<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-88799
----------------
INFONET SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4148675
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2160 East Grand Avenue, El Segundo, California
(Address of principal executive offices)
90245-1022
(Zip Code)
(310) 335-2600
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed under Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of February 10, 2000, the registrant had the following number of shares
outstanding:
<TABLE>
<S> <C>
Class A common stock 167,403,358 shares
Class B common stock 302,633,472 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I:
ITEM 1. FINANCIAL STATEMENTS
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1999
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 8,681 $ 784,555
Short-term investments................................ 8,196 991
Accounts receivable, net.............................. 58,168 139,264
Deferred income taxes................................. 5,387 7,374
Prepaid expenses...................................... 9,345 8,648
Other current assets.................................. 500 162
--------- ----------
Total current assets................................. 90,277 940,994
--------- ----------
PROPERTY, EQUIPMENT AND COMMUNICATION LINES, Net....... 52,406 136,073
GOODWILL AND OTHER INTANGIBLE ASSETS, Net.............. 4,573 3,708
OTHER ASSETS........................................... 35,007 53,221
--------- ----------
TOTAL ASSETS........................................... $ 182,263 $1,133,996
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.............. $ 1,662 $ 10,500
Current portion of capital lease obligations.......... 1,660 2,302
Accounts payable...................................... 20,058 69,596
Network communications................................ 4,112 11,670
Accrued salaries and related benefits................. 11,262 10,224
Income taxes payable.................................. 10,360 4,138
Advance billings...................................... 13,999 21,925
Other accrued expenses................................ 10,158 17,767
--------- ----------
Total current liabilities............................ 73,271 148,122
--------- ----------
DEFERRED INCOME AND COMPENSATION....................... 19,252 36,305
CAPITAL LEASE OBLIGATIONS.............................. 5,262 5,006
LONG-TERM OBLIGATIONS.................................. 7,253 77,471
MINORITY INTEREST...................................... 508 365
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value per share:
373,750 shares authorized and issued; 170,993 and
168,685 shares outstanding as of March 31, 1999
and December 31, 1999, respectively; 202,757 shares
held in treasury..................................... 67,819 67,400
Class B common stock, $0.01 par value per share:
373,750 shares authorized; 202,757 and 300,931 shares
issued and outstanding as of March 31, 1999 and
December 31, 1999, respectively...................... 124,074 955,694
Notes receivable from issuance of common stock........ -- (8,207)
Treasury stock, at cost, 202,757 shares............... (121,184) (121,184)
Retained earnings (accumulated deficit)............... 7,464 (25,273)
Accumulated other comprehensive loss.................. (1,456) (1,703)
--------- ----------
Total stockholders' equity.......................... 76,717 866,727
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 182,263 $1,133,996
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three
Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES, Net.......................... $ 77,108 $153,699 $217,679 $326,918
-------- -------- -------- --------
EXPENSES:
Country representative compensation.. 14,560 64,650 39,489 95,685
Bandwidth and related costs.......... 14,270 25,735 40,606 61,178
Network operations................... 13,287 21,809 40,139 54,708
Selling, general and administrative.. 33,469 65,380 101,969 148,861
-------- -------- -------- --------
Total expenses..................... 75,586 177,574 222,203 360,432
-------- -------- -------- --------
OPERATING INCOME (LOSS)................ 1,522 (23,875) (4,524) (33,514)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income...................... 80 2,082 1,581 3,155
Interest expense..................... (94) (1,850) (548) (4,733)
Other, net........................... 502 (83) 269 (194)
-------- -------- -------- --------
Total other income (expense), net.. 488 149 1,302 (1,772)
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES AND MINORITY
INTEREST.............................. 2,010 (23,726) (3,222) (35,286)
PROVISION (CREDIT) FOR INCOME TAXES.... 1,918 (1,158) 1,663 (2,906)
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST.............................. 92 (22,568) (4,885) (32,380)
MINORITY INTEREST...................... 47 (105) 63 (143)
-------- -------- -------- --------
NET INCOME (LOSS)...................... 45 (22,463) (4,948) (32,237)
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustments......................... (391) (769) 759 (379)
Unrealized gains (losses) on
securities.......................... -- 14 -- (6)
Minimum pension liability adjustment,
net of tax of $92................... -- -- -- 138
-------- -------- -------- --------
Total other comprehensive income
(loss), net....................... (391) (755) 759 (247)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS)....... $ (346) $(23,218) $ (4,189) $(32,484)
======== ======== ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER
COMMON SHARE.......................... $ 0.00 $ (0.05) $ (0.01) $ (0.08)
======== ======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING... 373,750 435,289 373,750 399,766
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 1999
(In Thousands, Except per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Notes Accumulated
Receivable Retained Other
Common Stock Treasury Stock from Earnings Comprehensive
------------------ ------------------- Issuance of (Accumulated Income
Shares Amount Shares Amount Common Stock Deficit) (Loss) Total
------- ---------- -------- --------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31,
1999................... 576,507 191,893 (202,757) (121,184) -- 7,464 (1,456) 76,717
Net loss.............. -- -- -- -- -- (32,237) -- (32,237)
Common stock issued,
net of issuance
cost................. 95,866 814,323 -- -- -- -- -- 814,323
Stock option
compensation charge.. -- 16,878 -- -- -- -- -- 16,878
Notes receivable from
issuance of common
stock ............... -- -- -- -- (8,207) -- -- (8,207)
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (379) (379)
Unrealized losses on
securities........... -- -- -- -- -- -- (6) (6)
Minimum pension
liability
adjustments, net of
tax of $92........... -- -- -- -- -- -- 138 138
------- ---------- -------- --------- ------- -------- ------- --------
BALANCE, DECEMBER 31,
1999................... 672,373 $1,023,094 (202,757) $(121,184) $(8,207) $(25,273) $(1,703) $866,727
======= ========== ======== ========= ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ (4,948) $(32,237)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 12,624 20,075
Stock based compensation charge............................ -- 28,370
Gain on sale of property, equipment and communication
lines..................................................... (283) 13
Deferred income taxes...................................... 1,233 (6,419)
Minority interest.......................................... 63 (143)
Changes in assets and liabilities, net of business sold:
Accounts receivable, net................................... (5,284) (81,618)
Prepaid expenses........................................... (553) 506
Other current assets....................................... (138) 338
Accounts payable........................................... (1,124) 46,495
Network communications..................................... 1,009 7,559
Accrued salaries and related benefits...................... 254 (1,063)
Income taxes payable....................................... 413 (6,220)
Advance billings........................................... 444 7,926
Other accrued expenses..................................... 3,209 10,650
Deferred income and compensation........................... 2,476 5,990
Purchases of trading securities............................ (6,584) (24,569)
Proceeds from sale of trading securities................... 5,609 15,982
Other operating activities................................. -- 75
-------- --------
Net cash provided by (used in) operating activities....... 8,420 (8,290)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and communication lines... (18,082) (73,077)
Proceeds from sale of property, equipment and communication
lines..................................................... 853 10
Purchases of short-term investments........................ (9,935) (1,972)
Proceeds from sale of short-term investments............... 9,922 6,737
Maturities of short-term investments....................... 9,749 2,440
Purchases of held-to-maturity securities................... (3,984) (3,417)
Maturity of held-to-maturity securities.................... 1,812 8,924
Other investing activities................................. (5,644) (5,555)
-------- --------
Net cash used in investing activities..................... (15,309) (65,910)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations............ 15,812 110,000
Payments on long-term obligations.......................... (6,500) (59,165)
Payment of capital lease obligations....................... (1,577) (1,552)
Net proceeds from issuance of common stock................. -- 806,371
Debt issuance cost......................................... -- (4,938)
Dividends paid............................................. (500) (487)
-------- --------
Net cash provided by financing activities................. 7,235 850,229
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 430 (155)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 776 775,874
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 11,449 8,681
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 12,225 $784,555
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes............................................... 3,957 9,928
Interest................................................... 424 4,814
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions of equipment through capital leases........... 4,075 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.
During the nine months ended December 31, 1999, the Company
issued shares of Class B common stock for notes receivable
amounting to $7,956.
During December 1999, the Company incurred a stock based
compensation charge of $28,370 relating to grants under
the 1998 Stock Appreciation Rights Plan and the 1998 Stock
Option Plan.
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements of Infonet Services Corporation and subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10Q and
Regulation S-X promulgated under the Securities Exchange Act of 1934.
Correspondingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All normal, recurring adjustments considered necessary for a fair
presentation have been included. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses. Actual results may differ from
these estimates. The financial statements should be read in conjunction with
the financial statements and notes thereto included in Infonet Services
Corporation's prospectus filed with the Securities and Exchange Commission on
December 15, 1999. The results of operations for the nine months ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2000.
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 April 2, 1999 as the year ended March 31, 1999, and
the 13- and 39-week periods ended January 1, 1999 and December 31, 1999 as the
three and nine months ended December 31, 1998 and December 31, 1999,
respectively.
Note 2. Consolidated Balance Sheet Components
Certain balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1999
--------- ------------
(Unaudited)
<S> <C> <C>
Property, equipment and communication lines:
Communication, computer and related equipment......... $114,922 $146,204
Communication lines................................... 9,811 70,573
Land, buildings and leasehold improvements............ 10,272 15,756
Furniture and other equipment......................... 6,239 7,383
-------- --------
141,244 239,916
Less accumulated depreciation and amortization........ (88,838) (103,843)
-------- --------
Total................................................. $ 52,406 $136,073
======== ========
Other assets:
SERP minimum pension liability........................ $ 3,014 $ 2,372
SERP assets........................................... 6,884 1,376
IDIP assets........................................... 9,813 18,843
Deferred income taxes................................. 11,043 15,546
Unamortized debt acquisition costs.................... -- 4,715
Unconsolidated investments in affiliates.............. 863 999
Other................................................. 3,390 9,370
-------- --------
Total................................................. $ 35,007 $ 53,221
======== ========
</TABLE>
Note 3. Common Stock
On December 16, 1999, the Company completed its initial public stock
offering of approximately 51.3 million shares of Class B common stock at an
offering price of $21.00. Of these shares, approximately 12.8 million shares
were sold by six stockholders and the Company sold approximately 38.5 million
shares. The gross proceeds from the IPO were approximately $807.7 million and
the Company incurred approximately $40.9 million in costs in connection with
the offering.
7
<PAGE>
Note 4. Earnings (Loss) Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", basic earnings (loss) per share for the three and nine
months ended December 31, 1998 and December 31, 1999 were computed by dividing
net income (loss) by the weighted average number of shares outstanding during
the periods presented.
At December 31, 1999 the Company's outstanding stock options represented the
only form of potential common stock. However, using these shares to calculate
diluted earnings per share had an antidilutive effect on reported loss per
share. Consequently, basic and diluted loss per share are the same amount for
the three and nine month periods ended December 31, 1999. As of December 31,
1998 there were no forms of potential common stock issued by the Company.
Note 5. Income Taxes
Net income (loss) and earnings (loss) per share reflect income taxes which
have been recorded at our estimated effective tax rate for the year. This
effective income tax rate has been determined by giving consideration to the
pretax earnings and losses applicable to foreign and domestic tax
jurisdictions.
The income tax benefits for the three and nine months ended December 31,
1999 were lower than normal due to an inability to deduct Incentive Stock
Option charges and the provision of a valuation allowance against deferred tax
assets. The impact of these items was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
December 31, 1999 December 31, 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
Loss before credit for income taxes......... ($23,726) ($35,286)
======== ========
Income tax benefit at 34%................... ($ 8,067) ($11,997)
Incentive stock option charges.............. 5,328 5,328
Valuation allowance......................... 1,023 2,963
Other, net.................................. 558 800
-------- --------
Reported income tax benefit................. ($ 1,158) ($ 2,906)
======== ========
</TABLE>
Note 6. 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.
8
<PAGE>
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- --------------------
1998 1999 1998 1999
--------- --------- -------- ----------
Reportable segments:
- -------------------- (Unaudited)
<S> <C> <C> <C> <C>
Revenues from external customers:
Direct........................... $ 69,657 $ 101,976 $197,866 $ 255,057
Alternate........................ 7,451 51,723 19,813 71,861
-------- --------- -------- ----------
Totals......................... $ 77,108 $ 153,699 $217,679 $ 326,918
======== ========= ======== ==========
Operating Contribution:
Direct........................... $ 24,583 $ 24,414 $ 67,855 $ 79,781
Alternate........................ 4,165 14,241 11,382 26,083
-------- --------- -------- ----------
Totals......................... $ 28,748 $ 38,655 $ 79,237 $ 105,864
======== ========= ======== ==========
<CAPTION>
Reconciliations:
- ----------------
<S> <C> <C> <C> <C>
Operating contribution from
reportable segments............... $ 28,748 $ 38,655 $ 79,237 $ 105,864
Core network, overhead and other
non-allocable costs............... (26,738) (62,381) (82,459) (141,150)
-------- --------- -------- ----------
Income (loss) before income taxes
and minority interest............. $ 2,010 $ (23,726) $ (3,222) $ (35,286)
======== ========= ======== ==========
Total assets of reportable
segments.......................... $ 63,857 $ 148,902
Core network, corporate and other
non-allocable assets.............. 102,376 985,094
-------- ----------
Total assets....................... $166,233 $1,133,996
======== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December
31,
----------------
1998 1999
--- --- ------- --------
<S> <C> <C> <C> <C>
Total assets:
Direct............................................... $57,161 $ 90,975
Alternate............................................ 6,696 57,927
--- --- ------- --------
Totals............................................. $63,857 $148,902
=== === ======= ========
</TABLE>
Note 7. Stock Incentive Plans
Subsequent to September 30, 1999, the Company issued additional stock
appreciation rights and experienced a number of forfeitures resulting in a net
increase of approximately 69,000 rights. As of December 31, 1999 there were
approximately 1.6 million SARs outstanding which are indexed to the Company's
Class B common stock at a base price of $0.84 per share. In accordance with
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" the
Company recorded a charge to compensation expense of approximately $11.5
million in December 1999.
Under the 1998 Stock Option Plan, the Company has issued and outstanding
approximately 3.5 million options to purchase shares of its Class B common
stock. The option plan was a book value plan that was converted to a market
value plan on December 16, 1999, the date of the Company's initial public
offering. In accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and Emerging Issues Task Force No.
88-6, "Book Value Stock Plans in an Initial Public Offering" the Company
recorded a charge to compensation expense of approximately $16.9 million in
December 1999.
9
<PAGE>
In November 1999 the Company's Board of Directors adopted the 1999 Stock
Option Plan which authorizes the company to issue up to a maximum of
approximately 10.6 million shares to executives and other employees and
directors of, and consultants to, the Company and its Affiliates to acquire a
continuing equity interest in the Company. On December 10, 1999 and December
15, 1999 the Company granted approximately 10.1 million options to key
executives and approximately 359,000 options to directors of the Company. The
options have been accounted for in accordance with APB Opinion No. 25. The
options vest ratably over three years beginning December 16, 2000 and expire
November 22, 2009. The exercise price for fifty percent of the options is
$21.00, for twenty-five percent is $23.10, and for the remaining twenty-five
percent is $25.20.
Note 8. Subsequent Events
In accordance with the terms of the credit agreement the Company entered
into on August 17, 1999 , the Company was required to pay down its borrowings
under the agreement up to 50% of the amount of the proceeds from the initial
public offering in excess of $750.0 million. As such, the Company paid down
debt in the amount of $10.0 million on January 4, 2000.
In January, 2000 the Company entered into a long-term lease agreement to
acquire bandwidth in the amount of approximately $20.0 million.
Subsequent to December 31, 1999 the Company converted approximately 1.3
million shares of its Class A common stock into approximately 1.3 million
shares of Class B common stock. Furthermore, approximately 420,000 options
issued pursuant to the 1998 Stock Option Plan were exercised subsequent to
December 31, 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In the following Management's Discussion and Analysis, the revenues and
expenses described as resulting from the outsourcing transaction refer to the
AUCS transaction on September 30, 1999 described under Recent Developments in
our prospectus filed with the Securities and Exchange Commission on December
15, 1999.
Results of Operations
The following tables summarize revenues by service, by distribution channel,
and by region and are provided in support of the accompanying management's
discussion and analysis for the three and nine month periods ended December
31, 1998 and 1999.
Revenues by Service
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Network Services........ $38,125 50% $ 56,153 37% $105,052 48% $152,044 46%
Consulting, Integration
and Provisioning
Services............... 21,005 27% 35,991 23% 58,095 27% 81,720 25%
Applications Services... 3,026 4% 4,335 3% 12,026 5% 12,008 4%
Other Communication
Services............... 14,952 19% 57,220 37% 42,506 20% 81,146 25%
------- -------- -------- --------
Total revenues.......... $77,108 100% $153,699 100% $217,679 100% $326,918 100%
======= ======== ======== ========
</TABLE>
Revenues by Distribution Channel
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Country representatives:
Number of representatives........... 56 54 56 54
Number of clients................... 1,124 1,416 1,124 1,416
Country representatives' revenues... $ 69,657 $ 101,976 $197,866 $255,057
Percent of total revenues........... 90% 67% 91% 78%
Alternate sales channels:
Number of sales channel partners.... 14 28 14 28
Number of sales channel partners'
clients............................ 174 1,234 174 1,234
Alternate sales channel revenues.... $ 7,451 $ 51,723 $ 19,813 $ 71,861
Percent of total revenues........... 10% 33% 9% 22%
</TABLE>
Revenues by Region
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- --------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Americas................ $28,108 37% $ 32,086 21% $ 81,626 37% $ 94,212 29%
Europe, Middle East and
Africa (EMEA).......... 41,044 53% 110,789 72% 114,192 52% 203,870 62%
Asia Pacific............ 7,956 10% 10,824 7% 21,861 10% 28,836 9%
------- -------- -------- --------
Total revenues.......... $77,108 100% $153,699 100% $217,679 100% $326,918 100%
======= ======== ======== ========
</TABLE>
11
<PAGE>
Three Months Ended December 31, 1999 Compared to Three Months Ended December
31, 1998
Revenues increased $76.6 million, or 99%, from $77.1 million for the three
months ended December 31, 1998 to $153.7 million for the three months ended
December 31, 1999. Excluding revenues resulting from a significant outsourcing
transaction completed on September 30, 1999, revenues increased $20.4 million,
or 26%, over the prior period. The overall increase in revenues was due to
increases of $18.0 million, or 47%, in Network Services, $42.3 million, or
283%, in Other Communication Services, and $15.0 million, or 71%, in
Consulting, Integration and Provisioning Services. The majority of growth in
sales of Network Services came from increased sales of Frame Relay and remote
access services. Other Communication Services and Consulting, Integration and
Provisioning Services increases included approximately $45 million and $11
million, respectively, in revenues from outsourcing services. Other
Communication Services including X.25 transport services and excluding
outsourcing services revenues, decreased $2.4 million or 16%. Excluding the
revenues from outsourcing services, Consulting, Integration and Provisioning
Services grew by $3.5 million, or 16.5%.
Revenues from country representatives increased $32.3 million, or 46%, from
$69.7 million for the three months ended December 31, 1998 to $102.0 million
for the three months ended December 31, 1999. Approximately $18 million of the
increase resulted from outsourcing services. While we decreased the number of
our country representatives from 56 at December 31, 1998 to 54 at December 31,
1999, the majority of our revenue growth was derived from continuing country
representatives. The number of our country representative clients increased by
292, or 26%, from 1,124 at December 31, 1998 to 1,416 at December 31, 1999.
Revenues from our alternate sales channels increased $44.3 million, or 594%,
from $7.5 million to $51.7 million. Approximately $38 million of the increase
resulted from outsourcing services. Our alternate sales channel partners
resold our suite of services to an additional 1,060 clients, including 1,027
new outsource clients, from 174 clients at December 31, 1998 to 1,234 clients
at December 31, 1999.
In terms of revenues billed on a regional basis, the largest portion of our
growth came from the EMEA region, which grew $69.7 million, or 170%, from
$41.0 million for the three months ended December 31, 1998 to $110.8 million
for the three months ended December 31, 1999. Approximately $56 million of
this revenue growth resulted from revenue growth in Europe incident to the
outsourcing transaction. Revenues billed in the Asia Pacific region grew $2.9
million, or 36%, from $8.0 million to $10.8 million over the three month
periods. Revenues billed in the Americas grew $4.0 million, or 14%, from $28.1
million to $32.1 million over the three month periods.
Country Representative Compensation expense increased $50.1 million, or
344%, from $14.6 million for the three months ended December 31, 1998 to $64.7
million for the three months ended December 31, 1999. Approximately $48
million of this increase resulted from outsource service revenues. The balance
of this expense grew in line with the related revenue.
Bandwidth and Related Costs increased $11.5 million, or 80%, from $14.3
million for the three months ended December 31, 1998 to $25.7 million for the
three months ended December 31, 1999. This increase was directly related to
higher network leasing expenses associated with increasing the capacity of our
network and our newly introduced ATM capability. The usage growth reflects
additional client port growth and increased capacity per port. Lease expense,
the largest component of bandwidth and related costs, increased $10.7 million,
or 92%, from $11.6 million to $22.3 million over the three month periods. An
increase in amortization of purchased capacity of $900,000 was included in the
three months ended December 31, 1999, compared to the same three month period
in the prior year.
Network Operations increased $8.5 million, or 64%, from $13.3 million for
the three months ended December 31, 1998 to $21.8 million for the three months
ended December 31, 1999. The largest component of this increase was a $6.2
million stock-related compensation charge recorded in the three month period
ended December 31, 1999. A smaller component of 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 $1.3
million, or 68%, from $2.0 million to $3.3 million over the periods.
12
<PAGE>
Selling, General and Administrative increased $31.9 million, or 95%, from
$33.5 million for the three months ended December 31, 1998 to $65.4 million
for the three months ended December 31, 1999. The largest component of the
increase was a $22.2 million stock-related compensation charge recorded in the
three months ended December 31, 1999. The increase was also due, in part, to
sales support expenses for multinational support activities which increased
$3.8 million from $13.7 million for the three months ended December 31, 1998
to $17.5 million for the three months ended December 31, 1999. This increase
was directly related to non-outsource revenue growth. In addition, personnel-
related expenses increased by $1.5 million, or 11%, from $13.9 million to
$15.4 million for the three month period compared to the prior year period,
due to sales and marketing efforts to increase our business. Administrative
expense, excluding stock related compensation expense, increased by
$5.1 million from $1.5 million for the three months ended December 31, 1998 to
$6.5 million for the current three month period, primarily due to legal and
accounting fees and other expenses incidental to the outsourcing transaction
of approximately $2.0 million, credits in the prior year period of $1.5
million for cancellation of an incentive program, and move and building
related expenses of $1.5 million.
Operating Income (Loss) decreased $(25.4) million, from $1.5 million to
$(23.9) million for the reasons discussed above. Of the loss, $(28.4) million
is attributable to stock-related compensation expenses.
Other Income (Expense) decreased from income of $500,000 for the three
months ended December 31, 1998 to income of $100,000 for the three months
ended December 31, 1999, This decrease was due to an increase in interest
expense over the period of $1.8, million, from $100,000 to $1.9 million. The
increased interest expense resulted from borrowings under the credit facility.
The decrease in Other Income (Expense) was also impacted by an increase in
interest income of $1.3 million resulting from investment of the IPO proceeds
received December 21, 1999.
Provision (Credit) for Income Taxes decreased $3.1 million from an expense
of $1.9 million for the three months ended December 31, 1998 to a credit of
$(1.2) million for the three months ended December 31, 1999. The effective tax
rate for the period differed from the federal statutory rate principally due
to an inability to deduct incentive stock option expenses and the provision of
a valuation allowance against deferred tax assets.
Net Income (Loss) decreased by $(22.5) million from $45,000 for the three
months ended December 31, 1998 to $(22.5) million for the three months ended
December 31, 1999 as a result of the factors described above.
Nine Months Ended December 31, 1999 Compared to Nine Months Ended December
31, 1998
Revenues increased $109.2 million, or 50%, from $217.7 million for the nine
months ended December 31, 1998 to $326.9 million for the nine months ended
December 31, 1999. Excluding revenues resulting from the outsourcing
transaction completed on September 30, 1999, revenues increased $53.0 million,
or 24%, over the prior year's period. The overall increase in revenues was due
to increases of $47.0 million, or 45%, in Network Services, $38.6 million, or
91%, in Other Communication Services, and $23.6 million, or 41%, in
Consulting, Integration and Provisioning Services. The majority of growth in
sales of Network Services came from increased sales of Frame Relay and remote
access services. Other Communication Services and Consulting, Integration and
Provisioning Services increases included approximately $45 million and $11
million, respectively, in revenues from outsourcing services. Other
Communication Services including X.25 transport services and excluding
outsourcing services revenues, decreased $6.0 million or 14%. Excluding the
revenues from outsourcing services, Consulting, Integration and Provisioning
Services grew by $12.1 million, or 21%.
Revenues from country representatives increased $57.2 million, or 29%, from
$197.9 million for the nine months ended December 31, 1998 to $255.1 million
for the nine months ended December 31, 1999. Approximately $18 million of the
increase resulted from outsourcing services. Revenues from our alternate sales
channels grew $52.0 million, or 263%, from $19.8 million to $71.9 million.
Approximately $38 million of the increase resulted from outsourcing services.
13
<PAGE>
In terms of revenues billed on a regional basis, the largest portion of our
growth came from the EMEA region, which grew $89.7 million, or 79%, from
$114.2 million for the nine months ended December 31, 1998 to $203.9 million
for the nine months ended December 31, 1999. Approximately $56 million of this
revenue growth resulted from alternate sales channel revenue growth in Europe
incident to the outsourcing transaction. Revenues billed in the Asia Pacific
region grew $7.0 million, or 32%, from $21.9 million to $28.8 million over the
three month periods. Revenues billed in the Americas grew $12.6 million, or
15%, from $81.6 million to $94.2 million over the three month periods.
Country Representative Compensation expense increased $56.2 million, or
142%, from $39.5 million for the nine months ended December 31, 1998 to $95.7
million for the nine months ended December 31, 1999. Approximately $48 million
of this increase related to outsource service revenues. The balance of this
expense grew in line with the related revenue.
Bandwidth and Related Costs increased $20.6 million, or 51%, from $40.6
million for the nine months ended December 31, 1998 to $61.2 million for the
nine months ended December 31, 1999. This increase was directly related to
higher network leasing expenses associated with increasing the capacity of our
network and our newly introduced ATM capability. The usage growth reflects
additional client port growth and increased capacity per port. Lease expense,
the largest component of bandwidth and related costs, increased $16.4, or 50%,
from $33.2 million to $49.6 million over the periods which is related to
revenue growth. Amortization of purchased capacity of $2.1 million was
included in the nine months ended December 31, 1999, reflecting amortization
on purchases of communications line capacity from November 1998 through the
current period.
Network Operations increased $14.6 million, or 36%, from $40.1 million for
the nine months ended December 31, 1998 to $54.7 million for the nine months
ended December 31, 1999. The largest component of this increase was a $6.2
million stock-related compensation charge recorded in the three month period
ended December 31, 1999. A $3.6 million impairment charge resulting from our
September 1999 decision to dispose of our ESG Communications Inc. subsidiary
was also recorded. Depreciation expense related to network equipment increased
$5.2 million, or 78%, from $6.6 million to $11.8 million over the periods.
Selling, General and Administrative increased $46.9 million, or 46%, from
$102.0 million for the nine months ended December 31, 1998 to $148.9 million
for the nine months ended December 31, 1999. The largest component of the
increase was a $22.2 million stock-related compensation charge recorded in the
current period. The increase was also due, in part, to sales support expenses
for multinational support activities which increased $10.7 million from $41.7
million for the nine months ended December 31, 1998 to $52.4 million for the
nine months ended December 31, 1999. This increase was directly related to
non-outsource revenue growth. In addition, personnel-related expenses
increased by $2.6 million, or 6%, from $42.2 million to $44.8 million for the
nine month period ended December 31, 1999 compared to the prior year period
due to sales and marketing efforts to increase our business. Administrative
expense, excluding stock-related compensation expenses, increased by $9.2
million from $8.0 million for the nine months ended December 31, 1998 to $17.2
million for the current nine month period, primarily due to legal and
accounting fees and other expenses incidental to the outsourcing transaction
of approximately $2.0 million, credits in the prior year of $1.5 million for
cancellation of an incentive program, retirement settlement expense of $1.7
million, and move and building related expenses of $1.5 million.
Operating Income (Loss) decreased $(29.0) million, from $(4.5) million to
$(33.5) million for the reasons discussed above. Of the loss, $(28.4) million
is attributable to stock-related compensation expenses.
Other Income (Expense) decreased from income of $1.3 million for the nine
months ended December 31, 1998 to expense of $(1.8) million for the nine
months ended December 31, 1999, a decrease of $3.1 million. This decrease was
due to an increase in interest expense over the period of $4.2 million, or
764%, from $500,000 to $4.7 million. The increased interest expense resulted
from borrowings under our credit facility. The decrease
14
<PAGE>
in Other Income (Expense) was also impacted by an increase in interest income
of $1.3 million resulting from investment of the IPO proceeds received
December 21, 1999.
Provision (Credit) for Income Taxes decreased $4.6 million from an expense
of $1.7 million for the nine months ended December 31, 1998 to a credit of
$(2.9) million for the nine months ended December 31, 1999. The effective tax
rate for the period differed from the federal statutory rate principally due
to an inability to deduct incentive stock option expenses and the provision of
a valuation allowance against deferred tax assets.
Net Income (Loss) increased by $(27.3) million from $(4.9) million for the
nine months ended December 31, 1998 to $(32.2) million for the nine months
ended December 31, 1999 as a result of the factors described above.
Liquidity and Capital Resources
Net cash used in operating activities during the nine months ended December
31, 1999 was $8.3 million compared to net cash provided by operating
activities of $8.4 million during the nine months ended December 31, 1998.
This resulted primarily from an increase in accounts receivable of
$76.3 million, partially offset by an increase in accounts payable of
$47.6 million, which both relate to the expansion of our client base in
Europe, and further offset by increased depreciation and amortization of
$7.5 million due to the expansion of our World Network and newly introduced
ATM capability, non-cash stock based compensation charges of $28.4 million and
various offsetting changes in operating assets and liabilities. Net cash used
in investing activities for the nine months ended December 31, 1999 was
$65.9 million compared to $15.3 million during the nine months ended
December 31, 1998. This increase was primarily due to the capital expenditures
in the expansion of our World Network and newly introduced ATM capability of
$55.0 million. Cash provided by financing activities for the nine months ended
December 31, 1999 was $850.2 million compared to $7.2 million for the nine
months ended December 31, 1998. This increase was the result of net proceeds
from the sale of common stock of $806.4 million, of which $766.8 million
related to our initial public offering in December 1999, and net proceeds from
our debt facility of $50.8 million.
As of December 31, 1999, we had $784.6 million of cash and cash equivalents,
working capital of $792.9 million and total assets of $1.1 billion.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Infonet's Registration Statement on Form S-1,
No. 333-88799.
15
<PAGE>
PART II:
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Prior to the date of our initial public offering, we submitted several
matters to the vote of our Class A common stock holders. In order to effect
our initial public offering, the Class A stockholders approved the adoption of
our revised certificate of incorporation, our revised bylaws, and the adoption
of a stockholders agreement among Infonet and our Class A common stock
holders. In addition, the Class A stockholders approved the adoption of our
1999 Stock Option Plan. Each of these matters were adopted by the unanimous
vote of the holders of our Class A common stock. Prior to the adoption of the
revised certificate of incorporation in connection with our initial public
offering, only our Class A common stock had voting rights.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFONET SERVICES CORPORATION
Date: February 14, 2000 /s/ Akbar H. Firdosy
_____________________________________
Akbar H. Firdosy
Chief Financial Officer (Chief
Accounting Officer)
17
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