<PAGE>
Rule No. 424(b)(1)
Registration No. 333-8879
PROSPECTUS
51,282,300 Shares
[LOGO OF INFONET APPEARS HERE]
Class B Common Stock
----------------
This is Infonet Services Corporation's initial public offering of Class B
common stock. We are offering 38,461,600 shares and the selling stockholders
identified on page 64 of this prospectus are offering 12,820,700 shares.
Prior to the offering, there has been no public market for our Class B
common stock. We have been approved to list our Class B common stock on the New
York Stock Exchange under the symbol "IN," and we have applied for listing on
the Frankfurt Stock Exchange.
Investing in our Class B common stock involves risks which are described
in the "Risk Factors" section beginning on page 6 of this prospectus.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................ $21.00 $1,076,928,300
Underwriting discount............................ $1.00 $51,282,300
Proceeds, before expenses, to Infonet Services
Corporation...................................... $20.00 $769,232,000
Proceeds, before expenses, to the selling
stockholders..................................... $20.00 $256,414,000
</TABLE>
The underwriters may also purchase up to an additional 7,692,342 shares
from the selling stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. See "Underwriting."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Class B common stock will be ready for delivery on or about
December 21, 1999.
----------------
Joint Global Coordinators
Merrill Lynch & Co.______________________________________Warburg Dillon Read LLC
Merrill Lynch & Co. is the sole bookrunner for the offering.
----------------
Merrill Lynch & Co_______________________________________Warburg.Dillon Read LLC
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
----------------
Deutsche Bank acted as advisor to the selling stockholders.
The date of this prospectus is December 15, 1999.
<PAGE>
EDGAR APPENDIX
The outside front and back covers of the Preliminary Prospectus, the inside
front cover and one gatefold page have a beige world map design over which the
black text of such pages is printed. The table of Infonet's global
communications solutions is printed on a plain white page.
Inside front cover text:
"Infonet's mission is simple... We make global communications for
multinationals a global reality. In a time of dramatic change, we represent
continuity, stability and innovation. We deliver performance, network power and
support to multinationals."
Inside front cover gatefold text:
"Infonet has the products, services, network and quality of performance to make
communications a global reality for discriminating companies worldwide. Our
"one size doesn't fit all" approach to custom solutions makes us unique."
[next page of gatefold]
The Infonet logo is above a table of Infonet's global communications
solutions.
The table of global communications solutions sets forth Infonet's various
service offerings in broad terms, such as "Applications Services" and
"MultiMedia Services", all supported by "The World Network."
Inside back cover text:
"Our success has--and always will be--measured by the success of each of our
multinational clients. Anticipating their global communications needs remains
the inspiration, source and global reality of our competitive advantage."
Illustration on page 48:
This illustration shows the hierarchical structure of The World Network, showing
global switching nodes at the top, flowing to global interregional traffic, to
regional switching/access nodes, flowing to intraregional traffic, to local
access nodes, flowing to local traffic at the bottom. Also shown on the diagram
are the speeds for each level and the points of typical customer and high-volume
customer access.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Industry................................................................. 38
Business................................................................. 41
Management............................................................... 57
Related Party Transactions............................................... 63
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 66
Description of Credit Facility........................................... 69
Shares Eligible for Future Sale.......................................... 71
Material United States Income Tax Consequences for Non-U.S. Holders...... 73
Underwriting............................................................. 76
Legal Matters............................................................ 80
Experts.................................................................. 80
Where You Can Find Additional Information................................ 80
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
In this prospectus, we rely on and refer to information regarding our
industry and its segments and competitors from market research reports and
other publicly available information. Although we believe this information is
reliable, we cannot guarantee the accuracy and completeness of the information
and have not independently verified it.
References in this prospectus to "Infonet," "we," "our" and "us" are to
Infonet Services Corporation, a Delaware corporation, and its consolidated
subsidiaries. "Infonet" is a trademark of Infonet Services Corporation. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder. Amounts denominated in dollars in this
prospectus are United States dollar amounts.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information contained elsewhere in
this prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in our Class B common
stock. You should read the entire prospectus carefully, especially the risks of
investing in our Class B common stock discussed under "Risk Factors." Some
technical terms used in this prospectus are more fully explained in the
sections entitled "Industry" and "Business."
Infonet
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 corporations worldwide, including 29% of the top
500 corporations in Business Week's 1998 Global 1000. We own and operate The
World Network, an extensive and versatile data communications network that can
be accessed from over 180 countries, making it one of the world's largest data
communications networks in terms of geographic coverage. Through The World
Network, we provide managed data services to our clients on a global basis, an
advantage over service providers that do not own an extensive global network.
We sell our services directly through our country representatives and
indirectly through major international telecommunications carriers. Our diverse
client base is comprised of multinational corporations that require cross-
border data communications services such as Allergan, Baan, Microsoft, Nestle,
Nokia, Pharmacia/Upjohn and Volkswagen. For the year ended March 31, 1999, we
had revenues of $303.0 million and EBITDA of $20.6 million.
Our broad range of integrated service solutions includes Frame Relay,
remote access, intranet, multimedia and Internet services; consulting, design,
and implementation; sale and installation of customer premise equipment; e-
mail, messaging, collaboration, Web hosting and other value-added services. Our
services employ a range of data transmission protocols available in the
industry, such as Asynchronous Transfer Mode, or ATM, Internet Protocol, or IP,
and Frame Relay.
Our country representatives give us a significant local presence in more
than 60 countries and strong working relationships with leading local
telecommunications providers in those countries. We believe this structure also
provides us with a competitive advantage over other data service providers who
do not have comparable levels of expertise on local operating, regulatory and
market conditions. Our country representative structure emerged from our
historical relationships with major telecommunications companies, such as
Deutsche Telecom, France Telecom, Korea Telecom, Singapore Telecom and Telekom
Malaysia.
We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. Today, our stockholders include six of the world's largest
telecommunications companies:
. KDD--KDD Corporation (Japan);
. KPN--KPN Telecom B.V. (The Netherlands);
. Swisscom--Swisscom AG (Switzerland);
. Telefonica --Telefonica International Holding B.V. (Spain);
. Telia--Telia AB (Sweden); and
. Telstra--Telstra Corporation Limited (Australia).
1
<PAGE>
Business Strategy
Our goal is to be the leading provider of global data communications
services to multinational corporations. To accomplish this objective, we will
continue to:
. Focus on multinational clients that require data communications
solutions;
. Upgrade and expand our global network;
. Develop innovative, value-added solutions;
. Strengthen our sales and customer support structure; and
. Provide the highest level of quality, security and reliability for our
services.
Recent Developments
Access to AUCS Clients
AT&T-Unisource Communications Services N.V., which we refer to as AUCS,
was a joint venture between AT&T Corp. and Unisource N.V. providing
international voice, data, Internet and messaging services to a broad array of
multinational corporations located primarily in Europe and the United States.
Unisource is owned by three of our stockholders, KPN, Swisscom and Telia. See
"Principal and Selling Stockholders." In early 1999, AT&T elected to exit the
AUCS joint venture. As a result, AUCS sought a new partner through which it
could outsource its services beyond the European region and could provide
international networking services previously provided by AT&T. We have agreed
to provide these services.
In our ongoing efforts to sell our services to multinational
corporations, on September 30, 1999, we entered into agreements with AUCS,
Unisource, and KPN, Swisscom and Telia. Our agreements with KPN, Swisscom and
Telia will give us access to their approximately 1,300 multinational corporate
clients currently being served by AUCS as well as additional multinational
clients to which KPN, Swisscom and Telia may provide services in the future. We
believe these agreements will increase the number of multinational corporate
clients to which we may offer our services. In exchange for the right to market
our services to their clients and $40.0 million in cash, we have issued an
aggregate of 47.84 million shares of our Class B common stock to KPN, Swisscom
and Telia under stock purchase agreements. Based on publicly available
information, AUCS total consolidated revenues for the 1998 calendar year were
875 million guilders, or approximately $441 million. The multinational clients
to which we will have access represented approximately 50% of AUCS revenues
over the past two years.
Senior Secured Credit Facility
In August 1999, we entered into a credit agreement with Merrill Lynch &
Co., as lead arranger and syndication agent, the Bank of Nova Scotia, as
administrative agent, Societe Generale, as documentation agent, and Merrill
Lynch Capital Corporation, UBS A.G., Stamford Branch, an affiliate of Warburg
Dillon Read LLC, and various other banks as lenders. This agreement provides
for a $250.0 million senior secured credit facility comprised of two term loan
facilities in an aggregate principal amount of $150.0 million which mature in
June 2006 and a revolving credit facility in an aggregate principal amount of
$100.0 million that matures in August 2005. Our ability to borrow under the
facilities is subject to various conditions. See "Description of Credit
Facility."
----------------
We were incorporated as a corporation under the laws of the State of
Delaware in March 1988 and our executive offices are located at 2160 East Grand
Avenue, El Segundo, California 90245- 1022. Our telephone number is (310) 335-
2600.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Class B common stock offered by us......... 38,461,600 shares
Class B common stock offered by the selling
stockholders.............................. 12,820,700 shares
Total...................................... 51,282,300 shares
Common stock to be outstanding after the
offering.................................. Approximately 168.69 million
shares of Class A common stock
and approximately 300.81 million
shares of Class B common stock.
The number of shares of our Class
B common stock to be outstanding
immediately after the offering is
based on the number of shares
outstanding on November 1, 1999.
This number does not take into
account approximately 14.32
million shares of our Class B
common stock which may be issued
upon exercise of options
outstanding under our stock
option plans.
Selling stockholders....................... The stockholders selling shares
in this offering are KDD, KPN,
Swisscom, Telefonica, Telia and
Telstra. Immediately prior to
this offering, selling
stockholders owned 100% of our
Class A common stock and
approximately 96% of our Class B
common stock.
After the completion of this
offering, selling stockholders
will own 100% of our Class A
common stock and approximately
80% of our Class B common stock.
For more information on the
selling stockholders, please read
the section entitled "Principal
and Selling Stockholders."
Over-allotment option...................... The selling stockholders have
granted the underwriters the
right to purchase up to
approximately 7.69 million
additional shares to cover over-
allotments.
Voting rights:
Class A common stock................. Ten votes per share,
representing, in the aggregate,
approximately 85% of the total
voting power upon the close of
this offering.
Class B common stock................. One vote per share, representing,
in the aggregate, approximately
15% of the total voting power
upon the close of this offering.
Other rights............................... Each class of common stock has
the same dividend and liquidation
rights. The Class A common stock
is convertible into Class B
common stock on a one-for-one
basis. However, the Class A
common stock cannot be sold or
transferred except after approval
by not less than two-thirds of
the outstanding Class A common
stock. Any proposed transfer of
the Class A common stock is also
subject to a right of first
refusal by the Class A
stockholders.
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
The Class A common stock
automatically converts into Class
B common stock upon the
occurrence of specified events.
See "Description of Capital
Stock."
Use of proceeds............................ We intend to use the net proceeds
of the offering to develop and
expand our network infrastructure
and for working capital and other
general corporate purposes. We
will not receive any proceeds
from the sale of Class B common
stock by the selling
stockholders. See "Use of
Proceeds."
New York Stock Exchange symbol............. "IN"
Frankfurt Stock Exchange Listing........... In connection with this offering,
we concurrently have applied for
the admission of the entirety of
our issued Class B common stock
to the Official Quotation
(Amtlicher Handel) of the
Frankfurt Stock Exchange.
Frankfurt Stock Exchange trading symbol.... "IN" The Frankfurt Stock Exchange
issues a trading symbol when a
corporation has been approved for
listing. The trading symbol is
expected to be "IN."
</TABLE>
----------------
Unless we indicate otherwise, all information in this prospectus
reflects:
. the conversion of all outstanding Class C common stock to Class B
common stock to be effected automatically upon the closing of this
offering;
. a 29,900-for-1 stock split of our common stock to be effected prior to
the closing of this offering; and
. no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of Class B common stock from
the selling stockholders.
4
<PAGE>
Summary Consolidated Financial Data
The following table sets forth our summary consolidated financial data.
You should read this information together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this prospectus, the information under "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." In the opinion of management, the unaudited consolidated financial
statements have been prepared on a basis consistent with our audited
consolidated financial statements and include all adjustments, which are only
normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for the unaudited periods. The
historical results are not necessarily indicative of the operating results to
be expected in the future. The consolidated balance sheet data presented on a
pro forma as adjusted basis reflects:
. the sale of approximately 38.46 million shares of our Class B common
stock in this offering at a public offering price of $21.00 per share;
. the termination of the repurchase right on our Class C common stock and
its conversion into our Class B common stock upon the completion of this
offering;
. the conversion of our book value stock option plan to a market value
stock option plan; and
. the repayment of long-term debt of approximately $7.8 million from the
proceeds of this offering.
We restated our consolidated financial statements for 1998 and 1999. See Note
16 of "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated statement of
operations data:
Revenues.................... $264,684 $294,244 $302,997 $140,571 $173,219
Expenses.................... 275,071 297,001 301,170 146,617 182,858
Operating income (loss)..... (10,387) (2,757) 1,827 (6,046) (9,639)
Net income (loss)(1)........ (7,481) (3,444) 3,449 (4,993) (9,774)
Basic and diluted earnings
(loss) per common
share(1)................... (0.02) (0.01) 0.01 (0.01) (0.03)
Basic and diluted weighted
average number of common
shares outstanding......... 373,750 373,750 373,750 373,750 382,004
Other consolidated financial
data:
Net cash flows provided by
(used in):
Operating activities...... $ 1,383 $ 13,032 $ 11,911 $ 1,311 $ 2,263
Investing activities...... (4,704) (5,511) (20,679) (4,393) (42,690)
Financing activities...... 13,048 (14,390) 5,828 5,253 71,186
EBITDA...................... 9,631 18,075 20,612 2,158 4,133
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------
Pro forma as
Actual adjusted
----------- ---------------
<S> <C> <C>
Consolidated balance sheet data:
Cash and cash equivalents........................... $ 39,202 $ 797,029
Total current assets................................ 117,010 874,837
Total assets........................................ 292,077 1,049,904
Total current liabilities........................... 81,203 81,203
Total debt.......................................... 96,259 88,431
Total stockholders' equity.......................... 93,119 843,148
</TABLE>
- --------
(1) In our three month period ending December 31, 1999, we will record a non-
cash, pre-tax compensation charge of approximately $15.0 million, resulting
from the conversion of our book value stock options to market value options
as a result of the offering and a pre-tax charge of approximately $10.2
million, resulting from our stock appreciation rights, each of which is
based upon the price of our Class B common stock in this offering. Had the
offering been completed during our six month period ended September 30,
1999, our net loss would have been approximately $25.4 million and our
basic and diluted earnings (loss) per common share would have been
approximately $(0.07).
5
<PAGE>
RISK FACTORS
An investment in our Class B common stock involves risks. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide to buy
our Class B common stock. If any of the following risks actually occur, our
business, results of operations or financial condition would likely suffer. In
that case, the market price of our Class B common stock could decline, and you
might lose all or part of the money you paid to buy our Class B common stock.
We may not be able to achieve our strategic objectives unless we successfully,
timely and cost-effectively expand our network and manage our growth.
We must continue to develop and expand our network infrastructure as the
number of clients and the amount of information they wish to transport as well
as the number of services we offer increases. The expansion and development of
our network infrastructure will require substantial financial, operational and
management resources. We may not be able to expand our network adequately to
meet the demand for increased usage. If we do not expand our network rapidly
enough, additional stress may be placed on our network hardware, traffic
management and other systems and operating facilities. Our network may be
unable to service a substantial number of additional clients while maintaining
high performance and competitive data transmission speeds.
A variety of factors, uncertainties and contingencies that are beyond our
control such as the availability of transmission capacity, price of
transmission capacity, continued deployment of our ATM-enabled network, local
regulations and availability of country representatives or other third-party
sales and support channels will affect the continued expansion of our network.
Currently, there is substantial volatility in the market price for transmission
capacity. We are investing significant capital in acquiring transmission
capacity at current fixed prices. These prices are anticipated to decline in
the future. We cannot assure you that actual expansion costs or the time
required to complete our network will not substantially exceed current
estimates. A failure to continue to expand our network may have a material
adverse effect on our ability to service our clients and to grow our business.
Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management,
financial controls, operating and accounting systems, personnel and other
resources. We currently rely on a relatively small core management team. As we
grow, we must not only manage demands on this team but also increase its
management resources, among other things, to continue to expand, train and
manage our employee base and maintain close coordination among our technical,
accounting, finance, marketing and sales staff. In addition, our network
infrastructure, technical support and other resources may not be sufficient to
facilitate our growth. If we do not successfully manage our growth, we may be
unable to adequately support our clients' communications needs in the future.
If we are unable to maintain our country representative and third-party sales
channel relationships, then our ability to sell and support our services may be
negatively impacted.
We are and will continue to be significantly dependent on a number of
third-party relationships, including our non-consolidated country
representatives, to market and support our services. Many of our arrangements
with third-party providers are not exclusive and may be terminated at the
convenience of either party. We cannot assure you that these third parties
regard our relationship with them as important to their own respective
businesses and operations, that they will not reassess their commitment to us
at any time in the future or that they will not develop their own competitive
services.
We may not be able to maintain or form new relationships with third
parties that supply us with clients, software or related products that are
important to our success. Accordingly, we cannot assure you that our existing
or prospective relationships will result in sustained business partnerships,
successful service offerings or the generation of significant revenues.
6
<PAGE>
We rely on our country representatives for some of the support and local
implementation necessary to deliver our services on a global basis. We also
rely on these country representatives for insights into local operating and
market conditions. The failure of these country representatives to perform
their tasks or operate their business effectively could, in turn, adversely
affect our business. In addition, we sometimes provide our country
representatives with equipment and installation services to facilitate our
market participation. We may have limited recourse, or potentially no recourse,
if they do not perform the services that we expect them to perform, and we may
not be able to recover our equipment. Our recourse may be limited because the
local laws and judicial system may not be effective in enforcing our rights.
Also, our country representatives are parties to the legal contracts with
clients. If these agreements are terminated, the clients have no obligation to
purchase our services.
In addition, we frequently depend on our country representatives to
obtain the regulatory approvals and licenses that we need to offer our
communications services in other countries. In some cases, we cannot determine
whether they are complying with local regulatory laws or taking the steps
necessary to maintain proper licenses and permits. If any of our country
representatives lose their telecommunications licenses, whether by violating
local laws or otherwise, our business could suffer.
We may expend extensive managerial and operational resources to transition the
multinational clients of KPN, Swisscom and Telia without receiving a
corresponding increase in revenues.
The multinational corporate clients of KPN, Swisscom and Telia, currently
using AUCS services, have no obligation to use our services. As a result, we
cannot assure you that any significant number of these clients will continue to
use the AUCS services we will provide or transition to The World Network during
the next 12 to 18 months or at all. We cannot assure you that the clients which
do transition to our network will continue to purchase our services or, if they
continue to use our services after the transition, that they will purchase as
many or more services from us than they did from AUCS. Thus, our access to this
additional client base may not yield substantial additional revenue.
We may not be able to reduce AUCS losses and therefore may not receive
management fees.
AUCS has a history of operating losses. If we are unable to reduce the
losses of AUCS, we may not earn the incentive payments provided for in the
management agreement and may be required to rebate our entire management fee.
If this occurs, we will have expended significant amounts of management time
and operational capacity which could have been more profitably spent on other
matters.
In addition, either party may terminate the management agreement upon 180
days' written notice, or upon 30 days' notice if agreed-upon funding
requirements of Unisource are exceeded. For additional information, please read
the section entitled "Business--AUCS Management Agreement."
Delays in receiving transmission capacity or delays in equipment delivery or
loss of our equipment suppliers could impair the quality of our service and our
growth.
We acquire, by lease or by purchase, transmission capacity from a wide
range of suppliers, both to connect client premises to our network and for
other network connections. We have from time to time experienced short-term
delays in receiving the requisite transmission capacity from suppliers. We
cannot assure you that we will be able to obtain these services in the future
within the time frames required by us and at a reasonable cost. Any failure to
obtain transmission capacity on a timely basis and at a reasonable cost in a
particular jurisdiction, or any interruption of local access services, could
have an adverse effect on our service levels and our growth.
The switches and routers used in our network are provided primarily by
Nortel Networks Corp. and Cisco Systems Inc. These suppliers also sell products
to our competitors and may become competitors themselves. We may experience
delays in receiving components from our suppliers or difficulties in obtaining
7
<PAGE>
their products at commercially reasonable terms. If we are required to seek
alternate sources of switches and routers, we are likely to experience delays
in obtaining the requisite equipment we need and may be required to pay higher
prices for that equipment, increasing the cost of expanding and maintaining our
network.
If our network infrastructure is disrupted or security breaches occur, we may
lose clients or incur additional liabilities.
We and other network services providers may in the future experience
interruptions in service as a result of fire, natural disasters, power loss, or
the accidental or intentional actions of service users, current and former
employees and others. Although we continue to implement industry-standard
disaster recovery, security and service continuity protection measures,
including the physical protection of our plant and equipment, similar measures
taken by us or by others have been insufficient or circumvented in the past. We
cannot assure you that these measures will be sufficient or that they will not
be circumvented in the future. Unauthorized use of our network could
potentially jeopardize the security of confidential information stored in the
computer systems of or transmitted by our clients. Furthermore, addressing
security problems may result in interruptions, delays or cessation of services
to our clients. These factors may result in liability to us or our clients.
The markets we serve are highly competitive and our competitors may have much
greater resources to commit to growth, new technology or marketing.
Our current and potential competitors include other companies that
provide data communications services to multinational businesses, systems
integrators, national and regional Internet Service Providers, or ISPs,
wireless, cable television and satellite communications companies, software and
hardware vendors, and global, regional and local telecommunications companies.
In addition, we expect that the predicted growth of the data communications
market will attract other established companies and multinational alliances.
Further, there are established and start-up companies building global networks
and beginning to offer data communications as part of a comprehensive
communications services portfolio. Our competitors, which may operate in one or
more of these areas, include companies such as AT&T, British Telecommunications
PLC, or BT, Equant N.V., Global One, Inc. and MCI WorldCom, Inc. and new
entrants such as Qwest Communications International Inc. and Global Crossing
Ltd. Our country representatives and suppliers could also become competitors
either directly or through strategic relationships with our competitors. We
have in the past and expect in the future to encounter competition as a result
of the formation of global alliances among large telecommunications providers,
such as the newly formed joint venture between AT&T and BT.
Several of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, greater name
recognition and more established relationships in the telecommunications
industry than we do. We cannot be sure that we will have the resources or
expertise to compete successfully in the future. Our competitors may be able
to:
. develop and expand their network infrastructures and service
offerings more quickly;
. adapt better to new or emerging technologies and changing client
needs;
. take advantage of acquisitions and other opportunities more readily;
. devote greater resources to the marketing and sale of their products;
and
. adopt more aggressive pricing policies.
Some of our competitors may also be able to provide clients with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions of our competitors. In addition, we believe it is
likely that there will be consolidation in our market, which could increase
competition in ways that may adversely affect our business, results of
operations and financial condition.
8
<PAGE>
Because we have international operations, we face additional risks related to
global political and economic conditions.
We operate in and intend to expand further into international markets. We
cannot be sure that we will be able to obtain or build the necessary global
communications infrastructure in a cost-effective manner or compete effectively
in international markets. There are risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differing technology standards;
. employment laws and practices in foreign countries;
. weaker intellectual property protections;
. political, social and economic instability;
. costs of services tailored to specified markets;
. imposition of currency exchange controls; and
. potentially adverse tax consequences.
Any of these factors could adversely affect our operations. In addition,
if we are able to transition a substantial number of the AUCS multinational
clients to our system, or if we derive significant revenues from the delivery
of AUCS services, then a substantial portion of our revenues will be derived
from European clients. Therefore, a future slowdown or recession in the
European economy in particular could have a material adverse effect on our
revenues and profitability.
Adverse currency fluctuations and foreign exchange controls could decrease
revenues we receive from our international operations.
We invoice all sales of services to our country representatives and sales
channel partners in U.S. dollars. However, many of our country representatives
and sales channel partners derive their revenues and incur maintenance and
other costs in currencies other than U.S. dollars. The obligations of these
country representatives and sales channel partners whose revenues are largely
in foreign currencies will be subject to unpredictable and indeterminate
fluctuations if those currencies change relative to U.S. dollars. Furthermore,
these country representatives and sales channel partners may be or may become
subject to exchange control regulations which might restrict or prohibit the
conversion of their revenue currencies into U.S. dollars. The occurrence of any
of these factors could have a material adverse effect on our current or future
international operations.
Our exposure to exchange rate fluctuations may increase while we
transition multinational clients of KPN, Swisscom and Telia to The World
Network because our receivables from these clients and our payables to AUCS
under the services agreement for services provided to those clients will be
denominated in different foreign currencies.
Our ability to retain our clients and provide them with new and innovative
service offerings may suffer if we are not able to keep up with the rapid
technological developments in our industry.
The global communications industry is subject to rapid and significant
technological changes, such as continuing developments of alternative
technologies for providing high-speed data communications. We cannot predict
the effect of technological changes on our business. We may rely in part on
third parties, including
9
<PAGE>
some of our competitors and potential competitors, for the development of and
access to communications and networking technologies. We expect that new
services and technologies applicable to our market will emerge. New products
and technologies may be superior and/or render obsolete the products and
technologies that we currently use to deliver our services. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and evolving industry standards. We may be unable to obtain access to
new technologies on acceptable terms or at all, and we may be unable to obtain
access to new technologies and offer services in a competitive manner. Any new
products and technologies may not be compatible with our technologies and
business plan. We believe that the global communications industry should set
standards to allow for the compatibility of various products and technologies.
The industry, however, may not set standards on a timely basis or at all.
If members of our senior management team leave Infonet, then our ability to
operate our business may be negatively affected.
Our future success depends to a significant extent on the continued
services of our senior management, particularly Jose A. Collazo, President and
Chairman of the Board of Directors, Akbar H. Firdosy, our Chief Financial
Officer, and other members of our executive management team. The loss of the
services of either of Mr. Collazo or Mr. Firdosy, or any other present or
future key employee, could have a material adverse effect on the management of
our business. We have employment agreements with Mr. Collazo and Mr. Firdosy.
We do not maintain "key person" life insurance for any of our personnel.
Competition for highly-skilled personnel is intense and the success of our
business depends on our ability to attract, retain and manage key personnel.
Our future success depends on our continuing ability to attract, retain
and motivate highly-skilled employees. As we continue to grow, we will need to
hire additional personnel in all areas. Competition for personnel throughout
the data and voice communications industries is intense. We may be unable to
attract or retain key employees or other highly qualified employees in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining
highly-skilled employees with appropriate qualifications. If we do not succeed
in attracting sufficient new personnel or retaining and motivating our current
personnel, our ability to provide our services could diminish.
Your share ownership may grant you limited voting power because our existing
stockholders will control the outcome of stockholder votes.
Following the offering, our existing stockholders will, in the aggregate,
beneficially own all of our Class A common stock and approximately 80% of our
Class B common stock, or more than 95% of our voting power. These stockholders
will be able to exercise control over all matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the
effect of delaying or preventing a change in control of our company, which
could have a material adverse effect on our stock price.
Immediately prior to the consummation of this offering, we expect to
enter into a stockholders agreement with all of our Class A stockholders. This
stockholders agreement will provide that each Class A stockholder holding at
least 14.95 million shares of our Class A common stock will have the right to
designate one of our directors, and each Class A stockholder will agree to vote
all of its shares in favor of the directors designated by the other Class A
stockholders and for our president as a director. Accordingly, seven of the
nine directors on our board will be appointed by our Class A stockholders.
In addition, our revised certificate of incorporation contains provisions
that require the approval of both 95% of the voting power of the Class A
stockholders and two-thirds of the voting power of the Class A and Class B
common stock voting together to take significant corporate actions such as
changes to our share capital, or a merger, consolidation or liquidation. Based
on the current ownership of our Class A common stock, we will not be able to
undertake these actions without the approval of each of our Class A
stockholders.
10
<PAGE>
If we sustain continued operating losses, then your share value may be
negatively impacted.
We incurred operating losses of approximately $10.4 million and $2.8
million for the years ended March 31, 1997 and 1998 and operating losses of
approximately $6.0 million and $9.6 million for the six months ended September
30, 1998 and 1999. Based on current trends, we expect to incur operating losses
for our year ending March 31, 2000. We cannot assure you that we will be able
to achieve or sustain profitability from operations in the future.
The Year 2000 problem could significantly disrupt our operations, causing a
decline in cash flow and revenue and other difficulties.
Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced to comply with these Year 2000 requirements. Our
business is dependent on the operations of numerous systems that could
potentially be impacted by Year 2000-related problems. As a result, we may
experience serious, unanticipated negative consequences, including material
costs caused by undetected errors in the technology used in our internal
systems.
We believe that the greatest risk of disruption in our business exists in
less developed countries. The possible consequences of us or our key business
partners not being fully Year 2000 compliant include, among other things,
temporary network closings, delays in the delivery of services, delays in the
receipt of supplies or invoice and collection errors. Based on our assessment
of these risks and after discussions with third parties, including key vendors,
service providers, country representatives and alternate sales channel
partners, we have made an evaluation of our state of readiness, potential risks
and costs, and are preparing a contingency plan. Please read the section in
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000."
We rely on several telecommunications providers to provide us with
transmission capacity. The Year 2000 compliance of telecommunications carriers
worldwide is beyond our control. There may be no possible alternate
telecommunications company available to us if a major carrier in a large
country breaks down due to Year 2000 problems. Any breakdown could prevent us
from delivering our services in that country, and possibly in other countries
where our service can be routed only through the problem country. Our inability
to deliver a significant portion of our services to our clients would have a
material adverse effect on our business, results of operations and financial
condition.
In addition, we cannot assure you that governmental agencies, utility
companies, ISPs, third-party service providers and others outside our control
will be Year 2000 compliant. Our worst case scenario is a prolonged failure of
these or other entities as a result of the Year 2000 problem, resulting in a
systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which would prevent us from
delivering many of our services.
Our quarterly operating results may vary which may cause volatility or a
decline in the price of our Class B common stock.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
. the size and timing of significant equipment and transmission
capacity purchases;
. the timing of new service offerings;
. changes in our pricing policies or those of our competitors;
. the timing and completion of our network expansion;
. market acceptance of data communications generally and of new and
enhanced versions of our services in particular;
. the length of our contract cycles; and
. our success in expanding our sales force and expanding our
distribution channels.
11
<PAGE>
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to global communications capacity,
depreciation, real estate and interest expenses and personnel, and therefore
our results of operations are particularly sensitive to fluctuations in
revenues. Due to the factors noted above and the other risks discussed in this
section, you should not rely on period-to-period comparisons of our results of
operations. Quarterly results are not necessarily meaningful and you should not
rely on them as an indication of future performance. It is possible that in
some future periods our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our Class B
common stock may fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face uncertain and changing regulatory restrictions which could limit our
operating flexibility and increase our costs.
The Federal Communications Commission, or the FCC, currently does not
regulate the data communications systems we operate in the United States
because our special services features enhance the basic data transmission
facilities offered to clients by connecting them to data switches or
processors. These networks generally are referred to as value-added networks
and are targeted to the data transfer requirements of the specific client. The
FCC also does not regulate value-added services such as voicemail, facsimile,
database access, storage and retrieval services, store-and-forward messaging
services, network management services, and Internet access, which are not
encompassed in the FCC's definition of "basic telecommunications services" and
which we refer to as enhanced services. Collectively, these services are
classified for regulatory purposes as "information services" and are currently
exempt from the common carrier regulations that apply to entities providing
"telecommunications services." As a result, most of the services we provide are
not currently subject to direct regulation by the FCC or the states. Future
changes in legislation or regulation, however, could result in some aspects of
our current operations becoming subject to regulation by the FCC or a state of
the United States. If the FCC or a state seeks to regulate some segments of our
activities as "telecommunications services," we cannot predict the impact, if
any, that future regulation or regulatory changes may have on our operations.
We currently hold common carrier authorizations to provide international
telecommunications services between the United States and other countries. We
apply for authorization as a common carrier in jurisdictions where we believe
this authorization will decrease our costs. We also hold an international
facilities license in the United Kingdom. Our licenses subject us to the
jurisdiction of the relevant regulatory body which, in turn, may require that
we make specified regulatory filings and pay attendant fees. Future regulatory,
judicial and legislative changes in countries in which we operate may impose
additional costs on us or restrict our activities. In addition, regulators or
third parties may raise material issues with regard to our compliance with
applicable regulations. Failure to comply with applicable laws or regulations
in the United States, or other countries in which we operate, could prevent us
from carrying on our operations cost effectively.
The law relating to the liability of online services companies and Internet
access providers for data and content carried on or disseminated through their
networks is currently unsettled and could expose us to unforseen liabilities.
It is possible that claims could be made against online services
companies and Internet access providers under United States and/or foreign law
for defamation, negligence, copyright or trademark infringement, or other
theories based on data or content disseminated through their networks, even if
a user independently originated this data or content. Several private lawsuits
seeking to impose liability upon online services companies and Internet access
providers have been filed in U.S. and foreign courts. While the United States
has passed laws protecting Internet access providers from liability for actions
by independent users in limited circumstances, this protection may not apply in
any particular case at issue. In addition, some countries, such as China,
regulate or restrict the transport of voice and data traffic in their
jurisdiction. The risk to us, as an Internet access provider, of potential
liability for data and content carried on or disseminated through our
12
<PAGE>
system could require us to implement measures to reduce our exposure to this
liability. This may require us to expend substantial resources or to
discontinue some of our services. Our ability to monitor, censor or otherwise
restrict the types of data or content distributed through our network is
limited. Failure to comply with any applicable laws or regulations in
particular jurisdictions could result in fines, penalties or the suspension or
termination of our services in these jurisdictions. The negative attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could adversely impact the growth of public Internet use. Our
professional liability insurance may not be adequate to compensate or may not
cover us at all in the event we incur liability for damages due to data and
content carried on or disseminated through our network. Any costs not covered
by insurance that are incurred as a result of this liability or alleged
liability, including any damages awarded and costs of litigation, could harm
our business and prospects.
If we or our existing stockholders sell additional shares of our Class B common
stock after the offering, it could cause the market price of our Class B common
stock to decline.
The market price of our Class B common stock could decline as a result of
sales of a large number of shares of Class B common stock in the market after
the offering, the perception that such sales could occur or sales by us, our
management or our stockholders. These sales, or the possibility that these
sales may occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
Sales of our common stock are restricted by lock-up agreements that we,
our directors, officers and certain existing stockholders have entered into
with the underwriters. The lock-up agreements restrict us, our directors and
officers and certain existing stockholders, subject to certain exceptions, from
selling or otherwise disposing of any shares for a period of 180 days after the
date of this prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. Merrill Lynch, Pierce, Fenner & Smith
Incorporated may, however, in its sole discretion and without notice, release
all or any portion of the shares from the restrictions in the lock-up
agreements.
After the offering, we will have approximately 300.81 million shares of
Class B common stock outstanding and approximately 168.69 million shares of
Class A common stock, which, subject to limitations, are convertible to Class B
common stock. Of these shares, the approximately 51.28 million shares we and
the selling stockholders are offering will be freely tradable. This leaves
approximately 418.21 million shares eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<C> <S>
893,113 After April 30, 2000 (Rule 144)
14,268,280 Upon the filing of a registration statement to register for
resale shares of Class B common stock issuable upon the
exercise of options granted under our stock option plans
369,480,700 After 180 days from the date of this prospectus (subject, in
some cases, to volume limitations under Rule 144)
47,893,820 At various times after 180 days from the date of this
prospectus (Rule 144)
</TABLE>
We intend to file one or more registration statements to register shares
of Class B common stock subject to outstanding stock options and Class B common
stock reserved for issuance under our stock option plan after the expiration of
the 180-day lockup. We expect the additional registration statements to become
effective immediately upon filing.
Volatility of our stock price may expose us to securities litigation.
The stock market has experienced significant price and volume
fluctuations, and the market prices of global communications companies have
been extremely volatile. The market price of our Class B common stock could be
affected by:
. quarterly variations in our operating results;
13
<PAGE>
. technological innovations of ours or of our competitors;
. changes in government regulations;
. conditions in the international data communications and
telecommunications industries;
. increased price competition;
. changes in earnings estimates by analysts; and
. changes in general economic conditions and volatility in the
financial markets.
In the past, following periods of volatility in the market price of a
public company's securities, securities class action litigation has often been
instituted against that company. This litigation could result in substantial
costs and a diversion of management's attention and resources.
There is no existing market for our Class B common stock, and we do not know if
one will develop to provide you with adequate liquidity.
There has not been a public market for our Class B common stock. We
cannot predict the extent to which investor interest in our company will lead
to the development of a trading market or how liquid that market might become.
The initial public offering price for the shares will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the open market.
The book value of shares of Class B common stock purchased in the offering will
be immediately diluted.
Investors who purchase Class B common stock in the offering will suffer
immediate and significant dilution in the net tangible book value per share. We
also have a large number of outstanding stock options to purchase Class B
common stock with exercise prices significantly below the estimated initial
public offering price of the Class B common stock. To the extent that these
options are exercised, there will be further dilution.
Our certificate of incorporation and bylaws include provisions that may
discourage a takeover attempt.
Provisions contained in our revised certificate of incorporation, our
revised bylaws, Delaware law and our stockholders agreement could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders. Provisions of our bylaws and certificate of incorporation
impose various procedural and other requirements which could make it more
difficult for stockholders to effect certain corporate actions. Our certificate
of incorporation requires the approval of both 95% of the voting power of the
Class A common stock and two-thirds of the voting power of the Class A and
Class B common stock voting together to take significant corporate actions such
as changes to our share capital, or a merger, consolidation or liquidation.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of our Class B common stock and may have the
effect of delaying or preventing a change in control.
This prospectus contains forward-looking statements that may not be accurate
indicators of our future performance.
Some of the statements contained in this prospectus contain forward-
looking information. These statements are found in the sections entitled
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Industry" and "Business." They include statements concerning:
. our business;
. our strategy;
14
<PAGE>
. liquidity and capital expenditures;
. use of proceeds of the offering;
. future sources of revenues;
. trends in the international data network services and global
communications industries;
. expansion of international network operations; and
. trends in government and international regulations.
You can identify these statements by forward-looking words such as
"expect," "anticipate," "believe," "goal," "plan," "intend," "estimate," "may"
and "will" or similar words. You should be aware that these statements are
subject to known and unknown risks, uncertainties and other factors, including
those discussed in this section, that could cause actual results to differ
materially from those suggested by the forward-looking statements.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares we are offering, after
deducting underwriting discounts and estimated offering expenses, will be
approximately $765.7 million. We will not receive any of the proceeds from the
sale of shares by the selling stockholders in the offering.
We intend to use the net proceeds of the offering primarily to develop
and expand our network infrastructure, and we intend to use any remaining net
proceeds for working capital, other general corporate purposes and for the
repayment of approximately $7.8 million in long-term debt under our credit
facility. See "Description of Credit Facility." Expansion of our network
infrastructure includes significant acquisitions of transmission capacity and
continued deployment of the ATM-enabled backbone.
Our management, subject to supervision by our board of directors, will
have significant flexibility in applying the net proceeds of the offering.
Pending any use as described above, we intend to invest the net proceeds in
interest-bearing investment grade instruments.
DIVIDEND POLICY
Since 1996, we have paid cash dividends of $500,000 per year on our
capital stock. However, we do not expect to pay any dividends for the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Any determination to pay cash dividends
in the future will be at the discretion of our board of directors and will
depend upon our results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by our board of
directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999 our
capitalization on an actual basis and on a pro forma as adjusted basis. You
should read this information in conjunction with "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999 (1)
---------------------------------
Pro forma as
Actual adjusted (2)
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt (including current portion of
long-term debt).............................. 2,793 2,793
Long-term debt (excluding current portion).... 93,466 85,638
-------------- --------------
Total debt................................ 96,259 88,431
-------------- --------------
Common stock subject to repurchase rights,
net:
Class C common stock, $0.01 par value per
share: 299,000,000 shares authorized,
9,444,513 shares issued and outstanding,
actual; 30,000,000 shares authorized, no
shares issued and outstanding, as
adjusted................................... 7,897 --
Less notes receivable from issuance of
common stock (3)(4)........................ (7,910) --
-------------- --------------
Total common stock subject to repurchase
rights, net.............................. (13) --
-------------- --------------
Stockholders' equity:
Class A common stock, $0.01 par value per
share: 373,750,000 shares authorized,
373,750,000 shares issued and 170,993,017
shares outstanding, actual; 400,000,000
shares authorized, 371,442,300 shares
issued and 168,685,317 shares outstanding,
as adjusted................................ 67,819 67,400
Class B common stock, $0.01 par value per
share: 373,750,000 shares authorized,
250,596,983 shares issued and outstanding,
actual; 600,000,000 shares authorized,
300,810,796 issued and outstanding, as
adjusted................................... 163,575 937,546
Less notes receivable from issuance of
common stock (3)(4)........................ -- (7,910)
Stock subscription receivable............... (13,333) (13,333)
Treasury stock, at cost, 202,756,983 shares
of Class A common stock.................... (121,184) (121,184)
Accumulated deficit......................... (2,810) (18,423)
Accumulated other comprehensive loss........ (948) (948)
-------------- --------------
Total stockholders' equity................ 93,119 843,148
-------------- --------------
Total capitalization.................... $ 189,365 $ 931,579
============== ==============
</TABLE>
- --------
(1) For consistency of presentation, we have described October 1, 1999 as
September 30, 1999.
(2) The consolidated balance sheet data presented on a pro forma as adjusted
basis reflects: (1) the sale of 38.46 million shares of our Class B common
stock in this offering at a public offering price of $21.00 per share;
(2) the conversion of approximately 2.31 million shares of our Class A
common stock into our Class B common stock upon completion of this
offering; (3) the termination of the repurchase right on our Class C
common stock and its conversion into our Class B common stock upon the
completion of this offering; (4) the conversion of our book value stock
option plan to a market value stock option plan; and (5) the repayment of
long-term debt of approximately $7.8 million from the proceeds of this
offering.
(3) Represents recourse notes issued by employees to us upon exercise of stock
purchase rights under our 1998 Stock Purchase Plan.
(4) Excludes approximately 3.71 million shares of our Class B common stock
that are reserved for issuance pursuant to outstanding options and
approximately 10.61 million shares of our Class B common stock that are
reserved for issuance upon exercise of options that may be issued in the
future under our stock option plan.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was $21.6
million, or $0.05 per share of outstanding common stock. Pro forma net tangible
book value per share is equal to the amount of our total tangible assets (total
assets less intangible assets) less total liabilities, divided by the number of
shares of our common stock outstanding as of September 30, 1999 and assumes the
termination of the repurchase right on our Class C common stock and the
repayment of long-term debt of approximately $7.8 million from the proceeds of
this offering. Assuming the sale of the shares we are offering by this
prospectus at an initial public offering price of $21.00 per share and after
deducting underwriting discounts and the estimated offering expenses payable,
our pro forma net tangible book value as of September 30, 1999 would have been
$787.2 million, or $1.68 per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $1.63 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $19.32 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C>
Initial public offering price per share.............................. $21.00
------
Pro forma net tangible book value per share before this offering... 0.05
Increase per share attributable to this offering................... 1.63
------
Adjusted pro forma net tangible book value per share after the
offering............................................................ 1.68
------
Dilution per share to new investors.................................. $19.32
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by new investors
purchasing shares in the offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- -------------------- Price Per
Number Percent Amount Percent Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 431,034,513 92% $118,107,000 13% $ 0.27
New investors............... 38,461,600 8 807,693,600 87 21.00
----------- --- ------------ --- ------
Total....................... 469,496,113 100% $925,800,600 100% $ 1.97
=========== === ============ === ======
</TABLE>
- --------
(1) Net of 202,756,983 shares of Class A common stock we hold in treasury. We
paid $121.2 million to acquire these shares.
The tables and calculations above assume no exercise of outstanding
options. As of September 30, 1999, there were approximately 3.71 million shares
of our Class B common stock reserved for issuance upon exercise of outstanding
options at a weighted average exercise price of $0.84 per share. To the extent
that these options are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans--1998 Stock Option Plan" and
"Description of Capital Stock."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
You should read this information together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated financial data
as of March 31, 1995, 1996 and 1997 and for each of the years in the two year
period ended March 31, 1996 have been derived from our audited consolidated
financial statements which are not included in this prospectus. The selected
consolidated financial data as of March 31, 1998 and 1999, and for each of the
years in the three year period ended March 31, 1999 have been derived from our
audited consolidated financial statements which appear elsewhere in this
prospectus. The selected consolidated financial data as of September 30, 1999,
and for the six months ended September 30, 1998 and 1999 are derived from our
unaudited consolidated financial statements which appear elsewhere in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements have been prepared on a basis consistent with our audited
consolidated financial statements and include all adjustments, which are only
normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for the unaudited periods. The
historical results are not necessarily indicative of the operating results to
be expected in the future.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31,(1) September 30,(1)
------------------------------------------------ ------------------
1995 1996 1997 1998(2) 1999(2) 1998 1999
-------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated statement of operations
data:
Revenues............................... $213,292 $240,776 $264,684 $294,244 $302,997 $140,571 $173,219
Expenses:
Country representative compensation.. 36,918 43,232 35,090 41,136 53,766 24,929 31,035
Bandwidth and related costs.......... 33,936 37,407 43,134 48,089 52,700 26,336 35,443
Network operations................... 68,075 75,386 81,106 77,489 55,041 26,852 32,899
Selling, general and administrative.. 78,290 84,948 115,741 130,287 139,663 68,500 83,481
-------- -------- -------- -------- -------- -------- --------
Total expenses....................... 217,219 240,973 275,071 297,001 301,170 146,617 182,858
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................ (3,927) (197) (10,387) (2,757) 1,827 (6,046) (9,639)
-------- -------- -------- -------- -------- -------- --------
Other income (expense):
Interest income...................... 1,751 1,847 1,014 1,515 1,881 1,501 1,073
Interest expense..................... (627) (477) (874) (868) (689) (454) (2,883)
Other, net........................... 3,664 (227) 2,591 2,969 382 (233) (111)
-------- -------- -------- -------- -------- -------- --------
Total other income (expense)......... 4,788 1,143 2,731 3,616 1,574 814 (1,921)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before provision (credit)
for income taxes and minority
interest.............................. 861 946 (7,656) 859 3,401 (5,232) (11,560)
Provision (credit) for income taxes.... 426 887 (175) 4,446 (180) (255) (1,748)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority
interest.............................. 435 59 (7,481) (3,587) 3,581 (4,977) (9,812)
Minority interest(3)................... -- -- -- (143) 132 16 (38)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(4)................... $ 435 $ 59 $ (7,481) $ (3,444) $ 3,449 $ (4,993) $ (9,774)
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss) per
common share(4)(5).................... $ 0.00 $ 0.00 $ (0.02) $ (0.01) $ 0.01 $ (0.01) $ (0.03)
Basic and diluted weighted average
number of common shares outstanding... 355,063 373,750 373,750 373,750 373,750 373,750 382,004
Other consolidated financial data:
Net cash flows provided by (used in):
Operating activities................. $ 11,146 $ (1,641) $ 1,383 $ 13,032 $ 11,911 $ 1,311 $ 2,263
Investing activities................. (36,777) (7,364) (4,704) (5,511) (20,679) (4,393) (42,690)
Financing activities................. 36,505 (3,577) 13,048 (14,390) 5,828 5,253 71,186
EBITDA(6).............................. 8,724 15,201 9,631 18,075 20,612 2,158 4,133
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
As of September 30,
As of March 31,(1) 1999(1)
-------------------------------------------- -----------------------
Pro forma
1995 1996 1997 1998(2) 1999(2) Actual as adjusted(7)
-------- -------- -------- -------- -------- -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated balance
sheet data:
Cash and cash
equivalents............ $ 22,030 $ 9,448 $ 18,906 $ 11,449 $ 8,681 $ 39,202 $ 797,029
Total current assets.... 86,273 75,709 92,296 90,757 90,277 117,010 874,837
Total assets............ 146,985 143,868 159,439 153,799 182,263 292,077 1,049,904
Current liabilities..... 41,706 42,744 60,286 62,814 73,271 81,203 81,203
Total debt.............. 8,003 5,112 15,372 2,066 15,837 96,259 88,431
Total stockholders'
equity................. 83,869 83,347 78,711 74,131 76,717 93,119 843,148
Other operating data:
Number of ports......... 5,143 5,814 7,914 9,205 10,590 11,977 11,977
Number of country
representatives........ 48 49 51 52 56 56 56
Number of dedicated
personnel:
U.S................... 660 728 764 580 592 630 630
Non-U.S.(8)........... 570 535 556 585 659 683 683
</TABLE>
- --------
(1) Our fiscal year is the 52- or 53-week period ending on the Friday nearest
to March 31. For simplicity of presentation, we have described the 52-week
periods ended April 1, 1995, March 29, 1996, and March 28, 1997, the 53-
week period ended April 3, 1998 and the 52-week period ended April 2, 1999
as the years ended March 31, 1995, 1996, 1997, 1998 and 1999, and we have
described the 26-week periods ended October 2, 1998 and October 1, 1999 as
the six months ended September 30, 1998 and 1999.
(2) As restated, see Note 16 of "Notes to Consolidated Financial Statements."
(3) Reflects the acquisition of a 51% interest in Infonet Luxembourg in the
year ended March 31, 1998.
(4) In our three month period ending December 31, 1999, we will record a non-
cash, pre-tax compensation charge of approximately $15.0 million ($14.7
million after tax), resulting from the conversion of our book value stock
options to market value options as a result of the offering and a pre-tax
charge of approximately $10.2 million ($6.1 million after tax), resulting
from our stock appreciation rights, each of which is based upon the price
of our Class B common stock in this offering. Had the offering been
completed during our six month period ended September 30, 1999, our net
loss would have been approximately $25.4 million and our basic and diluted
earnings (loss) per common share would have been approximately $(0.07).
(5) As of March 31, 1995, 1996, 1997 and 1998 and September 30, 1998, there
were no options, warrants or other forms of potential common stock issued
by us. Our outstanding common stock purchase rights represent the only form
of potential common stock as of March 31, 1999. All of these rights were
excluded from the computation of diluted earnings per share because their
inclusion would have had an antidilutive effect on earnings per share. Our
outstanding common stock options represent the only form of potential
common stock as of September 30, 1999. All of these options were excluded
from the computation of diluted earnings per share because their inclusion
would have been antidilutive.
(6) EBITDA, which we calculate as income from operations before interest, other
income (expense), provision for income taxes, depreciation, amortization
and compensation charge for stock option plans, is a supplemental financial
measure we use in the evaluation of our business and is used by many
analysts in our industry. However, you should read EBITDA only in
conjunction with our consolidated financial data summarized above and our
consolidated financial statements and the related notes to those financial
statements prepared in accordance with generally accepted accounting
principles, which appear elsewhere in this prospectus. You should not
construe EBITDA as an alternative to income from operations, as determined
in accordance with generally accepted accounting principles, as an
indicator of our operating performance or as an alternative to cash flows
from operating activities, as determined in accordance with generally
accepted accounting principles, as a measure of our liquidity. Our
definition of EBITDA may not be comparable to similarly titled measures of
other companies.
20
<PAGE>
(7) The consolidated balance sheet data presented on a pro forma as adjusted
basis reflects: (1) the sale of approximately 38.46 million shares of our
Class B common stock in this offering at the public offering price of
$21.00 per share; (2) the termination of the repurchase right on our Class
C common stock and its conversion into our Class B common stock upon the
completion of this offering; (3) the conversion of our book value stock
option plan to a market value stock option plan; and (4) the repayment of
long-term debt of approximately $7.8 million from the proceeds of this
offering.
(8) Includes employees of non-consolidated country representatives.
Quarterly Operating Performance
The following table sets forth quarterly operating data for the year
ended March 31, 1999 and for the quarters ended June 30 and September 30, 1999.
The information is derived from our unaudited consolidated financial
statements, prepared on a basis consistent with our audited consolidated
financial statements which appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended,
----------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $69,004 $71,567 $77,108 $85,318 $85,706 $87,513
Operating income
(loss)................. (3,213) (2,833) 1,522 6,351 (543) (9,096)
</TABLE>
Our revenues and operating income vary from quarter to quarter due to a
number of factors including the timing of new client contracts, new service
offerings, changes in our pricing policies or those of our competitors and the
timing and completion of our network expansion. Our operating income (loss)
also varies from quarter to quarter due to timing of expenses related to
provisioning of our services. Based on trends during the first part of our
current fiscal year, we expect revenues for the year ending March 31, 2000 to
be higher than each of the years ended March 31, 1998 and March 31, 1999.
Quarterly results are not necessarily meaningful and you should not rely on
them as an indication of our future performance.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the financial
statements and the related notes to those statements appearing elsewhere in
this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Please see "Risk Factors--This prospectus
contains forward-looking statements that may not be accurate indicators of our
future performance."
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 multinational corporations worldwide. We offer our
services to our clients directly through country representatives and indirectly
through alternate sales channels consisting of major international
telecommunications carriers and value-added resellers. We deploy a broad array
of fully managed data communications services over our reliable, secure, and
high quality global network, which we refer to as The World Network. The World
Network is an extensive and versatile ATM-enabled network that can be accessed
by our clients from over 180 countries.
We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. In a series of transactions from 1988 to 1992, CSC sold its ownership
in Infonet to a group of telecommunications companies. From 1988 through March
31, 1999, we funded the majority of our operations, capital expenditures and
other cash requirements from internally generated funds and from two separate
stock issuances of $40.0 million each to our stockholders, one in 1995 and one
in 1999.
Prior to October 1997, our results included the operations of Government
Systems, Inc., or GSI, a wholly owned subsidiary, and our government accounts
business, which we refer to together as Government Services. In October 1997,
we sold the assets of GSI to a third party for $21.0 million in cash and a
$5.5 million reduction in debt. For the year ended March 31, 1998, results of
operations from GSI included $32.5 million in revenues and $4.0 million in
income before taxes. In addition, we sold our government accounts to the same
third party and entered into an agreement allowing the third party to operate
as a country representative for a total of $7.0 million in cash. These
government accounts contributed $4.3 million in revenues in the year ended
March 31, 1998.
Subsequent to the issuance of our 1999 financial statements, we
determined that a charge of $3.3 million related to certain network equipment
taken in 1998 was in error. The effects of the restatement are presented in
Note 16 of "Notes to Consolidated Financial Statements" and are reflected in
our financial statements.
Revenues by Region and by Country
We provide our services throughout the world, with revenues billed and
costs incurred in more than 60 countries. The following tables set forth our
revenues by region and by country based upon the ten largest countries in terms
of revenues for the six months ended September 30, 1999. Due to the
multinational nature of our client base, the table does not reflect the country
in which services are provided, but rather is based on the jurisdiction in
which we invoice for our services.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
Region (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Americas................ $104,888 48% $109,049 43% $115,937 38% $ 53,518 38% $ 62,127 36%
Europe, Middle East and
Africa (EMEA).......... 90,710 41 116,123 46 158,234 52 73,148 52 93,082 54
Asia Pacific............ 23,320 11 29,004 11 28,826 10 13,905 10 18,010 10
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal................ 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended March 31, Ended September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Country
Australia............... $ 8,375 4% $ 9,206 4% $ 11,781 4% $ 5,313 4% $ 6,726 4%
Belgium................. 10,509 5 7,499 3 8,536 3 3,864 3 4,820 3
France.................. 12,804 6 12,671 5 13,183 4 6,679 5 6,906 4
Germany................. 14,735 7 17,742 7 23,438 8 10,493 7 13,783 8
Japan................... 4,661 2 6,315 2 7,813 3 3,730 3 4,323 2
Netherlands............. 8,449 4 20,091 8 34,944 12 15,492 11 21,044 12
Sweden.................. 7,659 3 10,923 4 13,859 4 6,466 4 8,623 5
Switzerland............. 8,116 4 9,931 4 12,071 4 5,633 4 7,191 4
United Kingdom.......... 11,488 5 12,604 5 19,682 6 9,310 7 13,033 8
United States........... 89,694 41 89,754 35 103,190 34 48,276 34 56,448 33
Other countries......... 42,428 19 57,440 23 54,500 18 25,315 18 30,322 17
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal............... 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
Distribution Channels
We offer our services through country representatives and through
alternate sales channels such as major telecommunication service providers and
value-added resellers. In the year ended March 31, 1999, country
representatives contributed 90% of our total revenues, while alternate sales
channels contributed 10% of our total revenues. The table below shows the
relative contribution to revenues from country representatives, excluding
Government Services, and alternate sales channels.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Country representatives:
Number of representatives... 51 52 56 55 56
Number of clients........... 1,152 1,101 1,129 1,123 1,189
Country representatives'
revenues................... $212,421 $239,776 $273,150 $128,209 $153,081
Percent of total revenues... 97% 94% 90% 91% 88%
Alternate sales channels:
Number of sales channel
partners................... 6 12 17 13 18
Number of sales channel
partners' clients.......... 63 117 184 157 195
Alternate sales channel
revenues................... $ 6,497 $ 14,400 $ 29,847 $ 12,362 $ 20,138
Percent of total revenues... 3% 6% 10% 9% 12%
</TABLE>
Country Representatives
We currently have 56 country representatives, nine consolidated and 47
non-consolidated, which together provide services in more than 60 countries.
Our consolidated country representatives are those in which we own, directly or
indirectly, greater than a 50% equity interest. Our consolidated country
representatives provide services in 14 countries and accounted for
approximately $152.4 million, or approximately 50% of our total revenues, in
the year ended March 31, 1999. Consolidated country representatives accounted
for approximately $86.8 million, or approximately 50% of our total revenues,
for the six months ended September 30, 1999.
23
<PAGE>
Our service agreements with our country representatives give us the right
to recommend prices for services, set revenue targets jointly, determine
staffing jointly, appoint one of the three members of the advisory review
board, and terminate the agreement if the country representative fails to meet
the revenue targets or if we cannot agree on revenue targets for two
consecutive years. In addition, each agreement outlines the compensation and
pricing arrangements with the country representatives. Established rates and
support charges are generally the same for all country representatives
throughout the world.
Our country representatives determine the prices they charge clients, in
accordance with our recommended prices and standard discounts, and enter into
contracts with clients to provide services using The World Network. We bill our
country representatives and recognize the full amount of revenues for all of
our services delivered to the clients. The country representatives bill us for
the sales and support services they provide, which we account for as country
representative compensation. The country representative bears the risk of
collection from the client as well as the exchange rate risk.
Alternate Sales Channels
Our alternate sales channel partners sell all or a portion of our suite of
services in their territories to clients that require one or more of our global
communications services that the sales channel partners cannot supply
independently. These sales channel partners include, among others, AT&T and MCI
WorldCom. Our relationships are governed by multi-year contracts, under which
we provide services to our sales channel partners who then resell our services
to clients on terms our sales channel partners determine.
Components of Revenues
Our revenues are derived from providing the following global data
communications services to our multinational clients worldwide:
. Network Services--includes Frame Relay, remote access, intranet,
multimedia, Internet and IP services;
. Consulting, Integration and Provisioning Services--includes consulting,
design, and implementation; installation of leased lines and customer
premise equipment associated with the client's access to
The World Network and use of our Network Services;
. Applications Services--includes e-mail, messaging, collaboration, Web
hosting and other value-added services; and
. Other Communications Services--includes X.25 transport services,
service access fees and other communications services.
Revenues by Services
We currently derive a majority of our revenues from the sale of Network
Services, specifically Frame Relay, remote access and IP services, as shown
below. We expect that Network Services will continue to constitute the largest
component of our revenue base going forward. We also anticipate that a
significant portion of our future revenue growth will continue to come from
Network Services and Consulting, Integration and Provisioning Services.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Network Services........ $ 66,153 30% $100,337 39% $144,642 48% $ 66,927 48% $ 95,891 55%
Consulting, Integration
and Provisioning
Services............... 48,264 22 58,637 23 78,777 26 37,090 26 45,729 27
Applications Services... 16,604 8 22,433 9 20,068 6 9,000 6 7,673 4
Other Communications
Services............... 87,897 40 72,769 29 59,510 20 27,554 20 23,926 14
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal................ 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
Pricing Policies
The pricing for our services differs depending on the services provided,
the speed of service, geographic location and capacity utilization. In the case
of services permitting dedicated client access to the network by leased
circuit, pricing is generally dependent more on the nature and capacity of the
service provided than on actual usage. For example, the pricing for a
connection to be used for Frame Relay services generally consists of a monthly
charge for the connection and the bandwidth access provided through the
connection. Pricing for dedicated access services is therefore largely based on
access equipment and bandwidth. In the case of remote access services, actual
usage and geographic location are more relevant to the pricing determination,
as the client is generally charged based on the duration of each connected
session. Once a base service is set, additional factors are taken into account
such as charges for additional network services, breadth of the service, and
discounts for larger volume clients that are prepared to guarantee specific
revenue levels.
Client Contracts
The client contracts generally include an agreed-upon price schedule that
details both fixed and variable prices for contracted services. The client
contracts generally have a term of one to three years, however, when clients
implement a number of our services, they may choose to extend the contracts for
a longer period of time. Our country representatives can easily add additional
services to existing contracts, enabling clients to increase the number of
locations through which they access our network, increase the speed of that
access, increase the sophistication of the services they use, or extend the
term for existing services.
Components of Costs and Expenses
Country Representative Compensation
Country representative compensation reflects the amounts paid to the
country representatives for the sales and support services our country
representatives provide to clients. These expenses are variable and increase as
the revenues from country representatives increase.
Bandwidth and Related Costs
Our bandwidth and related costs are primarily comprised of leasing and
amortization expenses associated with the leasing or purchasing of network
circuits. Currently, the majority of our network backbone infrastructure is
obtained from various providers from whom we lease bandwidth primarily under
short-term cancellable agreements. We bear these leasing expenses regardless of
whether we lease directly or indirectly through another entity that may lease
communications lines locally on our behalf. In the future, as we move towards
establishing a facilities-based network, we intend to migrate from leasing
bandwidth to purchasing bandwidth. Management believes that these purchases
will ultimately result in a lower unit cost for network infrastructure.
Bandwidth and related costs also include related equipment, maintenance and
personnel costs.
Network Operations
Our network operations expenses include costs associated with our network
management, operations and support activities. These costs include personnel,
occupancy, maintenance, equipment depreciation, outsourcing costs and other
network related costs.
Selling, General and Administrative
Selling expenses consist primarily of personnel costs and incentive
compensation related to our consolidated country representative sales force, as
well as costs related to providing centralized sales and marketing support for
our non-consolidated country representatives. Our selling expenses also include
promotion, advertising, travel and entertainment. In 1998, we began a global
advertising campaign to increase awareness of the Infonet brand name and our
service offerings. This campaign includes substantial increased
25
<PAGE>
spending on advertising. General and administrative expenses consist primarily
of salaries and other compensation, and occupancy costs for executive,
financial and accounting, human resources, legal and other administrative
personnel, as well as company-wide management incentive related costs.
Disposition of ESG Communications Inc.
In September 1999, we committed to a plan to dispose of our subsidiary,
ESG Communications Inc. ESG was formed as a wholly owned subsidiary in March
1998 to sell telecommunications services over international bypass routes.
Since formation, ESG established seven routes. Increasing competition,
decreasing prices and lower than anticipated volumes have resulted in current
and forecasted negative cash flows from the operation of each of ESG's routes.
Our plans to dispose of ESG call for the sale or abandonment of those routes.
Two of ESG's routes were shut down and abandoned prior to September 30, 1999
and one was shut down and abandoned in October 1999. We anticipate that the
remaining routes, if not sold, will be shut down and abandoned by December 31,
1999.
In connection with our decision to dispose of ESG, we recorded a total
charge of $4.0 million. This charge was comprised of $3.6 million related to
the impairment of communication equipment, of which approximately $1.2 million
related to routes abandoned before September 30, 1999, and $400,000 related to
remaining payments under communication line leases which have no alternative
use to us after operations cease. All lease payments will be made in cash
within the next twelve months. The $3.6 million impairment charge and the
$400,000 charge for lease payments are included in network operations, and
bandwidth and related costs in our statement of operations for the six months
ended September 30, 1999. See Note 17 of Notes to Consolidated Financial
Statements. The impairment charge was determined to be equal to the carrying
value of the equipment as the discounted estimated future cash flows from each
of the routes were negative. Our efforts to date to sell the equipment have
been unsuccessful. We estimate that the proceeds from the sale of equipment or
routes, if we are successful in selling any, will not be material. Revenues and
losses from operations of ESG were $270,000 and $1.4 million, for the fiscal
year ended March 31, 1999, and $1.7 million and $2.0 million for the six months
ended September 30, 1999. As a result of our decision, future operating results
over the course of the next twelve months will not reflect charges for the
$400,000 of lease payments and for the next four years our operating results
will not contain depreciation charges of approximately $900,000 per year as
these amounts are included in the charges discussed above. We expect no other
material cost savings as a result of our decision to dispose of ESG.
Future Compensation Charges Related to Stock Option and Stock Appreciation
Rights Grants
In April 1999, we granted options to employees for the purchase of
approximately 3.71 million shares of our Class B common stock at an exercise
price of $0.84 per share pursuant to our 1998 Stock Option Plan. The 1998 Stock
Option Plan is a book value plan which will convert to a market value plan upon
the close of this offering, creating a new measurement date for the stock
options. Since the exercise price of these options is substantially below the
price to the public in the offering, we will record a non-cash compensation
charge over the five year vesting period of the options. The amount of this
charge is a function of the public offering price. Based upon the price of our
Class B common stock in this offering, this charge would total approximately
$74.8 million of which approximately $15.0 million would be recognized in our
three months ending December 31, 1999. The remaining charge would be amortized
to expense at a rate of approximately $3.7 million per quarter through December
31, 2003.
During December 1998, we issued approximately 1.21 million stock
appreciation rights, or SARs, and during April 1999 we issued 365,079 SARs to
employees pursuant to our SARs Plan. The SARs vest 25% per year, commencing in
January, 2001, and are indexed to our Class B common stock at a base price of
$0.84 per share. We will record a compensation charge in each quarter of the
vesting period based upon the difference between the exercise price and market
value of our Class B common stock during the vesting period. The total amount
of this charge is a function of the price of our Class B common stock during
the vesting period. Based
26
<PAGE>
upon the initial public offering price, these charges would total approximately
$31.7 million over the next five years, of which approximately $10.2 million
would be recognized in our three months ending December 31, 1999. However, the
aggregate amount of these charges will differ due to fluctuations in our stock
price during the vesting period and those differences could be material.
Results of Operations
The following table sets forth certain financial data from our
consolidated statements of operations for the years ended March 31, 1997, 1998
and 1999 and for the six months ended September 30, 1998 and 1999 expressed in
each case as a percentage of revenues.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
March 31, September 30,
------------------ ----------------
1997 1998 1999 1998 1999
---- ---- ---- ------ ------
(As a percentage of
revenues)
<S> <C> <C> <C> <C> <C>
Revenues................................ 100% 100% 100% 100% 100%
Expenses:
Country representative compensation... 13 14 18 17 18
Bandwidth and related costs........... 16 17 17 19 21
Network operations.................... 31 26 18 19 19
Selling, general and administrative... 44 44 46 49 48
--- --- --- ------ ------
Total expenses........................ 104 101 99 104 106
--- --- --- ------ ------
Operating income (loss)................. (4) (1) 1 (4) (6)
Other income (expense)
Interest income....................... 0 1 0 1 1
Interest expense...................... 0 0 0 (1) (2)
Other, net............................ 1 1 0 0 0
Provision for income taxes.............. 0 (2) 0 0 1
Minority interest....................... 0 0 0 0 0
--- --- --- ------ ------
Net income (loss)....................... (3)% (1)% 1% (4)% (6)%
=== === === ====== ======
</TABLE>
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Revenues increased $32.6 million, or 23%, from $140.6 million for the six
months ended September 30, 1998 to $173.2 million for the six months ended
September 30, 1999. This increase was primarily due to a $29.0 million
increase, or 43%, growth in sales of Network Services over the period, from
$66.9 million to $95.9 million. The majority of the Network Services growth
came from increased sales of Frame Relay and remote access services. Frame
Relay sales increased $22.7 million, or 66%, from $34.6 million to
$57.3 million and remote access sales increased $9.2 million, or 86%, from
$10.7 million to $19.9 million, over the period. In addition, Consulting,
Integration and Provisioning Services, comprised primarily of our Global
Connect services increased $8.6 million, or 23%, from $37.1 million to $45.7
million. Our Applications Services declined over the period by $1.3 million, or
15%, from $9.0 million to $7.7 million, largely due to an expected decline in
our mature messaging product line as our clients migrate to more advanced
messaging applications and non-X.25 based transport services. Other
communications services including our X.25 transport services decreased $3.6
million, or 13%, from $27.6 million to $23.9 million.
Revenues from our country representatives increased $24.9 million, or
19%, from $128.2 million for the six months ended September 30, 1998 to $153.1
million for the six months ended September 30, 1999. While we increased the
number of our country representatives from 55 to 56 over the period, the
majority of our revenue growth was derived from existing country
representatives. While the number of our clients increased only 6% from 1,123
clients as of September 30, 1998 to 1,189 as of September 30, 1999, revenues
27
<PAGE>
increased as clients that used mostly lower revenue generating messaging and
X.25 based transport services were replaced by clients that purchased higher
revenue yielding Network Services. Revenues from our alternate sales channels
also grew $7.8 million, or 63%, from $12.4 million to $20.1 million. Our
alternate sales channel partners resold our suite of services to a net
additional 38 clients, or 24% more clients during the period, from 157 clients
as of September 30, 1998 to 195 clients as of September 30, 1999.
In terms of revenues billed on a regional basis, the largest portion of
our growth, in percentage terms, was in the Asia Pacific region, which grew
$4.1 million, or 30%, from $13.9 million for the six months ended September 30,
1998 to $18.0 million for the six months ended September 30, 1999. The majority
of this revenue growth was derived from strong alternate sales channel revenue
growth in Australia and strong country representative activities in Japan and
Singapore. Revenues billed in the Americas increased $8.6 million, or 16%, from
$53.5 million to $62.1 million over the period. EMEA revenues also increased
$19.9 million, or 27%, from $73.1 million to $93.1 million.
Country Representative Compensation increased $6.1 million, or 24%, from
$24.9 million for the six months ended September 30, 1998 to $31.0 million for
the six months ended September 30, 1999. This increase was due primarily to the
increase in the services provided by our non-consolidated country
representatives during the period. While we added one new country
representative, nearly all of the growth in these expenses came from increased
payments for services provided by our existing country representatives. These
payments are variable expenses, based on the amount and nature of services
provided by our country representatives. As such, we expect these expenses to
increase in the future as revenues generated by our country representatives
increase.
Bandwidth and Related Costs increased $9.1 million, or 35%, from $26.3
million for the six months ended September 30, 1998 to $35.4 million for the
six months ended September 30, 1999. This increase was directly related to
higher network leasing expenses associated with increasing the capacity of our
network. The usage growth reflects additional client port growth and increased
capacity per port. While bandwidth costs have been declining over time, clients
are demanding greater bandwidth capacity at the same price. Lease expense, the
largest component of Bandwidth and Related Costs, increased $8.1 million, or
31%, from $26.3 million to $34.4 million over the period. Bandwidth and related
costs for the six months ended September 30, 1999 also reflect a charge of
$400,000 for lease payments, which will be made subsequent to the anticipated
disposition of ESG. Amortization of purchased capacity of $1.0 million was
included in the six months ended September 30, 1999, reflecting purchases of
communications line capacity that commenced in November 1998 and will be
amortized over 10 years.
Network Operations increased $6.0 million, or 23%, from $26.9 million for
the six months ended September 30, 1998 to $32.9 million for the six months
ended September 30, 1999. The largest component of this increase was the $3.6
million impairment charge resulting from our September 1999 decision to dispose
of ESG. To a lesser extent this increase was related to the increased costs
associated with our network management, operations and support activities,
personnel costs, depreciation and other network operations expenses.
Depreciation expense related to network equipment increased $3.8 million, or
82%, from $4.7 million to $8.5 million over the period.
Selling, General and Administrative increased $15.0 million, or 22%, from
$68.5 million for the six months ended September 30, 1998 to $83.5 million for
the six months ended September 30, 1999. The increase was due, in part, to
sales support expenses for multinational support activities which increased
$6.9 million from $28.0 million for the six months ended September 30, 1998 to
$34.9 million for the six months ended September 30, 1999. This increase was
directly related to revenue growth. In addition, personnel-related expenses
increased by $1.2 million from $19.2 million for the six months ended September
30, 1998 to $20.5 million for the six months ended September 30, 1999, due to
sales and marketing efforts to grow our business. Administrative expenses
increased by $4.1 million from $6.5 million for the six months ended September
30, 1998 to $10.6 million for the six months ended September 30, 1999,
primarily due to legal and accounting fees incidental to the AUCS transactions
of $1.6 million and retirement settlement expense of
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$1.7 million. Depreciation expenses increased by $913,000 from $2.8 million for
the six months ended September 30, 1998 to $3.7 million for the six months
ended September 30, 1999, due to the placement of additional equipment at
client premises.
Operating Income (Loss) grew by $(3.6) million, or 59%, from $(6.0)
million to $(9.6) million. This increase in the loss was primarily due to costs
associated with the disposition of ESG partially offset by a slower growth in
expenses as described above.
Other Income (Expense) decreased from income of $814,000 for the six
months ended September 30, 1998 to expense of $1.9 million for the six months
ended September 30, 1999. This decrease was due to an increase in interest
expense over the period of $2.4 million, or 535%, from $454,000 to
$2.9 million. The increased interest expense resulted from borrowings under the
credit facility commencing in May 1999. The decrease in Other Income (Expense)
was also impacted by a decline in interest income of $428,000, or 29%, from
$1.5 million to $1.1 million over the period.
Provision (Credit) for Income Taxes increased $(1.5) million, or 585%,
from a credit of $(255,000) for the six months ended September 30, 1998 to a
credit of $(1.7) million for the six months ended September 30, 1999. This
increase in income tax credits was due primarily to an increase in losses
during the period.
Net Income (Loss) grew by $(4.8) million, or 96%, from $(5.0) million for
the six months ended September 30, 1998 to $(9.8) million for the six months
ended September 30, 1999, as a result of the factors described above.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Revenues increased $8.8 million, or 3%, from $294.2 million in the year
ended March 31, 1998 to $303.0 million in the year ended March 31, 1999.
Revenues in the year ended March 31, 1998 included $40.1 million related to
Government Services, which were sold in the year ended March 31, 1998 and thus
did not contribute to our revenues in the year ended March 31, 1999. Excluding
the contribution in 1998 from this business, our revenues would have grown
$48.8 million, or 19%, over the period from $254.2 million to $303.0 million.
This increase was primarily due to a $44.3 million increase, or 44%, in sales
of Network Services over the period, from $100.3 million to $144.6 million. The
majority of the Network Services growth came from increased sales of Frame
Relay and remote access services. Frame Relay sales increased $37.2 million, or
85%, from $43.7 million to $80.9 million and remote access sales increased
$9.8 million, or 76%, from $12.9 million to $22.7 million, over the period. In
addition, Consulting, Integration and Provisioning Services, comprised
primarily of our Global Connect services, increased $20.1 million, or 34%, from
$58.6 million to $78.8 million over the period. Our Applications Services
declined $2.4 million, or 11%, from $22.4 million to $20.1 million, and our
Other Communications Services declined $13.3 million, or 18%, from $72.8
million to $59.5 million. Our Other Communications Services decreased over the
period largely due to an expected decline in our mature messaging product line
and our X.25 transport services, as our clients are migrating to more advanced
messaging applications and non-X.25 based transport services.
Revenues from our country representatives excluding amounts generated by
Government Services increased $33.4 million, or 14%, from $239.8 million in the
year ended March 31, 1998 to $273.2 million in the year ended March 31, 1999.
While we increased the number of our country representatives from 52 to 56 over
the period, the largest portion of our revenue growth was derived through
existing country representatives. While the number of our clients increased
only 3%, from 1,101 clients as of March 31, 1998 to 1,129 clients as of March
31, 1999, revenues increased as clients that used mostly lower revenue
generating messaging and X.25 based transport services were replaced by clients
that purchased higher revenue yielding Network Services. Revenues from our
alternate sales channels grew $15.4 million, or 107%, from $14.4 million to
$29.8 million over the period primarily due to increased revenues from
Unisource Business Network, an alternate sales channel partner operating in The
Netherlands. In total, our alternate sales channel partners resold our suite of
services to a net additional 67 clients, or 57% more clients, during the
period, from 117 clients at the year ended March 31, 1998 to 184 clients at the
year ended March 31, 1999.
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In terms of revenues billed on a regional basis, the majority of our
growth was in the EMEA region, which increased $42.1 million, or 36%, from
$116.1 million in the year ended March 31, 1998 to $158.2 million in the year
ended March 31, 1999. More than half of the growth in the EMEA region came from
strong alternate sales channel revenue growth in The Netherlands and strong
country representative activities in the United Kingdom and Germany. Revenues
billed in the Americas grew $6.9 million, or 6%, from $109.0 million to $115.9
million over the period. Revenues billed in Asia Pacific decreased by $178,000
from $29.0 million in the year ended March 31, 1998 to $28.8 million in the
year ended March 31, 1999, reflecting a slowdown in the Asian economy.
Country Representative Compensation increased $12.6 million, or 31%, from
$41.1 million in the year ended March 31, 1998 to $53.8 million in the year
ended March 31, 1999. This increase was due primarily to the increase in the
services provided by our non-consolidated country representatives during the
period. While we added four new country representatives, nearly all of the
growth in these expenses came from increased payments for services provided by
our existing country representatives.
Bandwidth and Related Costs increased $4.6 million, or 10%, from $48.1
million in the year ended March 31, 1998 to $52.7 million in the year ended
March 31, 1999. This increase was directly related to the increased traffic on
our network associated with higher usage of our services by our clients. The
usage growth reflects 15% client port growth and increased capacity per port.
This increase was directly related to higher network leasing costs associated
with the increased traffic on our network.
Network Operations decreased $22.4 million or 29%, from $77.5 million in
the year ended March 31, 1998 to $55.0 million in the year ended March 31,
1999. The majority of this decrease was due to the inclusion of $24.0 million
of network operations expense related to Government Services in the year ended
March 31, 1998 and the absence of those costs in the year ended March 31, 1999
because we sold those businesses in the year ended March 31, 1998. Excluding
this factor, network operations would have increased $1.6 million or, 3%, from
$53.5 million to $55.0 million over the period.
Selling, General and Administrative increased $9.4 million, or 7%, from
$130.3 million in the year ended March 31, 1998 to $139.7 million in the year
ended March 31, 1999. The year ended March 31, 1998 expenses included $4.6
million in selling and administrative costs associated with GSI. Excluding this
factor, Selling, General and Administrative would have increased $14.0 million,
or 11%, from $125.7 million to $139.7 million over the period. Our sales
support expenses for multinational activities increased $7.0 million from $50.4
million in the year ended March 31, 1998 to $57.4 million in the year ended
March 31, 1999 which was directly related to revenue growth. In addition, sales
and marketing personnel related expenses increased $5.7 million for our
business while the GSI related expenses decreased $4.4 million resulting in a
net increase in these expenses of $1.3 million from $54.3 million in the year
ended March 31, 1998 to $55.6 million in the year ended March 31, 1999. The
decrease in GSI expense was due to the sale of that business and the increase
in our other business expenses was related to increased sales and marketing
efforts. Administrative expenses decreased by $2.4 million from $14.8 million
in the year ended March 31, 1998 to $12.4 million in the year ended March 31,
1999, primarily due to changes in our management incentive program, which was
replaced by a stock incentive program to better retain key personnel.
Depreciation expenses increased by $2.3 million from $4.4 million in the year
ended March 31, 1998 to $6.7 million in the year ended March 31, 1999. This was
due primarily to increased client premise equipment associated with our
network.
Operating Income (Loss) increased by $4.6 million, from a loss of $(2.8)
million in the year ended March 31, 1998 to income of $1.8 million in the year
ended March 31, 1999 due to the factors described above. The year ended March
31, 1998 included $10.9 million in operating income related to Government
Services.
Other Income (Expense) decreased from $3.6 million in the year ended
March 31, 1998 to $1.6 million in the year ended March 31, 1999. This decrease
was due to a one-time pretax gain of $3.7 million on the sale of GSI's assets
in the year ended March 31, 1998. Excluding this one-time gain, Other Income
(Expense) would have increased from $(100,000) in the year ended March 31, 1998
to $1.6 million in the year ended
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March 31, 1999. This increase reflects growth in interest income of $366,000,
or 24%, from $1.5 million to $1.9 million due to higher cash balances provided
by the investment of the proceeds from the sale of Government Services. In
addition, the increase reflects a slight decrease in interest expense of
$179,000, or 21%, from $868,000 to $689,000 over the period.
Provision (Credit) for Income Taxes decreased from $4.4 million in the
year ended March 31, 1998 to $(180,000) in the year ended March 31, 1999. The
unusually high tax provision in the year ended March 31, 1998, was primarily
due to our inability to realize tax benefits related to certain U.S. and
foreign subsidiary losses. In the year ended March 31, 1999, changes in
circumstances allowed the U.S. tax losses from the year ended March 31, 1998 to
be carried forward and included in our tax returns, resulting in a lower than
normal tax provision in the year ended March 31, 1999.
Net Income (Loss) increased from $(3.4) million in the year ended March
31, 1998 to $3.4 million in the year ended March 31, 1999 due to the factors
described above.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Revenues increased $29.6 million, or 11%, from $264.7 million in the year
ended March 31, 1997 to $294.2 million in the year ended March 31, 1998.
Revenues in the year ended March 31, 1998 included $40.1 million related to
Government Services, which were sold in the year ended March 31, 1998.
Similarly, revenues in the year ended March 31, 1997 included $45.8 million
related to Government Services. Excluding the contribution from these
businesses, our revenues would have grown $35.3 million, or 16%, over the
period from $218.9 million to $254.2 million. This increase was primarily due
to a $34.2 million increase, or 52%, growth in sales of Network Services over
the period, from $66.2 million in the year ended March 31, 1997 to $100.3
million in the year ended March 31, 1998. The majority of Network Services
growth came from increased sales of Frame Relay and remote access services.
Frame Relay sales increased $24.1 million, or 123%, from $19.6 million to $43.7
million and remote access sales increased $8.1 million, or 169% from
$4.8 million to $12.9 million, over the period. In addition, Consulting,
Integration and Provision Services, comprised primarily of our Global Connect
services increased $10.4 million, or 21%, from $48.3 million to $58.6 million
over the period. Our Applications Services revenues increased $5.8 million, or
35%, from $16.6 million to $22.4 million, and our Other Communications Services
declined $15.1 million, or 17%, from $87.9 million to $72.8 million. Our
Applications Services and Other Communications Services decreased over the
period largely due to an expected decline in our mature messaging product line
and our X.25 transport services, as our clients are migrating to more advanced
messaging applications and non-X.25 based transport services.
Revenues from our country representatives increased $27.4 million, or
13%, from $212.4 million in the year ended March 31, 1997 to $239.8 million in
the year ended March 31, 1998. While we increased the number of our country
representatives from 51 to 52 over the period, the largest portion of our
revenue growth was derived through existing country representatives. While the
number of our clients decreased by 4% from 1,152 clients as of March 31, 1997
to 1,101 clients as of March 31, 1998, revenue increased as clients that used
mostly lower revenue generating messaging and X.25 based transport services
were replaced by clients that purchased higher revenue yielding Network
Services. Revenues from our alternate sales channels grew $7.9 million, or
122%, from $6.5 million to $14.4 million over the period primarily due to
increased revenues from Unisource Business Network, an alternate sales channel
partner operating in The Netherlands. In total, our alternate sales channel
partners resold our suite of services to a net additional 54 customers, or 86%
more customers during the period, from 63 customers at the year ended March 31,
1997 to 117 customers at the year ended March 31, 1998.
In terms of revenues billed on a regional basis, the majority of our
growth was in the EMEA region, which increased $25.4 million, or 28%, from
$90.7 million in the year ended March 31, 1997 to $116.1 million in the year
ended March 31, 1998 primarily due to strong alternate sales channel revenue
growth in The Netherlands, and strong country representative activities in
Germany and Sweden, partially offset by a decline in revenues in Belgium.
Revenues billed in the Americas, grew $4.2 million, or 4%, from
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$104.9 million to $109.0 million over the period. Revenues billed from Asia
Pacific increased $5.7 million, or 24%, from $23.3 million in the year ended
March 31, 1997 to $29.0 million in the year ended March 31, 1998, reflecting a
strong Asian economy during the year ended March 31, 1998.
Country Representative Compensation increased $6.0 million, or 17%, from
$35.1 million in the year ended March 31, 1997 to $41.1 million in the year
ended March 31, 1998. This increase was due primarily to the increase in the
services provided by our non-consolidated country representatives during the
period. As we added only one new country representative over the period,
effectively all of the growth in these expenses came from the growth in
payments for services provided by our existing country representatives.
Bandwidth and Related Costs increased $5.0 million, or 11%, from $43.1
million in the year ended March 31, 1997 to $48.1 million in the year ended
March 31, 1998. This network leasing cost increase was directly related to the
increased traffic on our network associated with higher usage of our services
by our clients. The usage growth reflects 16% client port growth and increased
capacity per port.
Network Operations decreased $3.6 million, or 4%, from $81.1 million, in
the year ended March 31, 1997 to $77.5 million in the year ended March 31,
1998. These expenses included network operations expense related to Government
Services of $24.0 million in the year ended March 31, 1998 and $30.7 million in
the year ended March 31, 1997. Excluding this factor, network operations would
have increased $3.1 million, or 6%, from $50.4 million in the year ended March
31, 1997 to $53.5 million in the year ended March 31, 1998. This increase was
related to the increased costs associated with our network management,
operations and support activities, including depreciation and personnel costs.
Selling, General and Administrative increased $14.5 million, or 13%, from
$115.7 million in the year ended March 31, 1997 to $130.3 million in the year
ended March 31, 1998. These expenses included selling and administrative costs
associated with GSI of $6.8 million in the year ended March 31, 1997 and $4.6
million in the year ended March 31, 1998. Excluding GSI, these expenses would
have increased $16.8 million, or 15%, from $108.9 million to $125.7 million
over the period. Our sales support expenses for multinational support
activities increased $8.3 million from $42.1 million in the year ended March
31, 1997 to $50.4 million in the year ended March 31, 1998. The increases were
directly related to revenue growth. Sales and marketing personnel and related
expenses increased $2.1 million for our business while expenses related to GSI
decreased $2.2 million, resulting in a net decrease of these expenses of
$100,000 from $54.4 million in the year ended March 31, 1997 to $54.3 million
in the year ended March 31, 1998. The decrease in GSI expense was due to a
change in business strategy and the increase in our other business expenses was
related to increased sales and marketing efforts to grow the business.
Administrative expenses increased $3.4 million from $11.4 million in the year
ended March 31, 1997 to $14.8 million in the year ended March 31, 1998, due to
changes in our management incentive program. Depreciation expenses decreased by
$400,000 from $4.8 million in the year ended March 31, 1997 to $4.4 million in
the year ended March 31, 1998. This was due primarily to increased customer
premise equipment, offset by a one time adjustment in the year ended March 31,
1997.
Operating Income (Loss) improved by $7.6 million, or 73%, from a loss of
$(10.4) million in the year ended March 31, 1997 to a loss of $(2.8) million in
the year ended March 31, 1998 due to the factors described above.
Other Income (Expense) increased from $2.7 million in the year ended
March 31, 1997 to $3.6 million in the year ended March 31, 1998. This reflects
growth in interest income of $501,000, or 49%, from $1.0 million to $1.5
million due to higher cash balances provided by the investment of the proceeds
from the sale of Government Services. In addition, Other, net increased by
$378,000 for the year ended March 31, 1998 primarily related to lower foreign
exchange losses during the period. The year ended March 31, 1998 included a
one-time pretax gain of $3.7 million related to the sale of GSI's assets.
Similarly, the year ended March 31, 1997 included a one-time pretax gain of
$3.7 million related to the sale of an Internet business in Belgium.
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Provision (Credit) for Income Taxes increased $4.6 million, from
$(175,000) in the year ended March 31, 1997 to $4.4 million in the year ended
March 31, 1998. The unusually high tax provision in the year ended March 31,
1998, was primarily due to our inability to realize tax benefits related to net
operating losses of U.S. and foreign subsidiaries.
Net Income (Loss) narrowed from $(7.5) million in the year ended March
31, 1997 to $(3.4) million in the year ended March 31, 1998 due to the factors
described above.
Liquidity and Capital Resources
Net cash provided by operating activities during the six months ended
September 30, 1999 was $2.3 million compared to $1.3 million during the six
months ended September 30, 1998. The increase in net cash provided by operating
activities was primarily the result of increased depreciation and amortization
of $5.6 million, increases of $7.9 million in accounts payable, $5.3 million in
other accrued expenses and $5.6 million in deferred income and compensation
partially offset by a $4.8 million increase in net loss for the period,
decreased income taxes payable of $6.4 million and net purchases of trading
securities of $7.9 million. Net cash used in investing activities for the six
months ended September 30, 1999 was $42.7 million compared to $4.4 million for
the six months ended September 30, 1998. The increased cash used in investing
activities in this period primarily resulted from increased spending of $37.3
million for property, equipment and communications lines and $2.0 million for
other investing activities, decreased net proceeds from short-term investments
of $6.5 million and increased net proceeds from held-to-maturity securities of
$7.6 million. Net cash provided by financing activities for the six months
ended September 30, 1999 was $71.2 million compared to $5.3 million for the
six months ended September 30, 1998. This increased cash provided by financing
activities primarily resulted from net borrowings under our long-term credit
facilities in the amount of $51.0 million and $26.7 million of cash proceeds
from the issuance of our common stock partially offset by $4.9 million of debt
issuance cost.
Net cash provided by operating activities during the year ended March 31,
1999 was $11.9 million compared to $13.0 million during the year ended March
31, 1998. The decrease in net cash provided by operating activities in 1999
resulted primarily from a $2.0 million decrease in depreciation and
amortization expense, a $7.5 million increase in deferred income tax assets and
an $11.0 million increase in accounts receivable which were substantially
offset by an increase in net income of $6.9 million, an increase of
$5.7 million in accounts payable and the absence of the $10.7 million gain from
the sale of Government Services in 1999. We expect depreciation and
amortization expense to increase in the future. Net cash used in investing
activities for 1999 was $20.7 million compared to $5.5 million for 1998. The
increase in cash used in investing activities in 1999 primarily reflects the
sale in 1998 of GSI for net proceeds of $22.0 million. Net cash provided by
financing activities for 1999 was $5.8 million compared to net cash used in
financing activities in 1998 of $14.4 million, resulting primarily from the
issuance of $16.0 million of long-term obligations in 1999.
Net cash provided by operating activities during the year ended March 31,
1998 was $13.0 million compared to $1.4 million in the year ended March 31,
1997. The increase in net cash provided by operating activities in 1998 was
primarily attributable to a decrease in net loss of $4.0 million and increases
in most operating liabilities, partially offset by the gain of $10.7 million
from the sale of Government Services in 1998. Net cash used in investing
activities for 1998 was $5.5 million compared to $4.7 million for 1997. The
increase in cash used for investing activities during this period primarily
resulted from net increased purchases of short-term investments and other
securities of $27.6 million and increased purchases of property, equipment and
communication lines of $6.4 million, partially offset by net proceeds of $22.0
million from the sale of Government Services and proceeds of $12.5 million from
sale of property, equipment and communications lines in 1998. Net cash used in
financing activities for 1998 was $14.4 million compared to net cash provided
by financing activities of approximately $13.0 million for the year ended
March 31, 1997. The increase in net cash used in financing activities in the
year ended March 31, 1998 primarily reflects the repayment of $12.0 million of
net long-term obligations issued in 1997 and the absence of $3.3 million of net
cash provided by the sale and repurchase of common stock in 1997.
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As of September 30, 1999, we had $39.2 million of cash and cash
equivalents and working capital of $35.8 million.
In May 1999, we entered into a $50.0 million bridge loan facility with
Merrill Lynch Capital Corporation. This facility provided for an interest rate
of LIBOR plus 2.5%. In August 1999, we entered into a senior secured credit
facility with a group of lenders. This $250.0 million senior secured credit
facility consists of a seven year $100.0 million Delayed Draw Term Loan, a
seven year $50.0 million Tranche B Term Loan, and a six year $100.0 million
Revolving Credit Facility. The Tranche B Term Loan was fully funded at closing
and was used to pay down in full all amounts outstanding on August 20, 1999
under the bridge loan and a $9.5 million note payable. The Delayed Draw Term
Loan was partially funded in the amount of $10.0 million at closing.
Availability under the senior secured credit facility is determined by a
number of factors including financial covenants, financial ratios and other
conditions. The term loan facilities mature in June 2006 and the revolving
credit facility matures in August 2005. Amortization and reduced availability
began September 30, 1999 pursuant to a schedule. Interest on the loans is
payable, at a variable rate based on, at our option, either the base rate or
the eurodollar rate, in each case, plus a margin. The margin for term loans
(and, prior to February 20, 2000, for revolving credit loans) is fixed by
facility and by type of loan at the rates specified in the credit agreement and
ranges from 1.50% to 2.75%. From and after February 20, 2000, the margin for
revolving credit loans varies depending on the ratio of our total indebtedness
to consolidated EBITDA and ranges from 0.50% to 2.50%. Furthermore, we are
required by February 2000 to enter into hedge agreements that fix the interest
rate on at least 50% of the outstanding term loans for a period satisfactory to
our lenders. The senior secured credit facility is secured by substantially all
of our assets and a pledge of the stock of our direct and indirect
subsidiaries, requires us to maintain certain financial covenants and places
restrictions on, among other things, the payment of dividends, the incurrence
of debt and liens, the disposition of assets, transactions with affiliates and
certain investments. Deferred financing fees related to obtaining this senior
secured credit facility and the bridge loan were approximately $4.9 million.
In June 1999, we authorized, and have subsequently issued, 47.84 million
shares of our Class B common stock to KPN, Swisscom and Telia in exchange for
access to their multinational clients and $40.0 million in cash. See
"Business--Access to Multinational Corporate Clients of KPN, Swisscom and
Telia." We expect to use the funds from this issuance for continued upgrade and
expansion of our network and for general corporate purposes.
Our principal capital expenditure requirements involve the upgrade and
expansion of The World Network through the purchase or lease of transmission
capacity and the purchase of network related equipment as well as computer
equipment, furniture and fixtures. We have funded these expenditures to date
primarily through cash from operations, borrowings under our bridge loan
facility and operating and capitalized leases. Our capital expenditures for the
year ended March 31, 1999 were approximately $11.7 million for network related
equipment, approximately $9.8 million for the purchase of transmission capacity
and approximately $5.5 million for other capital expenditures. As of March 31,
1999, we had capital lease commitments totaling approximately $8.1 million
payable in various years through 2004.
In connection with the deployment of our ATM-enabled backbone, we
estimate that we will make at least $100.0 million of capital expenditures
during the year ending March 31, 2000. We expect our capital expenditures for
the year ending March 31, 2000 to include $18.0 million for the purchase of an
indefeasible right of use of capacity in a fiberoptic submarine cable system.
In addition, we will have the option for 90 days from the date of occupancy to
purchase our new headquarters facility for approximately $33.0 million. If we
exercise this option, we may finance this purchase with proceeds of the
offering, cash from operations or a mortgage loan from a commercial lender. We
expect that our capital expenditures will be the same or higher in the year
ending March 31, 2001. These expenditures will include payments of
approximately $27.0 million for the purchase of additional submarine cable
capacity. We expect to use cash from operations together with the proceeds of
the offering and availability under the senior secured credit facility to fund
these capital
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expenditures. The exact amount of future capital expenditures will depend on a
number of factors, including availability under our senior secured credit
facility, our ability to negotiate contracts to purchase transmission capacity
at favorable prices and the demands of our multinational clients. If we have
exhausted the net proceeds of this offering and borrowings under the senior
secured credit facility are not available, we may be required to seek
additional debt or equity financing. We cannot assure you that any financing
will be available on commercially reasonable terms or at all, or that any
additional debt financing would be permitted by the terms of our existing
indebtedness.
Our ability to make scheduled payments of principal of, or to pay
interest on, our debt obligations, and our ability to refinance any debt
obligations, or to fund planned capital expenditures, will depend on our future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, regulatory and other factors that are beyond our
control. Our business strategy contemplates substantial capital expenditures in
connection with the upgrade and expansion of The World Network. We believe that
cash flow from operations and the proceeds of the offering and available
borrowings under our senior secured credit facility will be sufficient to fund
our anticipated capital expenditures through the year ending March 31, 2002.
Inflation
The impact of inflation on our operations has not been significant to
date. Over the past two years, rising prices for some of our supplies have been
offset by decreasing prices for other services. In particular, our per unit
costs for leased lines and circuits has generally decreased over this period.
However, we cannot assure you that per unit costs for leased lines and circuits
will continue to decline or that a high rate of inflation in the future will
not adversely affect our operating results.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, which arise during the normal course of
business from changes in foreign exchange rates and interest rates. A
discussion of our primary market risks associated with our foreign currency
transactions, short-term investments, and long-term debt exposure is presented
below.
Foreign Exchange Risk
We conduct our operations in more than 60 countries around the world in a
number of different currencies. There is exposure to future earnings when
foreign exchange rates change and certain receivables, payables and
intercompany transactions are denominated in foreign currencies. We monitor our
exposure to foreign currencies through our regular operating activities and
have not historically used derivatives to hedge foreign exchange risk.
We bill our country representatives in U.S. dollars and our prices are in
U.S. dollars. However, many of our country representatives derive their
revenues and incur costs in currencies other than U.S. dollars. To the extent
that the local currency used by the country representative fluctuates against
the U.S. dollar, the obligations of the country representative may increase or
decrease significantly and lead to foreign exchange losses or gains. We assume
the exchange rate risk for our consolidated country representatives, although
our non-consolidated country representatives assume the exchange rate risk
under our country representative structure. Our exposure to exchange rate
fluctuations may increase while we transition multinational clients of KPN,
Swisscom and Telia to The World Network because our receivables from these
clients and our payables to AUCS under the services agreement for services
provided to those clients will be denominated in different foreign currencies.
As of March 31, 1999 we were primarily exposed to the following
currencies: the Canadian dollar, the British pound, the Belgian franc, the
French franc, and the Spanish peseta. Based upon a hypothetical ten-percent
strengthening of the U.S. dollar across all currencies, the potential losses in
future earnings due to foreign currency exposures would have been approximately
$513,000 as of that date.
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Interest Rate Risk
We currently maintain an investment portfolio of high quality marketable
securities. According to our investment policy, we may invest in taxable
instruments including U.S. Treasury bills, obligations issued by government
agencies, certificates of deposit, commercial paper, master notes, corporate
notes and asset-backed securities. In addition, the policy establishes limits
on credit quality, maturity, issuer and type of instrument. All securities are
classified as available for sale, and recorded in the balance sheet at fair
value. Fluctuations in fair value attributable to changes in interest rates are
reported as a separate component of stockholders' equity. We do not use
derivative instruments to hedge our investment portfolio.
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents. The remaining
short-term investments have maturities that range between three and 12 months.
The carrying amount, principal maturity and estimated fair value of our
investment portfolio and long-term debt exposure are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Maturity
-------- -------------------------------------- Fair
1999 2000 2001 2002 2003 2004 Value
-------- ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investments
Cash equivalents........ $6,354 $ -- $ -- $ -- $ -- $ -- $6,354
Weighted average
interest rate.......... 5.61% -- -- -- -- --
Short term investments.. $8,196 $ -- $ -- $ -- $ -- $ -- $8,196
Weighted average
interest rate.......... 6.40% -- -- -- -- --
Long-Term Debt
Secured bank notes...... $8,915 $1,662 $1,789 $1,925 $2,071 $1,468 $8,878
Average interest rate... 7.36% 7.36% 7.36% 7.36% 7.36% 7.36% --
</TABLE>
We have not historically used derivatives to hedge our interest rate
risk. However, under the terms of our senior secured credit facility entered
into on August 17, 1999, we will be required to enter into hedge agreements to
provide that at least 50% of the outstanding term loans are subject to fixed
interest rates.
Impact of the Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software that many companies and
governmental agencies use may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
In August 1996, we began working on our Year 2000 readiness project. As
part of the Year 2000 project, we have reviewed the Year 2000 readiness of all
of our systems, software and equipment, including our messaging systems,
billing systems and network services. Following our review, we conducted
simulation and integration tests of our systems. This testing was for the most
part completed by December 1998.
In our review and testing process we identified several critical and non-
critical systems with Year 2000 problems. To date, these systems have been
removed, replaced by compliant systems or transferred to Year 2000 compliant
environments.
We have requested that all of our key vendors, service providers and
sales channels provide us with statements of their Year 2000 readiness.
Wherever possible, our final determination as to whether these entities are
Year 2000 compliant has been based on our testing process, rather than their
responses to our requests. We
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have received responses from over two-thirds of our key vendors, service
providers and sales channels indicating that they are compliant and are
following up with those who have not yet responded.
In order to minimize the risk of operational problems due to the Year
2000 date change, we will avoid making changes to our network, services,
products and processes from the period October 1, 1999 to March 31, 2000. We
will, however, continue to support existing and new clients and make client
modifications, although we will not make structural changes such as node
migrations or formatting network modifications during this period.
To date, almost all of the work associated with our Year 2000 project has
been completed. As of September 30, 1999, we had spent approximately $1.0
million on our Year 2000 project and do not expect to incur significant
additional costs. Additionally, we have incurred capital expenditures of
approximately $2.2 million in upgrading our network to satisfy Year 2000
requirements.
We believe that the greatest risk of disruption in our businesses exists
in less developed countries. The possible consequences of us or our key
business partners not being fully Year 2000 compliant include, among other
things, temporary network closings, delays in the delivery of services, delays
in the receipt of supplies or invoices and collection errors. Based on our
assessment of these risks and after discussions with third parties, including
key vendors, service providers, country representatives and alternate sales
channel partners, we have made an evaluation of our state of readiness,
potential risks and costs, and are preparing a contingency plan. This
contingency plan is intended to prepare us for failures by these parties and
other business partners.
Our business and results of operations could be materially adversely
affected by a temporary inability to conduct our business in the ordinary
course for a period of time after January 1, 2000. Our worst case scenario is a
prolonged failure of one or more third-party entities as a result of the Year
2000 problem, resulting in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which would
prevent us from delivering many of our services. We believe, however, that our
Year 2000 readiness program, including the contingency planning discussed
above, should significantly reduce the extent of any disruption. See "Risk
Factors--The Year 2000 problem could significantly disrupt our operations,
causing a decline in cash flow and revenue and other difficulties."
Recently Adopted Accounting Standards
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes new
standards for reporting derivative and hedging information. The standard is
effective for periods beginning after June 15, 2000 and will be adopted by us
by April 1, 2001. We have not assessed the impact that the adoption of this
standard will have on our consolidated financial position or results of
operations.
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INDUSTRY
The information provided in "Industry" regarding growth in the
communications market was obtained from Data Communications magazine. Although
we believe that this source is reliable, we cannot assure you that these
projections will prove to be correct. See "Risk Factors."
Market Opportunity
With developments in network technology, advances in communications
service offerings and the globalization of business, multinational corporations
are increasingly demanding integrated solutions for their mission-critical
global communications needs. In addition, the rapid expansion and adoption of
the public Internet is creating additional opportunities for corporations to
interact with a large number of geographically distributed offices, employees,
customers, suppliers and partners. However, the public Internet was not
designed with the reliability, consistency, response time and security required
for mission-critical applications. As a result, multinational corporations rely
on service providers to enhance the quality, reliability and security of their
data communications and to provide global access equivalent to the public
Internet. These corporations require integrated solutions that span multiple
countries, have guaranteed network availability, can deliver continuous
increases in speed and capacity and provide local service and support. The
demand for these managed data services has dramatically increased the size and
growth rate of the communications marketplace.
The size of the global communications market reached approximately $800
billion in 1998, according to the International Telecommunications Union. The
market for data communications is one of the fastest growing segments of this
market. According to Data Communications, a leading magazine covering
enterprise networking, the global data communications services market, which
includes Frame Relay, ATM, intranet services, commercial Internet services and
Web hosting, was approximately $22 billion in 1998, or 2.8% of the global
communications market and had a compound annual growth rate of 55% from 1996 to
1998. Within this market, we focus on cross-border managed data communications
services for multinational corporations.
Industry Drivers
We believe that there is an attractive opportunity for marketing managed
data communications services to multinational corporations which results from
the following factors:
. globalization of business and increased need for connecting
international locations;
. rapid expansion of Internet-based applications;
. rising importance of data communications as a service critical to a
corporation's success; and
. increased outsourcing of corporate data communications.
Globalization of business and increased need for connecting international
locations. Over the past several decades, corporations have significantly
increased the international scope of their businesses. These corporations have
opened and made direct investments in branch offices, factories, and other
local representative facilities around the globe. It is critical for these
corporations to share information accurately and expediently between their
geographically dispersed locations, as well as with travelling and
telecommuting employees. New technologies and advanced remote access
alternatives are enabling these geographically dispersed employees to connect
to corporate and public networks at greater speeds, as well as from more varied
locations.
Rapid expansion of Internet-based applications. Internet-based
applications are rapidly expanding as an important medium for global
communications and e-commerce with the potential to connect a large number of
geographically dispersed offices, employees, customers, suppliers and partners.
Internet-based applications
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have emerged as a strategic component of business, and investment in Internet
services has increased dramatically. The public Internet's lack of reliability
and security for mission-critical data communications, however, has forced many
corporations to seek assistance from service providers and data network
companies to enhance the quality of their Internet communications or to design
and implement high performance private networks.
Rising importance of data communications as a service critical to a
corporation's success. An increasing number of businesses are investing in data
networks to achieve higher levels of productivity and lower operating expenses.
Increasingly, corporate intranets, public Internet Web sites, extranets and
other managed data networks are creating competitive advantages for companies
that use them to foster internal communications, e-commerce, source supplies,
recruit new employees, communicate with customers, penetrate new market
segments and collect market information. Corporations are demanding that their
networks deliver data quickly, consistently and globally and that these
networks can be upgraded as the complexity of the applications grows and
technologies change. Corporations also require networks that operate 24-hours a
day, seven days a week, and offer application support and a broad range of
functions, such as security, remote access and reliability.
Increased outsourcing of corporate data communications. Corporations are
focusing their resources on their core competencies. Investing in resources and
personnel required to maintain in-house private corporate networks is costly
and difficult, especially given the shortage of technical talent and risk of
technological change. The ongoing expansion of multinational businesses and
developments in technology, have made it difficult for in-house solutions to
keep pace with corporate needs. Therefore, corporations have sought third
parties to provide managed data communications services. Given the costs and
difficulties involved in implementing international network solutions, we
believe that multinational corporations are even more likely to outsource their
cross-border data communications needs.
Technology Overview
The evolution of computing and data network services has had a major
impact on the ways companies function. Most multinational corporations now
depend upon the efficient transmission of information through effective
communications networks. At particular sites, organizations employ localized
data networks known as local area networks, or LANs, to connect personal
computers. These LANs can be used to promote collaborative work practices
through data and directory sharing, facilitate communications through e-mail
and voice messaging, and simplify administrative procedures through services
such as direct facsimile transmission from a desktop computer. When LANs are
connected through a larger network, commonly referred to as a wide area
network, or WAN, an organization is able to replicate the services that can be
provided by a LAN seamlessly throughout the organization's various sites,
enabling personnel in diverse locations to share information.
A WAN which is designed to connect to and provide information from
diverse locations within a corporate organization is often referred to as an
intranet. An intranet operates like the public Internet but with more
consistent performance and better security. Intranets can also be used to
transmit information to and receive information from outside an organization,
enabling a company to engage in e-commerce. When a WAN or intranet is able to
transmit and receive information from outside an organization via the public
Internet, it is often referred to as an extranet.
Data protocols enable computers to exchange information by using a
commonly understood language and set of rules. Protocols are critical in data
communications because they dictate the speed and flexibility with which data
can be exchanged between computers. The following are the most commonly used
protocols:
. X.25 is a protocol that allows dial-up or permanent access to a
network from the user's premises at low to medium speeds from 9.6 to
64 kilobits per second, or Kbps. X.25 is suitable for most lower
performance applications and for users in developing countries that
lack the communications infrastructure to deliver high speed
services;
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. Frame Relay is a wide area protocol designed for transporting data at
higher speeds of up to 2 megabits per second, or Mbps. Frame Relay is
particularly suited for users who transmit high volumes of data. As
such, Frame Relay is a cost-effective means of connecting
geographically dispersed LANs;
. ATM is a high speed protocol that is capable of very high
transmission rates, primarily 45 Mbps or greater. ATM can be deployed
both as a protocol to transport data within core networks and as a
technology that enables high volume users to access a network. Both
LANs and WANs can use ATM to support broadband services such as
voice, video and data services; and
. Internet Protocol, or IP, is the protocol used for the Internet and
on many LANs and WANs that enables efficient communications across
data networks regardless of the hardware, software and protocols
used. IP permits WANs and LANs to operate seamlessly with one another
and permits varied networking and computer platforms to exchange
information. IP standards can be used to create intranets that link
IP-based corporate networks and to create extranets to connect
corporate networks to the public Internet.
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BUSINESS
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 corporations worldwide, including 29% of the top
500 corporations in Business Week's 1998 Global 1000. Our network, which we
refer to as The World Network, can be accessed from over 180 countries, making
it one of the world's largest data communications networks in terms of
geographic coverage. We own and operate our network, which allows us to provide
managed data services to our clients on a global basis, an advantage over
service providers that do not own an extensive global network. We sell our
services directly through our country representatives and indirectly through
major international telecommunications carriers, such as AT&T and MCI WorldCom,
and value-added resellers. Our country representatives give us a significant
local presence in more than 60 countries and strong working relationships with
leading local telecommunications providers in these countries. Our diverse
client base is comprised of multinational corporations that require cross-
border data communications services such as Allergan, Baan, Microsoft, Nestle,
Nokia, Pharmacia/Upjohn and Volkswagen.
We offer a broad range of integrated service solutions to our clients,
such as:
. Network Services--includes Frame Relay, remote access, intranet,
multimedia, Internet and IP services;
. Consulting, Integration and Provisioning Services--includes
consulting, design, and implementation; installation of leased lines
and customer premise equipment associated with the client's access to
The World Network and use of our Network Services;
. Applications Services--includes e-mail, messaging, collaboration, Web
hosting and other value-added services; and
. Other Communications Services--includes X.25 transport services,
service access fees and other communications services.
We take a consultative, applications-oriented approach to identifying
client needs and developing customized solutions. In addition, we offer a
consolidated billing, management and support system which provides a complete
solution for all the external and internal data communications services our
multinational clients require. Our approach is to integrate our full range of
services with the data communications and network operations of our clients. We
believe our ability to provide a comprehensive solution to our clients gives us
a key competitive advantage because our solutions are costly to develop and
difficult to replicate.
We own and operate The World Network, an extensive and versatile ATM-
enabled network that provides the delivery platform for our integrated,
enterprise-wide communications solutions. The World Network has approximately
11,977 ports comprised of over 6,000 IP, Frame Relay and X.25 access and
customer premise devices which are connected by over 950,000 route-kilometers
of data transmission circuits, most of which are over fiberoptic routes. This
global private network enables our clients to deploy and manage applications
effectively by combining reliability, security, high performance and a broad
range of functions using a variety of network protocols.
Our global sales and support structure, which in some countries is based
on partnerships with local telecommunications and other service providers,
gives us a strong presence in each of our markets. We believe this structure
also provides us with a competitive advantage over other data service providers
who do not have comparable levels of expertise as to local operating,
regulatory and market conditions. Our country representative structure emerged
from our historical relationships with major telecommunications companies, such
as Deutsche Telekom, France Telecom, Korea Telecom, Singapore Telecom and
Telekom Malaysia.
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We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. In a series of transactions from 1988 to 1992, CSC sold its ownership
in Infonet to a group of telecommunications companies. Our current stockholders
include six of the world's largest telecommunications companies:
. KDD--KDD Corporation (Japan);
. KPN--KPN Telecom B.V. (The Netherlands);
. Swisscom--Swisscom AG (Switzerland);
. Telefonica--Telefonica International Holding B.V. (Spain);
. Telia--Telia AB (Sweden); and
. Telstra--Telstra Corporation Limited (Australia).
Business Strategy
Our goal is to be the leading provider of global data communications
services to multinational corporations. We will continue to:
Focus on multinational clients that require data communications solutions
We will continue to focus on multinational corporations with cross-border
managed data communications needs. We believe that the rapid pace of
technological change, and the resultant complexity and cost of network
communications services, are causing large multinational corporations to
outsource their data communications services to focus on their core
competencies. Our flexible network architecture, local presence in more than 60
countries and consultative sales approach allow us to tailor our data
communications solutions to meet our clients' needs. Given the global reach of
our network, our local support services and our reputation for reliable and
innovative services, we believe we can further penetrate the market for global
data services. Between 1996 and 1998, we increased our penetration of the top
500 corporations in Business Week's Global 1000 from 21% to 29%. As part of
this strategy, we have launched a global branding program to increase awareness
of our services and the Infonet brand.
Upgrade and expand our global network
We intend to invest significant capital resources to upgrade and expand
further The World Network to maintain our competitive advantage. Currently, the
majority of our backbone is comprised of circuits leased on a short-term basis.
We are in the process of making significant purchases of transmission capacity
on major terrestrial and undersea routes. We believe that these investments
will enable us to exploit economies of scale associated with high volume
transmission capacity and better meet our clients' requirements for higher
speed connections. Also, as part of this strategy, we are currently expanding
the deployment of ATM backbone switches that will connect our core network
nodes around the world. We believe this ATM-enabled network will provide
greater capacity and improved functionality. We expect to use our ATM-enabled
network as a platform to offer a broader range of value-added services that
combine voice, video and data.
Develop innovative, value-added solutions
We are continually developing new solutions to meet our clients' rapidly
changing needs due to technological advances and the globalization of their
businesses. For example, we were the first to offer multiple levels of Frame
Relay service to our clients, providing them the flexibility to manage
standard, as well as mission-critical operations effectively through one
service. In 1998, we were awarded the Data Communications magazine "Hot Product
of the Year" award for our Frame Relay service, marking the sixth time in seven
years we have won this award for innovative services. With the expansion of our
ATM backbone we will begin to offer to our clients a broader range of
innovative, value-added services, including voice, video and data. We intend to
continue developing these services to allow us to derive additional revenue
from our existing client base and to attract new clients.
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Strengthen our sales and customer support structure
Our country representatives play a major role in the sales and marketing,
local client support and implementation of our services on a global basis. Our
country representative strategy has allowed us to expand geographically without
the related financial and managerial costs associated with building large
numbers of wholly-owned multinational sales and support operations. We are
constantly evaluating new opportunities to expand our sales channels through
the addition of new country representatives and alternate sales channel
partners. In the last three years, we have expanded into seven new countries
and have added 11 new alternate sales channel partners. Our strategy is to
capitalize on the strength of our country representatives and alternate sales
channel partners to build market share among multinational corporations.
Provide the highest level of quality, security and reliability for our
services
We are committed to maintaining the highest level of quality, security
and reliability in delivering data communications services over our network.
Using our network management tools and systems, we are able to proactively
monitor our global network operations and respond quickly to client problems,
24-hours a day, seven days a week. We consistently meet or exceed our 99.7%
quality standard, reflecting our guarantee of network availability. In
addition, we support our clients through our extensive local operations. To
ensure this quality, we continue to make investments in client service and
support, and continually evaluate our performance in order to retain our valued
clients. We also continually hire and train experienced and technically
sophisticated network support and services personnel. We are committed to
adhering to these quality standards, in part by maintaining our ISO 9001
certification.
Our Service Solutions
We provide services to meet clients' global data communications needs. We
offer clients either individual services that they can use as part of their own
networks or more integrated solutions that combine several of our services.
Examples of how our services and solutions meet our clients' needs include:
. For Leading Hotels of the World, Ltd., one of the world's oldest and
largest luxury hotel companies, we connect the reservation systems of
300 hotels in 66 countries;
. For Allergan, Inc., a global health care company, we manage data
communications between 40 offices, 4,500 desktop computers and 6,000
employees around the world;
. For KBC Bank NV, a major European commercial bank, we provide managed
data communications services to branch offices in 66 cities located
in Europe and Asia; and
. For Hellmann International Forwarders, Inc., a German freight
services company, we connect offices in 40 countries and integrate
their different e-mail and messaging systems.
Our services are organized into four categories: Network Services;
Consulting Integration and Provisioning Services; Application Services; and
Other Communications Services.
Network Services
We offer multinational corporations and our sales channel partners
private managed data services. Our clients use these services to manage
information among their worldwide locations. For example, manufacturing
companies use our services to integrate production and inventory schedules,
technology companies use our services to transmit design files and financial
institutions use our services to connect their trading desks. Typically,
clients employ these services to transmit information that is critical to their
daily operations. Within Network Services, we offer Frame Relay, ATM, Private
Internet, Global Internet, MultiMedia and Remote Access.
Frame Relay Services. Our Global Frame Relay service is the largest
component of our Network Services. We offer three levels of Frame Relay service
to meet the specific performance characteristics of our
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clients' applications. A premium level Frame Relay service is available for our
clients' mission-critical, interactive applications requiring the highest level
of performance and network availability. For example, clients use this service
to enhance the performance of and maximize their investment in enterprise
resource planning software. Clients use our second level Frame Relay service
for multi-protocol applications with less stringent response time requirements
such as remote printing, intranet browsing, collaborative software and large
file transfers. Our third level Frame Relay service is most suitable for
clients using applications with lower performance requirements which are less
sensitive to longer response times such as Internet browsing, e-mail and small
file transfers.
ATM Services. We are in the process of commercializing our ATM service.
More advanced than Frame Relay and X.25 technology, ATM enables us to address
the rapidly emerging requirements for high speed integrated voice, video and
data services, as well as the delivery of bandwidth-intensive applications,
such as video conferencing and advanced voice, video and data services.
Private Internet Services. As part of our Network Services, we offer our
clients a private Internet solution. Our Private Internet Services use IP to
provide corporate networks functionality similar to the public Internet but
with the performance characteristics of The World Network. This means that
clients can effectively run mission-critical applications using cost effective
Internet development tools on our high performance private network. Our Private
Internet Services are ideal for corporations seeking to establish extranets or
to engage in e-commerce.
Global Internet Services. Global Internet Services provide dedicated and
dial-up connectivity to the public Internet. We offer our multinational clients
dedicated and dial-up public Internet access from our locations through a
series of peering agreements and transit relationships with other global ISPs.
This service is attractive because clients can deal with a single provider
instead of a different ISP in each country. We provide a completely managed
service with local support, network management and 24-hour operations. We also
produce one consolidated invoice for all services.
MultiMedia Services. We provide high quality voice services, referred to
as our MultiMedia Services, which can be used independently or in combination
with our managed data services. We deliver high quality, cost-effective voice
services by using a technology that we developed with Nortel. We can easily add
office-to-office voice communications for clients that are using our managed
data services by connecting their voice telecommunications systems to The World
Network. We can also offer single-site companies such as shippers,
importers/exporters and telemarketers connections to the local public
telecommunications network. We can offer all of these voice services on a
single global invoice with location and call detail as well as customized dial-
plan capability. We expect to expand our MultiMedia Services to include video
services in the future.
Remote Access Services. We offer our clients a variety of remote access
services on a wireline and wireless basis. Our remote access services provide
our clients' employees, who are travelling or who are located remotely, with
access to the same network applications that would be available if they were at
their primary office. Using our services, applications such as enterprise
resource planning, file sharing, Internet access and e-mail are accessible with
higher levels of security and performance than would normally be provided by
accessing these networks via the public Internet. We contract with one of the
industry's leading suppliers of enhanced security products to offer these
security products to provide greater security than traditional password
systems. As a result, our remote access service provides connectivity for
"virtual offices" anywhere in the world, quickly, securely and cost
effectively. We provide dial-up connectivity through The World Network to
insure secure access for our clients' employees, business partners and
customers. We also provide worldwide virtual private network connectivity for
remote offices and LANs that support small office/home office, business
partner/client support networks and basic Internet access requirements. We can
offer this service through telecommuters' home computers, through toll free
dial-up service or via mobile phones connecting to our network via the local
public telecommunications network or via access methods appropriate to wireless
data telephony.
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Consulting, Integration and Provisioning
We offer integration, provisioning and implementation services to our
clients to implement the "last-mile" part of the solution. Our country
representatives provide the on-the-ground support and local implementation
necessary to deliver these services on a global basis. As part of the
integrated solution, the country representatives provision leased lines to
connect our clients' sites to The World Network. In addition, they procure,
install and maintain the appropriate customer premises equipment. We believe
few other global data communications service providers can provide these
localized services on a global scale and our local presence is a significant
competitive advantage. As part of the comprehensive solutions we offer, we also
provide consulting services to assist our clients in integrating our data
communications services into their operations.
Application Services
Our Application Services include messaging and collaboration services
that provide an attractive alternative for businesses that prefer to outsource
all of their "non-core" business messaging activities. We provide three types
of messaging and collaboration services. First, we host e-mail services for our
clients using Microsoft Exchange and Lotus Notes software. Our e-mail hosting
activities include management of the client servers, software support and
service, and e-mail translations to telex and fax. Second, we have developed a
proprietary global unified messaging and collaboration service and software
solution called MailMail. MailMail enables voicemail, fax, telex, paging and e-
mail messages to be aggregated and forwarded to a single e-mail location,
accessible via the public Internet. We offer MailMail as an alternate
enterprise wide e-mail service to our multinational clients, and we license it
to other ISPs. Third, our X.400 service enables our clients to exchange
information between different e-mail systems in a seamless and secure manner.
We offer hosting of Web sites, referred to as Web hosting services, to
clients who wish to outsource their Web sites and other Internet applications.
We run clients' servers for them at an operations center with high bandwidth
Internet connectivity, redundant power and disaster recovery provisioning. We
can connect hosting centers to the clients' private network, and we also offer
firewall and security services.
Other Communications Services
Our highly reliable, widely available and cost-efficient X.25 service is
typically used for lower performance applications requiring secure
connectivity. X.25 is a widely deployed and proven technology frequently used
in developing countries where high speed transmission capacity is not
available.
Global Network Management/Local Support
The World Network is the physical platform across which we deliver all of
our services. Our Global Network Management/Local Support infrastructure is the
combination of support, billing, management and personnel, which allows us to
offer our solutions seamlessly throughout the world.
We deliver our services through an infrastructure comprised of
technology, connectivity, tools, processes and personnel. We provide seamless
global performance through our network of nodes, switches, circuits and
terminating devices, combined with the management systems and processes for
change, configuration, security, billing and accounting. Changes, upgrades and
enhancements to our network are possible given our common information,
management and tracking infrastructure.
We develop client solutions through a collaborative effort among the
country representatives responsible for serving each client location. To ensure
the quality of the solution provided, an experienced global project management
team overseas the deployment of the client solution, using a highly-developed
set of systems, processes and infrastructure, which have been developed, tested
and improved over the last 30 years. After installation, our integrated global
billing system allows clients to receive a single invoice for all services.
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We believe the time and capital required to duplicate our global capabilities
provides us with a significant competitive advantage.
Development of Innovative Services
We are recognized in the industry as an innovative developer of products
and services. For example, Data Communications, a leading magazine covering
enterprise networking, has repeatedly recognized our achievements. In January
1998, it awarded us a "Hot Product of the Year" award for our innovative Frame
Relay technology. This marked the sixth time in seven years that an Infonet
service earned this distinguished award. In addition, we released multiple
levels of Frame Relay service in 1998 and IP service in 1991, in each case,
more than one year before our competitors. Designing solutions for our clients
keeps us closely involved with new market requirements, the most promising of
which are added to our ongoing service development programs.
Client Base
We have more than 1,150 multinational clients which typically have
between 15 and 25 locations and are diversified across both industry groups and
geographic regions. We provide our services to many of the world's largest
multinationals including Allergan, Baan, Microsoft, Nestle, Nokia,
Pharmacia/Upjohn and Volkswagen. Our 29% share of the top 500 corporations in
Business Week's 1998 Global 1000, an annual list of the world's largest
corporations, is evidence of the central role that we play in the global data
communications industry. No single client comprised more than 2% of our
revenues in fiscal year 1999.
A substantial portion of our revenues are under contract for one to three
years. The act of switching service providers not only has the potential to
compromise the security and performance of the client's network, but also
presents a significant inconvenience, particularly to larger clients using a
number of our services. Therefore, we believe that our larger clients typically
are reluctant to terminate their contracts with us.
Country Representatives
Our country representative structure gives us global reach and strong
local presence in the countries in which we operate. The country representative
structure emerged from our historical relationship with major
telecommunications companies, such as Deutsche Telekom, Embratel (Brazil),
France Telecom, Korea Telecom, Singapore Telecom and Telekom Malaysia. We have
enjoyed strong relationships with our 56 country representatives. A total of 14
country representatives have been with us for more than ten years and 29 have
been with us for more than five years.
Our consolidated country representatives consist of nine separate country
representatives that provide service in 14 countries. Our consolidated country
representatives accounted for approximately $152.4 million of our revenues in
fiscal year 1999, representing about 50% of total revenues. In addition to our
consolidated country representatives, we have 47 non-consolidated country
representatives which, together with our consolidated country representatives,
provide service in more than 60 countries. In the aggregate, our country
representatives accounted for approximately 90% of our revenues in fiscal year
1999.
We are the principal service provider to our clients and control the
delivery of all services to them on an end-to-end basis. We centrally control
and configure our network and rely on our country representatives to deliver
our services and maintain The World Network locally. We rely on our country
representatives for insights into local operating, regulatory and market
conditions. They are involved in sales and marketing, operations, network
management and client support. Depending on the geographic location and needs
of a client, country representatives from different countries will collaborate
with each other when making sales presentations. Country representatives manage
accounts on a daily basis and are the first point of contact for clients,
generally providing service in the local language. To minimize our regulatory
hurdles, each country representative is a party to a legal contract with the
client. Once a new client has signed a contract, we
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configure the network for the service and coordinate with other country
representatives to implement the solution for the client. Our country
representatives take a lead role in implementing the last-mile part of the
solution by provisioning leased lines and installing equipment at the client
site. In addition, the country representatives provide local support for our
services, operating our local network nodes and, in some cases, housing and
operating components of the infrastructure for specific services on our behalf.
Governance and Controls
We have service agreements with all of our country representatives that
govern our relationships. The agreements are generally non-exclusive and are
essentially the same for all country representatives and generally have five
year terms. These agreements provide the country representatives with:
. the right to market and sell our services;
. the right to use our trademarks and service marks;
. access to operational and marketing documentation; and
. training materials and sessions.
The agreements give us:
. the right to recommend prices;
. the right to jointly set revenue targets with the country
representatives;
. the ability to terminate the agreement if the country representative
fails to meet the revenue targets or if targets cannot be agreed upon
for two consecutive years;
. the ability to determine staffing of the local office jointly with
the country representatives; and
. in many cases, the right to appoint one of the three members of the
Advisory Review Board, which governs the relationship between us and
the country representative.
The agreements outline the fees that the country representatives are
required to pay us for access to our network. In addition, the agreements
outline our compensation and pricing arrangements with the country
representatives.
The World Network
Overview
We own and operate The World Network, one of the world's largest
commercial global data networks in terms of geographic coverage accessible from
over 180 countries. Our network supports several major protocols that allow us
to offer a broad range of services. Our network structure allows us to respond
quickly to our clients' changing needs for increased bandwidth, reliability and
security while enabling us to manage data traffic patterns efficiently. Because
we manage our network on an end-to-end basis, we are better able to control and
customize the services delivered to our clients. The World Network has 11,977
ports comprised of over 6,000 IP, Frame Relay and X.25 access and customer
premise devices which are connected by over 950,000 route-kilometers of data
transmission circuits, most of which are over fiberoptic routes.
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The World Network is based upon a three-tier hierarchical structure which
we believe provides a competitive advantage because it allows for efficient
traffic management, higher performance and reduced cost. This three-tiered
hierarchical structure is comprised of Global Switching Nodes, Regional
Switching/Access Nodes and Local Access Nodes as diagrammed below:
[Diagram of Tiered Node Structure Appears Here]
Global Switching Nodes: We use our Global Switching Nodes cost
effectively to aggregate and distribute interregional network traffic flows.
Equipped with FORE Systems' high capacity ATM switches, these Global Switching
Nodes are capable of accepting multiple channel inputs of data in excess of 45
Mbps. Our Global Switching Nodes are connected by fiberoptic transmission
capacity and are currently located in the following ten locations: Amsterdam,
Dallas, Kuala Lumpur, London, London-Docklands, Los Angeles, New Jersey, New
York, Stockholm and Tokyo. We plan to add more additional Global Switching
Nodes to further expand and enhance our ATM-enabled network around the world
and to increase our transmission capacity to as high as 2.5 gigabits per
second, or Gbps.
Regional Switching/Access Nodes: We use our Regional Switching/Access
Nodes to aggregate regional traffic and provide access to The World Network for
clients with bandwidth-intensive applications. These nodes are equipped with
Nortel Passport switches and Cisco hub and access routers. The Nortel Passport
switches provide Frame Relay capability as well as high capacity access (at
speeds of 2 Mbps to 45 Mbps) to the Global Switching Nodes through our
backbone. The Cisco hub and access routers provide high capacity
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local access for our clients and aggregation services for regional IP traffic.
The Cisco hub routers can also use the Nortel Passport switches for connection
to the Global Switching Nodes to exchange data interregionally. Our 114
Regional Switching/Access Nodes are located in 48 countries around the world.
Local Access Nodes: Our Local Access Nodes connect clients to The World
Network at speeds generally less than 2 Mbps. These nodes enable our clients to
connect to and use IP, X.25 and Frame Relay applications through dedicated and
dial-up access. The Local Access Nodes are equipped with Cisco access routers,
Nortel and Siemens X.25 devices and Ascend Dial Access devices. The Cisco
routers provide dedicated IP access, the Nortel and Siemens devices provide
dedicated access using X.25 and the Ascend devices provide dial-up access.
Local access is available in 125 locations in over 60 countries. We are also
able to extend our network reach to countries where the communications
infrastructure is not available by using satellite services, which are
integrated as part of The World Network.
Local Access
Clients can access The World Network either directly using a dedicated
line or through dial-up services by connecting through Local Access Nodes,
Regional Switching/Access Nodes, or via our interconnection with the national
data network of our local telecommunications partners. A country representative
arranges dedicated access through a leased line or via the national data
network of the local telecommunications partner. Dial-up services offer local
and remote access to The World Network through the local public
telecommunications network. We plan to offer additional access methods and
adapt them to our backbone for increased efficiency. Among those services
planned or under review for clients that require higher speed access are ATM,
digital subscriber line or DSL, and broadband wireless remote access. In remote
locations clients can access The World Network via satellite services. Clients
can choose to have us manage their entire provisioning and support at and
between each client location.
Backbone Capacity
Our backbone connects all nodes on The World Network. Traditionally, we
have obtained backbone capacity from major telecommunications carriers through
short-term leases. We have begun, and expect to continue, to purchase capacity
on major international and regional routes where it is economical to do so and
where capacity is available for purchase or long-term lease. We intend to
invest significant capital resources to expand and upgrade our network in order
to maintain our competitive advantage. We are currently in discussions with
several suppliers of terrestrial and intercontinental undersea cable. In
collaboration with Hughes Electronics, we are also using satellite technology
as a fill-in strategy to provide satellite links to The World Network where
terrestrial connections or alternative paths for specific high availability
applications may not be available. We increased our network capacity by more
than 500% in 1999, and we expect to continue to expand capacity as our clients
require.
Network Protocols
Our network strategy is to support a wide range of managed data
communications services over a common infrastructure. As such, our global
network infrastructure supports a variety of protocols including X.25, Frame
Relay, IP and ATM. Our existing Frame Relay network is the basis for our
delivery of seamless managed data communications services on a worldwide basis.
Moreover, by using Frame Relay technology we are able to capitalize efficiently
on The World Network's bandwidth to transport a variety of data traffic. We are
implementing the new industry-standard IP versions and extensions to
differentiate our network from other competitive networks. We intend to
introduce IP Version 6 into the network as it becomes commercially available
and is accepted.
Our ATM-enabled network is able to support broadband services that
require asynchronous networking capabilities (for example, video services), as
well as provide transport for aggregated data between our Regional
Switching/Access Nodes and our Global Switching Nodes. We believe our ATM-
enabled network will be the transport platform for our managed data
communications services in the future. We expect our ATM-enabled network will
allow for the efficient and high-speed transport of voice, video and data
traffic over
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a single network. This capability will not only enable us to further leverage
our network assets, but also allow us to capitalize on the demand for
anticipated new service offerings that combine voice, video and data.
Furthermore, as client demand for additional bandwidth, faster transmission
speeds and enhanced service quality increases for applications such as desktop
videoconferencing, we believe our investment in ATM technology will position us
as a leading provider of these services.
Network Management
We manage our network and monitor its operation 24-hours a day, seven
days a week through two network control centers located in Los Angeles and
Brussels and three global customer assistance centers in Los Angeles, London
and Tokyo. The customer support operations consist of multilingual,
technologically experienced staff in over 60 countries.
Our network management infrastructure is an integral component of the
seamless delivery and management of our suite of services. We proactively
monitor the "real-time" status of over 10,000 network components that provide
performance feedback on a daily basis. Consistent information is available to
all global support entities using trouble tracking services, network alerts and
alarms, change configuration and security management processes. We continue to
enhance these capabilities by adding automation tools and providing on-going
training.
Network Security
We have built and maintain an advanced security and control structure.
Because we manage our global network from end-to-end, we maintain central
control of network access, operations and maintenance. We protect our network
through various means including firewalls, intrusion detection platforms,
network address translation, filtering, and network architecture structures, as
well as various dedicated network and remote access authentication processes.
Backup Network Control Centers and Nodes
We also have backup network control centers in Sacramento, California and
Chantilly, Virginia, which we created to assume network control center
operations in the event of a disaster or similar emergency. In addition, in
order to lower the potential exposure from major failures or disasters
affecting a node, we have implemented second nodes capable of assuming the
traffic of our primary nodes. The fiber connections in the area and, where
feasible, client access lines are split between the two nodes. Thus, transit
traffic through a city can continue to flow in the event of a major failure or
disaster affecting one of the nodes. We have implemented second nodes in the
London-Docklands, Los Angeles, New York, New Jersey, San Francisco and
Sacramento metropolitan areas.
Circuit Diversity
Nodes are connected with other nodes with at least two redundant
connections, so that no single connection failure will result in the isolation
of the node. The failure of a connection results in the automatic rerouting of
traffic to one or more alternate network paths. In the event of a node outage,
transit traffic is automatically rerouted to paths around the failed node. In
addition, we have, over our operating history, sought to ensure that our
circuits are, as much as possible, diversely routed so that a major failure by
a carrier in a given route does not result in a total network outage to our
clients.
Disaster Recovery
Under our Disaster Recovery Plan, we distribute our critical operations
over two to three global regions which constantly share information with one
another. These network control centers and customer
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assistance centers are essentially self-contained units located in diverse
geographic regions, and thus provide natural disaster backup for each other as
described below:
. Network Control Centers in Los Angeles and Brussels;
. Global Customer Assistance Centers in Los Angeles, London and Tokyo;
. Second Level Customer Assistance in Los Angeles, Brussels and Tokyo;
and
. Third Level Customer Assistance in Los Angeles and Brussels.
Within the backbone, we have attempted to minimize the risk of node
outages by placing our nodes in highly secure facilities, and by requiring dual
cable entrances, diversely routed circuits and uninterruptable power supplies.
However, clients who need quick recovery from disasters or failures affecting a
node can supplement their service with our Failure Recovery Service option,
which provides access to an alternate Infonet node via a leased line, dial-up
access backup or satellite services. We provide this service on an automatic or
manual backup basis.
Quality Standards
We perform ongoing quality system audits and conduct client satisfaction
surveys. As a result, we receive constant performance feedback to ensure that
our quality systems meet client needs and our guarantee of 99.7% network
availability. We have been awarded ISO 9001 certification for several of our
services.
Sales and Marketing
Direct Sales Channels
Our country representatives are responsible for all of our sales
activities in their respective territories. Each country representative
maintains a sales force which directly calls on clients, coordinates the
contract signing process and manages accounts on a daily basis. We begin our
sales process by working with the client to gain an understanding of its
business needs so we can tailor a solution to meet its specific requirements.
The sales force for each country representative applies its knowledge of the
local operating, regulatory and market conditions to market our service
offerings effectively to best meet the needs of the local client base. In
addition, we provide centralized sales and marketing support for our country
representatives. We conduct sales training centrally and within each sales
region and use computerized training to reinforce classroom training. Direct
sales channels accounted for approximately 90% of our revenues in the year
ended March 31, 1999.
Alternate Sales Channels
Our global alternate sales structure is typically comprised of major
telecommunications companies and other value-added resellers. These sales
channel partners sell all or a portion of our suite of services in their
territories to clients that require one or more of our global network
communications services that the sales channel partners cannot supply
independently. Our sales channel partners often market these services under
their own brand names. We act as the "carrier's carrier" and/or as the product
development resource, providing global services to meet the sales channel
partners' specific needs. Multi-year contracts govern these relationships.
Alternate sales channels accounted for approximately 10% of our revenues in the
year ended March 31, 1999. The following are examples of our alternate sales
channel relationships:
. AT&T offers our services outside the U.S. to its U.S.-based clients.
AT&T also offers global access to the AT&T InterSpan Frame Relay
service using our Frame Relay dial-up and dedicated connectivity;
. MCI WorldCom has an agreement that allows it to offer global services
to its U.S. customers in those countries where MCI WorldCom has no
coverage; and
. Telstra, one of our stockholders and a leading telecommunications
provider, has entered into an agreement with us which allows it to
extend its global reach beyond Australia through The World Network.
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Promotion and Advertising
We recognize that strong brand development and awareness is crucial in
obtaining and maintaining market share. Our promotional and advertising
programs include participation in business seminars and information technology
information/training sessions as well as advertising in selected network
computer publications.
In 1999, we began a new global campaign to increase awareness of the
Infonet brand name and our service offerings. This campaign includes increased
spending on direct advertising, advertising in airports, major U.S. and
European newspapers, business magazines, trade magazines and inflight
magazines, as well as participation in trade shows and Internet marketing
campaigns.
Access to Multinational Corporate Clients of KPN, Swisscom and Telia
In our ongoing efforts to sell our services to multinational
corporations, on September 30, 1999, we entered into agreements with AUCS
Communications Services N.V., Unisource, the owner of AUCS, and the three
companies that own Unisource, KPN, Swisscom and Telia. KPN, Swisscom and Telia
are also our stockholders. See "Principal and Selling Stockholders."
Our agreements with KPN, Swisscom and Telia will give us access to their
approximately 1,300 multinational corporate clients currently being served by
AUCS as well as additional multinational clients to which KPN, Swisscom and
Telia may provide services in the future. We believe these agreements will
increase the number of multinational corporate clients to which we may offer
our services. In exchange for the right to market our services to their clients
and $40.0 million in cash, we have issued an aggregate of 47.84 million shares
of our Class B common stock to KPN, Swisscom and Telia under stock purchase
agreements.
These multinational clients represented approximately 50% of AUCS
revenues over the past two years. We understand that no single multinational
client accounted for more than approximately 3% of AUCS revenues in 1998 and
that the top ten multinational clients accounted for approximately 15% of AUCS
revenues in 1998. Based on publicly available information, AUCS total
consolidated revenues for the 1998 calendar year were 875 million guilders, or
approximately $441 million according to the exchange rate on October 1, 1999.
AUCS total revenues include amounts derived from AT&T customers serviced by
AUCS, but we will not obtain access to these clients. In addition, AUCS
revenues include voice and other services that we provide on a limited basis or
not at all. Because it is not possible to predict the multinational clients'
future needs, the multinational clients' contribution to AUCS total revenue is
not indicative of any contribution they may make to our revenues.
We have assumed the obligation to provide the multinational clients with
the services currently provided to them by AUCS under the terms of an agreement
that assigns existing distribution agreements to us. We also intend to sell
these multinational clients our services as a supplement or replacement for
services previously provided by AUCS and, over time, we expect to transition
the multinational clients onto The World Network. During the transition period,
we will continue to use the AUCS platform to deliver all or some of the
services provided to the multinational clients, which for convenience we refer
to as the AUCS services.
We will obtain the AUCS services to be provided to the multinational
clients under the terms of a services agreement with AUCS, which is based on
our standard services agreement. The pricing of the AUCS services provides us
with an agreed-upon approximately 20% gross margin on the provision of these
services. The services agreement is terminable upon 180 days' notice by any
party.
We also entered into a call option for the underlying tangible assets of
AUCS. Until September 2002, the option allows us to purchase any and all of the
AUCS tangible assets at fair market value not to exceed $130 million. The call
right allows us to purchase the assets of AUCS so that we can continue to offer
the AUCS services to our clients if the services agreement is terminated. The
call option may be subject to regulatory approval and is conditioned upon AUCS
ability to continue to fulfill its contractual obligations to third parties.
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While we will attempt to transition the multinational clients to The
World Network as soon as possible, we expect the transition will be implemented
over a period of 12 to 18 months. Since we already have The World Network, an
existing sales and marketing force and other elements necessary to service
these multinational clients, we believe our infrastructure will be sufficient
to transition these clients. We have not purchased any assets from AUCS, and we
will not obtain the right to use the AUCS sales force or employees.
The percentage of total revenues from the multinational clients
attributable to AUCS services and to our services is expected to vary depending
on the degree of the transition's success and the time necessary to transition
the multinational clients to The World Network. If the transition is not
effected quickly, the revenues attributable to AUCS services will remain a
larger percentage of our total revenues from the multinational clients than
that attributable to our services. As the transition is completed, and assuming
that the multinational clients continue as our clients after the transition,
the percentage of our total revenues attributable to our services, as compared
to that attributable to AUCS services, will correspondingly increase. Since the
multinational clients have no obligation to use our services, we cannot assure
you that all of the multinational clients will transition to our network, that
the multinational clients which do transition to our network will continue to
purchase our services or, if they continue to use our services after the
transition, that the multinational clients will purchase as many or more
services from us than they did from AUCS.
AUCS Management Agreement
We also entered into a three-year management agreement with AUCS on
September 30, 1999. For our management services, we will receive a quarterly
management fee equal to 1.5% of the total consolidated revenues of AUCS, up to
an aggregate maximum of (Euro)17.1 million, or $18.3 million as of October 7,
1999, over the term of the agreement. In addition, we will receive an incentive
payment equal to 100% of the amount by which the cumulative sum of AUCS EBITDA
losses during the initial three-year term is less than approximately
(Euro)295.3 million, or $316.9 million, or we must rebate to AUCS 25% of the
aggregate amount by which the cumulative sum of AUCS EBITDA losses during the
initial three-year term exceeds (Euro)295.3 million, or $316.9 million, subject
to a cap equal to the aggregate management fee. AUCS owner, Unisource, has the
right to terminate the agreement on 180 days' notice generally and 30 days'
notice if the cumulative EBITDA losses of AUCS exceed approximately
(Euro)368.3 million or $395.2 million during the three-year term of the
management agreement. From its formation in 1996 to December 31, 1998, AUCS
cumulative EBITDA losses were approximately $409 million. While we expect that
our management will improve the performance of AUCS during the three-year term
of the management agreement, we cannot assure you that AUCS losses
will decrease, that we will receive any incentive fee or that we will not have
to rebate all or part of our management fee.
Industry Participants and Competition
The growth and potential size of the data communications industry has
attracted many new entrants as well as existing businesses from several
industries. Current and prospective industry participants include multinational
alliances, long distance and local telecommunications providers, systems
integrators, cable television and satellite communications companies, software
and hardware vendors, wireless telecommunications providers and national, local
and regional ISPs. In addition, we expect that the predicted growth of the data
communications market will attract other established companies and
multinational alliances. Further, there are established and start-up companies
building global networks and beginning to offer data communications as part of
a comprehensive communications services portfolio. Our competitors include
AT&T, BT, Equant, GlobalOne and MCI WorldCom and new entrants such as Global
Crossing and Qwest. We compete in highly fragmented markets. Most participants
specialize in specific segments of the market, such as access and/or backbone
provision, managed access, such as intranets and extranets, application
services such as Web hosting; security services, and communication services,
such as IP-based voice, fax and video services and commercial e-mail. Many of
these existing and potential competitors have greater financial resources than
we do.
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We believe that competition in the data communication market is mainly a
function of the ability to offer a broad variety of innovative services
available on a reliable network supported by an effective service organization.
We believe that the key factors to our competitive position in this market are:
. our global reach;
. our full range of value-added services;
. the reliability of our extensive global network; and
. our extensive country representative structure and the support it
provides to our clients.
Employees
As of September 30, 1999, including our consolidated country
representatives, we had a total of approximately 857 employees, 227 of which
are located internationally. There are approximately 456 additional dedicated
Infonet personnel who are employed by our non-consolidated country
representatives, all of whom are based internationally. We have not experienced
any work stoppages and consider our relations with employees to be good. None
of our employees is represented by a labor union.
Facilities
Our principal offices currently occupy over 107,000 square feet in El
Segundo, California pursuant to a long term lease which expires in November
1999 and then continues on a month-to-month basis at our option. We have
entered into a lease for approximately 150,000 square feet of new office space
in an adjacent building currently under construction. This new building is
being constructed to our specifications and is expected to be completed in
December 1999. We have a 90-day option beginning on November 19, 1999 to
purchase the building for approximately $33.0 million. Any purchase would be
funded from general corporate funds and may be augmented by a mortgage. Once
complete, this new building will also house our Los Angeles Network Control
Center.
In addition, we lease sales offices domestically and internationally in a
variety of locations. These leases generally have terms of three to five years.
None of these offices is critical to our success, and we believe that suitable
additional or alternative space is available on commercially reasonable terms
as needed.
We also lease facilities for our network control centers, global customer
assistance centers and engineering offices around the world. We lease these
facilities at commercial rates under standard commercial leases. We believe
that suitable space for these operations is generally available on commercially
reasonable terms as needed.
Legal Proceedings
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this prospectus, we
are not a party to any litigation that we believe could reasonably be expected
to have a material adverse effect on our business, financial condition or
results of operations and we have not been involved in any litigation of that
kind in the past three years.
Regulation in the United States
Overview
We operate as an unregulated provider of information services, as that
term is defined in the Communications Act of 1934, as amended, and as an
enhanced service provider, as that term is defined in the Federal
Communications Commission ("FCC") rules. The FCC currently does not regulate
the data communications systems we operate in the United States because our
special services features enhance the basic data transmission facilities
offered to clients by connecting them to data switches or processors. These
networks generally are referred to as value-added networks and are targeted to
the data transfer requirements of
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the specific clients. The FCC also does not regulate value-added services such
as voicemail, facsimile, database access, storage and retrieval services,
store-and-forward messaging services, network management services, and Internet
access, which are not encompassed in the FCC's definition of "basic
telecommunications services" and which we refer to as enhanced services.
Collectively, these services are classified for regulatory purposes as
"information services." In most foreign jurisdictions we operate as a value-
added network provider. Our operations currently are not regulated by the FCC,
the states or the governments in the other countries where we operate. Although
we do not operate as a common carrier, we hold authorizations to provide
international services in some countries on a common carrier basis. We have
obtained common carrier authorizations only in those countries in which such
authorizations are useful in securing more favorable terms in our capacity or
facilities leases or interconnection arrangements. These authorizations require
us to comply with specified regulatory filing and reporting requirements. To
the extent that we begin to offer regulated telecommunications services as a
common carrier, we will become subject to additional rules and policies.
Various existing U.S. federal and state regulations are currently the
subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which the
telecommunications industry operates. In addition, some foreign governments are
actively considering regulation of some of the services we offer. We cannot
predict the outcome of these proceedings, or the impact they may have on the
telecommunications or information services industries generally, or on us
particularly. In addition, we cannot assure you that future legislative,
regulatory or judicial changes in the United States or in other countries in
which we operate will not have a material adverse impact on our business.
FCC Policy on Enhanced Services
In 1980, the FCC created a distinction between "basic" services, which it
regulates as common carrier services, and enhanced services, which remain
unregulated. The FCC exempted enhanced service providers from federal
regulations governing common carriers, including the obligation to pay access
charges and contribute to universal service. The Telecommunications Act of 1996
established a similar distinction between "telecommunications services" and
"information services." Changing technology and changing market conditions,
however, have made it increasingly difficult to discern the boundary between
unregulated and regulated services.
In general, information services are value-added services that provide
access to regulated transmission facilities only as part of a services package
which also uses network or computer software to change or enhance the
information transmitted. We believe the services we provide come within this
definition. Because the regulatory boundaries in this area are unclear and
subject to dispute, however, the FCC could seek to characterize some or all of
our services as "telecommunications services." If that happens, our services
would become subject to FCC regulation, although the impact of that
reclassification is difficult to predict. In general, the FCC does not regulate
the rates, services, and market entry and exit of non-dominant carriers, but
does require them to contribute to universal service and comply with other
regulatory requirements.
U.S. Licenses
Although we do not currently provide regulated telecommunications
services, we are authorized under Section 214 of the Communications Act of
1934, as amended, to provide global switched, data, voice, value-added and
private line services on a common carrier basis. We received authorization to
provide these services as a facilities-based common carrier in January 1999 and
to provide these services as a reseller in July 1999. We obtained these
licenses because we believe they allow us to procure the facilities and
capacity we need between the U.S. and foreign points under more favorable terms
and at lower cost than we could otherwise obtain. Although we do not currently
provide regulated telecommunications services, our FCC licenses subject us to
certain reporting and filing requirements.
FCC Regulatory Requirements
As noted above, our operation of networks does not currently subject us
to regulation in the U.S. either at the federal or state level. As an
authorized international common carrier, however, we are regulated by the FCC.
In
55
<PAGE>
the United States, authorized international carriers are subject to various
annual reporting requirements as a condition of their licenses. Each year, we
must submit data to the FCC concerning our international traffic as well as the
status of our international circuits. We must also file an annual employment
report to comply with the Commission's Equal Employment Opportunity policies.
International common carriers are also required to file a tariff containing the
rates, terms and conditions applicable to their services before initiating
international telecommunications services. If we fail to maintain proper
federal tariffs or certifications, or if there is any finding by the FCC that
we are not operating under permissible terms and conditions, this may result in
an enforcement action against us or an investigation, either of which could
impose upon us substantial penalties, including the loss of our licenses to
provide telecommunications services.
If we begin providing interstate, international telecommunications
services on a common carrier basis, we will be required to file additional
reports concerning our interstate and international traffic revenues. We also
may be required to contribute a percentage of these revenues to governmental
funds including Universal Service, Telecommunications Relay Service, Number
Portability, and the administration of the North American Numbering Plan. We
will also be subject to annual regulatory fees assessed by the FCC.
FCC Policies Applicable to Regulated International Traffic
If we begin to operate as a common carrier, we will be required to comply
with additional FCC policies governing international common carriers. For
example, the FCC requires carriers such as us to report "significant
affiliations," as defined by the FCC, with global carriers that have market
power in the countries in which we operate. In addition, the FCC administers a
variety of international service regulations, including the international
settlements policy. The international settlements policy governs the
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating traffic over each other's networks, as well as the accounting
rates for settlement. The FCC has considerably relaxed this policy in its
implementation of the 1997 World Trade Organization Agreement on Basic
Telecommunications ("WTO Agreement"), which went into effect in January 1998.
Representing 90% of worldwide telecommunications traffic, the 72 signatory
countries to the WTO Agreement agreed to open their telecommunications markets
to competition and foreign ownership. We believe that this agreement, and its
implementation by the signatory countries, will provide us with significant
opportunities to compete in markets in which we did not previously have access,
and to provide end-to-end facilities-based services to and from these
countries.
The regulatory requirements that may affect our operations continue to
evolve as a result of the WTO Agreement, federal legislation, court decisions
and new and revised policies of the FCC. In particular, the FCC continues to
refine its international service regulations in order to promote competition,
to reflect and encourage deregulation in foreign countries and to reduce
international accounting rates toward cost. Among other things, these changes
may increase competition and alter our ability to compete with other similar
service providers or to introduce new services. Any change in applicable
regulatory requirements may have an impact on our operations in a way that we
cannot predict.
Regulation in Non-U.S. Markets
Although most countries impose little or no regulation on our network
operations, the laws and regulations governing our services are under review in
many countries outside the U.S. and are subject to change. Consistent with our
strategy of obtaining licenses or authorizations to provide regulated services
when we are able to obtain more favorable facilities or capacity lease terms or
interconnection arrangements, we have obtained facilities-based authorization
to provide telecommunications services in the United Kingdom. We anticipate
filing requests for authorization in several other countries as well. In some
countries we are able to obtain the more favorable arrangements we seek simply
by notifying the relevant government authority that we intend to operate on a
common carrier basis. In other countries, we are engaging in discussions with
foreign regulators to determine whether we must apply for authorization in
order to acquire or lease facilities or interconnect with other carriers.
56
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth, as of December 1, 1999, the name, age and
position of our directors, executive officers and other key employees.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jose A. Collazo 55 President, Chairman of the Board of
Directors
Ernest U. Gambaro 61 Senior Vice President and Secretary,
General Counsel
Akbar H. Firdosy 53 Vice President and Chief Financial
Officer
John C. Hoffman 53 Executive Vice President of
Communications Sales & Service
Michael J. Timmins 47 Executive Vice President of Global
Business Development
Thomas E. Whidden 53 Vice President of Marketing
John M. Williams 52 Vice President of Network Services
Douglas Campbell(3) 60 Director
Eric M. de Jong(2) 51 Director
Morgan Ekberg(1) 54 Director
Masao Kojima(2) 51 Director
Joseph Nancoz(1) 51 Director
Rafael Sagrario(3) 55 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit and Finance Committee.
(3) Member of the Quality Assurance Committee.
Jose A. Collazo has served as our President and Chairman of the Board of
Directors since our founding in 1988. From 1967 to 1988, Mr. Collazo held
several management positions at Computer Sciences Corporation, or CSC,
including President of the International Division and head of global network
services. Mr. Collazo is on the Pepperdine University Board of Regents.
Dr. Ernest U. Gambaro is a Senior Vice President and has served as our
General Counsel and Secretary since our founding in 1988. From 1980 to 1988,
Dr. Gambaro was Assistant General Counsel of CSC. Dr. Gambaro also is a
director of STM Wireless, Inc., a satellite networking equipment and services
company.
Akbar H. Firdosy has served as our Vice President and Chief Financial
Officer since 1995. From 1988 to 1995, Mr. Firdosy served as our Controller.
Mr. Firdosy has been with us since our founding in 1988.
John C. Hoffman has served as our Executive Vice President Communications
Sales & Service since 1991. Mr. Hoffman also serves as president of our wholly
owned subsidiary, ESG Communications Inc. Mr. Hoffman has been with us since
our founding in 1988 and from 1983 to 1988 held several positions at CSC.
Michael J. Timmins has served as our Executive Vice President of Global
Business Development since 1995. From 1993 to 1995, he served as our Vice
President of Global Business Development. Mr. Timmins has been with us since
our founding in 1988.
57
<PAGE>
Thomas E. Whidden has served as our Vice President of Marketing since
December 1997. From July 1994 to December 1997 he served as our President of
International Sales. Prior to that time, he held various positions in our
European operations and Network Services.
John M. Williams has served as our Vice President of Network Services
since 1999. From 1992 to 1998, Mr. Williams was our Director of Network
Operations, the Vice President of Services Integration and Management for our
subsidiary, Government Systems, Inc., and from 1998 to 1999 was Senior Vice
President of the Communication Systems Division of our country representative,
CACI, Inc.
Douglas Campbell has been a member of our board of directors since 1999.
He is currently the Group Managing Director--Wholesale & International of
Telstra Corporation, a position he has held since 1998. From 1993 to 1998, he
served as Group Managing Director--Network & Technology of Telstra.
Eric M. de Jong has been a member of our board of directors since 1999.
Since 1996, he has served as the Director--Partnership Management of KPN
International. Prior to this time, he was Director of Strategy and a Project
Director of KPN in charge of the telecommunications development of the
Amsterdam airport area.
Morgan Ekberg has been a member of our board of directors since 1997. He
is currently an Executive Vice President and Head of Asia, Africa and Latin
America with Telia. Also during 1999, he served as Executive Vice President and
Head of Business Area Systems and Solutions with Telia AB and Deputy Head of
and Chief Operating Officer of Telia Business Solutions. From 1995 through
1998, Mr. Ekberg served as Deputy Head of and Chief Operating Officer of Telia
Telecom AB and prior to 1995 he was the Head of Telecom Services Division with
Telia, which was Swedish Telecom.
Masao Kojima has been a member of our board of directors since 1998. He
is currently a Senior Deputy Director, Network Business Department, of KDD, a
position he has held since 1999. From 1997 to 1999, Mr. Kojima served as Deputy
Director, Telecommunications Business Department, of KDD. From 1996 to 1997,
Mr. Kojima served as General Manager, Network Division of KDD. From 1995 to
1996, Mr. Kojima served as Deputy Director, Network System Development
Department of KDD. From 1993 to 1995, Mr. Kojima served as Manager, Network
Quality, Network Operations & Administration Department, of KDD.
Joseph Nancoz has been a member of our board of directors since 1989.
Since 1994, he has been the Chairman of the Board of Directors of Infonet
Switzerland, our country representative for Switzerland and a subsidiary of
Swisscom. Since 1998 he has held various positions in Swisscom's Products and
Services division. He was director of Swisscom's Key Accounts and Multinational
Corporations division from 1993 to 1998.
Rafael Sagrario has been a member of our board of directors since January
1999. He is currently the Operations General Manager of Telefonica Data. From
1995 to 1997, he served as the President of Telefonica Transmision de Datos.
From 1998 to February 1999, he served as Sole Administrator of Telefonica
Transmision de Datos.
Directors' Terms
Members of our board of directors currently hold office and serve until
our next annual meeting of stockholders, or until their respective successors
have been elected. Our board of directors is currently comprised of seven
directors and we expect to add one additional independent member to our board
of directors within 90 days and a second independent member to our board of
directors within one year after the consummation of this offering. At each
annual meeting of stockholders, the successors to directors whose term will
then expire will be elected to serve until the next annual meeting of
stockholders. In addition, our restated certificate of incorporation provides
that the authorized number of directors will be between seven and twelve, with
the exact number to be determined by a majority of our board of directors. Our
directors may be removed, with or without cause, by the affirmative vote of the
holders of two-thirds of the shares entitled to vote at an election of
directors. There are no family relationships among any of our directors and
executive officers.
58
<PAGE>
Committees of the Board of Directors
The Audit and Finance Committee of our board of directors was established
in 1988 and reviews, acts on and reports to our board of directors with respect
to various auditing and accounting matters, including the recommendation of our
independent auditors, the scope of the annual audits, fees to be paid to the
independent auditors, the performance of our independent auditors and our
accounting practices. The members of the Audit and Finance Committee are
Messrs. de Jong and Kojima and we intend to add one of the two additional
independent members to this committee within 90 days after the consummation of
this offering.
The Compensation Committee of our board of directors was established in
1988 and determines the salaries, benefits and stock option grants for our
employees, consultants and directors. The members of the Compensation Committee
are Messrs. Ekberg and Nancoz. The members of the Compensation Committee also
serve as our Stock Plans Committee. The Stock Plans Committee oversees the
administration of our employee stock option plans.
The Quality Assurance Committee of our board of directors was established
in 1994 and reviews, acts on and reports to our board of directors with respect
to the operation of our systems and the provision of services to our clients.
The members of the Quality Assurance Committee are Messrs. Campbell and
Sagrario.
Director Compensation
Directors receive approximately $1,130 per board of directors meeting and
approximately $565 per meeting of committees of the board of directors. All
directors are reimbursed for their out-of-pocket expenses in serving on the
board of directors or any committee thereof. In addition, we plan to provide
our non-employee directors with stock options under our 1999 Stock Option Plan.
Each option grant to a non-employee director under our 1999 Stock Option Plan
will vest equally over a three year period.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee serves as a member of the board
of directors or the compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. See "Related Party Transactions" for a description of
transactions between Infonet and entities affiliated with members of the
compensation committee.
Employment and Other Agreements
We have entered into employment agreements with Mr. Collazo, Mr. Firdosy
and Dr. Gambaro. These agreements become effective as of January 1, 2000 and
have three year terms which automatically renew in two year increments unless
notice is given not later than 24 months prior to the expiration date of each
term. The salary to be received by each of Messrs. Collazo and Firdosy and Dr.
Gambaro is his base salary in effect as of January 1, 2000 and will be reviewed
annually in accord with our salary review policies. Each will be eligible to
participate in all benefit programs we offer.
Each of the employment agreements may be terminated by us or the
respective executive without further obligation on the part of either party if
we terminate the executive for cause or if the executive resigns for other than
good reason, as those terms are defined in the agreements.
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<PAGE>
If any of Messrs. Collazo or Firdosy or Dr. Gambaro is terminated without
cause or resigns for good reason, then he would:
. be entitled to receive, for a period of two years or until the
expiration of his term of employment, whichever is longer, separation
payments equal to his average total cash compensation received during
the 12 month period immediately preceding the termination or
resignation date and his benefits,
. be entitled to accrue benefits during the severance period; and
. be subject to a limited non-compete clause for the term of the
severance period.
In the event of a change of control, Messrs. Collazo and Firdosy and Dr.
Gambaro would have identical rights to the ones described in the first two
bullet points above.
All of our other executive officers are appointed annually and serve at
the discretion of the board of directors.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to our chief executive officer and our four other most highly compensated
executive officers whose annual salary and bonus exceeded $100,000 in 1999 (the
"Named Executive Officers") for services rendered in all capacities to us
during our 1999 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
Name and Principal Fiscal ------------------- Underlying All Other
Position Year Salary Bonus Options Compensation (1)
- ------------------ ------ ------------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Jose A. Collazo,
President and Chairman
of the Board.......... 1999 $ 353,998 $ 297,358 -- $378,710
Ernest U. Gambaro,
Senior Vice
President, Secretary
and General Counsel... 1999 199,222 167,346 -- 188,813
Akbar H. Firdosy, Vice
President and Chief
Financial Officer..... 1999 162,048 136,120 269,100 3,531
John C. Hoffman,
Executive Vice President
of Communications Sales
& Service.............. 1999 194,365 147,450 -- 75,486
Michael J. Timmins,
Executive Vice
President of Global
Business Development.. 1999 127,957 252,878 -- 58,831
</TABLE>
- --------
(1) All other compensation includes imputed income in connection with payments
under auto allowances, financial planning services, club expenses, life
insurance and executive retirement plan values for the named executive
officers.
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<PAGE>
Option/SAR Grants In Last Year
We granted the following stock options to Mr. Firdosy in the year ended
March 31, 1999. We did not grant any stock appreciation rights to the Named
Executive Officers in the year ended March 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
% of Total Stock Option Appreciation
Number of Shares Options Granted for Option Term
Underlying Options to Employees Exercise Expiration --------------------------
Name Granted in Fiscal Year Price ($/share) Date 5% 10%
- ---- ------------------ --------------- --------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jose A. Collazo......... -- -- --
Ernest U. Gambaro....... -- -- --
Akbar H. Firdosy........ 269,100 7.26% $0.84 10/20/04 $ 6,934,845 $ 8,749,560
John C. Hoffman......... -- -- --
Michael J. Timmins...... -- -- --
</TABLE>
There was no public trading market for our Class B common stock as of
March 31, 1999. Accordingly, these values have been calculated on the basis of
the initial public offering price of $21.00 per share, less the applicable
exercise price per share, multiplied by the number of shares underlying these
options.
Employee Benefit Plans
1998 Stock Purchase Plan
Our board of directors adopted a stock purchase plan, effective as of
October 20, 1998. The plan provides all employees designated by our board of
directors the ability to purchase shares of our Class B common stock. The plan
is administered by the compensation committee of our board of directors. No
shares of stock purchased under the plan are transferable until we have
effected an initial public offering.
In April 1999, we sold approximately 9.44 million shares of our Class B
common stock to our key employees pursuant to our 1998 Stock Purchase Plan. In
accordance with the provisions of the Stock Purchase Plan, some employees
purchased their shares for cash and other employees received their shares in
exchange for a secured, recourse promissory note held by us. Each share was
sold for $0.84, which price was set by the pricing formula at the time of the
sales. We do not intend to offer any more shares for purchase under this plan.
1998 Stock Option Plan
In October 1998, we adopted our 1998 Stock Option Plan. The specific
terms of the options issued is to be determined at the time of issuance by the
compensation committee of our board of directors. The exercise price for shares
issued under the plan may be no less than the value of the shares determined by
a pricing formula based on a multiple of our consolidated historic revenues.
Shares of stock purchased under the plan may not be traded or exchanged prior
to our initial public offering. The plan terminates on October 20, 2008, unless
terminated earlier pursuant to its terms.
In April 1999, we issued options to purchase approximately 3.71 million
shares of our Class B common stock to 29 employees under our 1998 Stock Option
Plan. Each option was evidenced by an option agreement. The exercise price for
each option is $0.84 per share. Each option award vests in 20% portions on
December 31 of each year from 1999 to 2004. All shares of our Class C common
stock will convert automatically into Class B common stock upon the
consummation of this offering.
1999 Stock Option Plan
In November 1999, we adopted our 1999 Stock Option Plan. The plan
provides for the issuance of options related to our Class B common stock to our
directors, employees and consultants. We may not issue more than 10.61 million
shares of our Class B common stock under the plan.
61
<PAGE>
The specific terms of any options issued under the plan will be
determined at the time of issuance by a committee appointed by our board of
directors administering the plan. The exercise price for options issued under
the plan will generally be based on or higher than the trading price of the
Class B common stock at the time the options are issued.
Options granted under the plan will vest over three or five years,
depending on the individual grant, in equal increments on the anniversaries of
the grant dates. Options granted under the plan will vest automatically upon a
change of control. The plan terminates in December 2009, unless terminated
earlier pursuant to its terms.
Pension Plan
Our pension plan is a contributory defined pension plan in which
substantially all of our domestic employees are eligible to participate. The
pension benefits received by a retiring employee are calculated by multiplying
the employee's total eligible compensation by 2.25%. Eligible compensation
consists of base compensation plus nondiscretionary bonuses and commissions.
Compensation deferred under the Infonet Deferred Income Plan, income related to
the 1998 Stock Option Plan, reimbursements, fringe benefits or other forms of
special pay are not eligible compensation.
As of March 31, 1999, Jose A. Collazo, Ernest U. Gambaro, Akbar H.
Firdosy, John C. Hoffman and Michael J. Timmins, upon retirement at age 65,
would be entitled to annual retirement benefits of $46,621, $46,384, $15,547,
$18,762, and $20,924.
Supplemental Executive Retirement Plan
We also have a Supplemental Executive Retirement Plan, or SERP, which is
a non-qualified, non-contributory pension plan. Our SERP is a defined benefit
retirement plan for specified key officers and executives and provides for
benefits based on years of service, the age of the participant, and the
participant's average compensation during his or her final period of employment
under the SERP.
Stock Appreciation Rights Plan
The stock referred to in the SARs Plan is our Class B common stock. The
SARs vest at 25% per year over four years with the first quartile vesting on
January 1, 2001. The SARs Plan terminates on October 20, 2004 or earlier if
specified conditions of the SARs Plan have been fully met.
Deferred Income Plan
The Infonet Deferred Income Plan, or IDIP, is a nonqualified deferred
income plan for employees earning over a prescribed amount. Participants may
defer receipt of compensation, which is held by us in trust and is invested in
accordance with the participants' directions.
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<PAGE>
RELATED PARTY TRANSACTIONS
Stockholders Agreement
Immediately prior to the consummation of this offering, we expect to
enter into a stockholders agreement with all of our Class A stockholders. This
stockholders agreement provides that each Class A stockholder holding at least
14.95 million shares of our Class A common stock will have the right to
designate one of our directors, and each Class A stockholder will agree to vote
all of its shares of common stock in favor of the directors designated by the
other Class A stockholders and for our president as a director. Accordingly,
seven of the nine directors on our board will be appointed by our Class A
stockholders. Each Class A stockholder will have a right of first refusal to
acquire any Class A common stock proposed to be sold or otherwise transferred
by another Class A stockholder. We will agree in the stockholders agreement to
include, at the request of any Class A stockholder, shares of that Class A
stockholder in a registered offering of stock by us or another Class A common
stockholder through provisions commonly referred to as piggyback registration
and, subject to limitations, to undertake up to two registered offerings of
Class B common stock upon demand by each Class A stockholder up to a maximum of
two per year but only one in the first year following this offering. Each Class
A stockholder will agree to maintain a country representative to support our
marketing efforts and our clients in that stockholder's home country.
Commercial Contracts with Related Parties
Some of our country representatives are related parties where either
(1) we hold more than twenty but less than fifty percent ownership interest or
(2) a country representative is owned, directly or indirectly, by one of our
stockholders. In each such case, our agreement with the related party acting as
our country representative is our standard service agreement. Each service
agreement has a term of four or five years, and gives the country
representative the right to sell our services and use our trademarks, marketing
and operating documentation and our training materials and services. In the
agreements, we receive the right to set revenue targets, terminate the
agreement if the revenue targets are not met, jointly determine staffing of the
country office with the country representative and appoint members of the
country representative's advisory review board. The agreements outline monthly
fees the country representatives pay us for access to our network and the fees
we pay the country representatives for the service and customer support.
Additionally, we have alternate sales channel agreements with some of our
stockholders that allow these stockholders to resell our services under their
brand names or to package them with other services they provide to their
customers. These alternate sales channel agreements are generally under the
same terms as alternate sales channel agreements we enter into with other
communications providers. For the year ended March 31, 1999, $88.3 million of
total revenues were generated by all of these related parties and $40.0 million
of total country representative compensation resulted from a related party
acting as our country representative.
From time to time we lease transmission capacity from our stockholders
where they are existing local carriers. These leases are short term and at
tariff rates in regulated markets and at standard market rates in unregulated
markets.
Recent Contracts with our Stockholders
We recently entered into a number of agreements with our stockholders,
KPN, Swisscom and Telia, as well as a number of their affiliates. As part of
the agreements, our stockholders have agreed to indemnify us and we have agreed
to indemnify them for certain breaches of representations and warranties. For
additional information, please read the sections entitled "Business--Access to
Multinational Corporate Clients of KPN, Swisscom and Telia" and "Business--AUCS
Management Agreement," as well as the applicable risks disclosed in our "Risk
Factors."
Loans to our Senior Management
In connection with our 1998 Stock Purchase Plan, several members of our
management team borrowed the purchase price for their stock pursuant to terms
of the plan. Persons borrowing from us entered into loan, pledge and security
agreements. In addition, the loan is full recourse to the borrower. Each loan
is at an annual interest rate of five percent. The amounts loaned to each
officer were: Jose A. Collazo, $3,325,000; Ernest U. Gambaro, $1,400,000; Akbar
H. Firdosy, $450,000; John C. Hoffman, $750,000; Michael J. Timmins, $750,000;
Thomas E. Whidden, $475,000; and John M. Williams, $75,000.
We have loaned $100,000 to John C. Hoffman in connection with Mr.
Hoffman's purchase of a club membership which he uses for business-related
facilities and entertainment. Mr. Hoffman has executed a promissory note for
the full amount of the loan. The note is payable on demand and is secured by
some of Mr. Hoffman's assets.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of November 20, 1999 with
respect to the beneficial ownership of our common stock, and as adjusted to
reflect the sale of the shares of Class B common stock in the offering, by (1)
each person (or group of affiliated persons) known by us to beneficially own 5%
or more of our common stock, (2) each of our directors and Named Executive
Officers and (3) all of our directors and executive officers as a group. Unless
otherwise set forth herein, the street address of the named beneficial owner is
2160 East Grand Avenue, El Segundo, California 90245-1022.
<TABLE>
<CAPTION>
Prior to this Offering (1) This Offering After this Offering
---------------------------------------------------------- ------------------ -------------------------
Shares of Class B
common stock
Shares of Class A Shares of Class B Shares of Class A and being sold in Shares of Class A and
Common Stock Common Stock Class B Common Stock this offering(2) Class B Common Stock
----------------- ----------------- --------------------------- ------------- -------------------------
Percent Percent
of Total of Total
Voting Voting
Beneficial Owner Number Number Number Power Number Number Power
---------------- ----------------- ----------------- ------------- --------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
KDD
Corporation(3)(4)..... 26,877,588 38,229,542 65,107,130 15.7 4,871,800 60,235,330 15.2
KDD Bldg. P.O. No. 1
3-2, Nishishinjuku 2
Chome Shinjuku-Ku,
Tokyo 163 Japan
KPN Telecom B.V.(4).... 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Telecomplein 5
2516 CK The Hague
The Netherlands
Swisscom AG (4)........ 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Alte Tiefenaustrasse 6
CH-3048 Worblaufen
Switzerland
Telefonica
International Holding
B.V.(4)............... 28,918,263 41,131,935 70,050,198 16.9 1,410,300 68,639,898 16.5
Beatriz de Bobadilla,
18
28040 Madrid, Spain
Telia AB(3)(4)......... 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Vitsandsgatan 9, House
D
S-123 86 Farsta, Sweden
Telstra Corporation
Limited............... 28,442,375 -- 28,442,375 16.6 2,307,700 26,134,675 13.1
Level 14
231 Elizabeth Street
Sydney NSW 2000
Australia
Jose A. Collazo........ -- 3,976,700 3,976,700 * -- 3,976,700 *
Ernest U. Gambaro...... -- 1,674,400 1,674,400 * -- 1,674,400 *
Akbar H. Firdosy....... -- 592,020 592,020 * -- 592,020 *
John C. Hoffman........ -- 897,000 897,000 * -- 897,000 *
Michael J. Timmins..... -- 897,000 897,000 * -- 897,000 *
Thomas G. Whidden...... -- 568,100 568,100 * -- 568,100 *
John M. Williams....... -- 89,700 89,700 * -- 89,700 *
Douglas Campbell....... -- -- -- -- -- -- --
Eric M. de Jong........ -- -- -- -- -- -- --
Morgan Ekberg.......... -- -- -- -- -- -- --
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Prior to this Offering (1) This Offering After this Offering
------------------------------------------------------------- ----------------- -------------------------
Shares of Class B
common stock
Shares of Class A Shares of Class B Shares of Class A and being sold in Shares of Class A and
Common Stock Common Stock Class B Common Stock this offering(2) Class B Common Stock
----------------- ----------------- ---------------------- -------------------- -------------------------
Percent of Percent
Total of Total
Voting Voting
Beneficial Owner Number Number Number Power Number Number Power
---------------- ----------------- ----------------- ------------- ----------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Masao Kojima......... -- -- -- -- -- -- --
Joseph Nancoz........ -- -- -- -- -- -- --
Rafael Sagrario...... -- -- -- -- -- -- --
All directors and
executive officers
as a group (13
persons)............ -- 8,694,920 8,694,920 * -- 8,694,920 *
</TABLE>
- --------
* Less than 1% of total.
(1) Gives effect to the shares of Class B common stock issuable within 60 days
of the closing of this offering upon the exercise of all options and other
rights beneficially owned by the indicated stockholders on that date.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, or SEC, and includes voting and
investment power with respect to shares. Unless otherwise indicated, the
persons named in the table have sole voting and sole investment control
with respect to all shares beneficially owned.
(2) Does not reflect any exercise of the underwriters' over-allotment option.
If that option is exercised in full, each selling stockholder would sell
approximately 1.28 million more shares of Class B common stock.
(3) Under an agreement between Telia and KDD entered into in November 1999,
Telia has agreed to buy 5,531,500 shares of our Class A common stock and
5,531,500 shares of our Class B common stock from KDD. This transaction is
subject to the other Class A stockholders' right of first refusal, approval
by each of KDD's and Telia's board of directors and approval under the
Hart-Scott-Rodino Act. If consummated, this offering will reduce the number
of shares held by KDD prior to this offering to 21,346,088 shares of Class
A common stock and 32,698,042 shares of Class B common stock. Similarly,
the number of shares held by Telia prior to this offering will increase to
34,449,763 shares of Class A common stock and 62,610,002 shares of Class B
common stock. This sale is expected to close shortly after this offering.
(4) Shares of Class A common stock do not reflect fractional shares of 0.4,
which are not included for ease of presentation.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
certificate of incorporation and our bylaws are summaries and are qualified by
reference to the provisions of our certificate and our bylaws. Copies of these
documents have been or will be filed with the SEC as exhibits to our
registration statement, of which this prospectus forms a part. The description
of our capital stock reflects changes to our capital structure that will occur
upon the closing of this offering in accordance with the terms of our
certificate of incorporation.
Our authorized capital stock consists of 400 million shares of Class A
common stock, par value $0.01 per share, 600 million shares of Class B common
stock, par value $0.01 per share, and 30 million shares of Class C common
stock, par value $0.01 per share. As of November 1, 1999, there were
170,993,017 shares of Class A common stock, 250,596,983 shares of Class B
common stock, and 9,444,513 shares of Class C common stock outstanding and held
of record by an aggregate of 36 stockholders. Our board of directors has the
power to issue the authorized but unissued shares of our Class B and Class C
common stock, which authority is of unlimited duration. Upon the closing of
this offering, the Class C common stock will automatically convert to Class B
common stock; however, Class C common stock will remain authorized under our
certificate of incorporation. The Class C common stock has no voting rights and
we have no plans to issue any of the authorized Class C common stock in the
future.
Common Stock
Holders of Class B common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and they do not have
cumulative voting rights. Holders of Class A common stock are entitled to ten
votes for each share on all matters submitted to a vote of stockholders and
they do not have cumulative voting rights. Accordingly, holders of a majority
of the shares of Class A common stock entitled to vote in any election of
directors may elect all of the directors standing for election. However, the
holders of the Class B common stock have the exclusive right to elect two
independent directors. Holders of Class A and Class B common stock are entitled
to receive ratably those dividends, if any, as may be declared by our board of
directors out of funds legally available for that purpose. Upon any
liquidation, dissolution or winding up, the holders of Class A and Class B
common stock are entitled to receive ratably our net assets available after the
payment of all debts and other liabilities. Holders of our Class A common stock
have pre-emptive rights to acquire additional shares of Class A common stock
that may be issued, as well as a right of first refusal upon proposed transfers
from other Class A stockholders, but they have no redemption or conversion
rights other than from Class A to Class B common stock on a one-for-one basis.
Holders of our Class B common stock have no preemptive, subscription,
redemption or conversion rights. The Class A common stock cannot be sold or
transferred except after approval by not less than two-thirds of the
outstanding Class A common stock. Any proposed transfer of the Class A common
stock, including any proposed conversion of the Class A common stock into Class
B common stock, is also subject to a right of first refusal by the selling
stockholders. Following the consummation of this offering, all of our issued
common stock will be fully paid and non-assessable.
Registration Rights
Under the terms of the stockholders agreement, after the closing of this
offering the holders of Class A common stock will be entitled to require us to
register, under the Securities Act of 1933 (the "Act"), some or all of the
Class B shares they currently hold, or those shares they will hold after
conversion of their Class A common stock. We will agree to include, at the
request of any Class A stockholder, shares of that Class A stockholder in a
registered offering by us or another Class A common stockholder through
provisions commonly referred to as piggyback registration and, subject to
limitations, to undertake up to two registered offerings of Class B common
stock upon demand by each Class A stockholder up to a maximum of two
registrations per year but only one in the first year following this offering.
We will bear the costs and expenses attributable to the registration.
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<PAGE>
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
Subject to exceptions, Section 203 of the Delaware General Corporation
Law prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes, among other
things, a merger or consolidation involving us and an interested stockholder
and the sale of more than 10% of our assets. Although there are limited
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% of our
voting stock. This statute could prohibit or delay the accomplishment of
mergers or other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us. A Delaware corporation may
opt out of the anti-takeover law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the corporation's outstanding voting shares. Under the
terms of our certificate of incorporation, we have opted out of this provision
of the anti-takeover law.
In addition, provisions of our certificate and bylaws that will be in
effect upon the closing of this offering and are summarized in the following
paragraphs, may be deemed to have anti-takeover effects and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interest, including those attempts that might result in a premium over
the market price for the shares held by stockholders. These provisions may also
have the effect of preventing changes in our management.
Our certificate authorizes our board of directors to fill vacant
directorships. This may deter a stockholder from removing incumbent directors
and simultaneously gaining control of our board of directors by filling the
vacancies created by that removal with its own nominees. Our certificate and
bylaws contain other provisions that may be deemed to have anti-takeover
effects, such as the ability of a majority of our Class A stockholders to call
special meetings and a limit on the maximum number of directors. These
provisions could delay, defer or prevent a tender offer or takeover attempt. In
addition, based on the current ownership of our Class A common stock and the
voting rights that attach to them, the Class A stockholders will be able to
exercise control over all matters requiring approval by our stockholders,
including the approval of significant corporate transactions.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. Our certificate of incorporation and bylaws
provide that the affirmative vote of at least two-thirds of the Class A and
Class B common stock voting as a single class is required to amend our
certificate of incorporation and bylaws and both 95% of the Class A and two-
thirds of the Class A common stock and Class B common stock voting as a single
class is required to approve a change in our capital structure or significant
corporate actions.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, our directors are not
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as our directors. Under the Delaware General Corporation Law,
our directors have a fiduciary duty to us that is not eliminated by this
provision of our certificate of incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the Delaware General Corporation Law
for breach of the director's duty of loyalty to us or our stockholders, for
acts or omissions
67
<PAGE>
which are found by a court of competent jurisdiction to be not in good faith or
that involve intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited
by the Delaware General Corporation Law. This provision also does not affect
the directors' responsibilities under any other laws, such as the Federal
securities laws or state or Federal environmental laws.
Our certificate of incorporation provides that we will indemnify our
directors, officers, employees and agents to the fullest extent provided in our
bylaws or in any contract or agreement with any of those directors, officers,
employees or agents. Our bylaws provide that we will, to the greatest extent
permitted by the Delaware General Corporation Law, indemnify and advance the
expenses of any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact that such person is or was a director, officer, employee or agent of ours
or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. We
believe that these provisions and agreements are necessary to attract and
retain qualified directors and executive officers. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether the
Delaware General Corporation Law would permit indemnification. We have
liability insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for
indemnification.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for
the Class B common stock will be Firstar Corporation.
68
<PAGE>
DESCRIPTION OF CREDIT FACILITY
The Senior Secured Credit Agreement
We entered into a senior secured credit agreement with a syndicate of
lenders arranged by Merrill Lynch & Co., which included The Bank of Nova
Scotia, as administrative agent, Societe Generale, as documentation agent and a
number of financial institutions and other entities as lenders. The credit
agreement provides for the following facilities:
. Delayed Draw Term Loan Facility. This is a seven-year delayed-draw
term loan facility in an aggregate principal amount equal to $100.0
million available to be drawn until August 20, 2000. The initial draw
under the facility was used to repay existing indebtedness and fees
and expenses in connection with the bridge loan facility. The
proceeds of future draws can be used for our general working capital
needs as well as those of our subsidiaries, including for capital
expenditures. The delayed draw term loans are required to be repaid
in 20 consecutive quarterly installments, commencing on September 30,
2001. Amounts borrowed and repaid under this facility cannot be
reborrowed.
. Tranche B Term Loan Facility. This is a seven-year term loan facility
in an aggregate principal amount equal to $50.0 million. The tranche
B term loan was drawn in full on August 20, 1999, the closing date of
the credit agreement, and was used to repay our existing indebtedness
under the bridge loan facility. The tranche B term loan is required
to be repaid in 28 consecutive quarterly installments, which
commenced on September 30, 1999. Amounts borrowed and repaid under
this facility cannot be reborrowed.
. Revolving Credit Facility. This is a six-year revolving credit
facility in an aggregate principal amount equal to $100.0 million.
Loans made under this facility are to be used for our general working
capital needs as well as those of our subsidiaries, including capital
expenditures. Amounts borrowed and repaid under this facility can be
reborrowed during the six-year availability period. This facility
contains a $10.0 million sub-limit for letters of credit.
Optional and Mandatory Prepayment
The loans under each facility may be prepaid without premium or penalty
at our option. The term loans are also subject to mandatory prepayment with:
. 100% of the net proceeds of specified indebtedness (excluding the
first $100.0 million of senior subordinated indebtedness);
. 50% (reduced to 25% upon satisfaction of a leverage ratio) of the net
proceeds of any equity issuance (excluding the first $750.0 million
realized from an initial public offering by us);
. 100% of the net proceeds of specified asset sales or dispositions (or
payments received in respect of property or casualty insurance
claims); and
. beginning in our 2002 fiscal year, 50% (reduced to 25% upon
satisfaction of a leverage ratio) of excess cash flow.
The revolving credit loans are subject to mandatory prepayment (with an
accompanying permanent reduction of the commitments under the revolving credit
facility) with:
. 100% of the net proceeds of specified indebtedness (excluding the
first $100.0 million of senior subordinated indebtedness); and
. 100% of the net proceeds of specified asset sales or dispositions (or
payments received in respect of property or casualty insurance
claims).
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<PAGE>
Mandatory prepayments are applied first to pay down the term loans and
second to pay down the revolving credit loans. As long as any delayed draw term
loans are outstanding, each tranche B term loan lender has the right to refuse
all or any part of any optional or mandatory prepayment that would otherwise be
allocated to its tranche B term loans. Any tranche B prepayment amount refused
will instead be applied to prepay the delayed draw term loans.
Interest Rates and Fees
Interest on the loans is payable, at a variable rate based on, at our
option, either the base rate or the eurodollar rate, in each case, plus a
margin. The margin for term loans (and, prior to February 20, 2000, for
revolving credit loans) is fixed by facility and by type of loan at the rates
specified in the credit agreement and ranges from 1.50% to 2.75%. From and
after February 17, 2000, the margin for revolving credit loans varies depending
on the ratio of our total indebtedness to consolidated EBITDA and ranges from
0.50% to 2.50%. Eurodollar loans are available, at our option, with an interest
period of one, two, three or six months and, if available to all relevant
lenders, twelve months.
Under our credit agreement, we are required, by February 17, 2000, to
enter into hedge agreements to provide that at least 50% of the outstanding
term loans are subject to either a fixed interest rate or interest rate
protection for a period acceptable to the administrative agent.
We are required to pay the lenders under the delayed draw term loan
facility and the revolving credit facility commitment fees, at a variable rate
depending on our level of borrowing under each facility, on the available
undrawn amount under each facility. The commitment fee rate varies from 0.50%
to 1.00%. Commitment fees are payable quarterly in arrears. We are also
required to pay an annual administration fee to the administrative agent and
certain other fees pursuant to a fee letter with Merrill Lynch & Co. and one of
its affiliates.
Collateral
Our obligations under the credit agreement and the other loan documents
are secured by liens granted by us and our domestic subsidiaries on
substantially all of our tangible assets located in the United States and on
all of our intangible assets. The collateral includes intellectual property and
all of the capital stock of each of our direct and indirect domestic
subsidiaries and 65% of the capital stock of any foreign subsidiaries owned
directly by us or any of our domestic subsidiaries, now owned or hereafter
acquired. Various assets and properties, including our new corporate
headquarters and our Maryland data center facility, are expressly excluded from
the collateral.
In addition, the payment and performance of our obligations under the
credit agreement and the other loan documents are guaranteed by our domestic
subsidiaries and a Belgian subsidiary.
Restrictions
The credit agreement contains representations, warranties, covenants
(including affirmative, negative and financial covenants) and events of
default, including nonpayment of principal and interest, violations of
covenants and the incurrence of material judgments, each of which are customary
for transactions of this type.
The financial covenants require compliance with a minimum consolidated
fixed charge coverage ratio, a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. The credit agreement also
contains limitations on permitted capital expenditures.
Certain other negative covenants restrict our ability and our
subsidiaries' ability to, among other things, incur debt, make investments or
acquisitions, grant liens, dispose of property, pay dividends or make other
restricted payments.
For purposes of the loan documents, Networks Telephony Corporation and
Osiware International, S.A. are deemed not to be our subsidiaries.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our
Class B common stock, and no prediction can be made as to the effect, if any,
that market sales of shares of Class B common stock or the availability of
shares of Class B common stock for sale will have on the market price of our
Class B common stock. Nevertheless, sales of substantial amounts of Class B
common stock in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of our Class B
common stock and could impair our future ability to raise capital through the
sale of our equity securities. See "Risk Factors--If we or our existing
stockholders sell additional shares of our Class B common stock after the
offering, it could cause the market price of our Class B common stock to
decline."
Upon the closing of this offering, we will have an aggregate of
approximately 300.81 million shares of Class B common stock and approximately
168.69 million shares of Class A common stock outstanding, assuming no exercise
of outstanding options. Of the outstanding shares, the shares sold in this
offering will be freely tradable, except that any shares held by our
"affiliates," as that term is defined under Rule 144 of the Securities Act of
1933, as amended, or the Act, may be sold only in compliance with the
limitations described below. The remaining shares of Class A common stock and
Class B common stock will be deemed "restricted securities" as defined under
Rule 144. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 of the Act, which rules are summarized below.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares of our Class B common stock will
be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
893,113 After April 30, 2000 (Rule 144)
14,268,280 Upon the filing of a registration statement to register for resale
shares of Class B common stock issuable upon the exercise of
options granted under our stock option plans
369,480,700 After 180 days from the date of this prospectus (subject, in some
cases, to volume limitations under Rule 144)
47,893,820 At various times after 180 days from the date of this prospectus
(Rule 144)
</TABLE>
Rule 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares of our Class B common stock for at least one year is
entitled to sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
. 1% of the then outstanding shares of Class B common stock (including
any Class A common stock converted into Class B common stock) or
approximately 4.70 million shares
. the average weekly trading volume in the Class B common stock on the
New York Stock Exchange during the four calendar weeks preceding the
date on which notice of such sale is filed, subject to restrictions.
Such sales under Rule 144 are also subject to manner of sale provisions
and notice requirements and to the availability of current public information
about us.
In addition, a person who is not deemed to have been an affiliate of ours
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of ours, such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
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<PAGE>
Rule 701
Our employees, directors, officers or consultants who purchase our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144. Affiliates may sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions. In each of these cases, Rule 701 allows
the stockholders to sell 90 days after the date of the prospectus.
Lock-Up Agreements
Our directors, officers and certain existing stockholders have agreed
that they will not sell, directly or indirectly, subject to certain exceptions,
any shares of our common stock without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated for a period of 180 days from the
date of this prospectus. See "Underwriting."
We have agreed not to sell or otherwise dispose of any shares of our
common stock during the 180-day period following the date of this prospectus,
except we may issue, and grant options to purchase, shares of Class B common
stock under our existing employee benefit plans referred to in this prospectus.
In addition, we may issue shares of Class B common stock in connection with any
acquisition of another company if the terms of the issuance provide that the
Class B common stock may not be resold prior to the expiration of the 180-day
period described above.
Registration Rights
Following this offering, under conditions and limitations described in
the stockholders agreement, holders of our outstanding Class A common stock
will have registration rights with respect to their shares of Class B common
stock (subject to the 180-day lock-up arrangement described above) to require
us to register their shares of Class B common stock under the Securities Act,
and to participate in any future registration of securities by us. These
holders are subject to lock-up periods of not more than 180 days following the
date of this prospectus or any subsequent prospectus. See "Description of
Capital Stock--Registration Rights."
Stock Options and Warrants
Options to purchase up to an aggregate of approximately 14.32 million
shares of our Class B common stock will be outstanding as of the closing of
this offering, but vest over a three to five year period. None of the shares
issuable pursuant to these vested options is subject to the 180-day lock-up
agreements described above.
Following this offering, we intend to file one or more registration
statements on Form S-8 under the Securities Act to register all shares of
common stock subject to outstanding stock options and options issuable pursuant
to our stock option plan. Subject to the lock-up agreements, shares covered by
these registration statements will be eligible for sale in the public markets,
other than shares owned by our affiliates, which may be sold in the public
market if they qualify for an exemption from registration under Rule 144 or
701.
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<PAGE>
MATERIAL UNITED STATES INCOME TAX CONSEQUENCES
FOR NON-U.S. HOLDERS
Overview
The following general discussion summarizes certain of the material U.S.
federal income and estate tax aspects of the ownership and disposition of Class
B common stock applicable to non-U.S. holders of Class B common stock. In
general, a "non-U.S. holder" is a person other than:
. a citizen or resident of the United States,
. a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any of its political
subdivisions,
. an estate the income of which is subject to U.S. federal income
taxation regardless of its sources,
. a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have
authority to control all substantial decisions of the trust; or
. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a United States person.
The discussion is based upon the Internal Revenue Code of 1986, as
amended, regulations of the Treasury Department, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change (possibly on a retroactive basis). The discussion does
not address aspects of U.S. federal taxation other than income and estate
taxation and does not address all aspects of federal income and estate
taxation. The discussion does not consider any specific facts or circumstances
that may apply to a particular non-U.S. holder and does not address all aspects
of U.S. federal income tax law that may be relevant to non-U.S. holders that
may be subject to special treatment under such law, such as insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
certain U.S. expatriates, controlled foreign corporations, passive foreign
investment companies or foreign personal holding companies.
Persons considering the purchase of Class B common stock should consult
their tax advisors concerning the application of U.S. federal income tax laws,
as well as the laws of any state, local or foreign taxing jurisdiction to their
particular situations.
Dividends
In general, the gross amount of dividends paid to a non-U.S. holder will
be subject to U.S. withholding tax at a 30% rate, or any lower rate prescribed
by an applicable tax treaty, unless the dividends:
. are effectively connected with a trade or business carried on by the
non-U.S. holder within the United States and a Form 4224 is filed
with the withholding agent, or
. if a tax treaty applies, are attributable to a United States
permanent establishment of the non-U.S. holder.
If either exception applies, the dividend will be taxed at ordinary U.S.
federal income tax rates. A non-U.S. holder may be required to satisfy certain
certification requirements in order to claim the benefit of an applicable
treaty rate or otherwise claim a reduction of, or exemption from, the
withholding obligation under the above described rules. In the case of a non-
U.S. holder that is a corporation, effectively connected income may also be
subject to an additional branch profits tax, which is generally imposed on a
foreign corporation at a rate of 30% of the deemed repatriation from the United
States of "effectively connected earnings and profits" or such lower rate as an
applicable tax treaty may provide. To the extent a distribution exceeds our
current or accumulated earnings or profits, it will be treated first as a
return of the holder's tax basis, and then as a gain from the sale of a capital
asset. Any withholding tax on a distribution in excess of our accumulated
earnings or profits is refundable to the non-U.S. holder upon filing an
appropriate claim with the Internal Revenue Service.
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<PAGE>
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payor has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under
recently finalized United States Treasury regulations, a non-U.S. holder of
Class B common stock who wishes to claim the benefit of an applicable treaty
rate (and avoid backup withholding as discussed below) for dividends paid after
December 31, 2000, will be required to satisfy applicable certification and
other requirements.
Disposition of Common Stock
Generally, a non-U.S. holder will not be subject to U.S. federal income
tax on any gain recognized upon the disposition of Class B common stock unless:
. the gain is effectively connected with a trade or business carried on
by the non-U.S. holder within the United States, or, alternatively,
if a tax treaty applies, attributable to a United States permanent
establishment maintained by the non-U.S. holder, in which case such
gain will be subject to tax at the rates and in the manner applicable
to U.S. persons, and, if the holder is a foreign corporation, the
branch profits tax may also apply,
. the Class B common stock is disposed of by an individual non-U.S.
holder, who holds the Class B common stock as a capital asset and is
present in the United States for 183 days or more in the taxable year
of the disposition and certain other conditions are met, in which
case such gain will be subject to a flat 30% tax, which may be offset
by United States source capital losses even though the individual is
not considered a resident of the United States, or
. (A) we are or have been a "U.S. real property holding corporation"
within the meaning of Section 897(c)(2) of the Code at any time
within the shorter of the five-year period preceding such disposition
or such non-U.S. holder's holding period and (B) assuming that the
Class B common stock is "regularly traded on an established
securities market" for U.S. federal income tax purposes, the non-U.S.
holder held, directly or indirectly, at any time during the
applicable period from clause (A) above, including on the date of
disposition, more than 5% of the outstanding Class B common stock. We
are not and do not anticipate becoming a "U.S. real property holding
corporation."
Non-U.S. holders should consult applicable treaties, which may exempt
from U.S. taxation gains realized upon the disposition of Class B common stock
in certain cases.
Estate Tax
Common stock owned, or treated as owned, by an individual non-U.S. holder
at the time of death will be includible in the individual's gross estate for
U.S. federal estate tax purposes, and may be subject to U.S. federal estate
tax, unless an applicable treaty provides otherwise.
Information Reporting and Backup Withholding
On October 6, 1997, the Internal Revenue Service issued final regulations
relating to withholding, information reporting and backup withholding that
unify current certification procedures and forms and clarify reliance
standards. The final regulations generally will be effective for payments made
after December 31, 2000.
Except as provided below, this section describes rules applicable to
payments made on or before December 31, 2000. Backup withholding, which
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the U.S.
information reporting
74
<PAGE>
and backup withholding rules, generally will not apply to (1) dividends paid to
non-U.S. holders that are subject to the 30% withholding discussed above, or
that are not so subject because a tax treaty applies that reduces or eliminates
such 30% withholding, or (2) dividends paid on the Class B common stock to a
non-U.S. holder at an address outside the United States, unless the payor has
actual knowledge that the payee is a U.S. person. We will be required to report
annually to the Internal Revenue Service and to each non-U.S. holder the amount
of dividends paid to, and the tax withheld from, such holder, regardless of
whether any tax was actually withheld or whether withholding was required. The
information may also be made available to the tax authorities in the non-U.S.
holder's country of residence.
In the case of a non-U.S. holder that sells Class B common stock to or
through a U.S. office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the Internal Revenue Service, unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. In the case of a non-U.S. holder that sells Class B
common stock to or through the foreign office of a U.S. broker, or a foreign
broker with certain types of relationships to the United States, the broker
must report the sale to the Internal Revenue Service (but not backup withhold)
unless the broker has documentary evidence in its files that the seller is a
non-U.S. holder or certain other conditions are met, or the holder otherwise
establishes an exemption. A non-U.S. holder will generally not be subject to
information reporting or backup withholding if such non-U.S. holder sells the
Class B common stock to or through a foreign office of a non-U.S. broker.
Any amount withheld under the backup withholding rules from a payment to
a holder is allowable as a credit against the holder's U.S. federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes
the required information to the Internal Revenue Service. In addition, certain
penalties may be imposed by the Internal Revenue Service on a holder who is
required to supply information but does not do so in the proper manner.
The final regulations eliminate the general, current legal presumption
that dividends paid to an address in a foreign country are paid to a resident
of that country. The final regulations impose certain certification and
documentation requirements on non-U.S. holders claiming the benefit, under a
tax treaty, of a reduced withholding rate on dividends.
Prospective purchasers of the Class B common stock are urged to consult
their own tax advisors as to the effect, if any, of the final regulations on
their purchase, ownership and disposition of the Class B common stock.
75
<PAGE>
UNDERWRITING
General
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Warburg Dillon
Read LLC, are acting as representatives of each of the underwriters named
below. Subject to the terms and conditions set forth in a purchase agreement
among us, the selling stockholders and the underwriters, we and the selling
stockholders have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of Class B common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................... 13,884,690
Warburg Dillon Read LLC......................................... 13,884,690
ABN AMRO Incorporated........................................... 4,628,230
Goldman, Sachs & Co. ........................................... 4,628,230
Lehman Brothers Inc. ........................................... 4,628,230
Salomon Smith Barney Inc. ...................................... 4,628,230
Banc of America Securities LLC.................................. 250,000
Bear, Stearns & Co. Inc. ....................................... 250,000
Credit Lyonnais Securities (USA) Inc. .......................... 250,000
Credit Suisse First Boston Corporation.......................... 250,000
Deutsche Bank Securities Inc. .................................. 250,000
Dresdner Kleinwort Benson North America LLC..................... 250,000
A.G. Edwards & Sons, Inc. ...................................... 250,000
ING Baring Furman Selz LLC...................................... 250,000
Lazard Freres & Co. LLC......................................... 250,000
J.P. Morgan Securities Inc. .................................... 250,000
Morgan Stanley & Co. Incorporated............................... 250,000
Prudential Securities Incorporated.............................. 250,000
SG Cowen Securities Corporation................................. 250,000
Schroder & Co. Inc. ............................................ 250,000
The Chapman Company............................................. 150,000
Crowell, Weedon & Co. .......................................... 150,000
Jefferies & Company, Inc. ...................................... 150,000
Legg Mason Wood Walker, Incorporated............................ 150,000
Loop Capital Markets............................................ 150,000
Brad Peery Inc. ................................................ 150,000
Scotia Capital Markets (USA) Inc. .............................. 150,000
Muriel Siebert & Co., Inc. ..................................... 150,000
U.S. Bancorp Piper Jaffray Inc. ................................ 150,000
Utendahl Capital Partners, L.P. ................................ 150,000
----------
Total...................................................... 51,282,300
==========
</TABLE>
In the purchase agreement, the underwriters have agreed, subject to the
terms and conditions set forth in the agreement, to purchase all of the shares
of Class B common stock being sold pursuant to the agreement if any of the
shares of Class B common stock being sold under the agreement are purchased. If
an underwriter defaults, the purchase agreement provides that, in specified
circumstances, the purchase commitments of the nondefaulting underwriters may
be increased or the purchase agreement may be terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the securities laws, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
76
<PAGE>
The shares of Class B common stock are being offered by the underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
The underwriters have represented and agreed that each (or any affiliate)
(i) has not offered or sold and, prior to the expiry of the period of six
months from the date of the offering, will not offer or sell any shares of
Class B common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (ii) has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the shares of Class B common stock in, from
or otherwise involving the United Kingdom, and (iii) has only issued or passes
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issue of the shares of Class B common stock to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Commissions and Discounts
The representatives have advised us that they propose initially to offer
the shares of Class B common stock to the public at the initial public offering
price set forth on the cover page of this prospectus, and to certain dealers at
that price less a concession not in excess of $.60 per share of Class B common
stock. The underwriters may allow, and those dealers may reallow, a discount
not in excess of $.10 per share of Class B common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may change.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option with respect to the
selling stockholders' shares.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............ $21.00 $1,076,928,300 $1,238,467,482
Underwriting discount............ $1.00 $51,282,300 $58,974,642
Proceeds, before expenses, to
Infonet Services Corporation.... $20.00 $769,232,000 $769,232,000
Proceeds, before expenses, to the
selling stockholders............ $20.00 $256,414,000 $410,260,840
</TABLE>
The expenses of the offering (exclusive of the underwriting discount and
commissions) are estimated at $3,577,500. The underwriters have agreed to
reimburse us for up to $2.75 million of our expenses incurred in connection
with this offering.
Over-allotment Option
The selling stockholders have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to
approximately 7.69 million additional shares of Class B common stock at the
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of the Class B common stock
being offered. To the extent that the underwriters exercise this option, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Class B common stock proportionate to that
underwriter's initial amount reflected in the above table.
77
<PAGE>
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price up to 4,615,407 shares, or nine percent, of the shares
offered by this prospectus to some of our directors, officers, employees,
vendors, business associates and related persons. The number of shares of Class
B common stock available for sale to the general public will be reduced to the
extent those persons purchase reserved shares. Any reserved shares which are
not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered in this prospectus.
No Sales of Similar Securities
For a period of 180 days after the date of this prospectus, we, our
officers, directors and certain stockholders, have agreed not to, directly or
indirectly, subject to certain exceptions, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the several
underwriters:
. offer, pledge, sell, dispose of or transfer any shares of common
stock or securities convertible into common stock; or
. enter into any agreement that transfers any part of the economic
consequence of ownership of the common stock.
Our stockholders do, however, have the right to:
. transfer the securities as a bona fide gift or to one or more trusts
or by will or intestacy, provided the transferee or transferees
thereof agree in writing to be bound by this restriction, and
. for purposes of a loan, provided that the lender or lenders to whom
the common stock is pledged agree in writing to be bound by the terms
of this restriction.
In addition, we have the right to transfer Class B common stock in
connection with an acquisition, if any recipient of shares agrees to be bound
by provisions of the lock-up agreement. We also have the right to issue shares
upon the exercise of options or warrants currently outstanding and referred to
in this prospectus and to issue shares or grant options to purchase our Class B
common stock pursuant to our existing employee benefit plans referred to in
this prospectus.
Listing on the New York Stock Exchange and the Frankfurt Stock Exchange
In the United States, our Class B common stock will trade on the New York
Stock Exchange under the symbol "IN." In connection with this offering, we
concurrently have applied for the admission of the entirety of our issued Class
B common stock to the Official Quotation (Amtlicher Handel) of the Frankfurt
Stock Exchange. The Frankfurt Stock Exchange issues a trading symbol when a
corporation has been approved for listing. The trading symbol is expected to be
"IN". We cannot assure you that we will be approved for listing on the
Frankfurt Stock Exchange at the same time our Class B common stock trades on
the New York Stock Exchange or at all.
Before this offering, there has been no public market for our Class B
common stock. The initial public offering price has been determined through
negotiations between us and the representatives. The principal factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were the valuation multiples of publicly-traded
companies that the representatives believe to be comparable to us, some of our
financial information, the history of, and the prospects for, our company and
the industry in which we compete, and an assessment of our management, its past
and present operations, the prospects for, and timing of, our future revenues,
the present state of our development and the above factors in relation to
market values and various value measures of other companies engaged in
activities similar to ours. We cannot assure you that an active trading market
will develop for our Class B common stock or that our Class B common stock will
trade in the public market subsequent to this offering at or above the initial
public offering price.
78
<PAGE>
The underwriters do not expect sales of the Class B common stock to be
made to any accounts over which they exercise discretionary authority to exceed
five percent of the number of shares being offered in this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the Class B common stock is completed, rules of
the SEC may limit the ability of the underwriters and some selling group
members to bid for and purchase our Class B common stock. As an exception to
these rules, the representatives are permitted to engage in transactions that
stabilize the price of our Class B common stock. These transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of our Class B common stock.
If the underwriters create a short position in our Class B common stock
in connection with the offering, that is, if they sell more shares of our Class
B common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our Class B common
stock in the open market. The representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on our underwriters and
selling group members. This means that if the representatives purchase shares
of our Class B common stock in the open market to reduce the underwriters'
short position or to stabilize the price of our Class B common stock, they may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of our Class B common stock to the
extent that it discourages resales of our Class B common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Class B common stock. In addition,
neither we nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offerings made outside of the United
States, to persons located in the United States.
Other Relationships
Some of the underwriters and their affiliates have from time to time
provided, and may in the future provide, investment banking and general
financing and banking services to us and our affiliates. Merrill Lynch Capital
Corporation acted as the lender for our $50.0 million bridge loan facility.
Merrill Lynch & Co. acted as Lead Arranger and Syndication Agent to underwrite
and syndicate our $250.0 million senior secured credit facility for which it
received customary compensation. Merrill Lynch Capital Corporation and UBS
A.G., Stamford Branch, an affiliate of Warburg Dillon Read LLC, are also
lenders under the credit facility. In addition, Merrill Lynch & Co. loaned Jose
A. Collazo, our President, $125,000 in November 1999. The loan was a bridge
loan made for estate and tax planning purposes and is unsecured with an annual
interest rate of 8.16%. Warburg Dillon Read LLC acted as our financial advisor
in connection with the AUCS transactions and received customary fees.
79
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Class B common stock to be
sold in the offering will be passed upon for us by Latham & Watkins, Costa
Mesa, California. Certain legal matters in connection with the issuance of the
Class B common stock to be sold in the offering will be passed upon for the
underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
Our consolidated financial statements as of March 31, 1998 and 1999 and
for each of the years in the three year period ended March 31, 1999 and the
related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing in this prospectus and elsewhere in the
registration statement, and are included in reliance upon the reports of that
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Act with respect to the shares of Class B common stock to be sold in the
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information regarding our company and the
shares of Class B common stock to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. In each case you should read the contract, agreement or
other document, a copy of which is filed as an exhibit to the registration
statement.
You may read and copy all or any portion of the registration statement or
any other information that we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement, are also available to you on the SEC's
Web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, accordingly, will file periodic reports, proxy statements and
other information with the SEC. In addition to being available at the SEC, upon
approval of the Class B common stock for listing on The New York Stock
Exchange, our reports, proxy and information statements and other information
may also be inspected at the offices of The New York Stock Exchange, 20 Broad
Street, New York, New York.
80
<PAGE>
INFONET SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of March 31, 1998 (as Restated) and 1999
(as Restated) and September 30, 1999 (Unaudited)......................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the Years Ended March 31, 1997, 1998 (as Restated) and 1999 (as Restated)
and the Six Months Ended September 30, 1998 (Unaudited) and 1999
(Unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March
31, 1997, 1998 (as Restated) and 1999 (as Restated) and the Six Months
Ended September 30, 1999 (Unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997,
1998 (as Restated) and 1999 (as Restated) and the Six Months Ended
September 30, 1998 (Unaudited) and 1999 (Unaudited)....................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Infonet Services Corporation
El Segundo, California:
We have audited the accompanying consolidated balance sheets of Infonet
Services Corporation and its subsidiaries (the "Company") as of March 31, 1998
and 1999, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each of
the three years in the period ended March 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 16, the accompanying 1998 and 1999 consolidated
financial statements have been restated.
/s/ Deloitte & Touche LLP
Deloitte & Touche
LLP
Los Angeles, California
June 14, 1999 (November 19, 1999 as to Note 16 and December 15, 1999 as to the
last paragraph of Note 17)
F-2
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
March 31,
-------------------- September 30,
1998 1999 1999
--------- --------- -------------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 11,449 $ 8,681 $ 39,202
Short-term investments.................... 18,533 8,196 976
Accounts receivable, net of allowances of
$3,851, $3,876 and (unaudited) $3,534 as
of March 31, 1998 and 1999, and September
30, 1999, respectively................... 47,170 58,168 58,849
Deferred income taxes..................... 6,189 5,387 7,577
Prepaid expenses.......................... 7,133 9,345 9,969
Other current assets...................... 283 500 437
--------- --------- ---------
Total current assets..................... 90,757 90,277 117,010
--------- --------- ---------
PROPERTY, EQUIPMENT AND COMMUNICATION
LINES, Net................................ 36,900 52,406 125,634
GOODWILL AND OTHER INTANGIBLE ASSETS, Net.. 5,114 4,573 3,787
OTHER ASSETS............................... 21,028 35,007 45,646
--------- --------- ---------
TOTAL ASSETS............................... $ 153,799 $ 182,263 $ 292,077
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.. $ -- $ 1,662 $ 500
Current portion of capital lease
obligations.............................. 1,961 1,660 2,293
Accounts payable.......................... 14,564 20,058 31,334
Network communications.................... 5,339 4,112 7,928
Accrued salaries and related benefits..... 10,603 11,262 9,432
Income taxes payable...................... 7,200 10,360 4,060
Advance billings.......................... 12,021 13,999 13,812
Other accrued expenses.................... 11,126 10,158 11,844
--------- --------- ---------
Total current liabilities................ 62,814 73,271 81,203
DEFERRED INCOME AND COMPENSATION........... 16,373 19,252 23,832
CAPITAL LEASE OBLIGATIONS.................. 105 5,262 5,510
LONG-TERM OBLIGATIONS...................... -- 7,253 87,956
MINORITY INTEREST.......................... 376 508 470
COMMON STOCK SUBJECT TO PUT OPTION, Net:
Class C common stock, $0.01 par value per
share:
299,000 shares authorized;
9,445 shares issued and outstanding....... -- -- 7,897
Less notes receivable from issuance of
common stock............................. -- -- (7,910)
--------- --------- ---------
Total common stock subject to put
option, net............................. -- -- (13)
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value per
share:
373,750 shares authorized;
373,750 shares issued and 170,993 shares
outstanding; 202,757 shares held in
treasury................................. 67,819 67,819 67,819
Class B common stock, $0.01 par value per
share:
373,750 shares authorized;
202,757, 202,757 and 250,597 shares
issued and outstanding as of March 31,
1998 and 1999, and September 30, 1999,
respectively............................. 124,074 124,074 163,575
Stock subscription receivable............. -- -- (13,333)
Treasury stock, at cost, 202,757 shares... (121,184) (121,184) (121,184)
Retained earnings (accumulated deficit)... 4,515 7,464 (2,810)
Accumulated other comprehensive loss...... (1,093) (1,456) (948)
--------- --------- ---------
Total stockholders' equity.............. 74,131 76,717 93,119
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $ 153,799 $ 182,263 $ 292,077
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES, Net............... $264,684 $294,244 $302,997 $140,571 $173,219
EXPENSES:
Country representative
compensation............. 35,090 41,136 53,766 24,929 31,035
Bandwidth and related
costs.................... 43,134 48,089 52,700 26,336 35,443
Network operations........ 81,106 77,489 55,041 26,852 32,899
Selling, general and
administrative........... 115,741 130,287 139,663 68,500 83,481
-------- -------- -------- -------- --------
Total expenses.......... 275,071 297,001 301,170 146,617 182,858
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)..... (10,387) (2,757) 1,827 (6,046) (9,639)
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........... 1,014 1,515 1,881 1,501 1,073
Interest expense.......... (874) (868) (689) (454) (2,883)
Other, net................ 2,591 2,969 382 (233) (111)
-------- -------- -------- -------- --------
Total other income
(expense), net......... 2,731 3,616 1,574 814 (1,921)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
PROVISION (CREDIT) FOR
INCOME TAXES AND MINORITY
INTEREST................... (7,656) 859 3,401 (5,232) (11,560)
PROVISION (CREDIT) FOR
INCOME TAXES............... (175) 4,446 (180) (255) (1,748)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
MINORITY INTEREST.......... (7,481) (3,587) 3,581 (4,977) (9,812)
MINORITY INTEREST........... -- (143) 132 16 (38)
-------- -------- -------- -------- --------
NET INCOME (LOSS)........... (7,481) (3,444) 3,449 (4,993) (9,774)
-------- -------- -------- -------- --------
OTHER COMPREHENSIVE INCOME
(LOSS):
Foreign currency
translation adjustments.. 56 (626) (241) 1,150 390
Unrealized gains (losses)
on securities............ 2 (10) 16 -- (20)
Minimum pension liability
adjustment, net of tax of
$92...................... -- -- (138) -- 138
-------- -------- -------- -------- --------
Total other
comprehensive income
(loss), net............ 58 (636) (363) 1,150 508
-------- -------- -------- -------- --------
COMPREHENSIVE INCOME
(LOSS)..................... $ (7,423) $ (4,080) $ 3,086 $ (3,843) $ (9,266)
======== ======== ======== ======== ========
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE.... $ (0.02) $ (0.01) $ 0.01 $ (0.01) $ (0.03)
======== ======== ======== ======== ========
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING......... 373,750 373,750 373,750 373,750 382,004
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1998 (AS RESTATED, NOTE 16)
AND 1999 (AS RESTATED, NOTE 16), AND
(UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, 1999
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Stock Treasury Stock Stock Earnings Comprehensive
---------------- ------------------- Subscription (Accumulated Income
Shares Amount Shares Amount Receivable Deficit) (Loss) Total
------- -------- -------- --------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996.. 547,589 $171,917 (173,839) $(104,495) $ -- $16,440 $ (515) $ 83,347
Common stock issued... 28,918 19,976 -- -- -- -- -- 19,976
Purchase of treasury
stock................ -- -- (28,918) (16,689) -- -- -- (16,689)
Net loss.............. -- -- -- -- -- (7,481) -- (7,481)
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 56 56
Unrealized gains on
securities........... -- -- -- -- -- -- 2 2
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31,
1997................... 576,507 191,893 (202,757) (121,184) -- 8,459 (457) 78,711
Net loss (as restated,
Note 16)............. -- -- -- -- -- (3,444) -- (3,444)
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (626) (626)
Unrealized losses on
securities........... -- -- -- -- -- -- (10) (10)
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31, 1998
(AS RESTATED, NOTE
16).................... 576,507 191,893 (202,757) (121,184) -- 4,515 (1,093) 74,131
Net income (as
restated, Note 16)... -- -- -- -- -- 3,449 -- 3,449
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (241) (241)
Unrealized gains on
securities........... -- -- -- -- -- -- 16 16
Minimum pension
liability
adjustments, net of
tax of $92........... -- -- -- -- -- -- (138) (138)
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31, 1999
(AS RESTATED, NOTE
16).................... 576,507 191,893 (202,757) (121,184) -- 7,464 (1,456) 76,717
Net loss (unaudited).. -- -- -- -- -- (9,774) -- (9,774)
Common stock issued,
net of issuance cost
(unaudited).......... 47,840 39,501 -- -- -- -- -- 39,501
Stock subscription
receivable
(unaudited) ......... -- -- -- -- (13,333) -- -- (13,333)
Dividends paid ($0.00
per share)
(unaudited).......... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments
(unaudited).......... -- -- -- -- -- -- 390 390
Unrealized losses on
securities
(unaudited).......... -- -- -- -- -- -- (20) (20)
Minimum pension
liability
adjustments, net of
tax of $92
(unaudited).......... -- -- -- -- -- -- 138 138
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, SEPTEMBER 30,
1999 (UNAUDITED)....... 624,347 $231,394 (202,757) $(121,184) $(13,333) $(2,810) $ (948) $ 93,119
======= ======== ======== ========= ======== ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (7,481) $ (3,444) $ 3,449 $ (4,993) $ (9,774)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 20,018 20,832 18,785 8,204 13,772
Gain on sale of business and other.................... (3,730) (10,696) -- -- --
Gain on sale of property, equipment and communication
lines................................................ (453) -- (283) -- --
Deferred income taxes................................. (7,642) (799) (7,539) (859) (1,803)
Minority interest..................................... -- (143) 132 16 (38)
Changes in assets and liabilities, net of business
sold:
Accounts receivable, net.............................. (3,069) (1,489) (10,974) (2,570) (818)
Prepaid expenses...................................... (1,730) (3,732) (2,409) (68) (589)
Other current assets.................................. (152) 216 (419) (144) 63
Accounts payable...................................... (420) (504) 5,725 (2,899) 7,856
Network communications................................ (420) 2,412 (1,227) 299 (841)
Accrued salaries and related benefits................. 1,446 (290) 644 31 (1,846)
Income taxes payable.................................. 3,629 1,926 3,099 (1,148) (6,408)
Advance billings...................................... 1,566 3,929 1,978 (598) (191)
Other accrued expenses................................ 2,163 2,807 (731) 4,111 5,305
Deferred income and compensation...................... (2,086) 4,743 3,609 2,903 5,574
Purchases of trading securities....................... (403) (7,599) (7,628) (3,952) (12,391)
Proceeds from sale of trading securities.............. 147 6,238 5,957 2,978 4,459
Other operating activities............................ -- (1,375) (257) -- (67)
-------- -------- -------- -------- --------
Net cash provided by operating activities............ 1,383 13,032 11,911 1,311 2,263
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and communication
lines................................................ (16,182) (22,635) (27,033) (14,217) (51,518)
Proceeds from sale of property, equipment and
communication lines.................................. 3,194 12,467 902 33 10
Proceeds from sale of business........................ 3,884 33,522 -- -- --
Costs associated with sale of business................ -- (11,531) -- -- --
Purchases of short-term investments................... (3,958) (29,173) (11,115) (4,939) (1,957)
Proceeds from sale of short-term investments.......... 13,134 6,854 9,922 8,938 6,737
Maturities of short-term investments.................. 980 9,575 11,546 9,749 2,440
Purchases of held-to-maturity securities.............. -- (14,194) (4,435) (3,883) (2,467)
Maturity of held-to-maturity securities............... -- 9,540 2,205 1,812 7,975
Acquisition of businesses, net of cash acquired....... (4,095) 44 -- -- --
Other investing activities............................ (1,661) 20 (2,671) (1,886) (3,910)
-------- -------- -------- -------- --------
Net cash used in investing activities................ (4,704) (5,511) (20,679) (4,393) (42,690)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations....... 13,327 -- 16,000 6,500 110,000
Payments on long-term obligations..................... (1,298) (12,029) (7,085) -- (59,040)
Payment of capital lease obligations.................. (1,768) (1,861) (2,587) (747) (1,057)
Net proceeds from issuance of common stock............ 19,976 -- -- -- 26,708
Debt issuance cost.................................... -- -- -- -- (4,938)
Purchase of treasury stock............................ (16,689) -- -- -- --
Dividends paid........................................ (500) (500) (500) (500) (487)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.......................................... 13,048 (14,390) 5,828 5,253 71,186
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ (269) (588) 172 845 (238)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 9,458 (7,457) (2,768) 3,016 30,521
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 9,448 18,906 11,449 11,449 8,681
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 18,906 $ 11,449 $ 8,681 $ 14,465 $ 39,202
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.......................................... $ 3,838 $ 3,319 $ 4,913 $ 3,061 $ 6,741
Interest.............................................. $ 428 $ 903 $ 698 $ 147 $ 2,642
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisitions of equipment through capital leases...... $ -- $ 584 $ 7,443 $ 4,027 $ 1,938
During June 1999, the Company acquired a right of use
of capacity in a fiberoptic submarine cable system
for a total commitment of $45.0 million. Of the total
commitment, $18.0 million was settled in cash in
June 1999 (unaudited).
During the six months ended September 30, 1999, the
Company issued shares of Class C common stock for
notes receivable amounting to $7,856 and shares of
Class B common stock for a stock subscription
receivable amounting to $13,333 (unaudited).
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
1. GENERAL INFORMATION
Description of Business--Infonet Services Corporation ("Infonet" or the
"Company") provides cross-border managed data communications services to
multinational corporations worldwide. Infonet's stockholders include six of the
world's major telecommunication companies. Infonet provides services directly
through country representatives and indirectly through major international
telecommunications carrriers and value-added resellers.
Fiscal Year--The Company's fiscal year is the 52- or 53-week period
ending on the Friday nearest to March 31. For simplicity of presentation, the
Company has described the 52-week period ended March 28, 1997, the 53-week
period ended April 3, 1998 and the 52-week period ended April 2, 1999 as the
years ended March 31, 1997, 1998 and 1999, respectively, and the 26-week
periods ended October 2, 1998 and October 1, 1999 as the six months ended
September 30, 1998 and 1999, respectively.
Unaudited Condensed Consolidated Interim Financial Statements--The
condensed consolidated financial statements as of September 30, 1999 and for
the six months ended September 30, 1998 and 1999 are unaudited. In the opinion
of management, the unaudited financial statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations as of such date and for
such periods. Results of interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--All majority-owned subsidiaries and
subsidiaries where the Company exercises economic control are included in the
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated. The Company's investments in 20% to 50%
owned companies in which it has the ability to exercise significant influence
over operating and financial policies of the investee are accounted for using
the equity method.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. As with any estimates, actual results could differ
from those estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Fair Value of Financial Instruments--The carrying amounts of cash and
cash equivalents, short-term investments, accounts receivable, and accounts
payable approximate fair value because of the short-term maturities of these
instruments. The carrying amount of the long-term note payable approximates
fair value since the fixed rate charged on the note approximates the current
market rate.
Concentration of Credit Risk--The Company's financial instruments that
are exposed to concentration of credit risk consist primarily of its cash
equivalents, short-term investments, and accounts receivable. The Company
restricts investments in cash equivalents and short-term investments to
financial institutions with high
F-7
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
credit standing. Credit risk on accounts receivable is minimized as a result of
the large and diverse nature of the Company's worldwide customer base. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses.
Revenue Recognition--The Company records revenues for network services;
consulting, integration and provisioning services; applications services; and
other communications services when the services are provided. Such services are
provided under client contracts which generally have a term of 1 to 3 years.
Amounts for services billed in advance of the service period and cash received
in advance of revenues earned are recorded as advance billings and recognized
as revenue when earned. Approximately 14%, 8% and 0% of revenues for fiscal
year 1997, 1998 and 1999, respectively, is derived from long-term fixed priced
contracts with various U.S. government agencies. These long-term contracts are
accounted for utilizing the percentage of completion method of accounting
(cost-to-cost and output methods). An allowance for customer credits is accrued
concurrently with the recognition of revenue.
Depreciation and Amortization--The cost of property, equipment and
communication lines, less applicable estimated residual values, is depreciated
over their useful lives, on the straight-line method, from the date the
specific asset is complete, installed, and ready for normal use, as follows:
<TABLE>
<S> <C>
Communication, computer and
related equipment................ 3 to 5 years
Communication lines............... 10 years
Buildings......................... 40 years
Leasehold improvements............ Shorter of lease term or useful lives
Furniture and other equipment..... 5 to 10 years
</TABLE>
Investments in Securities--Short-term investments are classified as
available-for-sale with unrealized gains and losses reported as a separate
component of stockholders' equity. Cost and realized gains and losses from the
sale of short-term investments are based on the specific identification method.
Securities held in a trust pursuant to the Company's SERP (see Note 9)
are classified as held-to-maturity due to the fact that the Company has the
positive intent and ability to hold the securities to maturity. These
securities are stated at amortized cost, and are included in other assets. Cost
and realized gains and losses from the sale of held-to-maturity securities are
based on the specific identification method.
Securities held in a trust pursuant to the Company's IDIP (see Note 10)
are accounted for as trading securities due to the fact that the securities in
this trust are invested in accordance with the participants' direction. These
securities are recorded in other assets. Both realized and unrealized gains and
losses are included in other income.
Goodwill and Other Intangible Assets--Goodwill arising from the
acquisition of businesses is amortized on a straight-line basis over a period
of 20 years. Intangible assets include customer base and trademarks, which are
amortized over 10 years on a straight-line basis.
Impairment of Long-Lived Assets--The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may no longer be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) from the use of
an asset are less than the carrying value, a write-down would be recorded to
reduce the related asset to its estimated fair value. For purposes of
estimating future cash flows from possibly impaired assets, the Company groups
assets at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets.
F-8
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Income Taxes--Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases
of assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to periods in
which the differences are expected to reverse. If necessary, a valuation
allowance is established to reduce deferred income tax assets to the amount
expected to be realized. U.S. income taxes have not been provided for the
undistributed earnings of the Company's foreign subsidiaries, since such
earnings are intended to be permanently reinvested in the operations of those
subsidiaries. At March 31, 1999 the cumulative undistributed earnings of the
Company's foreign subsidiaries was approximately $17,154,000 and unrecognized
deferred taxes were not material.
Foreign Currency Translation--For foreign operations, the balance sheet
accounts are translated at the year-end exchange rate, and income statement
items are translated at the average exchange rate for the year. Resulting
translation adjustments are recorded as a separate component of other
comprehensive income. Assets and liabilities denominated in foreign currencies
are remeasured at the balance sheet date. Resulting exchange rate gains or
losses are included as a component of current period earnings. Exchange gains
and losses are not material in amount in any period.
Treasury Stock--The Company accounts for treasury stock using the cost
method.
New Accounting Pronouncements--The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," (as
amended) which establishes new standards for reporting derivative and hedging
information. SFAS 133 (as amended) is effective for periods beginning after
June 15, 2000. Management has not completed its assessment of the impact of the
adoption of SFAS No. 133 (as amended) on the Company's financial position or
results of operations.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation.
F-9
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
3. INVESTMENTS IN SECURITIES
The following is a summary of the available-for-sale securities
classified as current assets.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
<S> <C> <C>
As of March 31, 1998:
U.S. government securities.............................. $ 1,098 $ 1,097
Corporate debt instruments.............................. 17,445 17,436
------- -------
$18,543 $18,533
======= =======
As of March 31, 1999:
U.S. government securities.............................. $ -- $ --
Corporate debt instruments.............................. 8,190 8,196
------- -------
$ 8,190 $ 8,196
======= =======
</TABLE>
As of March 31, 1999, all short-term investments had a maturity of less
than one year. Proceeds from the sale and maturities of available-for-sale
securities amounted to approximately $14.1 million, $16.4 million and
$21.5 million for the years ended March 31, 1997, 1998 and 1999, respectively.
Gross unrealized and realized gains and losses on available-for-sale securities
were not material in any of these years or at March 31, 1998 or 1999.
The following is a summary of the held-to-maturity securities classified
as other assets.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ------
<S> <C> <C>
As of March 31, 1998:
Mortgage-backed debt securities.......................... $1,713 $1,713
Corporate debt instruments............................... 1,021 1,020
Other debt securities.................................... 334 334
Commercial paper......................................... 1,193 1,193
U.S. government obligations.............................. 393 394
------ ------
$4,654 $4,654
====== ======
As of March 31, 1999:
Mortgage-backed debt securities.......................... $2,761 $2,773
Corporate debt instruments............................... 1,011 1,009
Other debt securities.................................... 3,112 3,112
------ ------
$6,884 $6,894
====== ======
</TABLE>
Gross unrealized gains and losses on held-to-maturity securities were not
material in each of the three years in the period ended March 31, 1999.
Maturities on held-to-maturity debt securities range from overnight to two
years.
The net unrealized holding gains (losses) on trading securities amounted
to $598,000, $798,000 and $96,000 for the years ended March 31, 1997, 1998, and
1999, respectively.
F-10
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
4. INCOME TAXES
The provision for (benefit from) income taxes is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 4,018 $ 2,493 $ 3,729
State.......................................... 796 1,119 1,078
Foreign........................................ 2,653 1,633 2,552
------- ------- -------
7,467 5,245 7,359
------- ------- -------
Deferred:
Federal........................................ (6,656) (180) (6,023)
State.......................................... (986) (619) (1,516)
------- ------- -------
(7,642) (799) (7,539)
------- ------- -------
$ (175) $ 4,446 $ (180)
======= ======= =======
</TABLE>
The components of income (loss) before income taxes and minority
interest are (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1997 1998 1999
------- ---- -------
<S> <C> <C> <C>
Federal............................................. $(8,229) $669 $(4,537)
Foreign............................................. 573 190 7,938
------- ---- -------
$(7,656) $859 $ 3,401
======= ==== =======
</TABLE>
The following table reconciles the difference between the U.S. federal
statutory tax rate and the rates used by the Company in the determination of
net income (loss) (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Provision for income taxes, at 34%................ $(2,603) $ 292 $ 1,156
State taxes, net of federal effect................ (125) 330 (289)
Difference in U.S. federal and foreign tax rates,
net.............................................. 581 188 282
Effect of foreign losses.......................... 1,729 1,283 --
Valuation allowance............................... -- 1,617 (1,617)
Non-deductable expense items...................... 251 269 233
Other............................................. (8) 467 55
------- ------ -------
$ (175) $4,446 $ (180)
======= ====== =======
</TABLE>
F-11
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
The principal components of deferred tax assets and (liabilities) are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Differences between book and tax bases of
property....................................... $(2,543) $ 601 $ 6,155
Compensation and benefit accruals............... 2,839 4,159 5,933
Billings in excess of revenues.................. 2,563 3,346 3,953
Net operating loss benefit...................... 2,656 1,617 --
Alternative minimum tax credit carryforward..... 662 459 --
Accrued contract costs.......................... 1,532 -- --
Other........................................... 383 326 389
------- ------- -------
8,092 10,508 16,430
Valuation allowance............................. -- (1,617) --
------- ------- -------
$ 8,092 $ 8,891 $16,430
======= ======= =======
</TABLE>
Although realization is not assured, management believes that it is more
likely than not that all deferred income tax assets at March 31, 1999 will be
realized. If, however, estimates of future taxable income were to materially
decline, the carrying value of deferred income tax assets could be reduced.
5. COMMITMENTS AND CONTINGENCIES
Leases--Minimum fixed payments required for the next five years and
thereafter under capital and operating leases in effect at March 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
Capital -----------------
Leases Real
Equipment Estate Equipment
--------- ------- ---------
<S> <C> <C> <C>
2000............................................ $ 2,027 $ 3,500 $4,467
2001............................................ 1,932 2,210 2,955
2002............................................ 1,604 1,478 2,204
2003............................................ 1,604 1,046 185
2004............................................ 981 949 34
2005 and thereafter............................. -- 1,604 30
------- ------- ------
8,148 $10,787 $9,875
======= ======
Imputed interest................................ (1,226)
-------
Present value of net minimum lease payments..... $ 6,922
=======
</TABLE>
Rental expense under noncancelable operating leases for the use of real
estate and equipment amounted to approximately $8,480,000, $8,800,000 and
$8,886,000 in 1997, 1998 and 1999, respectively.
The Company leases certain communication lines and related bandwidth for
its backbone network under short-term arrangements which are cancelable by
either party.
Capital leases pertain to amounts due under leases for the use of
communications and related equipment. The net book value at March 31, 1998 and
1999 of the related assets included in property, equipment and communication
lines was approximately $1,055,000 and $8,006,000, respectively.
F-12
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
During November 1999, the Company's existing headquarters facility lease
with Computer Sciences Corporation will expire and the Company is currently
continuing to lease the facility on a month-to-month basis. The Company has
entered into a 12-year lease agreement for a new facility, which will commence
upon completion of construction. The expected date of the relocation to the new
facility is November 1999. The minimum lease payments disclosure above does not
reflect the new facility lease because the rent has not yet been determined.
However, the annual base rent is expected to approximate $3.0 million with
increases every 30 months. The first increase will be 7%, with additional
increases based on a formula using the Consumer Price Index. The terms of the
lease agreement require the Company to maintain certain financial covenants.
Additionally, the lease agreement includes an option to purchase the building
within 90 days of the commencement of the lease. The Company has not determined
whether it will exercise that option.
Litigation--During the normal course of business, the Company may be
subject to litigation involving various business matters. Management believes
that an adverse outcome of any such known matters would not have a material
adverse impact on the Company.
6. PROPERTY, EQUIPMENT AND COMMUNICATION LINES
Property, equipment and communication lines consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Communication, computer and related equipment........... $ 96,575 $114,922
Communication lines..................................... -- 9,811
Land, buildings and leasehold improvements.............. 9,927 10,272
Furniture and other equipment........................... 5,621 6,239
-------- --------
112,123 141,244
Less accumulated depreciation and amortization.......... 75,223 88,838
-------- --------
Net property, equipment and communication lines......... $ 36,900 $ 52,406
======== ========
</TABLE>
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
SERP minimum pension liability (see Note 9)............... $ 3,232 $ 3,014
SERP assets (see Note 9).................................. 4,654 6,884
IDIP assets (see Note 10)................................. 8,829 9,813
Deferred income taxes..................................... 2,702 11,043
Unconsolidated investments in affiliates.................. 621 863
Other..................................................... 990 3,390
------- -------
$21,028 $35,007
======= =======
</TABLE>
8. LONG-TERM OBLIGATIONS
The Company has a $10.0 million credit agreement (the "Credit Agreement")
with a bank, expiring in July 1999, under which no borrowings were outstanding
as of March 31, 1998 or 1999. Borrowings under the Credit Agreement bear
interest, at the Company's option, at either the prime rate or London Interbank
Offering Rate ("LIBOR") plus 1.25%. The terms of the Credit Agreement contain,
among other provisions, requirements for maintaining defined levels of
profitability, tangible net worth, and various financial ratios. The amount of
credit available under the Credit Agreement is reduced by the amount of
outstanding letters of
F-13
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
credit, which totaled $2.5 million at March 31, 1999. Thus, total available
credit under the line was $7.5 million at March 31, 1999.
In December 1998, the Company obtained a $9.5 million note payable with
the same bank. This five-year note accrues interest at a fixed rate of 7.36%
and is collateralized by the leased communication lines.
Maturities of long-term debt for the next five years are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended:
<S> <C>
2000........................................................... $1,662
2001........................................................... 1,789
2002........................................................... 1,925
2003........................................................... 2,071
2004........................................................... 1,468
------
Total........................................................... 8,915
Less current portion............................................ (1,662)
------
$7,253
======
</TABLE>
F-14
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
9. EMPLOYEE BENEFIT PLANS
Pensions--The Infonet Pension Plan (the "Plan") is a contributory defined
benefit pension plan in which substantially all domestic employees are eligible
to participate. The benefits for the Plan are based on years of participation
and the employee's compensation over the entire period of participation in the
Plan. In addition, the Company has a Supplemental Executive Retirement Plan
(the "SERP"), which is a nonqualified, noncontributory pension plan. The SERP
is a defined benefit retirement plan for designated key officers and executives
and provides for benefits based on years of service, age of participant, and
the participant's average compensation during his or her final period of
employment under the SERP.
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two years, and a
statement of the funded status as of each year-end (dollars in thousands):
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1999 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of
year.............................. $ 15,784 $ 20,135 $ 690 $ 578
Service cost....................... 835 1,007 -- --
Interest cost...................... 1,199 1,398 51 40
Plan participants' contributions... 494 487 -- --
Amendments......................... 1,309 -- -- --
Actuarial (gain) loss.............. 962 2,418 (140) (37)
Benefits paid...................... (448) (628) (23) (26)
-------- -------- ------- -------
Benefits obligation at end of
year.............................. 20,135 24,817 578 555
-------- -------- ------- -------
Change in plan assets
Fair value of plan assets at
beginning of year................. 10,689 12,250
Actual return on plan assets....... 1,515 2,009
Plan particpants' contributions.... 494 487
Benefits paid...................... (448) (628)
-------- -------- ------- -------
Fair value of plan assets at end of
year.............................. 12,250 14,118
-------- -------- ------- -------
Funded status...................... (7,885) (10,699) (578) (555)
Unrecognized net actuarial loss
(gain)............................ 806 2,219 (853) (836)
Unrecognized prior service cost.... 3,514 3,035 1,089 1,025
-------- -------- ------- -------
Net amount recognized.............. $ (3,565) $ (5,445) $ (342) $ (366)
======== ======== ======= =======
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability......... $ (6,797) $ (8,689) $ (578) $ (555)
Intangible asset.................. 3,232 3,014 236 189
Accumulated other comprehensive
income........................... -- 230 -- --
-------- -------- ------- -------
Net amount recognized.............. $ (3,565) $ (5,445) $ (342) $ (366)
======== ======== ======= =======
Weighted-average assumptions as of
year-end:
Discount rate..................... 7.00% 6.50% 7.00% 6.50%
Expected return on plan assets.... 9.00% 9.00% N/A N/A
Rate of compensation increase..... 5.43% 4.93% N/A N/A
</TABLE>
F-15
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
The rate of compensation increase shown is for the qualified pension
plan. For the nonqualified pension plan, compensation is assumed to increase at
a 4% annual rate.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1999. The rate was assumed
to decrease gradually to 5% for 2002 and remain at that level thereafter.
Net periodic benefit cost for pension plans include the following
components (in thousands):
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------ ---------------------
1997 1998 1999 1997 1998 1999
------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 822 $ 835 $ 1,007 $ -- $ -- $ --
Interest cost........... 984 1,199 1,398 90 51 40
Expected return on plan
assets................. (866) (1,023) (1,108) -- -- --
Amortization of prior
service cost........... 327 356 478 64 64 64
Recognized actuarial
(gain)loss............. -- (27) 103 -- (45) (54)
------ ------- ------- ------ ------ ------
Net periodic benefit
cost................... $1,267 $ 1,340 $ 1,878 $ 154 $ 70 $ 50
====== ======= ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $5,338, $3,451 and $0, respectively
as of March 31, 1997, $7,549, $5,824, and $0, respectively, as of March 31,
1998 and $10,077, $7,251, and $0, respectively as of March 31, 1999 (all
figures are in thousands).
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service and interest cost
components..................................... $ 2 $ (2)
Effect on postretirement benefit obligation..... $22 $(24)
</TABLE>
At March 31, 1998 and 1999, the Company earmarked a total of $4.7 million
and $6.9 million, respectively, and placed these amounts in a rabbi trust to
satisfy future SERP liabilities. These assets are accounted for as "held-to-
maturity" and included in other assets in the accompanying consolidated
financial statements.
Employees outside the United States are generally enrolled in pension
plans in the country of domicile. These plans are not considered to be
significant individually or in the aggregate to the Company's financial
statements. The pension liabilities and their related costs are computed in
accordance with the laws of the individual countries and appropriate actuarial
practices.
10. STOCK INCENTIVE AND DEFERRED COMPENSATION PLANS
During 1999, the Company's Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the "Purchase Plan"), 1998 Stock Appreciation Rights Plan
(the "SARs Plan"), and 1998 Stock Option Plan (the "Option Plan"). The Company
has elected to account for stock-based compensation in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to
F-16
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Employees." SFAS No. 123, "Accounting for Stock-Based Compensation," encourages
a fair value-based method of accounting for stock-based compensation. As
permitted by SFAS No. 123, the Company adopted its disclosure-only
requirements.
Under the Purchase Plan, the Company is authorized to issue up to
17,940,000 shares of its newly authorized Class C common stock, $0.01 par value
("Class C Stock") to 35 participants designated by the Committee which
administers the Purchase Plan. The Purchase Plan is a book value plan whereby
participants may purchase shares of the Company's stock at book value at the
date of grant, as calculated in accordance with the Purchase Plan. The Purchase
Plan provides that book value is determined using a formula based on a multiple
of the Company's consolidated revenue. The Purchase Plan also provides that the
Company has a call right to repurchase the shares from stockholders under the
Purchase Plan who leave the Company's employ, or on or after March 15, 2003,
provided that the stock is not publicly traded. The stockholders under the
Purchase Plan also have a right to put the shares purchased under the Purchase
Plan to the Company, which then has to repurchase the shares at its book value
as of that date, provided that the stock is not publicly traded. During 1999,
the Company granted purchase rights with respect to approximately 9,501,622
shares at $0.84 per share.
Pursuant to the Company's SARs Plan, the maximum number of SARs that may
be offered is 1,495,000. The stock referred to in the SARs Plan is the newly
authorized Class C Stock. The SARs vest at 25% per year over four years with
the first quartile vesting on January 1, 2001. The SARs Plan terminates October
20, 2004 or earlier if certain conditions of the SARs Plan have been fully met.
During fiscal 1999, the Company granted 1,207,362 SARs which are indexed to the
Company's Class C common stock at a base price of $0.84 per share.
Under the Option Plan, the Company is authorized to issue options to
purchase up to 8,970,000 shares of its Class C Stock. Options granted under the
Option Plan vest ratably over five years. All options must be exercised within
ten years from the date of original grant. The Option Plan is a book value plan
whereby participants are granted options to purchase shares of the Company's
stock at book value, as determined at the date of grant and as calculated in
accordance with the Option Plan. The Option Plan provides that book value is
determined using a formula based on a multiple of the Company's consolidated
revenue. The Option Plan also provides that the Company has a call right to
repurchase the shares from stockholders under the Option Plan who leave the
Company's employ, or on or after March 15, 2003, provided that the stock is not
publicly traded. The stockholders under the Option Plan also have a right to
put the shares purchased under the Option Plan to the Company, which then has
to repurchase the shares at its book value as of that date, provided that the
stock is not publicly traded. During 1999, no options were granted.
The Company has a nonqualified deferred income plan (the "IDIP") for
employees earning over a prescribed amount. Participants may defer receipt of
compensation, which is held by the Company in trust and is invested in
accordance with the participants' directions. As of March 31, 1998 and 1999,
the trust assets held by the Company aggregated $8,829,000 and $9,813,000,
respectively; the vested portion of trust assets aggregated $6,875,000 and
$8,528,000, respectively. These assets are accounted for as trading securities
and included in other assets in the accompanying financial statements.
In 1995, the Company created an agreement with the participants of the
Infonet Phantom Stock Option Plan (the "Phantom Stock Plan") whereby the
participants could elect either a cash or deferral option for the vested value
of grants under the Phantom Stock Plan at the end of 1994, effectively
terminating the Phantom Stock Plan. Participants who elected the deferral
option are eligible to receive additional amounts through 1999, based on the
Company's achieving revenue and profit goals and the individuals' continued
employment. Under this arrangement, the expense in 1997, 1998 and 1999 was
$900,000, $803,000 and $830,000, respectively. Participants can elect to have
their annual vested portion contributed to their individual account as part of
the IDIP.
F-17
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
11. STOCKHOLDERS' EQUITY
During 1999, the Company amended its Certificate of Incorporation to
establish a third class of common stock. As of March 31, 1999, the Company has
three classes of common stock as follows:
<TABLE>
<CAPTION>
Shares Shares Shares
Authorized Issued Outstanding
----------- ----------- -----------
<S> <C> <C> <C>
Class A, net of 202,756,983 shares of
treasury stock....................... 373,750,000 373,750,000 170,993,017
Class B............................... 373,750,000 202,756,983 202,756,983
Class C............................... 299,000,000 -- --
----------- -----------
576,506,983 373,750,000
=========== ===========
</TABLE>
Class A shares have voting rights. Class B shares are identical in
rights and privileges to Class A, except that Class B does not have voting
rights. Class C shares are identical in rights and privileges to Class B,
except that upon the closing of an underwritten initial public offering, as
defined, each outstanding share of Class C common stock shall automatically
convert into one share of the class of common stock registered in connection
with the initial public offering.
12. RELATED-PARTY TRANSACTIONS
Related parties consist of non-consolidated country representative
organizations in which the Company holds less than a fifty percent ownership
interest and country representative organizations owned directly or indirectly
by the Company's stockholders, and the Company's stockholders.
Related party transactions for the years ended March 31 comprise the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues, net........................................ $39,512 $62,594 $88,278
Country representative compensation.................. 19,322 29,261 40,031
Bandwidth and related costs.......................... 7,166 7,347 9,002
Selling, general and administrative.................. 7,856 8,553 9,181
</TABLE>
Related party balances as of March 31 comprise the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accounts receivable......................................... $10,506 $14,442
Accounts payable............................................ 615 908
Network communications...................................... 1,053 531
</TABLE>
13. ACQUISITIONS AND DIVESTITURES
On January 3, 1997 the Company acquired 95% of the capital stock of
Interpac Belgium S.A. The purchase price was approximately $3,120,000 and the
resulting goodwill recorded was approximately $103,000. Prior to this date the
Company owned a 5% interest in Interpac Belgium S.A. which was accounted for
on the cost basis. In March 1997 the Company acquired an additional 36%
interest in its Luxembourg subsidiary for $330,000 bringing its ownership to
51%.
These acquisitions were accounted for under the purchase method. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill which is being amortized on a
straight-line basis over 20 years.
F-18
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
During fiscal 1997 the Company sold its remaining interest in a foreign
affiliate for a pretax gain of $1,030,000 and Interpac Belgium sold its
Internet business to one of its former shareholders for a net pretax gain of
$2,700,000. These pretax gains are recorded in other income in the statement of
operations and comprehensive income (loss).
In October 1997, the Company sold the net assets of its subsidiary,
Government Systems, Inc. ("GSI"), to a third party for $21.0 million in cash
and received $5.5 million as a working capital adjustment to pay down GSI loans
prior to transfer of the net assets sold. The sale resulted in a pretax gain of
$3.7 million, which is recorded in other income in the statement of operations
and comprehensive income (loss). GSI's results from operations included in the
1998 consolidated statements of operations and comprehensive income (loss) were
revenues of $32.5 million and income before income taxes of $4.0 million.
Additionally, the Company sold its government accounts to the same third party
and entered into an agreement allowing the third party to operate as a country
representative for a total of $7.0 million in cash.
14. EARNINGS PER SHARE
As of March 31, 1997 and 1998, there were no forms of potential common
stock issued by the Company. The Company's outstanding purchase rights
represent the only form of potential common stock at March 31, 1999. All of
these potential common shares were excluded from the computation of diluted
earnings per share ("EPS") because their inclusion would have had an
antidilutive effect on EPS.
Unaudited: As of September 30, 1998, there were no forms of potential
common stock issued by the Company. The Company's outstanding stock options
represent the only form of potential common stock at September 30, 1999. All of
these potential common shares were excluded from the computation of diluted EPS
because their inclusion would have been antidilutive.
15. SEGMENT INFORMATION
The Company conducts business in two operating segments: country
representatives or Direct Sales Channels ("Direct") and Alternate Sales
Channels ("Alternate"). Both these segments generate revenues from providing
customers with a complete global networking solution.
The Company has organized its operating segments around differences in
distribution channels used to deliver its services to customers. These segments
are managed and evaluated separately because each segment possesses different
economic characteristics requiring different marketing strategies.
The accounting policies adopted for each segment are the same as those
described in the summary of significant accounting policies. The Company's
management evaluates performance based on operating contribution, where segment
revenues are reduced by those costs that are allocable to the segments. Costs
relating to operating the Company's core network, and non-allocable general,
administrative, marketing and overhead costs, including income tax expense, are
not charged to the segments. Accordingly, neither assets related to the core
network, nor their associated depreciation expense are allocated to the
segments.
The Company accounts for intersegment transactions on the same terms and
conditions as if the transactions were with third parties.
F-19
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands).
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
Reportable segments:
- -------------------- (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues from external customers:
Direct.......................... $258,187 $279,844 $273,150 $128,209 $153,081
Alternate....................... 6,497 14,400 29,847 12,362 20,138
-------- -------- -------- -------- --------
Totals........................ $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
Operating Contribution:
Direct.......................... $ 93,781 $105,171 $ 97,350 $ 43,272 $ 55,367
Alternate....................... 2,316 7,621 16,975 7,217 11,842
-------- -------- -------- -------- --------
Totals........................ $ 96,097 $112,792 $114,325 $ 50,489 $ 67,209
======== ======== ======== ======== ========
Depreciation and amortization of:
Direct.......................... $ 4,309 $ 4,039 $ 5,163 $ 2,582 $ 3,300
Alternate....................... 4 5 36 2 3
-------- -------- -------- -------- --------
Totals........................ $ 4,313 $ 4,044 $ 5,199 $ 2,584 $ 3,303
======== ======== ======== ======== ========
Total assets:
Direct.......................... $ 76,499 $ 52,031 $ 63,459 $ 58,508 $ 62,808
Alternate....................... 1,192 3,503 8,683 5,240 9,191
-------- -------- -------- -------- --------
Totals........................ $ 77,691 $ 55,534 $ 72,142 $ 63,748 $ 71,999
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------------- ------------------
1997 1998 1999 1998 1999
--------- --------- --------- -------- --------
Reconciliations: (As Restated, Note
- ---------------- 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating contribution
from reportable
segments................ $ 96,097 $ 112,792 $ 114,325 $ 50,489 $ 67,209
Core network, overhead
and other non-allocable
costs................... (103,753) (111,933) (110,924) (55,721) (78,769)
--------- --------- --------- -------- --------
Income (loss) before
income taxes and
minority interest....... $ (7,656) $ 859 $ 3,401 $ (5,232) $(11,560)
========= ========= ========= ======== ========
Total assets of
reportable segments..... $ 77,691 $ 55,534 $ 72,142 $ 63,748 $ 71,999
Core network, corporate
and other non-allocable
assets.................. 81,748 98,265 110,121 98,567 220,078
--------- --------- --------- -------- --------
Total assets............. $ 159,439 $ 153,799 $ 182,263 $162,315 $292,077
========= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
Geographic Information:
- ----------------------- (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues from external customers
based upon the country in which
invoices are produced are as
follows:
United States.................. $135,460 $129,822 $103,190 $ 48,276 $ 56,448
Netherlands.................... 8,449 20,091 34,944 15,492 21,044
Germany........................ 14,735 17,742 23,438 10,493 13,783
United Kingdom................. 11,488 12,604 19,682 9,310 13,033
Other.......................... 94,552 113,985 121,743 57,000 68,911
-------- -------- -------- -------- --------
$264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
F-20
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated, (Unaudited)
Note 16)
Geographic Information:
- -----------------------
<S> <C> <C> <C> <C> <C>
Long-lived assets:
United States................... $ 46,048 $ 29,877 $ 44,529 $ 39,864 $117,031
United Kingdom.................. 2,269 2,604 2,862 2,764 3,379
Other........................... 3,537 4,419 5,015 5,189 5,224
-------- -------- -------- -------- --------
$ 51,854 $ 36,900 $ 52,406 $ 47,817 $125,634
======== ======== ======== ======== ========
<CAPTION>
Services Information:
- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers:
Network services................ $ 66,153 $100,337 $144,642 $ 66,927 $ 95,891
Consulting, integration and
provisioning services.......... 48,264 58,637 78,777 37,090 45,729
Applications services........... 16,604 22,433 20,068 9,000 7,673
Other communications services... 87,897 72,769 59,510 27,554 23,926
Government services............. 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
$264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
16. RESTATEMENT
Subsequent to the issuance of the Company's 1999 financial statements,
the Company's management determined that a charge of $3.3 million related to
certain network equipment taken in 1998 was in error. As a result, the 1998 and
1999 financial statements have been restated from the amounts previously
reported as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
As
Previously As
Reported Restated
---------- --------
<S> <C> <C>
As of March 31, 1998:
Property, Equipment and Communication Lines, net......... $33,583 $36,900
Income Taxes Payable..................................... 5,873 7,200
Retained Earnings........................................ 2,525 4,515
Year ended March 31, 1998:
Network Operations....................................... 80,806 77,489
Net Loss................................................. (5,434) (3,444)
Basic and diluted loss per common share.................. (0.01) (0.01)
As of March 31, 1999:
Property, Equipment and Communication Lines, net......... 51,133 52,406
Income Taxes Payable..................................... 9,851 10,360
Retained Earnings........................................ 6,700 7,464
Year ended March 31, 1999:
Network Operations....................................... 52,997 55,041
Net Income............................................... 4,675 3,449
Basic and diluted earnings per common share.............. 0.01 0.01
</TABLE>
F-21
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
17. SUBSEQUENT EVENTS
During April 1999, 9,444,513 of the 9,501,622 rights to purchase shares
of Class C Stock granted under the Purchase Plan were exercised by employees
and the remaining rights expired unexercised. Of the total shares issued,
9,396,075 shares were purchased with full recourse notes in the amount of
$7,856,000, by the employees to the Company and 48,438 shares issued were
purchased with cash. The notes bear interest at 5% per year and are payable on
January 1, 2002 (the "Maturity Date"); provided however, that if the shares of
common stock, or a class of securities into which such shares are convertible,
are sold in an initial public offering after January 1, 2000, but before the
Maturity Date, the Maturity Date shall be extended by the period of time, if
any, between January 1, 2000 and the date of such initial public offering.
During April 1999, the Company granted options to acquire 3,707,600 shares of
Class C Stock with an exercise price of $0.84 per share. These options vest
ratably over five years.
In May 1999, the Company obtained a $50.0 million bridge loan facility
(the "Bridge Loan") from Merrill Lynch Capital Corporation. The Bridge Loan
bears interest at LIBOR plus 2.5% and expires in November 1999. The Company
used a portion of the proceeds from the Bridge Loan to repay the existing $10.0
million line of credit.
Unaudited
Subsequent to June 14, 1999, the Company amended the SARs Plan by
eliminating the limit on the maximum number of SARs that may be offered and the
termination date of October 20, 2004. The Company also issued 365,079
additional SARs under the SARs Plan which are indexed to the Company's Class C
common stock at a base price of $0.84 per share. As of September 30, 1999,
there were 1,572,441 SARs outstanding.
During June 1999, the Company entered into an agreement for the long-term
right of use of capacity in a fiberoptic submarine cable system (the "Right of
Use"). The Right of Use acquired by the Company is comprised of three units of
capacity at a total commitment of $45.0 million. The first unit of capacity was
activated in June 1999 for a payment of $18.0 million. The second installment
of $12.0 million is due on the earlier of the activation of the second unit of
capacity or June 30, 2000. The third installment of $15.0 million is due on the
earlier of the activation of the third unit of capacity or June 30, 2000. The
Company intends to refinance the second and third installment obligations
through drawdowns on the Senior Secured Credit Facility described below. The
Company has the right to have the capacity activated at any time after the date
of the agreement and has the right to use the capacity to the end of the cable
system's design life which is expected to occur in 2022. The Right of Use was
recorded as communication lines.
On August 17, 1999, the Company entered into a new credit agreement (the
"New Credit Agreement") with a syndicate of lenders to provide credit
facilities to the Company in an aggregate amount of $250.0 million (the "Senior
Secured Credit Facility"). The Senior Secured Credit Facility consists of two
term loan borrowing facilities, in the amount of $100.0 million (the "Delayed
Draw Term Loan") and $50.0 million (the "Tranche B Term Loan"), respectively,
and a revolving credit borrowing facility in the amount of $100.0 million (the
"Revolving Credit Facility"). The Tranche B Term Loan was used to pay down in
full all amounts outstanding on August 20, 1999 under the Bridge Loan and the
$9.5 million note payable. The Tranche B Term Loan bears interest, at the
Company's option, at the Base Rate, as defined below, plus 1.75% or the
eurodollar rate plus 2.75%, and matures in 28 consecutive unequal quarterly
installments, commencing on September 30, 1999. The Delayed Draw Term Loan is
accessible until August 20, 2000, bears interest, at the Company's option, at
the Base Rate, as defined below, plus 1.50% or the eurodollar rate plus 2.50%,
and matures in 20 consecutive unequal quarterly installments, commencing on
September 30, 2001. The Revolving Credit Facility is accessible
F-22
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
until August 20, 2005, bears interest, at the Company's option, at the Base
Rate, as defined below, plus 1.50% or the eurodollar rate plus 2.50% (which
margin will vary after February 20, 2000, depending on the Company's leverage
ratio), and matures on August 17, 2005. The Company is also required, by
February 17, 2000, to enter into hedge agreements to provide that at least 50%
of the outstanding term loans are subject to either a fixed interest rate or
interest rate protection for a period acceptable to the administrative agent.
The Base Rate is defined as the greatest of the Prime Rate, the Base CD
Rate plus 1.00% and the Federal Funds Effective Rate plus 0.50% in effect on a
given day. The loans under the Senior Secured Credit Facility are secured by
substantially all of the domestic tangible assets and all intangible assets of
the Company and its domestic subsidiaries, excluding certain specific assets
identified in the New Credit Agreement. Under the terms of the Senior Secured
Credit Facility the Company is required to maintain certain financial ratios
and other financial conditions, and there are restrictions imposed on certain
transactions of the Company. The Senior Secured Credit Facility also provides
for letters of credit to be available to the Company. Furthermore, the New
Credit Agreement requires the Company to pay commitment fees of between 0.50%
and 1.00% per year calculated quarterly on the average daily amount of
available credit, dependent on the amount of the aggregate principle amounts
outstanding under the Senior Secured Credit Facility. These commitment fees are
payable quarterly in arrears.
In September 1999, the Company committed to a plan to dispose its
subsidiary, ESG Communications Inc. ESG was formed as a wholly owned subsidiary
of the Company in March 1998 to sell telecommunications services over
international bypass routes. Since formation, ESG established seven routes.
However, substantially increased competition and other market factors have
decreased the prices which ESG can charge its customers to less than half of
those anticipated by the Company at the time of formation of ESG. These
decreased prices and less than anticipated volumes have resulted in current and
forecasted negative cash flows from the operation of each of ESG's routes.
Management's plans to dispose of ESG call for the sale or abandonment of those
routes. Two of ESG's routes were shut down and abandoned prior to September 30,
1999, and one was shut down and abandoned in October 1999. Management
anticipates that the remaining routes, if not sold, will be shut down and
abandoned by December 31, 1999.
In connection with its decision to dispose of ESG, the Company recorded a
total charge of $4.0 million. This charge was comprised of $3.6 million related
to the impairment of communication equipment, of which approximately
$1.2 million related to routes abandoned before September 30, 1999, and
$400,000 related to remaining payments, after operations cease, under
communication line leases which have no alternative use to the Company. All
such lease payments will be made in cash within the next twelve months. The
$3.6 million impairment charge and the $400,000 charge for lease payments are
included in network operations, and bandwidth and related costs, respectively,
in the accompanying consolidated statement of operations for the six months
ended September 30, 1999. The impairment charge was determined to be equal to
the carrying value of the equipment as the discounted estimated future cash
flows from each of the routes were negative. Management's efforts to date to
sell the routes or the equipment have been unsuccessful. Management estimates
that the proceeds from the sale of equipment or routes, should the Company be
successful in selling any, will not be material. Revenues and losses from
operations of ESG were $270,000 and $1.4 million, respectively, for the fiscal
year ended March 31, 1999, and $1.7 million and $2.0 million, respectively, for
the six months ended September 30, 1999.
On September 30, 1999, the Company entered into agreements with three of
its stockholders (the "Stockholders") and affiliates of the Stockholders which,
among other things, give the Company access to additional multinational
corporate clients of the Stockholders. In exchange for the right to market the
Company's services to clients of the Stockholders and $40.0 million in cash,
the Company issued
F-23
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
47.84 million shares of the Class B common stock to the Stockholders. The
shares issued were recorded at $40 million, which represents cash received by
the Company of $26.7 million and $13.3 million reflected as a stock
subscription receivable at September 30, 1999. Staff Accounting Bulletin 48,
Transfers of Nonmonetary Assets by Promoters or Shareholders, requires that
transfers of nonmonetary assets to a company by stockholders in exchange for
stock prior to or at the time of the company's initial public offering be
recorded at the transferor's historical cost basis. Accordingly, the right to
market the Company's services to the customers of the Stockholders has been
valued at the Stockholders' basis of $0.
During the six months ended September 30, 1999, the Company's SERP
incurred a settlement of $5.6 million of the vested benefit obligation due to a
transfer of assets by a plan participant from the SERP into the IDIP. The
Company recorded a settlement loss of $1.7 million as a result of this
settlement.
In November, 1999, the Company's board of directors approved the 1999
Stock Option Plan, which authorizes the Company to issue options to purchase up
to 10,614,500 shares of its Class B common stock.
On December 15, 1999 the Company effected a 29,900-for-1 split of its
Class A, Class B and Class C common stock and increased the authorized shares
of its Class A, Class B and Class C common stock to 400.0 million, 600.0
million and 30.0 million shares, respectively. All share and per share amounts
in the accompanying consolidated financial statements have been retroactively
restated to reflect this stock split.
F-24
<PAGE>
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Through and including January 9, 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
51,282,300 Shares
[LOGO OF INFONET]
Class B Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
Warburg Dillon Read LLC
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
December 15, 1999
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