<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 June 30, 2000
[_] 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 001-15475
______________
INFONET SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4148675
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 11, 2000, the registrant had the following number of shares
outstanding:
Class A Common Stock: 167,403,358
Class B Common Stock: 302,866,134
<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, June 30,
2000 2000
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 727,681 $ 398,133
Short-term investments -- 301,806
Accounts receivable, net 138,762 163,795
Deferred income taxes 6,011 6,639
Prepaid expenses 9,308 9,958
Other current assets 177 187
---------- ----------
Total current assets 881,939 880,518
---------- ----------
PROPERTY, EQUIPMENT AND COMMUNICATION LINES, Net 226,562 243,498
GOODWILL AND OTHER INTANGIBLE ASSETS, Net 3,425 1,801
OTHER ASSETS 110,401 47,580
---------- ----------
TOTAL ASSETS $1,222,327 $1,173,397
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 2,059 $ 1,701
Current portion of capital lease obligations 3,191 3,146
Accounts payable 83,694 97,306
Network communications 50,717 25,113
Accrued salaries and related benefits 22,119 11,396
Income taxes payable 7,538 11,693
Advance billings 22,168 23,623
Other accrued expenses 12,079 16,140
---------- ----------
Total current liabilities 203,565 190,118
---------- ----------
DEFERRED INCOME AND COMPENSATION 29,714 26,437
CAPITAL LEASE OBLIGATIONS 12,058 11,444
LONG-TERM OBLIGATIONS 73,081 50,531
LONG-TERM BANDWIDTH OBLIGATIONS 27,393 303
MINORITY INTEREST 465 535
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value per share:
400,000 shares authorized 370,160 shares issued, 167,403 shares outstanding
202,757 shares held in treasury, as of March 31, 2000 and June 30, 2000 67,167 67,167
Class B common stock, $0.01 par value per share:
600,000 shares authorized; 302,778 and 302,843 shares issued and
outstanding as of March 31, 2000 and June 30, 2000, respectively 959,870 971,539
Treasury stock, at cost, 202,757 shares (121,184) (121,184)
Notes receivable from issuance of common stock (8,134) (8,104)
Accumulated deficit (19,741) (12,040)
Accumulated other comprehensive loss (1,927) (3,349)
---------- ----------
Total stockholders' equity 876,051 894,029
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,222,327 $1,173,397
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<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
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES, Net $ 85,706 $154,165
-------- --------
EXPENSES:
Country representative compensation 15,861 53,706
Bandwidth and related costs 14,620 31,485
Network operations 14,250 16,256
Selling, general and administrative 41,518 47,482
-------- --------
Total expenses 86,249 148,929
-------- --------
OPERATING INCOME (LOSS) (543) 5,236
-------- --------
OTHER INCOME (EXPENSE):
Interest income 491 12,730
Interest expense (652) (2,489)
Other, net (15) 1,357
-------- --------
Total other income (expense), net (176) 11,598
-------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEM (719) 16,834
PROVISION FOR INCOME TAXES 707 8,561
-------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EXTRAORDINARY ITEM (1,426) 8,273
MINORITY INTEREST (52) 70
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,374) 8,203
EXTRAORDINARY ITEM, NET OF TAX OF $363 -- 502
-------- --------
NET INCOME (LOSS) (1,374) 7,701
-------- --------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments (416) (1,342)
Unrealized losses on securities (10) (80)
------- -------
Total other comprehensive loss, net (426) (1,422)
-------- --------
COMPREHENSIVE INCOME (LOSS) $ (1,800) $ 6,279
-------- --------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
SHARE $0.00 $0.02
-------- --------
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 380,059 470,231
======== ========
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARE OUTSTANDING 380,059 470,789
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2000
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Notes
Receivable
from Accumulated
Common Stock Treasury Stock Issuance of Other
-------------------- ---------------------- Common Accumulated Comprehensive
Shares Amount Shares Amount Stock Deficit Loss Total
------- ---------- --------- ---------- --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 2000 672,938 $1,027,037 (202,757) $(121,184) $(8,134) $(19,741) $(1,927) $876,051
Net income -- -- -- -- -- 7,701 -- 7,701
Exercise of stock options 65 55 -- -- -- -- -- 55
Stock based compensation
charge -- 11,614 -- -- -- -- -- 11,614
Repayment of notes receivable
from issuance of common stock -- -- -- -- 30 -- -- 30
Foreign currency translation
adjustments -- -- -- -- -- -- (1,342) (1,342)
Unrealized losses on
securities -- -- -- -- -- -- (80) (80)
------- ---------- -------- --------- -------- ------------ ----------- --------
BALANCE, JUNE 30, 2000 673,003 $1,038,706 (202,757) $(121,184) $(8,104) $(12,040) $(3,349) $894,029
======= ========== ======== ========= ======== ============ =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,374) $ 7,701
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 5,226 8,527
Loss on sale of business and other -- 480
Extraordinary loss due early to retirement
of debt, net of tax of $363 -- 502
Stock based compensation charge -- (1,389)
Loss on sale of property, equipment and
communication lines -- 38
Deferred income taxes 319 2,759
Minority interest (52) 70
Changes in assets and liabilities, net of
business sold:
Accounts receivable, net (343) (26,495)
Prepaid expenses 862 (778)
Other current assets 21 (9)
Accounts payable (3,092) 16,611
Network communications 329 (34,327)
Accrued salaries and related benefits (742) (1,460)
Income taxes payable (2,029) 4,599
Advance billings (148) 1,455
Other accrued expenses 2,416 2,513
Deferred income and compensation 743 1,281
Purchases of trading securities (3,222) (3,325)
Proceeds from sale of trading securities 1,448 2,230
Other operating activities (67) 235
-------- --------
Net cash provided by (used in)
operating activities 295 (18,782)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and
communication lines (25,885) (17,434)
Proceeds from sale of property, equipment and
communication lines 2,004 90
Net proceeds from sale of business -- 716
Purchases of short-term investments (1,921) (287,764)
Proceeds from sale of short-term investments 5,802 44,685
Maturities of short-term investments 494 --
Purchases of held-to-maturity securities (500) --
Maturity of held-to-maturity securities 500 --
Other investing activities (3,650) (120)
-------- --------
Net cash used in investing activities (23,156) (259,827)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
obligations 50,000 27,000
Repayments on long-term obligations (404) (49,908)
Repayments of capital lease obligations (434) (659)
Payments on long-term bandwidth obligations -- (27,000)
Net proceeds from issuance of common stock 41 55
Repayments of notes receivable from issuance
of common stock -- 29
-------- --------
Net cash provided by (used in) financing
activities 49,203 (50,483)
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<S> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES ON CASH (285) (456)
------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,057 (329,548)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,681 727,681
------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $34,738 $ 398,133
======= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 3,060 $ 970
Interest $ 413 $ 2,460
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions of equipment through capital leases $ 1,938 --
Acquisitions of communication lines accrued but not yet paid -- $ 8,723
Dividends declared but not paid $ 500 --
</TABLE>
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 three months ended June 30, 1999, the Company issued shares of common
stock for notes receivable amounting to approximately $7.9 million.
During April 2000, the Company amended its 1998 Stock Appreciation Rights Plan
(see Note 7) resulting in a new measurement date. The Company consequently
reduced accrued salaries and related benefits and deferred income and
compensation by approximately $5.3 million to reflect the stock price at the
new measurement date. The Company also reclassified approximately $7.7 million
of accrued salaries and related benefits and deferred income and compensation
to Class B Common Stock as a result of the amendment.
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 10-Q 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 the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on June 26, 2000. The results of operations
for the three months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2001.
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 31, 2000 as the year ended March 31, 2000, and
the 13-week periods ended July 2, 1999 and June 30, 2000 as the three months
ended June 30, 1999 and June 30, 2000, respectively.
Note 2. Consolidated Balance Sheet Components
Certain balance sheet components are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
2000 2000
-------- --------
(Unaudited)
<S> <C> <C>
Property, equipment and communication lines:
Communication, computer and related equipment $160,461 $162,447
Communication lines 112,786 127,162
Land, buildings and leasehold improvements 48,041 48,671
Furniture and other equipment 17,347 16,458
-------- --------
338,635 354,738
Less accumulated depreciation and amortization 112,073 111,240
-------- --------
Total $226,562 $243,498
======== ========
Other assets:
SERP minimum pension liability $ 1,924 $ 1,924
SERP assets 24 24
IDIP assets 21,217 21,686
Deferred income taxes 16,329 12,942
Unamortized debt acquisition costs 4,495 3,402
Unconsolidated investments in affiliates 1,088 1,475
Available-for-sale securities 58,807 --
Other 6,517 6,127
-------- --------
Total $110,401 $ 47,580
======== ========
</TABLE>
Note 3. Divestitures
On June 30, 2000 the Company sold its interest in its subsidiary Infonet
Software Solutions Inc. in Canada for $1.5 million in cash, resulting in a loss
of $480,000.
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 months ended
June 30, 1999 and 2000 were computed by dividing net income (loss) by the
weighted average number of shares outstanding during the periods presented.
At June 30, 1999 and 2000 the Company's outstanding stock options represented
the only form of potential common stock. Using these shares to calculate diluted
earnings per share had an antidilutive effect on reported loss per share at June
30, 1999 and no effect on basic earnings per share at June 30, 2000.
Consequently, basic and diluted earnings (loss) per share are the same amount
for the three month periods ended June 30, 1999 and 2000.
See accompanying notes to consolidated financial statements.
7
<PAGE>
Note 5. Income Taxes
The provision for income taxes for the three months ended June 30, 1999 and June
30, 2000 is higher than normal due to the provision of a valuation allowance
against deferred tax assets and, in the three-month period ended June 30, 2000,
an inability to deduct certain incentive stock option charges.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 2000
------------------ ------------------
<S> <C> <C>
Income (loss) before provision for income taxes
and extraordinary item $(719) $16,834
----- -------
Provision for income taxes at 34% and 35% for June 30, 1999 and 2000,
respectively $(244) $ 5,892
Incentive stock option charges -- 1,034
Valuation allowance 790 1,028
Other, net 161 607
----- -------
Reported provision for income taxes $ 707 $ 8,561
===== =======
</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 in the Company's
Annual Report on Form 10-K. 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.
See accompanying notes to consolidated financial statements.
8
<PAGE>
Summarized financial information concerning the Company's reportable segments
is shown in the following table (in thousands).
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
1999 2000
-------- ----------
(Unaudited)
<S> <C> <C>
Reportable segments:
-------------------
Revenues from external customers:
Direct $ 76,514 $ 100,068
Alternate 9,192 54,097
-------- ----------
Totals $ 85,706 $ 154,165
======== ==========
Operating Contribution:
Direct $ 27,777 $ 38,231
Alternate 5,333 19,334
-------- ----------
Totals $ 33,110 $ 57,565
======== ==========
As of June 30,
----------------------
1999 2000
-------- ----------
(Unaudited)
Total assets:
Direct $ 64,381 $ 93,366
Alternate 8,249 72,652
-------- ----------
Totals $ 72,630 $ 166,018
======== ==========
Three Months Ended
June 30,
----------------------
1999 2000
-------- ----------
(Unaudited)
Reconciliations:
---------------
Operating contribution from reportable segments $ 33,110 $ 57,565
Core network, overhead and other non-allocable costs (33,829) (40,731)
-------- ----------
Income (loss) before provision for income taxes,
minority interest, and extraordinary item $ (719) $ 16,834
======== ==========
As of June 30,
----------------------
1999 2000
-------- ----------
(Unaudited)
Total assets of reportable segments $ 72,630 $ 166,018
Core network, corporate and other non-allocable assets 185,586 1,007,379
-------- ----------
Total assets $258,216 $1,173,397
======== ==========
</TABLE>
Note 7. Stock Incentive Plans
On April 18, 2000, the Company's Board of Directors approved the 2000 Employee
Stock Purchase Plan and the 2000 International Employee Stock Purchase Plan
which authorizes the Company to issue rights to the employees of the Company,
to purchase up to a combined total of 1.0 million shares.
Additionally, on April 18, 2000 the Company's Board of Directors approved an
Omnibus Stock Plan ("the Omnibus Plan") which authorizes the Company to grant
or issue options, restricted stock and performance awards, dividend equivalents,
deferred stock and stock payments.
Included in the Omnibus Plan is the 2000 Stock Option Plan, which authorizes
the Company to issue options to employees of the Company and subsidiaries,
directors, affiliates and consultants. During the three months ended June 30,
2000, approximately 1.7 million options were granted at market value on the
grant date and are being accounted for under the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." The Omnibus Plan authorizes grants of up to
3,000,000 options.
On April 25, 2000, the Company amended its 1998 Stock Appreciation Rights Plan
(the "SARs Plan") to provide for a tandem feature which allows for the
settlement of the SARs with shares of Class B common stock as an alternative to
a cash settlement. The amended SARs Plan provides that the SARs may be settled
with stock or cash at the sole discretion of the Company. In accordance with
Financial Accounting Standards Board Interpretation No. 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Options or Award Plans," the
Company is accounting for the tandem award as equity instruments and the plan,
as amended, as a fixed plan under the provisions of APB Opinion No. 25
"Accounting for Stock Issued to Employees." The amendment to the SARs plan
created a new measurement date resulting in a credit to compensation expense of
approximately $5.3 million during the three months ended June 30, 2000. The
remaining unrecognized compensation expense of approximately $11.6 million at
June 30, 2000 will be amortized ratably over the remaining vesting period at a
rate of approximately $824,000 per quarter through December 31, 2003.
During the three months ended June 30, 2000, the Company granted 120,000
additional options under the 1999 Stock Option Plan bringing the total grants
issued and outstanding under this plan to approximately 10.2 million.
Additionally, approximately 96,000 options were terminated under the 1998 Stock
Option Plan.
9
<PAGE>
Note 8. Commitments and Contingencies
In connection with its outsourcing agreement with AUCS, the Company also
entered into a management agreement with AUCS under which the Company is
entitled to a management fee equal to 1.5% of the total consolidated revenues of
AUCS, up to an aggregate maximum of euro 17.1 million over the term of the
contract or approximately $16.2 million based on the exchange rate at June 30,
2000. The Company is also entitled to an incentive payment equal to 100% of the
amount by which the cumulative sum of AUCS EBITDA losses over the three-year
term of the management agreement is less than euro 295.3 million or
approximately $280.3 million at June 30, 2000. However, the Company must rebate
to AUCS 25% of the aggregate amount by which the cumulative sum of AUCS EBITDA
losses during the initial three-year term exceed euro 295.3 million, or
approximately $280.3 million, subject to a cap equal to the aggregate management
fee. As a result of the then uncertainty related to the amount of cumulative
EBITDA losses of AUCS over the term of the contract, no management fees due to
the Company were recognized as revenue prior to the three months ended June 30,
2000. During the three months ended June 30, 2000 approximately $1.9 million of
management fees were recognized as revenue.
Note 9. Long-Term Obligations
In April 2000, the Company repaid all of its debt outstanding under the
Tranche B Term Loan, amounting to $49.6 million. As a result of this early
extinguishment, maximum borrowing available to the Company under the Senior
Secured Credit Facility were reduced by $50.0 million. The write-off of
unamortized debt issuance costs associated with this repayment in the amount of
$502,000, net of tax, is reported as an extraordinary item in the three month
period ended June 30, 2000.
Note 10. Subsequent Events
In July 2000 the Board of Directors of the Company approved an increase in the
authorized awards of stocks under the Omnibus Plan from 3.0 million to 6.0
million and under the 2000 Stock Purchase Plan from 1.0 million to 2.0 million.
In July 2000, the Company purchased 1.0 million shares of preferred stock in
a company for $2.5 million in cash.
On August 4, 2000 the Company paid $12 million in cash to acquire the
remaining 51% in its subsidiary Network Telephony Corporation ("NTC"). This
increases the Company's ownership in the subsidiary to 100%. The Company had
been consolidating the financial statements of NTC due to its substantial
financial control.
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 outsourcing services refer to the Outsourcing
Agreement with three of our stockholders, AUCS, and its distributors described
in our Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
You should read this discussion together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in this
report.
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 month periods ended June 30, 1999 and
2000.
<TABLE>
<CAPTION>
Revenues by Service
Three Months Ended June 30,
----------------------------------------
1999 2000
--------------- -----------------
<S> <C> <C> <C> <C>
Network Services $45,599 53% $ 65,530 43%
Consulting, Integration and Provisioning Services 25,681 30% 40,695 26%
Applications Services 4,291 5% 3,539 2%
Other Communications Services 10,135 12% 44,401 29%
------- --- -------- ---
Total revenues $85,706 100% $154,165 100%
======= ========
<CAPTION>
Revenues by Distribution Channel
Three Months Ended June 30,
---------------------------------------
1999 2000
-------------- ----------------
Country representatives:
Number of representatives 56 55
Number of clients 1,160 1,310
Country representatives' revenues $76,514 $100,068
Percent of total revenues 89% 65%
Alternate sales channels:
Number of sales channel partners 16 21
Number of sales channel partners' clients 191 1,148
Alternate sales channel revenues $ 9,192 $ 54,097
Percent of total revenues 11% 35%
<CAPTION>
Revenues by Region
Three Months Ended June 30,
---------------------------------------
1999 2000
--------------- ----------------
Americas $31,529 37% $ 41,646 27%
Europe, Middle East and Africa (EMEA) 45,821 53% 100,527 65%
Asia Pacific 8,356 10% 11,992 8%
-------------- ---------------
Total revenues $85,706 100% $154,165 100%
============== ===============
</TABLE>
11
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues increased $68.5 million, or 80%, from $85.7 million in the three
months ended June 30, 1999 to $154.2 million in the three months ended June 30,
2000. Excluding revenues resulting from a significant outsourcing agreement
entered into on September 30, 1999, revenues increased $27.3 million, or 32%,
over the prior year period from $85.7 million to $113.0 million. The overall
increase in revenues was due to increases of $34.3 million, or 338%, in Other
Communications Services, $19.9 million, or 44%, in Network Services, and $15.0
million, or 58%, 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 Communications Services and
Consulting, Integration and Provisioning Services increases included
approximately $32 million and $9 million, respectively, in revenues from
outsourcing services. Excluding outsourcing services revenues, Other
Communications Services, which includes X.25 transport services, increased $2.4
million or 24%. Excluding outsourcing services revenues, Consulting, Integration
and Provisioning Services increased $5.7 million or 22%.
Revenues from country representatives increased $23.6 million, or 31%, from
$76.5 million for the three months ended June 30, 1999 to $100.1 million for the
three months ended June 30, 2000. Approximately $6 million of the increase
resulted from outsourcing services. Although we decreased the number of our
country representatives from 56 as of June 30, 1999 to 55 as of June 30, 2000,
we saw increased revenue that was derived largely through the growth of existing
country representatives. The number of our country representative clients
increased by 150, or 13%, from 1,160 as of June 30, 1999 to 1,310 as of June 30,
2000. Revenues from our alternate sales channels also grew $44.9 million, or
489%, from $9.2 million to $54.1 million. Approximately $35 million of the
increase resulted from outsourcing services. Our alternate sales channel
partners resold our suite of services to a net additional 957 clients, including
807 new outsource customers, from 191 clients as of June 30, 1999 to 1,148
clients as of June 30, 2000.
In terms of revenues billed on a regional basis, the majority of our growth
was in the EMEA region, which increased $54.7 million, or 119%, from $45.8
million for the three months ended June 30, 1999 to $100.5 million for the three
months ended June 30, 2000. Approximately $41 million of this revenue growth
was in Europe as a result of outsourcing services; the balance of the increase
is due to the addition of new clients and increases in sales of services to
existing clients. Revenues billed in the Asia Pacific region grew $3.6 million,
or 44%, from $8.4 million to $12.0 million over the three month periods.
Revenues billed in the Americas grew $10.1 million, or 32%, from $31.5 million
to $41.6 million over the three month periods.
Country Representative Compensation increased $37.8 million, or 239%, from
$15.9 million for the three months ended June 30, 1999 to $53.7 million for the
three months ended June 30, 2000. Approximately $32 million of this increase
resulted from outsourcing services revenues. The balance of this expense grew
in line with the related revenue.
Bandwidth and Related Costs increased $16.9 million, or 115%, from $14.6
million for the three months ended June 30, 1999 to $31.5 million for the three
months ended June 30, 2000. 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 $15.9 million, or 152%, from
$10.4 million to $26.3 million over the three month periods. Amortization of
purchased capacity increased $2.0 million, from $246,000 to $2.2 million over
the three month periods.
Network Operations increased $2.0 million, or 14%, from $14.3 million for
the three months ended June 30, 1999 to $16.3 million for the three months ended
June 30, 2000. Stock related compensation charges of $509,000 offset by a one-
time credit of $1.6 million were recorded in the three months ended June 30,
2000. The stock related compensation credit resulted from an amendment to one of
the Company's stock-based compensation plans. Depreciation expense related to
network equipment increased $1.9 million, or 82%, from $2.3 million to $4.2
million over the three month periods. The remaining increase was related to the
increased costs associated with our network management, operations and support
activities, personnel costs, and other network operations expenses.
Selling, General and Administrative increased $6.0 million, or 14%, from
$41.5 million for the three months ended June 30, 1999 to $47.5 million for the
three months ended June 30, 2000. Stock related compensation charges of $3.4
million offset by a one-time credit of $3.6 million were recorded in the three
months ended June 30, 2000. The stock related compensation credit resulted from
an amendment to one of the Company's stock-based compensation plans. Our sales
support expenses for multinational support activities decreased $400,000 from
$17.1 million for the three months ended June 30, 1999 to $16.7 million for the
three months ended June 30, 2000. In addition, personnel-related expenses
increased by $2.1 million, or 15% from $14.6 million to $16.8 million over the
three month periods due to increased sales and marketing efforts to increase our
business.
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Administrative expense, excluding stock related compensation, increased by
$2.0 million from $4.8 million for the three months ended June 30, 1999 to $6.8
million for the three months ended June 30, 2000. The increase was primarily
due to payroll and related expense.
Operating Income (Loss) grew by $5.8 million, from $(543,000) for the three
months ended June 30, 1999 to $5.2 million for the three months ended June 30,
2000 due to the factors stated above.
Other Income (Expense) increased $11.8 million, from expense of $176,000
for the three months ended June 30, 1999 to income of $11.6 million for the
three months ended June 30, 2000. This increase was due to an increase in
interest income over the period of $12.2 million from $491,000 to $12.7 million.
The increased interest income resulted from the investment of IPO proceeds
received in December 1999. The increase in Other Income (Expense) was also
impacted by an increase in interest expense of $1.8 million resulting from
borrowings under the senior secured credit facility. Other, net for the three
months ended June 30, 2000 included foreign exchange gains of $1.8 million
related to the settlement of communication lines purchases.
Provision (Credit) for Income Taxes increased $7.9 million from an expense
of $707,000 for the three months ended June 30, 1999 to $8.6 million for the
three months June 30, 2000. The effective tax rate is higher in the three month
period ended June 30, 2000 due primarily to non-deductible incentive stock
option charges.
Income (Loss) before Extraordinary Item increased $9.6 million from $(1.4)
million for the three months ended June 30, 1999 to $8.2 million for the three
months ended June 30, 2000 as a result of the factors described above.
Extraordinary Item, Net of Tax for the three month period ended June 30,
2000 represents the write-off of unamortized debt issuance costs associated with
the $49.6 million of long-term debt which was repaid prior to its due date
during the three month period ended June 30, 2000.
Net Income (Loss) increased $9.1 million from $(1.4) million for the three
months ended June 30, 1999 to $7.7 million for the three months ended June 30,
2000 as a result of the factors described above.
Liquidity and Capital Resources
Net cash used in operating activities during the three months ended June 30,
2000 was $18.8 million compared to net cash provided by operating activities of
$295,000 during the three months ended June 30, 1999. This resulted primarily
from a decrease in network communications liability of $34.7 million and an
increase in accounts receivable of $26.2 million, partially offset by an
increase in accounts payable of $19.7 million. Accounts receivable and payable
increases relate to the expansion of our client base in Europe. Cash flows from
operating activities were further impacted by increased net income of $9.1
million, increased income taxes payable of $6.6 million, and increased
depreciation and amortization of $3.3 million due to the expansion of our World
Network and newly introduced ATM capability. Net cash used in investing
activities for the three months ended June 30, 2000 was $259.8 million compared
to $23.2 million during the three months ended June 30, 1999. This increase was
primarily due to an increase in purchases of short-term investments of $285.8
million, partially offset by an increase in proceeds from sale of short-term
investments of $38.9 million. Cash used in financing activities for the three
months ended June 30, 2000 was $50.5 million compared to cash provided by
financing activities of $49.2 million for the three months ended June 30, 1999.
This change was the result of an increase in repayments of long-term obligations
of $49.5 million, payments on long-term bandwidth obligations of $27.0 million
during the three months ended June 30, 2000, and a decrease in proceeds from
issuance of long-term obligations of $23.0 million.
As of June 30, 2000, the Company had $611.8 million of cash and cash equivalents
and working capital of $690.4 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.
As of June 30, 2000, we were primarily exposed to the following currencies:
the Euro, the British pound, the German mark, and the Italian lira. 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 $1.1 million as of that date.
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PART II:
Item 1. Legal Proceedings
Not applicable.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
3.1 Restated Certificate of Incorporation.*
3.2 Amended and Restated By Laws.*
10.1 Amendment to senior secured facility filed herewith.
*Incorporated by reference to the corresponding exhibit number from the
registrant's Registration Statement on Form S-1 filed with the Commission on
December 15, 1999.
B. Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter for
which this report is filed.
Exhibit 27.1 Financial Data Schedule filed herewith.
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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: August 14, 2000 /s/ AKBAR H. FIRDOSY
--------------------
Akbar H. Firdosy
Chief Financial Officer (Chief
Accounting Officer)
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