss before minority interest, equity accounted for
investments and extraordinary item (14,324) (4,471) (5,284)
Minority interest (note 11) - 204 249
Loss from equity accounted for investments (note 11) (773) (677) (261)
-------------------------------------------------
Loss before extraordinary item (15,097) (4,944) (5,296)
Extraordinary loss relating to extinguishment of debt (note 9) (809) -- --
-------------------------------------------------
Net loss and comprehensive loss for the year (15,906) (4,944) (5,296)
-------------------------------------------------
Basic and fully diluted loss per common share before
extraordinary item (1.52) (1.41) (1.52)
-------------------------------------------------
Basic and fully diluted loss per common share relating to the
extraordinary loss from the extinguishment of debt (0.08) -- --
-------------------------------------------------
Basic and fully diluted loss per common share (note 14) (1.60) (1.41) (1.52)
-------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE>
GlobeNet Communications Group Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the year (15,906) (4,944) (5,296)
Items not involving cash
Amortization of fixed assets 1,854 1,502 429
Write-down of other assets -- 201 --
Amortization of other assets 1,949 321 305
Extraordinary loss-extinguishment of debt 809 -- --
Minority interest -- (204) (249)
Loss from equity accounted for investments 773 677 261
Accrued contingent interest 538 960 382
Gain on granting of indefeasible rights of use and loss
on sale of capital assets -- (970) --
Compensatory share options 4,207 -- --
Net change in non-cash operating items
Accounts receivable (249) (577) (1,270)
Other receivables 568 970 (1,688)
Note receivable (32) -- --
Prepaid expenses and deposits (1,294) (138) 32
Accounts payable 1,265 (6,369) 9,669
Accrued liabilities 13,778 3,908 959
Deferred revenue 3,760 1,174 1,521
Recoverable duties -- -- 392
-------------------------------------------------
Cash provided by (used in) operating activities 12,020 (3,489) 5,447
-------------------------------------------------
Financing activities
Issuance of common shares 259,861 -- 84
Purchase and cancellation of common shares, net of fees (30,600) -- --
Proceeds from issuance of long-term debt 400,500 9,350 29,740
Repayment of long-term debt (23,677) (2,413) --
Deferred financing costs (26,514) -- (1,472)
Other assets (653) -- --
Loans provided by minority shareholders -- -- 807
-------------------------------------------------
Cash provided by financing activities 578,917 6,937 29,159
-------------------------------------------------
Investing activities
Restricted cash (528,397) -- 2,015
Purchase of fixed assets (4,139) (1,791 (22,662)
Construction in progress (note 6) (62,799) -- --
Granting of indefeasible rights of use and proceeds on sale of
capital assets -- 1,596 --
Change in other assets 5 (218) (2)
Due from related party 1,363 (1,363) --
Proceeds from sale of equity accounted for investment -- 410 --
Advances to equity accounted for investee -- (411) (22,479)
-------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
58
<PAGE>
GlobeNet Communications Group Limited
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash (used in) investing activities (593,967) (1,777) (43,128)
-------------------------------------------------
Increase (decrease) in cash for the year (3,030) 1,671 (8,522)
Cash - Beginning of year 3,030 1,359 9,881
-------------------------------------------------
Cash - End of year -- 3,030 1,359
=================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
59
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
1 Nature of operations
GlobeNet Communications Group Limited provides international
telecommunications services to both residential and commercial customers
and is a provider of telecommunications capacity. The Company is currently
developing a fibre optic submarine cable system called Atlantica-1 that
will link Bermuda, North and South America and offer capacity between major
cities in the United States, Bermuda, Brazil, Venezuela and Argentina.
Atlantica-1 is currently being constructed.
In November 1997, the Company deployed a fibre optic submarine cable system
which connects Bermuda and the United States ("BUS-1"). The Company
provides international telecommunications services to both residential and
commercial customers in Bermuda through a subsidiary company, TeleBermuda
International Limited ("TBI") through the BUS-1.
On January 10, 1997, TBI was granted its public telecommunications service
licence in Bermuda under the provisions of the Telecommunications Act, 1986
and the Public Telecommunication Service (Licence) Regulations, 1988 for a
five-year term and began commercial operations in May 1997. TBI has an
interconnection agreement with the Bermuda Telephone Company ("BTC"), the
domestic carrier in Bermuda. No consideration was paid by the Company in
relation to these agreements.
2 Summary of significant accounting policies
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
following is a summary of the significant accounting policies followed in
the preparation of these consolidated financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiary companies. Intercompany accounts and transactions
have been eliminated on consolidation.
Use of significant accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could significantly
differ from those estimates.
Revenue, deferred revenue and cost recognition
Revenue: The Company provides telecommunication services and the granting
or leasing of indefeasible rights of use ("IRU") interests in its
telecommunications infrastructure.
60
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic for which revenue will not be
collected. Historical deductions have not been material. Service discounts
and incentives are accounted for as a reduction of revenue when granted, or
where provided in relation to a service contract, rateably over the
contract period.
The Company has entered into certain IRU agreements. Such agreements are
accounted for as either service or lease transactions. Those IRU agreements
that meet all of the following characteristics have been accounted for as
leases:
(a) The purchaser has exclusive right to the purchased capacity for a
specified period, generally the estimated useful life of the system,
which is 25 years.
(b) The Company cannot sell or otherwise use any of the purchaser's unused
capacity for the term of the agreement.
(c) The purchased capacity is physically limited to discrete channels on
the purchaser's own dedicated circuits at a specified amount of
capacity, which cannot be exceeded. The specific circuits are agreed
to by the parties.
(d) The Company has no right to move the purchased capacity to another
discrete channel from the purchaser's dedicated circuits without the
purchaser's permission.
IRU agreements that meet these criteria are accounted for as lease
transactions. If the transactions meet the sales type lease criteria of
Financial Accounting Standard No. 13, including those related to
collectibility of the payments and the absence of any important
uncertainties surrounding unreimbursable costs yet to be incurred by the
Company, then revenue is recognized in the period that the IRUs are
transferred and the capacity is available for service. If these criteria
are not met, the transactions are accounted for as operating leases and
revenue is recognized over the term of the lease.
To date, the Company has not entered into any IRU agreements that are
considered to be service transactions. Revenue from service transactions
would be recognized as earned over the term of the agreement.
In addition, we note that the accounting for sales of capacity is evolving,
and is currently under consideration by accounting standard setters. Any
change in accounting literature may affect the timing and method of
recognition of these revenues and related costs.
Revenues from private line services are recognized as earned.
Deferred Revenue: Rent from the operating leases of capacity in the
telecommunications infrastructure to third party carriers is deferred and
recognized over the term of the lease on a straight-line basis. Revenue
from the sale of prepaid calling cards is recognized as the services are
provided.
61
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
Cost: Carrier charges are comprised primarily of local access charges and
international termination costs. These costs are recognized based on
traffic volume.
Fixed assets
Fixed assets are recorded at cost less accumulated amortization.
Amortization commences when an asset is available for use, and is
calculated in a systematic manner based on the expected useful lives of the
assets as follows:
<TABLE>
<CAPTION>
Asset category Basis Rate
-------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Fibre optic submarine cable straight-line 25 years
Network and telecommunications equipment straight-line 10 years
Leasehold improvements straight-line term of the lease
Computer equipment straight-line 3 years
Furniture and office equipment diminishing balance 20% per year
Software straight-line 5 years
</TABLE>
Construction in progress
Construction in progress includes direct expenditures for the construction
of the Company's Atlantica-1 project and is stated at cost. Costs are
capitalized once it is probable that the fibre optic cable system will be
constructed, otherwise they are expensed as incurred. Capitalized costs
include costs incurred under the construction contract, advisory,
consulting and legal fees and interest.
Deferred financing costs
Deferred financing costs represent debt issuance costs, which are amortized
over the estimated term of the related debt.
Investments
The Company's investments are accounted for using the equity method.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated into U.S. dollars at the
average rates of exchange prevailing at the dates of the respective
transactions. Transactions are translated into U.S. dollars at the exchange
rates in effect at the time the transactions occur. Exchange gains and
losses arising on translation are included in the operating results for the
year.
62
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
Assets and liabilities of non-Bermudian subsidiaries where the functional
currency is other than the U.S. dollar are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated
at average exchange rates prevailing during the year.
Financial instruments
The fair value of financial assets and liabilities represents the amount at
which these instruments could be exchanged in an arm's length transaction
between willing parties.
As at December 31, 1999, the carrying amounts of financial assets and
liabilities in the consolidated balance sheet approximate their fair values
due to the short-term nature of these instruments.
The reported amount of fixed rate long-term debt instruments is estimated
to approximate fair values as actual rates are consistent with rates
estimated to be currently available for debt of similar terms and remaining
maturities.
In addition, the Company has entered into an interest rate cap agreement to
modify the interest characteristics of part of its outstanding long-term
debt. This agreement involves an exchange of amounts based on a fixed
interest rate for amounts based on a variable interest rate whenever the
interest rate exceeds the cap specified in the agreement. The premium paid
by the Company upon entering in the agreement is amortized over the term of
the agreement and recognized as an adjustment of interest expense related
to the debt. The Company does not use derivative financial instruments for
speculative trading purposes. As of December 31, 1999, the carrying value
approximates fair value.
Income taxes
Under current Bermuda laws, the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda, pursuant to the
Exempted Undertakings Tax Protection Act 1966, which exempts the Company
from any such tax until March 28, 2016. Subsidiaries in other jurisdictions
are subject to local taxes.
Stock based compensation
The Company applies APB Opinion 25 ("Accounting for Stock Issued to
Employees") in accounting for its stock option plan, and, accordingly, does
not recognize compensation cost at the time options are granted unless the
exercise price is less than the market price of the stock on the
measurement date.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities" which is effective for fiscal years
63
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
beginning after June 15, 2000. SFAS 133, as amended, requires the Company
to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. It further provides criteria for
derivative instruments to be designated as fair value, cash flow, and
foreign currency hedges and establishes respective accounting standards for
reporting changes in the fair value of the derivative instruments. Upon
adoption, the Company will be required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or
losses as adjustments to be reported in net income or other comprehensive
income, as appropriate. Management has not determined the impact of this
statement on its financial position, results of operations and cash flows.
FASB Interpretation No. 43, "Real Estate Sales - an interpretation of FASB
Statement No. 66," was issued in June 1999. It clarifies the standards for
recognition of profit on all real estate sales transactions, including
those related to fibre optic cable that cannot be removed and used
separately from the real estate without incurring significant costs. This
interpretation is effective for all applicable transactions after June 30,
1999. However, no such transactions have been entered into after June 30,
1999 and we have not yet completed our analysis of the applicability or the
impact of this statement on future transactions.
3 Restricted cash
Components of restricted cash are:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Cash 6,628 --
Cash equivalents maturing within 90 days:
Commercial paper 513,703 --
Term deposit 8,066 --
-------------------------------
528,397 -
Less: Current portion 79,998 -
-------------------------------
448,399 -
===============================
</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 and Poor's or P-1 by Moody's.
64
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
4 Related party transactions
a) On August 26, 1998, TBI loaned CAD$2,000 ($1,292) to the Chairman and
Chief Executive Officer of the Company. This loan and all outstanding
interest thereon was repaid in full in January 1999.
b) In September 1997, the Company entered into a service agreement with
First Bermuda Securities Ltd., of which a Director of the Company is
the Chief Executive Officer. Under this agreement, First Bermuda
Securities Ltd. provides the Company with various financial and
business advisory services. Payments made to First Bermuda Securities
in 1999 were $81 (1998 - $125; 1997 - $145) and are included in
general and administrative expenses.
5 Fixed assets
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Land 2,611 - 2,611
Fibre optic submarine cable 44,459 3,756 40,703
Network and telecommunications equipment 5,328 1,037 4,291
Leasehold improvements 1,154 226 928
Computer equipment 596 346 250
Furniture and office equipment 266 67 199
Software 240 74 166
---------------------------------------------------------
54,654 5,506 49,148
=========================================================
1998
---------------------------------------------------------
<CAPTION>
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Fibre optic submarine cable 21,881 971 20,910
Network and telecommunications equipment 4,415 549 3,866
Leasehold improvements 944 140 804
Computer equipment 470 167 303
Furniture and office equipment 140 38 102
Software 224 27 197
---------------------------------------------------------
28,074 1,892 26,182
=========================================================
</TABLE>
65
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
6 Construction in progress
The Company is currently constructing a fibre optic submarine cable system
called Atlantica-1 linking Bermuda, North and South America. As of December
31, 1999, costs of $98,062 have been capitalized and included in this
amount is capitalized interest of $4,220 (1998 - $nil).
7 Other assets
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Deferred financing costs, net of accumulated amortization of $1,936
(1998 - $626) 24,743 981
Other 1,104 430
---------------------------------------
25,847 1,411
=======================================
8 Accounts payable and accrued liabilities
Accounts payable are comprised as follows:
1999 1998
$ $
Atlantica-1 payables 31,043 --
Trade payables 1,873 777
Foreign carrier settlement payables 3,263 3,037
Other payables -- 57
-----------------------------------------
36,179 3,871
=========================================
Accrued liabilities are comprised as follows:
1999 1998
$ $
Interest payable 18,266 2,002
Foreign carrier accrual 480 880
Equalization payment accrual 470 668
Other accruals 1,901 1,421
-----------------------------------------
21,117 4,971
=========================================
</TABLE>
Foreign carrier settlement payables and foreign carrier accrual represent
costs for foreign traffic payable to other carriers.
66
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
9 Long-term debt
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Term loan (a) - 21,990
Operating credit facility (a) - 1,687
Subordinated debentures and retractable warrants (a) - 13,000
Accrued contingent interest (a) - 1,342
Senior notes (b) 300,000 -
Bank credit facility (c) 100,000 -
----------------------------------
400,000 38,019
Less: Current portion - 3,000
----------------------------------
400,000 35,019
==================================
</TABLE>
(a) On July 14, 1999, the term loan, operating credit facility and certain
accrued interest on the subordinated debentures were repaid. As well, all
of the remaining obligations to the subordinated debenture holders 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 is payable semi-annually in arrears commencing January 15,
2000. The notes are unsecured.
(c) On July 14, 1999 the Company secured a bank credit facility ("Credit
Facility") of up to $400,000, consisting of various term facilities
totalling $390,000 and a revolving credit facility of $10,000. In addition,
under the Credit Facility, the Company may also request an additional
facility of up to $50,000 subject to lender approval and other
restrictions. The Credit Facility matures in 2005. Interest rates on the
Credit Facility range from LIBOR plus 3.5% to LIBOR plus 4.0% and
availability of funds under the Credit Facility is subject to certain terms
and conditions. Commitment fees for the Credit Facility were $2,541.
Substantially all of the assets of GlobeNet Communications Holdings Ltd.
and of its present and future direct and indirect subsidiaries have been
pledged as collateral for the Credit Facility. GlobeNet Communications
Holdings Ltd. is a wholly owned subsidiary of the Company. In addition, a
third party supplier has provided an initial guarantee subject to certain
conditions and adjustments of up to $100,000 for one of the term
facilities.
On December 22, 1999, the Company entered into an interest rate cap
transaction effectively fixing the interest rate on $50,000 of the Credit
Facility at 7.0% for a three year term.
67
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
As at December 31, 1999 the unused facility was $300,000 and the average
rate of interest during 1999 was 9.7%.
The principal repayments required in the next five years and thereafter in
respect of the senior notes and the Credit Facility are as follows:
<TABLE>
<CAPTION>
$
<S> <C> <C>
Fiscal year 2002 1,000
2003 1,000
2004 1,000
2005 97,000
2006 --
Thereafter 300,000
----------------
400,000
----------------
</TABLE>
10 Granting of indefeasible rights of use and leasing of the fibre optic
submarine cable
a) During 1998, the Company granted indefeasible rights of use ("IRU's") in
its fibre optic submarine cable to certain third party carriers for a
period of 25 years for $1,521. The costs recognized with the granting of
the IRU's are calculated as total capacity granted in relation to the total
cost of the activated fibre optic submarine cable times the total cost of
the fibre optic submarine cable system. In addition, under these IRU
agreements, the third party carrier is responsible for paying its pro rata
share of restoration costs. These costs are accounted for as expenses as
they are incurred, less a recovery of expense being recorded to reflect the
required pro rata reimbursement from the IRU customer.
b) The Company has entered into an agreement to provide capacity in its fibre
optic submarine cable to a third party. This arrangement is being accounted
for as an operating lease. The term of the lease is for the greater of 25
years or the operational life of the fibre optic submarine cable. If the
operational life is less than 10 years, the Company must provide a refund
on a pro rata basis for each year short of the 10 year period. For the
first four years of the agreement, the Company is responsible for
maintenance and operating costs, thereafter the lessee will pay a monthly
charge for operating and maintenance costs. The total rental payment for
this agreement was $8,000, of which $4,000 was paid in 1999 and $3,000 in
1998. The remaining payment of $1,000 is due on September 24, 2000. Lease
income is being recognized on a straight-line basis over the 25 year term.
During 1999, lease income of $315 (1998 - $263; 1997 - $nil) was
recognized.
Under this agreement, the third party has the right to enter into a second
lease of capacity in the fibre optic submarine cable commencing September
24, 2001. The consideration for the second lease will
68
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
be $4,000 payable upon activation of the second circuit. If the third party
elects not to proceed with the second lease a penalty of $250 is payable to
the Company.
11 Minority interest and equity accounted for investments
Rocom TBI Limited
During 1998, the Company sold its interest in Rocom TBI Limited, a
telecommunications services joint venture in the United Kingdom, for total
consideration of $820 ((pound)500), of which $410 ((pound)250) was received
in cash and a remaining receivable of $410 ((pound)250) is included in
other assets.
TeleBermuda International L.L.C.
On November 1, 1999, The Company indirectly acquired the 80% interest in
TeleBermuda International L.L.C. ("TBI L.L.C.") that it did not previously
own for nominal consideration pursuant to a Put and Call Agreement entered
into in May 1996. TBI L.L.C. holds the landing license for the Company's
Bermuda to United States cable system ("BUS-1") in the United States, a 50%
interest in the BUS-1 and a 100% interest in the U.S. landing plant. From
May 1996 to November 1, 1999, the Company's 20% investment in TBI L.L.C.
was accounted for using the equity method. Under the equity method, the
Company reported 100% of the losses of TBI L.L.C. as the Company had
certain rights and obligations related to the investment, including the
requirement to fund operations and capital expenditures.
Summarized financial information for TBI L.L.C. at and for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
December 31,
1998
$
<S> <C>
Balance sheet
Current asset 2
Non-current asset 21,432
Current liabilities 62
Non-current liabilities 22,803
Statement of operations
Revenues -
Expenses 943
Net loss from TBI L.L.C. (943)
</TABLE>
69
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
12 Share capital
a) Authorized
The Board of Directors has the authority to issue common shares, securities
convertible into common shares or grant options, up to a maximum of 20% of
the fully diluted shares of the Company pursuant to a general mandate of
the shareholders. This mandate will expire at the next annual meeting of
the shareholders, unless it is re-approved at that meeting.
During 1999, the authorized common shares of the Company were increased by
10,499,900 effective June 15, 1999 and 6,500,200 effective July 12, 1999 to
an aggregate total of 24,000,000 common shares. In addition, the Company
bye-laws authorized the creation of 100 Class B shares. On July 12, 1999,
the authorized Class B shares of the Company were increased by 1,900.
Class B restricting voting shares are entitled to a maximum of $1.50 par
value on any liquidation of the Company. The holders of these shares are
the only shareholders permitted to hold common shares representing more
than 35% of the aggregate issued share capital of the Company at any time
or shares representing more than 35% of the votes attaching to all issued
shares of the Company at any time. Approval of the holders of the majority
of Class B share is required before changes may be made to any of the
Company's governing documents and certain specific transactions.
b) Capital transactions
i) On October 3, 1997, 100 common shares were converted into Class A
shares. On July 14, 1999, the Company purchased and cancelled 100
Class A shares at their par value of $1.50 per share.
ii) On July 14, 1999, the Company issued for cash 1000 Class B shares at
their par value of $1.50.
iii) On July 14, 1999, the Company issued 13,263,646 common shares for cash
at $20.40 per share and aggregate proceeds of $258,913, net of
expenses related to the offering of $11,665. On the same date, the
subordinated debenture holders elected to exercise their warrants and
convert the principal and remaining accrued interest at their carrying
amounts into 1,635,286 shares aggregating $17,313. On August 9, 1999,
the Company purchased for cancellation 1,500,000 common shares at
$20.40 per share for a total cost of $30,600. Commissions of $450 were
paid to First Bermuda Securities Ltd., of which a Director of the
Company is the Chief Executive Officer.
70
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
13 Common share options
The Company awards options to employees, officers and directors of the
Company under the terms of the 1997 and 1998 Share Option and Incentive
Plans. In addition, the Board has the authority to grant options outside of
these plans under separate stock option agreements. A summary of the
outstanding common share purchase option activities is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Common Weighted Common Weighted Common Weighted
shares average shares average shares average
purchase exercise purchase exercise purchase exercise
options price options price options price
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 543,489 5.15 556,489 5.22 352,500 3.21
Options granted 1,277,019 13.14 - - 232,000 8.00
Options exercised (129,041) 7.37 - - (28,011) 3.00
Options forfeited (11,670) 13.06 (13,000) 8.00 - -
------------- ------------- -------------
Options outstanding at
year-end 1,679,797 11.00 543,489 5.15 556,489 5.22
------------- ------------- ------------- ------------- ------------- --------------
Options exercisable at
year-end 844,462 8.93 440,309 4.49 374,489 3.87
------------- ------------- ------------- ------------- ------------- --------------
</TABLE>
These options expire on various dates from 2001 to 2009 and generally vest
over a three-year period.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted average
Exercise remaining contractual Number of share options
price life (years) of options Number of options exercisable at
$ outstanding outstanding December 31, 1999
<S> <C> <C> <C>
0.01 6.09 45,000 45,000
1.00 1.41 26,863 26,863
3.00 2.03 180,000 180,000
8.00 8.00 153,275 102,942
8.50 2.77 50,000 50,000
9.00 9.20 760,640 280,638
19.00 9.56 35,000 30,000
20.40 8.65 429,019 129,019
--------------------------- ---------------------------
1,679,797 844,462
--------------------------- ---------------------------
</TABLE>
71
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
i) On December 18, 1998 and May 21, 1999, the Board of Directors issued
263,000 options and 5,000 options, respectively to employees and
certain officers and directors at an exercise price of $9.00 per
option, vesting over a three-year period, under the 1998 Share Option
and Incentive Plan. In July 1999, when these options were approved by
the shareholders, the market price of these options was $20.40. The
difference between the market price and the exercise price has been
reflected as deferred compensation in the statement of shareholders'
equity and is being amortized over the vesting period as at December
31, 1999. Compensation expense in the amount of $1,794 has been
recorded in the financial statements.
On July 9, 1999, 35,000 options, with an exercise price of $19.00 with
a ten-year term were granted to certain directors. The market price of
these options on the measurement date was $20.40. The vesting of these
options occurred on July 14, 1999. The difference between the exercise
price and market price at the time of vesting amounted to $49 and has
been reflected as compensation expense.
On April 12, 1999, the Company granted 540,000 options at an exercise
price of $9.00 with a ten-year term to certain officers and directors.
These options vest in three separate tranches based upon the Company
meeting certain milestones related to the Atlantica-1 project. On July
14, 1999, the first vesting milestone occurred on 165,000 of these
options, when the financing was secured and the vesting period for
another 165,000 options was determined. The difference between the
exercise price and the market value amortized over the vesting period
amounted to $2,364 and has been reflected as compensation expense.
On October 7, 1999, the Company granted 429,019 options at an exercise
price of $20.40 to certain officers. Of these options 129,019 vest
immediately and 300,000 vest over three years although vesting on
these options may be accelerated as a result of certain events.
On October 22, 1999, the Company granted 5,000 options at an exercise
price of $19.00 to an employee. These options vest over three years.
Total stock-based compensation expense included in general and
administrative expenses for the year ended December 31, 1999 is $4,207
(1998 - $nil; 1997 - $nil).
Had the Company elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by SFAS 123,
the pro forma effects to reported net loss for the year and basic and fully
diluted loss per common share, would be as follows:
72
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Net loss for the year - as reported 15,906 4,944 5,296
Net loss for the year - pro forma 15,906 5,047 5,296
Basic and fully diluted loss per common share - as reported 1.60 1.41 1.52
Basic and fully diluted loss per common share - pro forma 1.60 1.43 1.52
</TABLE>
The fair value of each option grant has been estimated using the
Black-Scholes option pricing model, using a volatility assumption of 20%
(1998 - 20%; 1997 - 20%), expected life of 7 years (1998 - 7 years; 1997 -
7 years), a dividend rate of nil (1998 - $nil; 1997 - $nil) and a risk-free
interest rate of 5.64% (1998 - 5.28%; 1997 - 6.33%).
The above pro forma effects on the net loss for the year may not be
representative of the effects on the net loss for the year for future
periods as option grants typically vest over several years and additional
options are generally granted each year.
14 Basic and fully diluted loss per common share
The basic loss per common share is calculated using the weighted average
number of common shares outstanding of 9,911,341 (1998 - 3,515,927; 1997 -
3,492,915). The weighted average number of common shares on a fully diluted
basis is calculated on the same basis as the basic weighted average number
of shares as the Company is in a loss position and the effects of possible
conversion would be anti-dilutive.
15 Supplemental information
i) Included in general and administrative expense are the following:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Rent 426 342 242
Bad debt 212 114 91
Advertising 312 224 148
</TABLE>
ii) Amounts paid for interest and income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Interest 4,517 1,901 540
Income taxes 70 36 51
</TABLE>
73
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
16 Commitments
a) The Company has entered into operating lease agreements for its
premises and for maintenance of its fibre optic cable. Minimum lease
commitments pursuant to these leases over the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
Year ending December 31, 2000 2,538
2001 1,059
2002 1,028
2003 1,061
2004 1,035
Thereafter 12,128
------
18,849
======
</TABLE>
b) On June 16, 1999, the Company entered into a supply contract with
Alcatel Submarine Networks ("Alcatel") to construct a fibre optic
submarine cable called Atlantica-1 for a total contract price of
$620,861, (of which $93,129 has been recorded at December 31, 1999),
which is subject to amendment by the mutual agreement of the parties.
Future payments are based upon a specified billing schedule and are
due when the corresponding project milestone has been achieved and
engineer acceptance has been provided. The future minimum payments,
beyond the $93,129 that has been recorded as of December 31, 1999,
required as a result of the contract, are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
Year ending December 31, 2000 465,646
2001 62,086
-------
527,732
=======
</TABLE>
c) As of December 31, 1999, the Company was committed to $2,901 of future
construction costs under its participation in a cable network
construction and maintenance agreement.
d) In the normal course of business, the Company has also entered into a
number of contracts under which it is committed to the purchase and
supply of telecommunication services at fixed prices. It is not
anticipated that losses will be incurred on these contracts.
74
<PAGE>
GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
For the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except share and per share amounts)
17 Segmented information
The Company operates predominantly in the international telecommunications
services business and substantially all of the Company's business activity
was conducted in Bermuda.
18 Subsequent event
On February 15, 2000, the Company signed a contract variation with Alcatel
for the fixed price turnkey supply of all six undersea cable stations and
the associated overland routes from the cable stations to the cable beach
landing points at a cost of approximately $50,000.
75
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant.
Directors and Officers
The following table sets forth the names, ages and positions of our
directors and officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael Kedar............................... 58 Executive Chairman
Jorge L. Escalona........................... 49 Director, President and Chief Executive Officer
Anthony Bolland............................. 46 Director
Sebastien Rheaume........................... 31 Director
Linda Dougherty............................. 30 Director
George E. Matelich.......................... 43 Director
Kevin J. Maroni............................. 37 Director
Harley J. Murphy............................ 55 Director
Mark A. Pelson.............................. 38 Director
Scott K. Socol.............................. 46 Executive Vice President and Chief Operating Officer
Greg Belbeck................................ 45 Executive Vice President and Chief Financial Officer
Laurent Duplantie........................... 45 Executive Vice President, Engineering and Operations
Lin Gentemann............................... 39 Executive Vice President, General Counsel and Secretary
James Fitzgerald............................ 53 Vice President, Bermuda Operations
Eldon Blust................................. 57 Senior Vice President, Business Development
Edward A. Weisbrot.......................... 53 Senior Vice President, Network Services
</TABLE>
- ----------
Michael Kedar. Mr. Kedar, a citizen of Canada and founder of the Company,
has been the Company's Executive Chairman since October 1999 and he served as
the Company's Chairman and Chief Executive Officer from January 1995 to October
1999. Prior to his positions with the Company, Mr. Kedar was the Chairman and
Chief Executive Officer of Call-Net Enterprises Inc., which he founded in 1986.
In addition, Mr. Kedar founded Microcell Communications, Inc., a PCS provider in
Canada. Mr. Kedar holds an Engineering degree from Ecole Superior Technique
(Geneva, Switzerland). Mr. Kedar's business address is 3300 Highway #7, Ste 401,
Concord, Ontario L4K 4M3.
Jorge L. Escalona. Mr. Escalona, a citizen of the United States, has served
on the Company's board since March 2000 and has been the Company's President and
Chief Executive
76
<PAGE>
Officer since March 2000, having previously served as Senior Advisor to the
Company's board since January 2000. Prior thereto, he served in various
positions during his 25-year career with AT&T. Most recently, Mr. Escalona was
Vice President of the global segment in AT&T's Consumer Markets Division. He
also served as CEO of Alestra, AT&T's joint venture communications service
company in Mexico; President of AT&T Mexico; President of AT&T's long distance
and equipment company in Puerto Rico and the U.S. Virgin Islands; Vice President
of international public affairs for AT&T's operations in the Americas and
Sub-Sahara Africa regions; and Chief Financial Officer and Chief Information
Officer of AT&T Microelectronics de Espana. Mr. Escalona holds a B.A. in
economics and an M.B.A. from Inter American University in San Juan, Puerto Rico,
where he graduated with honors. His business address is 525 North Broadway, 2nd
Floor, White Plains, New York 10603.
Anthony Bolland. Mr. Bolland, a citizen of the United Kingdom, has been a
director of the Company since July 1999. He has been a Managing Director of
Boston Ventures Management, Inc. since 1983. Boston Ventures, through its
partnerships, is an active investor in the media, telecommunications and
services industries. From 1975 to 1983, Mr. Bolland was an Officer of First
National Bank of Boston. Mr. Bolland holds an L.L.B. from Warwick University,
which he received in 1975. He is also a director of Ogden Corporation. Mr.
Bolland's business address is One Federal Street, 23rd Floor, Boston,
Massachusetts 02110.
Sebastien Rheaume. Mr. Rheaume, a citizen of Canada, has been a director of
the Company since July 1999. Mr. Rheaume is a Manager at Capital Communications
CDPQ, Inc., a private subsidiary of the Montreal-based Caisse de depot et
placement du Quebec, the fund manager for public sector pension and insurance
plans in Quebec. This fund had total assets of $45 billion at the end of 1998.
Prior to joining Capital Communications CDPQ, Inc. in April 1999, Mr. Rheaume
was an Associate Director in the Corporate Finance/Mergers and Acquisitions
department of Bell Canada, a Senior Analyst in the Financial Strategy department
at Royal Bank of Canada, and Director of Finance in Kerr Financial Corporation.
Mr. Rheaume holds a B.Comm. degree from McGill University. He is a Chartered
Accountant and a Chartered Financial Analyst, and his business address is 1981
Avenue McGill College, Montreal, Quebec H3A 3C7.
Linda Dougherty. Ms. Dougherty, a citizen of the United States, has served
on the board of the Company since March 1999. She is Vice-President and
Director, Merchant Banking, of TD Capital Group Limited and has more than eight
years of experience in the financial services industry. Prior to joining TD
Capital Group Limited, Ms. Dougherty was with TD Securities Inc. as a
Vice-President in Mergers and Acquisitions and Corporate Finance, specializing
in Project Finance (1993) and Communications (1994-1996). Prior to joining TD
Securities Inc., she was a regional South East Asian equities analyst with James
Capel in Singapore and a Consultant with Oliver, Wyman & Company, a financial
services consulting firm, in New York and London, England. Ms. Dougherty
graduated magna cum laude, Phi Beta Kappa from the Wharton School (B.S.) and the
College of Arts & Sciences (B.A.) of the University of Pennsylvania. She also
completed the Executive Development Program at the Kellogg Graduate School of
Management.
77
<PAGE>
Ms. Dougherty's business address is 55 King Street West, Toronto Dominion Bank
Tower, 8th Floor, P.O. Box 1, Toronto Dominion Center, Toronto, Ontario M5K 1A2.
George E. Matelich. Mr. Matelich, a citizen of the United States, has
served on the Company's board since July 1999. He is a Managing Director of
Kelso & Company, and has been with Kelso since 1985. Prior to joining Kelso he
spent two years in the Mergers and Acquisitions and Corporate Finance
Departments at Lehman Brothers Kuhn Loeb, where his responsibilities included
the analysis, evaluation and financing of leveraged buyouts, and the refinancing
of more mature buyout companies. His previous experience includes two years as a
consultant with Ernst & Whinney. Mr. Matelich is a Certified Public Accountant,
holds a Certificate in Management Accounting, and received a B.A. in Business
Administration, summa cum laude, from the University of Puget Sound and an
M.B.A. (Finance and Business Policy) from Stanford Graduate School of Business.
He is also a director of Humphreys Inc., MJD Communications and is a trustee of
the University of Puget Sound. Mr. Matelich's business address is 320 Park
Avenue, New York, NY 10022.
Kevin J. Maroni. Mr. Maroni, a citizen of the United States, has served on
the Company's board since July 1999. Mr. Maroni is a General Partner of Spectrum
Equity Investors. Spectrum is a leading private equity firm which manages over
$1 billion of capital for investment in telecommunications and media companies.
Prior to joining Spectrum in 1994, Mr. Maroni worked at Time Warner, Inc. and
Harvard Management Company. Mr. Maroni holds an MBA from Harvard University and
a BA from the University of Michigan. Mr. Maroni is a director of CTC
Communications Corp. (NASDAQ: CPTL); American Cellular Corp; Pathnet, Inc., and
Formus Communications Inc. His business address is One International Place, 29th
Floor, Boston, Massachusetts 02110.
Harley J. Murphy. Mr. Murphy, a citizen of Canada, has served on the
Company's board since its inception and has served on the board of TBI since
January 1995. He joined Wood Gundy in 1971 working in the Money Market,
Corporate Finance and International Investment Banking areas and is presently
Director and Vice-President of the Hamilton, Ontario operations. In 1982, he
co-founded and was President of Celtel Communications Corporation, which when
licensed along with Rogers Cantel, provided cellular services to Canadians. In
1985, he founded Metroplex Communications Inc., an affiliate of Page Canada, the
first privately-owned company to introduce nation-wide paging in Canada. Mr.
Murphy graduated in 1969 from the University of Toronto with a degree in
Industrial Engineering. His business address is 21 King Street West, Ste. 600,
Hamilton, Ontario L8P 4W7.
Mark A. Pelson. Mr. Pelson, a citizen of the United States, has served on
the Company's board since July 1999. Mr Pelson is a Principal of Providence
Equity Partners Inc., which he joined in August 1996. Prior to joining
Providence, he was a co-founder and director of TeleCorp, Inc., a wireless
telecommunications company. From 1989 to 1995, Mr. Pelson served in various
management positions with AT&T, with his most recent position being a general
manager of strategic planning and mergers and acquisitions. Mr. Pelson is also a
director of
78
<PAGE>
Language Line LLC, Carrier1 International S.A., and Madison River Telephone
Company, L.L.C. He received a B.A. from Cornell University and a J.D. from
Boston University. Mr. Pelson's business address is 50 Kennedy Plaza, 900 Fleet
Center, Providence, Rhode Island 02903.
Scott K. Socol. Mr. Socol, a citizen of the United States, has been the
Company's Executive Vice President and Chief Operating Officer since May 1996.
Prior thereto, he was the Director of Operations from 1995 to 1996. From 1986 to
1994, Mr. Socol worked with MCI/MCI International with responsibility for global
expansion and management of operations of more than 20 international offices
located in the Atlantic Ocean region. Mr. Socol holds a B.A. from Guilford
College and a Juris Doctorate degree from the University of Georgia. His
business address is 3300 Highway #7, Ste 401, Concord, Ontario L4K 4M3.
Greg Belbeck. Mr. Belbeck, a citizen of Canada, has been an Executive Vice
President of the Company since October 1999, and has been Chief Financial
Officer of the Company since February 1997. Prior to joining the Company in
1997, Mr. Belbeck worked for 14 years in accounting, corporate finance and
valuation at Price Waterhouse and two years in finance and business development
roles with two Canadian start-up telecommunications companies. Mr. Belbeck holds
a B.A. (economics) degree from York University, and a law degree from Osgoode
Law School. Mr. Belbeck is a Chartered Accountant and a Chartered Business
Valuator and his business address is 3300 Highway #7, Ste 401, Concord, Ontario
L4K 4M3.
Laurent Duplantie. Mr. Duplantie, a citizen of Canada, has been Executive
Vice President, Engineering and Operations, of the Company since October 1999,
and was Vice President, Engineering and Operations from October 1996 to October
1999. Prior to joining the Company, he spent 15 years at Teleglobe Canada as
Director of Strategic Development and Director of Network Services promoting
CANTAT-3 and CANUS 1, and as Project Director for the construction of CANTAT-3.
Mr. Duplantie holds a Bachelor's degree in Engineering from l'Ecole
Polytechnique de Montreal. Mr. Duplantie's business address is 170 Taschereau
Blvd., Ste. 310, La Prairie, Quebec J5R 5H6.
Lin Gentemann. Ms. Gentemann, a citizen of the United States, has been an
Executive Vice President of the Company since October 1999, and has been General
Counsel and Secretary of the Company since November 1997. Ms. Gentemann also was
a Vice President of the Company from November 1997 to October 1999. Prior to
joining the Company, Ms. Gentemann served as senior corporate attorney at MCI
from 1992 to 1997. Before joining MCI, Ms. Gentemann was an associate with the
law firm of Jones, Day, Reavis and Pogue. She holds a B.A. from the University
of Virginia and a Juris Doctorate degree from the Washington College of Law,
American University. Ms. Gentemann's business address is P.O. Box HM 3043,
Hamilton HM NX, Bermuda.
James Fitzgerald. Mr. Fitzgerald, a citizen of Canada, has been the
Company's Vice President, Bermuda Operations since 1999. He also has served as
TBI's General Manager since
79
<PAGE>
1999, when he was promoted from Senior Vice President of Marketing, Sales and
Customer Service of TBI. Prior thereto, Mr. Fitzgerald held senior management
positions at Bell Canada, Northern Telecom (Nortel), Unitel (AT&T Canada) and
most recently, from 1995 to 1998, as President & Chief Operating Officer of MTS
Mobility, Inc., a Canadian regional cellular provider. Mr. Fitzgerald holds a
B.A. degree and a M.B.A. degree from York University. His business address is 2
Carter's Bay Road, Southside, St. David's, DDBX Bermuda.
Eldon Blust. Mr. Blust, a citizen of the United States, has been Senior
Vice President, Business Development, of the Company since October 1999. Prior
to joining the Company, Mr. Blust was Senior Director, Global Strategy and
Development, at MCI WorldCom where he was responsible for the company's offshore
investments and alliances in Australia (AAP Telecommunications Pty Ltd), Canada
(Stentor Resource Center, Inc.), Mexico (Avantel, S.A.) and New Zealand (Clear
Communications Company Limited). Prior thereto, Mr. Blust was Director, Global
Network Services, where he was responsible for all sales, marketing, product
management and delivery of MCI's extensive portfolio of international network
services provided through both satellite and fiber cable facilities. He joined
MCI in 1986. Mr. Blust holds a Bachelor's degree in Electrical Engineering from
the University of Missouri at Columbia and is a registered Professional Engineer
(Virginia). His business address is 525 North Broadway, 2nd Floor, White Plains,
New York 10603.
Edward A. Weisbrot. Mr. Weisbrot, a citizen of the United States, joined
the Company in October 1999 as Senior Vice President, Network Services. For the
last two years, Mr. Weisbrot has served as Vice President of Engineering and
Operations at Primus Telecom. Prior to joining Primus, he served as the Director
for Voice Engineering at GlobalOne, where he supervised the design and
development of its voice network. Previously, he spent 17 years with MCI and was
the primary technical director for MCI's global networks. Mr. Weisbrot holds a
Bachelor of Science, Electrical Engineering degree from the New Jersey Institute
of Technology. His current business address is 525 North Broadway, 2nd Floor,
White Plains, New York 10603.
Item 11. Executive Compensation.
The following tables set forth certain historical compensation information
for our two Chief Executive Officers during fiscal years 1999 and 1998 and the
other four most highly compensated executive officers who were serving as
executive officers at the end of fiscal years 1999 and 1998 (collectively, the
"Named Executive Officers "). Mr. Kedar served as Chief Executive Officer until
October 1999, when Mr. Jerry A. DeMartino became our Chief Executive Officer. In
January 2000, Mr. DeMartino resigned as Chief Executive Officer for medical
reasons, and Mr. Kedar became our acting Chief Executive Officer pending our
selection of a replacement for Mr. DeMartino. In March 2000, Mr. Escalona became
our Chief Executive Officer. The following tables state the current positions of
the Named Executive Officers, although prior to October 1999, when we hired Mr.
DeMartino as President and Chief Executive Officer, Mr. Blust as Senior Vice
President, Business Development, and Mr. Weisbrot as Senior Vice President,
Network Services, Mr. Kedar was Chairman and Chief Executive
80
<PAGE>
Officer, Ms. Gentemann was General Counsel, Vice President and Secretary, Mr.
Duplantie was Vice President, Engineering and Operations, and Mr. Belbeck was
Chief Financial Officer. Mr. Socol's positions did not change.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation for fiscal years 1999
and 1998 for the Named Executive Officers:
<TABLE>
<CAPTION>
Long Term
---------
Annual Compensation Compensation
------------------- ------------
Awards
------
Other Annual Securities Underlying
------------ ---------------------
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Michael Kedar,
Executive Chairman ............................. 1999 $257,688 $203,750 $ 8,633 180,000
1998 144,750 71,700 -- 25,000
Jerry A. DeMartino
Former Chief Executive Officer(1)............... 1999 150,000 -- -- 249,019
1998 -- -- -- --
Scott K. Socol,
Executive Vice President and
Chief Operating Officer......................... 1999 201,751 80,150 16,239 100,000
1998 154,962 53,625 16,000 35,000
Lin Gentemann,
Executive Vice President, General Counsel and
Secretary....................................... 1999 164,374 43,750 12,750 100,000
1998 107,121 30,000 18,000 25,000
Laurent Duplantie,
Executive Vice President, Engineering and
Operations...................................... 1999 209,666 41,250 -- 100,000
1998 83,333 30,000 -- 25,000
Greg Belbeck,
Executive Vice President and Chief Financial
Officer......................................... 1999 180,999 25,000 -- 100,000
1998 86,667 16,666 -- 25,000
</TABLE>
(1) Reflects Mr. DeMartino's compensation from October 1, 1999, when he joined
the Company, to December 31, 1999.
81
<PAGE>
OPTION GRANTS IN 1999
The following table sets forth option grants during fiscal year 1999 to the
Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------
Number Of Percent Of Potential Realizable Value
--------- ---------- --------------------------
Securities Total Options At Assumed Annual Rates
---------- ------------- -----------------------
Underlying Granted To Exercise Of Stock Price Appreciation
---------- ---------- -------- ---------------------------
Option Employees Price Expiration For Option Term
------ --------- ----- ---------- ---------------------------------------
Name Granted In Fiscal Year ($/Share) Date 0% 5% 10%
---- ------- -------------- --------- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Kedar,
Executive Chairman........... 80,000 9% $20.40 Oct. 7, 2009 -- $1,026,356 $2,600,987
100,000 10 9.00 Apr. 12, 2009 $1,140,000 2,422,945 4,391,235
Jerry A. DeMartino,
Former Chief
Executive Officer......... 200,000 20 20.40 Oct. 7, 2009 -- 2,565,890 6,502,469
49,019 5 20.40 Jan 7, 2000 -- 12,500 2,500
Scott K. Socol,
Executive Vice
President and Chief
Operating Officer......... 100,000 10 9.00 Apr. 12, 2009 1,140,000 2,422,945 4,391,235
Lin Gentemann,
Executive Vice President,
General
Counsel and
Secretary................. 100,000 10 9.00 Apr. 12, 2009 1,140,000 2,422,945 4,391,235
Laurent Duplantie,
Executive Vice
President, Engineering
and Operations............ 100,000 10 9.00 Apr. 12, 2009 1,140,000 2,422,945 4,391,235
Greg Belbeck,
Executive Vice
President and Chief
Financial Officer......... 100,000 10 9.00 Apr. 12, 2009 1,140,000 2,422,945 4,391,235
</TABLE>
82
<PAGE>
AGGREGATED OPTION EXERCISES IN 1999 AND DECEMBER 31, 1999 OPTION
VALUES
The following table sets forth options exercised by our Named Executive
Officers during fiscal year 1999 and the value of unexercised options for these
officers at the end of fiscal year 1999:
<TABLE>
<CAPTION>
Number of
---------
Securities Value Of
---------- --------
Underlying Unexercised
---------- -----------
Unexercised In-The-Money
----------- ------------
Options At Fiscal Options At
----------------- ----------
Shares Year-End Fiscal Year-End
------ -------- ---------------
Acquired On Value Exercisable/ Exercisable/
----------- ----- ------------ ------------
Name Exercise Realized Unexercisable Unexercisable
---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Michael Kedar,
Executive Chairman .................... 0 0 186,666/93,334 $1,640,546/1,074,004
Jerry A. DeMartino,
Former Chief Executive Officer ........ 0 0 49,019/200,000 0/0
Scott K. Socol,
Executive Vice President and Chief
Operating Officer...................... 5,637 103,552 88,530/98,333 1,240,805/1,129,337
Lin Gentemann,
Executive Vice President, General
Counsel and Secretary ................. 0 0 48,333/86,667 557,663/991,337
Laurent Duplantie,
Executive Vice President, Engineering
and Operations......................... 0 0 48,333/86,667 557,663/991,337
Greg Belbeck,
Executive Vice President and Chief
Financial Officer...................... 0 0 48,333/86,667 557,663/991,337
</TABLE>
83
<PAGE>
Board of Directors
The affairs of the Company are governed by the board of directors. Our
directors are elected to one-year terms. Our board consists of 11 directors: (1)
two directors (who have not yet been nominated), one of whom is to be nominated
by the holders of a majority of the Class B shares and both of whom must be
approved by a vote of the Class B shareholders (although two of the Class B
shareholders are excluded from the nomination and approval of these directors),
(2) six directors appointed by certain of the Class B shareholders, and (3)
three directors approved by a vote of the holders of our common shares, although
Class B shareholders are not permitted to vote their common shares.
Compensation Committee
Our board of directors has established a Compensation Committee. The
purpose of the Compensation Committee is to establish and submit to our board of
directors recommendations with respect to (1) compensation of our officers and
other key employees and (2) awards to be made under our share option and
incentive plan. Messrs. Kedar, Bolland, Maroni, Murphy and Pelson served on the
1999 Compensation Committee.
Compensation of Directors
In 1997 and 1998 we granted our directors stock options representing in the
aggregate 85,000 common shares. In 1999 we granted our directors in their
capacity as directors (except Messrs. Kedar and DeMartino) stock options
representing in the aggregate 50,000 common shares. Directors did not receive
monetary compensation for their services as directors in 1997, 1998 or 1999. We
have not set aside or accrued any amounts during our last fiscal year to provide
pension, retirement or similar benefits for our directors and officers.
Employment Agreements with Named Executive Officers
We entered into employment agreements with our Named Executive Officers in
October 1999. Each agreement provides for a term of employment of two years,
commencing in July 1999, and continuing thereafter for successive two-year terms
unless either we or the officer provides at least three months' notice in
advance of the expiration of the current term. Each agreement terminates
automatically upon the death of the officer, we may terminate the agreement for
cause or without cause or due to an officer's disability and the officer may
terminate the agreement for good reason or without good reason. If we terminate
an agreement without cause or due to an officer's disability, the officer
terminates the agreement for good reason, the agreement terminates due to the
officer's death or we elect not to renew an officer's employment for another
term, (1) we are required to make a lump sum payment to the officer (or
84
<PAGE>
the officer's legal representatives) equal to the sum of two times the officer's
then current annual base salary, accrued bonus, certain other accrued
obligations and accrued investments under our investment plans, and (2) the
vesting of the officer's options may be accelerated. Each agreement also
restricts the officer from competing with us during the term of the officer's
employment and for a period of two years thereafter.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 17, 2000,
regarding the beneficial ownership of our common shares and Class B shares by:
. each person (or group as defined in Section 13(d)(3) of the Exchange
Act) who is known to us to be the beneficial owner of more than five
percent of our common shares or Class B shares,
. our directors and nominees,
. our Named Executive Officers, and
. our directors and executive officers as a group.
Unless otherwise noted and subject to community property laws, the persons
or entities in this table have sole voting and investment power with respect to
all shares owned by them. The information set forth in the table and footnotes
below has been provided to the Company by the shareholders listed below.
85
<PAGE>
<TABLE>
<CAPTION>
Shares
------
Total Number of Beneficially
--------------- ------------
Title of Class Name of Beneficial Owner(1) Shares Owned Through Percent of Class
- -------------- --------------------------- ------ ------------- ----------------
Beneficially Owned Options
------------------ -------
<S> <C> <C> <C> <C>
Common / Class B Boston Ventures Limited 2,941,176 / 199 -- 17.3% / 19.9%
Partnership V(2)
One Federal Street, 23rd
Floor
Boston, MA
02110-2003
Common / Class B TD Capital Group Limited(3) 2,918,540 /197 -- 17.2% / 19.7%
55 King Street
Toronto Dominion Bank
Tower, 8th Floor P.O. Box 1
Toronto Dominion Centre
Toronto, Ontario M5K 1AZ
Canada
Common / Class B Kelso Investment Associates VI, 2,500,000 / 169 -- 14.7% / 16.9%
L.P.(4)
320 Park Avenue, 24th Floor
New York, NY 10022
Common / Class B Providence Equity Partners III, 1,508,378 / 98 -- 8.9% / 9.8%
L.P.(5)
Fleet Center, 9th Floor
50 Kennedy Plaza
Providence, RI 02903
Common / Class B Capital Communications CDPQ, 1,470,588 / 100 -- 8.6% / 10.0%
Inc.(6)
1981 McGill College Avenue
Montreal, Quebec H3A 3C7
Canada
Common / Class B Spectrum Equity Investors III, 1,458,824 / 97 -- 8.6% / 9.7%
L.P.(7)
One International Place, 29th
Floor
Boston, MA 02110
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Shares
------
Total Number of Beneficially
--------------- ------------
Title of Class Name of Beneficial Owner(1) Shares Owned Through Percent of Class
- -------------- --------------------------- ------ ------------- ----------------
Beneficially Owned Options
------------------ -------
<S> <C> <C> <C> <C>
Common Michael Kedar (Executive 186,666 186,666 1.1%
Chairman)(8)
Common / Class B Jorge L. Escalona (Director, -- -- --
President and Chief Executive
Officer)
Common / Class B Jerry A. DeMartino (Former -- -- --
Director, President and Chief
Executive Officer)
Common Harley J. Murphy (Director) 50,000 50,000 *
Common / Class B Linda Dougherty (Director) -- -- --
Common / Class B Anthony Bolland (Director) -- -- --
Common / Class B Kevin J. Maroni (Director) -- -- --
Common / Class B George E. Matelich (Director) -- -- --
Common / Class B Mark A. Pelson (Director) -- -- --
Common / Class B Sebastian Rheaume (Director) -- -- --
Common Scott K. Socol (Executive Vice 93,177 88,529 *
President and Chief Operating
Officer)
Common Lin Gentemann (Executive Vice 53,931 48,333 *
President, General Counsel
and Secretary)
Common Laurent Duplantie (Executive 48,333 48,333 *
Vice President, Engineering
and Operations)
Common Greg Belbeck (Executive Vice 48,333 48,333 *
President and Chief Financial
Officer)
Common All Directors and Executive 480,641 -- 2.80%
Officers as a Group
</TABLE>
87
<PAGE>
- ----------
* Denotes ownership of less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed a "beneficial owner" of a security if he or she has or
shares the power to vote or direct the voting of such security or the power
to dispose or direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities that that person has the
right to acquire beneficial ownership of within 60 days. More than one
person may be deemed to be a beneficial owner of the same securities.
(2) Boston Ventures Company V, LLC is the general partner of Boston Ventures
Limited Partnership V, and by virtue of such status may be deemed to be the
beneficial owner of the shares owned by Boston Ventures Limited Partnership
V. Anthony Bolland, Roy Coppedge, Richard Wallace, James Wilson, Martha
Crowninshield and Barbara Genader are the managing directors of Boston
Ventures Company V, LLC, and by virtue of such status may be deemed to be
the beneficial owner of the shares beneficially owned directly or
indirectly by Boston Ventures Company V, LLC. Each of Anthony Bolland, Roy
Coppedge, Richard Wallace, James Wilson, Martha Crowninshield and Barbara
Genader disclaim such beneficial ownership.
(3) Toronto-Dominion Bank, the parent of TD Capital Group Limited, may be
deemed to share beneficial ownership of the shares beneficially owned
directly or indirectly by TD Capital Group Limited.
(4) Excludes 441,176 common shares and 30 Class B shares held by an affiliate
of Kelso Investment Associates VI, L.P. The general partner of Kelso
Investment Associates VI, L.P. may be deemed to share beneficial ownership
of the shares beneficially owned directly or indirectly by Kelso Investment
Associates VI, L.P. and the affiliate, but disclaims beneficial ownership
of these shares. Frank T. Nickell, Thomas R. Wall, IV, George E. Matelich,
Michael B. Goldberg, David I. Wahrhaftig, Frank K. Bynum, Jr. and Philip E.
Berney may be deemed to share beneficial ownership of the shares
beneficially owned directly or indirectly by Kelso Investment Associates
VI, L.P. and its affiliate by virtue of their status as managing members of
the affiliate and of the general partner of Kelso Investment Associates VI,
L.P., but each disclaims such beneficial ownership. Due to their common
control, Kelso Investment Associates VI, L.P and its affiliate could be
deemed to beneficially own each others shares, but each disclaims such
beneficial ownership.
(5) Excludes 11,230 common shares and 1 Class B share held by an affiliate of
Providence Equity Partners III, L.P. Providence Equity Partners III L.L.C.,
the general partner of Providence Equity Partners III, L.P., may be deemed
to share beneficial ownership of the shares beneficially owned directly or
indirectly by Providence Equity Partners III, L.P. and by the affiliate,
but disclaims beneficial ownership of these shares. Jonathan M. Nelson,
Glenn M. Creamer and Paul J. Salem may be deemed to share voting and
investment power
88
<PAGE>
with respect to the shares in which Providence Equity Partners III L.L.C.
has direct or indirect beneficial ownership, but each disclaims such deemed
beneficial ownership.
(6) Caisse de Depot et Placement du Quebec, an agent of the Crown and right of
the Province of Quebec, may be deemed to share beneficial ownership of the
shares beneficially owned directly or indirectly by Capital Communications
CDPQ, Inc.
(7) Excludes 60,784 common shares and 2 Class B shares held by two affiliates
of Spectrum Equity Investors III, L.P. Spectrum Equity Associates III,
L.P., the general partner of Spectrum Equity Investors III, L.P., may be
deemed to share beneficial ownership of the shares beneficially owned
directly or indirectly by Spectrum Equity Investors III, L.P. and the
affiliates, but disclaims beneficial ownership of these shares. Brian B.
Applegate, William P. Collatos, Kevin J. Maroni and Randy Henderson may be
deemed to share beneficial ownership of the shares beneficially owned
directly or indirectly by Spectrum Equity Associates III, L.P. by virtue of
their status as general partners of Spectrum Equity Associates III, L.P.,
but each disclaims such beneficial ownership.
(8) Excludes 717,528 common shares and 120,000 options held by TeleBermuda
(BVI) Limited, an investor holding company incorporated in the British
Virgin Islands in which Mr. Kedar holds preference shares that carry more
than 50% of the voting rights. Although Mr. Kedar may be deemed for
disclosure purposes to share beneficial ownership of the common shares and
options held by TeleBermuda (BVI) Limited by virtue of his ownership of the
preference shares, Mr. Kedar disclaims beneficial ownership of the common
shares and options held by TeleBermuda (BVI) Limited. Other than the fixed
equity represented by the preference shares, Mr. Kedar does not have any
equity interest in TeleBermuda (BVI) Limited.
Item 13. Certain Relationships and Related Transactions.
We have entered into the transactions described below with our officers,
directors or five percent shareholders or entities affiliated with our officers,
directors or five percent shareholders. See "Executive Compensation" for a
discussion of employment agreements entered into with our Named Executive
Officers and Item 14 herein for a list of indemnity agreements, employment
agreements and stock option agreements included as exhibits to this Form 10-K.
On September 15, 1997, TBI entered into a consulting services arrangement
with First Bermuda Securities Limited, of which Jeffrey Conyers, one of our
former directors, is the Chief Executive Officer. Under the arrangement as
amended on March 23, 1999, First Bermuda Securities Limited will, among other
things, (1) assist TBI in the development of a business plan and with regulatory
compliance matters, (2) provide advice with respect to strategic alternatives
and ongoing regulatory issues and (3) assist in the Atlantica-1 Network
financing efforts in Bermuda. First Bermuda Securities Limited received a fee of
$6,250 per month for its services through December 31, 1999. A new arrangement
between GlobeNet and First Bermuda
89
<PAGE>
Securities Limited was entered into as of January 1, 2000 under which GlobeNet
will pay First Bermuda Securities Limited $5,000 per month for business and
financial advisory services.
In connection with our repurchase of common shares on August 9, 1999, First
Bermuda Securities Limited served as our repurchase agent. First Bermuda
Securities Limited received customary fees for its services.
Linda Dougherty, one of our directors, is a Vice President of TD Capital
Group Limited, which is an affiliate of one of the initial purchasers of our 13%
senior notes. An affiliate of TD Capital Group Limited had previously loaned
$9.5 million to us in the form of secured subordinated loans with warrants to
acquire common shares of the Company. This affiliate exercised all its warrants
applying the $9.5 million principal amount of its subordinated loans and the
$1.9 million in accrued interest as the exercise consideration. TD Capital Group
Limited's affiliate used to own a majority of our Class A shares by virtue of
its subordinated loans and is a party to an amended and restated
securityholders' agreement entered in connection with the private equity
financing. TD Capital Group Limited's affiliate is also a party to the
registration rights agreement entered into in connection with the private equity
financing.
Another affiliate of TD Capital Group Limited received customary fees for
serving as an initial purchaser of our 13% senior notes, as the financial
advisor and placement agent in connection with the private equity financing and
as the arranger and administrative agent in connection with Holdings' bank
credit facility.
On August 26, 1998, we loaned $1,292,000 (CAD$2,000,000) to Mr. Kedar, our
then Chairman and Chief Executive Officer. Mr. Kedar used the proceeds of the
loan to invest in a joint venture with a third party carrier. The loan to Mr.
Kedar, and his participation in the joint venture, were conditional on the third
party carrier granting an option in favor of TBI to acquire an equity interest
in the third party carrier's Canadian operations. The option was exercisable
until November 30, 1998 for a 20% equity interest in the Canadian operations at
an exercise price of $7,445,000 (CAD$11,525,000) (applying the August 26, 1998
exchange rate). As a result of our later decision to pursue the development of
the Atlantica-1 Network, TBI elected not to exercise the option. Subsequent to
year-end 1998, the loan to Mr. Kedar and all interest thereon were paid in full.
TBI's U.S. affiliate, TBI L.L.C., was formed in May 1996 as a limited
liability company under the laws of the State of Delaware. TBI L.L.C. holds the
landing license for the BUS-1 system in the United States issued by the FCC, as
well as certain ownership and leasehold rights with respect to BUS-1 system
assets in the United States. TBI L.L.C. is a wholly owned subsidiary of TBI.
Previously, TBI held a 20% ownership interest in TBI L.L.C. and Elbac Cable
Corporation ("Elbac") held the remaining 80% ownership interest. On October 29,
1999, the FCC issued a Memorandum Opinion and Order granting authority for TBI
to acquire Elbac, including the 80% ownership interest held by Elbac in TBI
L.L.C. This transaction was consummated on November 1, 1999, thus providing TBI
with a 100% ownership interest in TBI L.L.C.
90
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Filed as a Part of this Report
1. Financial Statements (included in Part II of this Form 10-K)
Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
See Exhibits 27.1 and 99.2 hereto.
3. Exhibit Index
Exhibit Number Description
- -------------- -----------
*3.1 Memorandum of Association of GlobeNet Communications Group Limited
(see Exhibit 3.1 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*3.2 Bye-Laws of GlobeNet Communications Group Limited dated July
12, 1999 (see Exhibit 3.2 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*4.1 Indenture between GlobeNet Communications Group Limited and
Bankers Trust Company, dated as of July 14, 1999 (see Exhibit 4.1
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
91
<PAGE>
*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 (see Exhibit 4.2 to
GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*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 (see Exhibit 4.3
(a) to GlobeNet Communications Group Limited Registration Statement
on Form S-4 (File No. 333-86461)).
*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 (see Exhibit 4.3(b) to GlobeNet
Communications Group Limited Registration Statement on Form S-4
(File No. 333-86461)).
*4.5 Reimbursement Agreement between GlobeNet Communications
Holdings Ltd. and Alcatel, dated as of July 14, 1999
(see Exhibit 4.3(c) to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*10.1 Indemnity Agreement dated July 14, 1999 between Anthony
Bolland and GlobeNet Communications Group Limited. (Director) (see
Exhibit 10.1 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.2 Indemnity Agreement dated May 21, 1999 between Linda Dougherty and
GlobeNet Communications Group Limited. (Director) (see Exhibit 10.2
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.3 Indemnity Agreement dated July 14, 1999 between Sebastien Rheaume
and GlobeNet Communications Group Limited. (Director)
(see Exhibit 10.3 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
92
<PAGE>
*10.4 Indemnity Agreement dated July 14, 1999 between George E. Matelich
and GlobeNet Communications Group Limited. (Director) (see Exhibit
10.4 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.5 Indemnity Agreement dated May 21, 1999 between Michael Kedar and
GlobeNet Communications Group Limited. (Director) (see Exhibit 10.5
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.6 Indemnity Agreement dated May 21, 1999 between Harley J. Murphy and
GlobeNet Communications Group Limited. (Director) (see Exhibit 10.6
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.7 Indemnity Agreement dated July 14, 1999 between Mark A. Pelson and
GlobeNet Communications Group Limited. (Director) (see Exhibit 10.7
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.8 Indemnity Agreement dated July 14, 1999 between Kevin J. Maroni and
GlobeNet Communications Group Limited. (Director) (see Exhibit 10.9
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.9 Indemnity Agreement dated May 21, 1999 between Michael Kedar and
GlobeNet Communications Group Limited. (Officer) (see Exhibit 10.10
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.10 Indemnity Agreement dated May 21, 1999 between Greg Belbeck and
GlobeNet Communications Group Limited. (Officer) (see Exhibit 10.11
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.11 Indemnity Agreement dated May 21, 1999 between Lin Gentemann and
GlobeNet Communications Group Limited. (Officer) (see Exhibit 10.12
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.12 Indemnity Agreement dated May 21, 1999 between Scott K. Socol and
GlobeNet Communications Group Limited. (Officer) (see Exhibit 10.13
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.13 Indemnity Agreement dated May 21, 1999 between Laurent Duplantie
and GlobeNet Communications Group Limited. (Officer) (see Exhibit
10.14 to
93
<PAGE>
GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.14 Indemnity Agreement dated July 15, 1999 between James Fitzgerald
and GlobeNet Communications Group Limited. (Officer) (see Exhibit
10.15 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.15 Amended & Restated Securityholders' Agreement, dated July 14, 1999
(see Exhibit 10.16 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*10.16 Project Development and Construction Contract Among Alcatel
Submarine Networks, Alcatel Submarine Networks, Inc. and Atlantica
Network (Bermuda) Ltd., dated as of June 16, 1999 (see Exhibit
10.17 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.17 AT&T-SSI, Inc. Supply Contract (including Amendment), dated May 16,
1996 (see Exhibit 10.18 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*10.18 1998 Share Option and Incentive Plan, dated December 18, 1998 (see
Exhibit 10.19 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.19 TBI 1997 Stock Option Plan, dated September 24, 1997 (see Exhibit
10.20 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.20 Executive Employment Agreement dated October 1, 1999 between
GlobeNet Communications Group Limited and Jerry A. DeMartino (see
Exhibit 10.21 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.21 Stock Option and Compensation Agreement dated October 7, 1999
between GlobeNet Communications Group Limited and Jerry A.
DeMartino (see Exhibit 10.22 to GlobeNet Communications Group
Limited Registration Statement on Form S-4 (File No. 333-86461)).
*10.22 Supplemental Stock Option Agreement dated October 7, 1999 between
GlobeNet Communications Group Limited and Jerry A. DeMartino (see
Exhibit 10.23 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
94
<PAGE>
*10.23 Executive Employment Agreement dated October 7, 1999 between
TeleBermuda International (Canada) Limited and Michael Kedar (see
Exhibit 10.24 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.24 Supplemental Stock Option Agreement dated October 7, 1999
between GlobeNet Communications Group Limited and Michael Kedar
(see Exhibit 10.25 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*10.25 Executive Employment Agreement dated October 1, 1999 between
TeleBermuda International Limited and Lin Gentemann (see Exhibit
10.26 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.26 Executive Employment Agreement dated October 7, 1999 between
TeleBermuda International (Canada) Limited and Scott Socol (see
Exhibit 10.27 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.27 Executive Employment Agreement dated October 1, 1999 between
TeleBermuda International (Canada) Limited and Laurent Duplantie
(see Exhibit 10.28 to GlobeNet Communications Group Limited
Registration Statement on Form S-4 (File No. 333-86461)).
*10.28 Executive Employment Agreement dated October 1, 1999 between
TeleBermuda International (Canada) Limited and Greg Belbeck (see
Exhibit 10.29 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.29 Indemnity Agreement dated October 1, 1999 between Edward Weisbrot
and GlobeNet Communications Group Limited. (Officer) (see Exhibit
10.30 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.30 Indemnity Agreement dated October 1, 1999 between Eldon Blust and
GlobeNet Communications Group Limited. (Officer) (see Exhibit 10.31
to GlobeNet Communications Group Limited Registration Statement on
Form S-4 (File No. 333-86461)).
*10.31 Indemnity Agreement dated October 7, 1999 between Jerry DeMartino
and GlobeNet Communications Group Limited. (Director) (see Exhibit
95
<PAGE>
10.32 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
*10.32 Indemnity Agreement dated October 1, 1999 between Jerry DeMartino
and GlobeNet Communications Group Limited. (Officer) (see Exhibit
10.33 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
12.1 Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of GlobeNet Communications Group Limited (see Exhibit
21.1 to GlobeNet Communications Group Limited Registration
Statement on Form S-4 (File No. 333-86461)).
27.1 Financial Data Schedule.
99.1 Auditors' Report on Exhibit 99.2.
99.2 Schedule of Allowance for Doubtful Accounts.
- ---------------
* 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.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Act by registrants that have not registered securities pursuant to
Section 12 of the Act: No annual report or proxy material has been sent to
security holders as of the date hereof. We expect to furnish our security
holders with an annual shareholders' circular and proxy soliciting material
subsequent to the filing of this Form 10-K and will supplementally furnish
copies of such documents to the Commission upon furnishing them to our security
holders.
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2000.
GLOBENET COMMUNICATIONS GROUP
LIMITED
(Registrant)
By: /s/ Jorge L. Escalona
-------------------------
Jorge L. Escalona
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Name Title Date
/s/ Jorge L. Escalona Chief Executive Officer March 30, 2000
- ----------------------------- (principal executive
Jorge L. Escalona officer)
/s/ Greg Belbeck Chief Financial Officer March 30, 2000
- ----------------------------- (principal financial
Greg Belbeck officer and principal
accounting officer)
/s/ Michael Kedar
- ----------------------------- Director, Executive Chairman March 30, 2000
Michael Kedar
/s/ Anthony Bolland Director March 30, 2000
- -----------------------------
Anthony Bolland
/s/ Sebastien Rheaume Director March 30, 2000
- -----------------------------
Sebastien Rheaume
S-1
<PAGE>
/s/ Linda Dougherty Director March 30, 2000
- -----------------------------
Linda Dougherty
/s/ George E. Matelich Director March 30, 2000
- -----------------------------
George E. Matelich
- ----------------------------- Director March 30, 2000
Kevin J. Maroni
/s/ Harley J. Murphy Director March 30, 2000
- -----------------------------
Harley J. Murphy
- ----------------------------- Director March 30, 2000
Mark A. Pelson
S-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
Ten For the For the For the
months year year year
ended ended ended ended
December December December December
31, 1996 31, 1997 31,1998 31, 1999
$ $ $ $
-------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Loss before income taxes,
minority interest, equity
accounted for investment
and extraordinary item (3,018) (5,231) (4,435) (14,183)
Fixed charges 43 1,519 4,937 21,107
Minority interest -- 249 204 --
Earnings (loss) from equity
accounted for investment (228) (261) (677) (773)
-------------------------------------------------------
(3,203) (3,724) 29 6,151
-------------------------------------------------------
Fixed charges
Interest component of rent expense 43 82 114 142
Interest on long-term debt -- 1,055 3,863 20,427
Accrued contingent interest -- 382 960 538
-------------------------------------------------------
43 1,519 4,937 21,107
-------------------------------------------------------
Deficiency of earnings available
to cover fixed charges (3,246) (5,243) (4,908) (14,956)
=======================================================
</TABLE>
<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 AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 528,397 3,030
<SECURITIES> 0 0
<RECEIVABLES> 2,470 2,565
<ALLOWANCES> 224 80
<INVENTORY> 0 0
<CURRENT-ASSETS> 83,876 7,296
<PP&E> 152,716 28,074
<DEPRECIATION> 5,506 1,892
<TOTAL-ASSETS> 705,332 56,260
<CURRENT-LIABILITIES> 57,296 11,842
<BONDS> 400,000 35,019
0 0
2 0
<COMMON> 25,566 5,274
<OTHER-SE> 216,013 1,430
<TOTAL-LIABILITY-AND-EQUITY> 705,332 56,260
<SALES> 0 0
<TOTAL-REVENUES> 26,348 26,724
<CGS> 0 0
<TOTAL-COSTS> 10,989 15,676
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 212 114
<INTEREST-EXPENSE> 20,965 4,823
<INCOME-PRETAX> (14,183) (4,435)
<INCOME-TAX> 141 36
<INCOME-CONTINUING> (14,324) (4,471)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (809) 0
<CHANGES> 0 0
<NET-INCOME> (15,906) (4,944)
<EPS-BASIC> (1.60) (1.41)
<EPS-DILUTED> (1.60) (1.41)
</TABLE>
<PAGE>
Exhibit 99.1
Report of Independent Accountants on Schedule of Allowance for Doubtful Accounts
To the Directors of
GlobeNet Communications Group Limited
Our audits of the consolidated financial statements referred to in our report
dated February 16, 2000 appearing in Item 8 of this Form 10-K also included an
audit of the Schedule of Allowance for Doubtful Accounts included as Exhibit
99.2 to this Form 10-K. In our opinion, the Schedule of Allowance for Doubtful
Accounts presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 16, 2000
<PAGE>
<TABLE>
<CAPTION>
Exhibit 99.2
Schedule of Allowance for Doubtful Accounts
Year Balance at Beginning Additions Charged to Deductions (1) Balance at End of
of Year Costs and Expenses Year
<S> <C> <C> <C> <C>
1997 0 0 0 0
1998 0 114 -34 80
1999 80 212 -68 224
- -----------------
(1) Primarily write-offs.
</TABLE>
