<PAGE>
As filed with the Securities and Exchange Commission on May 3, 2000
Registration No. 333-32134
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TYCOM LTD.
(Exact Name of Registrant as Specified in Its Charter)
Bermuda 3670 Not Applicable
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number)Identification Number)
incorporation or
organization)
The Zurich Centre, Second Floor,
Suite 201
90 Pitts Bay Road
Pembroke HM 08, Bermuda
(441) 298-9770
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Puglisi & Associates
850 Library Avenue, Suite 204
P.O. Box 885
Newark, Delaware 19711
(302) 738-6680
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Francis J. Morison, Byron S. Kalogerou, Esq. Alan L. Beller, Esq.
Esq. Vice President and General Raymond B. Check, Esq.
E. Waide Warner, Counsel Cleary, Gottlieb, Steen &
Jr., Esq. TyCom Ltd. Hamilton
Davis Polk & The Zurich Centre, 1 Liberty Plaza
Wardwell Second Floor, Suite 201 New York, New York 10006
450 Lexington 90 Pitts Bay Road (212) 225-2000
Avenue Pembroke HM 08, Bermuda
New York, New York (441) 298-9770
10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Securities to be Amount to be Offering Price Offering Registration
Registered Registered Per Share Price(1)(2) Fee
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<S> <C> <C> <C> <C>
Common Shares, par value $0.25 per share... 46,000,000 $25.00 $1,150,000,000 $303,600(3)
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</TABLE>
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(1) Includes common shares which may be purchased from TGN Holdings Ltd. by the
underwriters to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the
registration fee. In accordance with Rule 457(o) under the Securities Act
of 1933, as amended, the number of shares being registered and the proposed
maximum offering price per share are not included in this table.
(3) $264,000 of which was previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. We may not +
+sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 3, 2000
Shares
[LOGO OF TYCOM]
40,000,000
Common Shares
$ per share
-----------
We are offering 40,000,000 newly issued common shares to the public. We
anticipate that the initial public offering price will be between $20 and $25
per share. After the offering, Tyco International Ltd. will own indirectly at
least 80% of our outstanding common shares, assuming no exercise of the
underwriters' over-allotment option. The underwriters named in this prospectus
may purchase up to 6,000,000 additional common shares from TGN Holdings Ltd., a
wholly-owned subsidiary of Tyco International Ltd., to cover over-allotments.
We will not receive any part of the proceeds from any sale of common shares by
TGN Holdings Ltd.
No public market currently exists for our common shares. We have applied to
have the common shares approved for listing on the New York Stock Exchange and
for a secondary listing on the Bermuda Stock Exchange, in each case, under the
symbol "TCM".
-----------
Investing in our common shares involves risks. See "Risk Factors" beginning
on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission nor the Registrar of Companies or the Bermuda Monetary Authority in
Bermuda 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.
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount ........................................ $ $
Proceeds to TyCom before expenses............................. $ $
</TABLE>
- -----
The underwriters expect to deliver the common shares to purchasers on or
about , 2000.
Goldman, Sachs & Co. Salomon Smith Barney
Merrill Lynch & Co.
Prospectus dated , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividends................................................................ 19
Corporate Structure and Reorganization................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 34
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 58
Relationship with Tyco After the Offering and Certain Transactions......... 67
Principal and Selling Shareholders......................................... 70
Description of Share Capital............................................... 71
Shares Eligible for Future Sale............................................ 76
Tax Considerations......................................................... 77
Underwriting............................................................... 81
Legal Matters.............................................................. 83
Experts.................................................................... 83
Where You Can Find More Information........................................ 84
Service of Process and Enforcement of Liabilities.......................... 84
Index to Consolidated Financial Statements ................................ F-1
</TABLE>
The Bermuda Stock Exchange takes no responsibility for the contents of this
document, makes no representations as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss howsoever arising
from or in reliance upon any part of the contents of this document.
Until , 2000, all dealers that buy, sell or trade common shares,
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.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before deciding to invest in our common shares. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section and the consolidated
financial statements and the notes to those statements. Unless otherwise
indicated, information presented in this prospectus assumes no exercise of the
underwriters' over-allotment option.
Who We Are
TyCom Ltd. is a leading independent provider of undersea fiber optic
networks and services. We have designed, engineered, manufactured and installed
over 300,000 kilometers of undersea cable. TyCom, with its fleet of eleven
ships, has played a principal role in the deployment and maintenance of most of
the world's major undersea cable networks. Over the last nine years, TyCom
Laboratories, which has its origins in Bell Labs, has achieved milestones in
the laboratory environment by increasing the amount of data that can be
transmitted on undersea fiber optic networks.
We are an indirect subsidiary of Tyco International Ltd., recently formed to
hold its undersea fiber optic telecommunications business. Following this
offering, Tyco will indirectly own at least 80% of our common shares.
The TyCom Global Network
We plan to use our expertise to design, manufacture, install, own, operate,
maintain and sell bandwidth capacity on what we believe will be the most
extensive and technologically advanced global undersea fiber optic network--the
TyCom Global Network. We will position ourselves as an independent provider of
bandwidth solutions to telecommunications providers, Internet and application
service providers, and others requiring significant bandwidth capacity. In
addition, we intend to reserve a portion of our cable system supply capacity
for the needs of our customers.
The first phase of our network will be designed to offer bandwidth capacity
upgradeable to a minimum of 2.56 terabits per second, span approximately 70,000
undersea kilometers and connect 27 of the world's major telecommunication
centers, including New York, London, Paris, Tokyo and Hong Kong. We anticipate
that the transatlantic portion of the first phase will be operational in the
second half of 2001 and the remainder, consisting of the transpacific and
European portions, by the end of 2002. We plan to fund the first phase of our
network with cash from operations, a portion of the proceeds from this offering
and funds drawn under our credit agreement with Tyco. Upon completion of the
entire TyCom Global Network, we expect that it will span approximately 250,000
undersea kilometers, linking terrestrial networks on all six inhabited
continents.
Our Strategy
The principal elements of our business strategy are to:
. Deploy the TyCom Global Network to Address Increasing Demand. We are
launching the TyCom Global Network to address the increasing demand for
undersea fiber optic bandwidth driven by the growth of the Internet and
bandwidth-intensive applications.
. Transform TyCom into a Provider of Undersea Bandwidth Services. We
intend to build on our record of technological innovation, our
experience in undersea systems supply and our customer relationships to
focus on providing a broad spectrum of undersea bandwidth services.
3
<PAGE>
. Deliver Customer-Driven Network Solutions. We expect to offer our
customers a wide range of undersea bandwidth capacity options and
flexible links to terrestrial networks and to develop customer-driven
network and bandwidth management solutions, including virtual private
networks and selected Internet enabling products and services.
Our Competitive Advantages
Our primary competitive advantages include:
. Technology Leadership. The TyCom Global Network will incorporate leading
edge fiber optic technology developed by our scientists and engineers,
who are at the forefront of research to increase undersea bandwidth
capacity and data transmission speeds.
. Integrated Capabilities Drive Cost and Deployment Advantages. We believe
our integrated capabilities to design, manufacture, install, operate and
maintain a global undersea fiber optic network will enable us to deploy
the TyCom Global Network more cost-effectively and to provide bandwidth
services to our customers more quickly and reliably than our
competitors.
. Strong Management Team and Proven Ability to Execute. From 1997 to 1999,
our management team, with an average of 15 years of experience in
undersea cable systems supply, has reduced our systems delivery time by
nearly 40%, grown annual revenues from approximately $950 million to
over $1.6 billion and increased our backlog nine-fold to $2.7 billion.
----------------
Our principal executive offices are located at The Zurich Centre, Second
Floor, Suite 201, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and our telephone
number is (441) 298-9770.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common shares offered............. 40,000,000 shares
Common shares outstanding after
this offering.................... 230,000,000 shares(1)
Voting rights..................... One vote per share
Use of proceeds................... We estimate that our net proceeds from the
offering will be approximately
$868,500,000. We intend to apply
approximately $ of the net proceeds
towards the deployment of the first phase
of the TyCom Global Network and use the
remainder to pay a dividend to TGN Holdings
Ltd.
Dividend policy................... We do not intend to pay dividends on our
common shares in the foreseeable future. We
plan to retain any earnings for use in the
operation of our business and to fund
future growth.
Proposed New York Stock Exchange
symbol........................... TCM
Proposed Bermuda Stock Exchange
symbol........................... TCM
</TABLE>
- --------
(1) Excludes common shares which are reserved for issuance under our share
option plans. Options to purchase common shares under our benefit plans
were outstanding or had been approved for grant at , 2000.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial and operating
data for TyCom. The data presented in this table are derived from the
consolidated financial statements and notes thereto which are included
elsewhere in this prospectus. You should read the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a further explanation of the
financial data summarized here.
<TABLE>
<CAPTION>
(Unaudited)
Six Months
Fiscal Year Ended Ended
September 30, March 31,
-------------------------- ---------------- ---
1997 1998 1999 1999 2000
------ -------- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue................. $375.5 $1,281.6 $1,637.6 $699.3 $1,275.8
Operating income (loss)..... (265.5) 262.3 323.6 162.5 220.2
Income (loss) before income
taxes...................... (267.5) 238.3 269.1 131.4 212.3
Net income (loss)........... (156.6) 152.0 163.0 77.4 135.2
Other Data:
Capital expenditures........ $ 18.7 $ 28.2 $ 97.4 $ 39.0 $ 66.1
Net cash provided by
operations................. 272.4 46.9 773.5 147.0 135.7
Net cash used in investing
activities................. (29.2) (110.3) (172.1) (67.5) (57.3)
Net cash provided by (used
in) financing activities... (243.2) 113.1 (639.0) (58.1) (75.2)
EBITDA...................... (253.9) 298.8 370.7 181.8 253.2
</TABLE>
<TABLE>
<CAPTION>
As of March
31, 2000
-------------
(in millions)
<S> <C>
Balance Sheet Data:
Cash.............................................................. $ 15.3
Short-term advances to Tyco....................................... 87.1
Working capital................................................... (182.0)
Total assets...................................................... 1,870.0
Long-term debt.................................................... 655.1
Shareholder's equity.............................................. 72.6
</TABLE>
The loss in fiscal year 1997 includes a pre-tax charge of $361.0 million
($220.2 million after tax) for the write-off of purchased in-process research
and development related to the acquisition of the submarine systems business of
AT&T Corp. in July 1997.
The operating results, which are presented in accordance with generally
accepted accounting principles, are supplemented by a discussion of earnings
before interest, taxes, depreciation and amortization data, which we refer to
as EBITDA in this prospectus. As our operations transition to deploying the
TyCom Global Network and selling bandwidth capacity, management will begin
to view results on an EBITDA basis. EBITDA is commonly used in the
communications industry to analyze companies on the basis of operating
performance. EBITDA, however, should not be considered an alternative to
operating or net income as an indicator of the performance of our business, or
as an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles.
6
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in our
common shares. Some of the following risks relate principally to our business
in general and the industry in which we operate. Other risks relate principally
to the securities market and ownership of our shares.
Risk Factors Relating to TyCom
We may not successfully manage the transformation of our business to one
focused on the sale of undersea bandwidth capacity.
We may fail to generate sufficient revenues from our sale of bandwidth
capacity to justify our development of the TyCom Global Network. TyCom must
undergo substantial changes to make the transition from a company primarily
involved in the design, manufacture, installation, maintenance and operation of
undersea fiber optic cable systems for others, to a larger and more complex
organization which will principally own, operate and sell bandwidth capacity on
a global undersea fiber optic cable network, the TyCom Global Network. This
transition will require that we, among other things, expand and refocus our
global sales and marketing force to sell undersea bandwidth capacity, enhance
our financial and management controls and systems, and develop and market new
products and services, as well as requiring us to direct resources away from
the existing cable systems supply business that generates our current revenues.
We cannot provide any assurance that we will succeed in managing this
transition.
During construction of the transatlantic portion of the TyCom Global
Network, our revenues and operating income may decrease from current levels.
System supply revenues are expected to decline in each quarter through June 30,
2001 and operating expenses are expected to increase during the construction of
our network infrastructure. This may result in an operating loss as we begin to
sell capacity on the TyCom Global Network. Please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" for more information.
We may not deploy and operate the TyCom Global Network successfully.
Our ability to complete each phase of the TyCom Global Network on time and
within budget will be affected by a variety of factors, many of which we cannot
control, including those related to the ability to connect with terrestrial
networks, availability of suitable landing sites or rights-of-way, unforeseen
engineering or construction challenges, including work stoppages, weather
interference, natural disasters, environmental, marine or geological problems,
unanticipated costs or technical failures, shortages of labor or materials, and
our ability to manage and finance the deployment of each phase in a cost-
effective manner. As a result, the phases of the TyCom Global Network may not
be completed within the estimated time frames or cost estimates.
The operation, administration and maintenance of the TyCom Global Network
requires the coordination and integration of sophisticated and highly
specialized hardware and software technologies and equipment located throughout
the world. Even if built to specifications, our network may not function as
designed or be completed within our current cost estimates. We anticipate that
we will need to expand and upgrade the TyCom Global Network following its
initial construction for us to compete effectively. Any expansion or upgrade of
our network may require substantial additional operational, technical,
financial and managerial resources. If we are unable to expand or upgrade our
network to respond to these developments on a timely basis and at a
commercially reasonable cost, we may lose customers or revenues.
7
<PAGE>
Any failure to meet the substantial capital requirements of the TyCom Global
Network is likely to prevent us from fully realizing our business objectives.
We estimate that the total cost to implement the first phase of the TyCom
Global Network, as currently contemplated, will be approximately $5.7 billion.
We plan to fund the first phase of our network with cash from operations, a
portion of the proceeds from this offering and funds drawn under our credit
agreement with Tyco. If we fail to obtain any required funds, whether from
operations or by raising additional debt or equity capital, we may need to
delay or abandon all or part of the TyCom Global Network or restrict our other
spending plans or activities. To the extent that these sources of funds may not
be sufficient, we will need to seek additional financing through either debt or
equity offerings. Any such required financing may not be available when needed,
or may only be available at significant additional cost or dilution to
shareholders.
Rapid changes in telecommunications technology raise the possibility that our
fiber optic cable technology could be surpassed or become obsolete.
If we do not maintain our technological leadership, we will be unable to
compete effectively. Even if we increase our research and development spending,
we cannot provide any assurance that we will maintain our technological
competitiveness. The pace and direction of technological change is
unpredictable. If subsequent generations of new products or new technologies
are not developed or incorporated into our network, competitors may be able to
install, purchase or operate competing systems at a lower per-bit transmission
cost on undersea cable routes currently targeted by us, or to expand bandwidth
capacity on their existing systems, thus placing us at a competitive
disadvantage. Important aspects of our network will rely on technology that is
in the development stage or that is largely commercially unproven and may not
be compatible with existing technology.
In addition, we have no prior history of developing products for the
terrestrial equipment marketplace and have only recently dedicated a group of
research and development employees to explore the application of some of our
undersea technologies to terrestrial systems. Our efforts in this area are
currently exploratory and we cannot provide any assurance that we will ever
develop any commercially viable terrestrial products.
Our transformation to being an owner-operator may alienate some of our current
or future customers.
Some of our current and potential customers may view our transformation to a
company focused on the ownership, operation and sale of bandwidth capacity of
an undersea fiber optic network unfavorably. They may therefore be less likely
to place orders with TyCom for bandwidth capacity or system services, either
because they perceive us as a competitor or because of a concern that our shift
in focus will divert our attention from our traditional system supply and
maintenance business. Alienating even a small number of potential customers
could have a serious impact on our business, since the number of potential
customers is limited and may be reduced by ongoing consolidation in the
telecommunications industry.
Because we face significant competition, we may not be able to attract or
retain the specialized capacity sales, technical and managerial personnel
necessary to achieve our business objectives.
Our future success depends partly on our ability to attract and retain
qualified bandwidth capacity sales personnel and the continued service of our
key sales, research, engineering, marketing, manufacturing, executive and
administrative personnel, particularly in connection with the TyCom Global
Network and the new products and services we intend to offer. Some of our key
8
<PAGE>
employees currently do not have employment agreements with TyCom that would
limit their ability to leave our employment or compete with us following their
departure. If we fail to attract a sufficient number of new personnel or to
retain our employees, our ability to manage our transition, growth and the day-
to-day aspects of our complex network will be weakened and we will not be able
to maintain and expand our business. Competition for qualified bandwidth
capacity sales specialists, fiber optic engineers, network operators and
management personnel is especially intense. As a result, certain of our
departments have had to increase spending to retain personnel.
We may face substantial damages or be enjoined from pursuing important
activities as a result of existing or future litigation, arbitration or other
claims.
Tyco Submarine Systems Ltd. is a party to a recently filed lawsuit alleging
that it failed to negotiate in good faith a system supply agreement for a cable
system that the plaintiff alleges was to be substantially similar to the
proposed TyCom Global Network. The plaintiff seeks $1 billion in compensatory
damages and injunctive relief. Due to the uncertainty inherent in litigation,
we cannot provide assurance that the ultimate result of this litigation will
not result in the award of substantial damages against us or judicially imposed
restrictions on our planned deployment of the TyCom Global Network. Please
refer to "Business--Legal Proceedings." In addition, we are subject to
potential lawsuits, arbitration proceedings and other claims in connection with
our current business and with regard to the transformation of our business,
including the development and deployment of our network. Please refer to
"Business--Undersea Cable System Issues."
Network failure, delays and errors in transmissions or service interruptions
could expose us to potential liability.
Given the complexity of our proposed network, it is possible that
transmitted data will be lost, delayed or distorted. Disruptions in data
delivery may cause significant losses to a customer using our network. Our
network may also contain undetected design faults that, despite our testing,
may be discovered only after the network has been installed and is in use. The
failure of any equipment or facility on the network could result in the
interruption of customer service until we effect necessary repairs or install
replacement equipment. Network failures, delays and errors could also result
from:
. natural disasters; . excessive, sustained or peak user demand;
. power losses; . network software flaws;
. telecommunications failures;
. cable cuts; and
. security breaches; . computer viruses.
These failures, faults or errors could cause delays or service interruptions,
expose us to customer liability or require expensive modifications.
Similarly, if a carrier or other service provider fails to provide
uninterrupted terrestrial connections to our network, service to our customers
will be disrupted. If service is not restored quickly, agreements with our
customers may obligate us to provide credits to them, which would reduce our
revenues. Service disruptions could also damage our reputation and impair our
ability to attract and retain customers.
We are dependent on a small number of suppliers, including specialized
equipment and component manufacturers.
We are dependent on suppliers for various electrical and optical components,
including fiber, lasers and network switching equipment. If any of these
relationships is terminated or a supplier
9
<PAGE>
fails or is unable to provide reliable services or equipment and we are unable
to reach suitable alternative arrangements quickly, we may experience
significant delays and additional costs in the deployment of our network. In
particular, currently there are only two companies, Corning and Lucent
Technologies, that are capable of supplying optical fibers in the quantity and
of the quality required by the TyCom Global Network. If either Corning or
Lucent were to cease manufacturing optical fibers, if either of their
manufacturing operations were interrupted for any significant amount of time,
or if they were unable or unwilling to supply TyCom for any other reason,
including capacity restraints, then we would be at least temporarily unable to
obtain sufficient supplies of fiber, thus exposing us to significant delays and
additional costs.
If we fail to maintain cooperative relationships with the providers of
terrestrial access, our operations may be impaired.
Our ability to link to terrestrial networks depends upon the willingness of
providers of terrestrial access to offer cost-effective terrestrial services,
and to agree to connect terrestrial networks to the TyCom Global Network. We
cannot assure you that these providers will perform their contractual
obligations or that there will not be political events or changes in relation
to these providers which have adverse effects on us.
We may experience difficulties constructing or operating the TyCom Global
Network in certain jurisdictions.
Our strategy depends on our ability to provide fiber optic cable capacity on
the TyCom Global Network to customers in a number of countries around the
world, some of which have a history of political and economic instability. The
following are among the principal difficulties we may face as a result of doing
business outside the United States:
. political, economic and other uncertainties, including risk of war,
revolution, expropriation, renegotiation or modification of existing
contracts, labor disputes and other uncertainties arising out of foreign
government sovereignty over our international operations;
. difficulties in staffing and managing our operations outside of the
United States;
. longer payment cycles;
. problems in collecting accounts receivable;
. delays from customs brokers or government agencies with respect to
necessary imports in the construction of the TyCom Global Network; and
. potentially adverse consequences resulting from operating in multiple
countries, each with its own laws and regulations, including tax laws and
industry related regulations.
If we are unable to successfully overcome these difficulties, we may be
unable to fully deploy and operate our network.
Problems we encounter in expanding and operating our fleet of cable laying and
maintenance ships may interfere with our ability to install and maintain the
TyCom Global Network.
Installing and maintaining the TyCom Global Network on time and within
budget depends in part upon successful operation and expansion of our fleet of
cable laying and maintenance ships. The ownership and operation of any ocean-
going fleet is affected by a number of risks inherent to shipping, many of
which we cannot control, including mechanical failure, personal injury, vessel
and material loss or damage, business interruption due to political conditions,
hostilities, labor strikes, adverse weather conditions and catastrophic marine
disasters, including environmental accidents and collisions. Some of our
vessels are approaching the end of their economic lives. In general,
expenditures necessary for maintaining a vessel in good operating condition
increase as the age of the vessel increases, and older vessels may develop
unexpected mechanical and
10
<PAGE>
operating problems despite adherence to regular maintenance schedules and
proper upkeep. Our new ship building program is also affected by a number of
inherent risks, many of which are likewise beyond our control, including the
possibility of significant delays in delivery of, or failure to deliver, one or
more of our new ships. Any of these risks could cause us to lose revenues,
incur increased costs, or result in delays or damage to our reputation with
current or potential customers.
Under the general maritime law in many jurisdictions, crew members, tort
claimants, claimants for breach of certain maritime contracts, mortgagees,
suppliers of goods and services to a vessel and shippers and consignees of
cargo may be entitled to a maritime lien or a statutory lien against that
vessel for unsatisfied debts, claims or damages, and in many jurisdictions a
maritime lienholder may enforce its lien by attaching a vessel through
foreclosure proceedings.
Because many of our existing and prospective customers deal predominantly in
non-U.S. currencies, we may be exposed to exchange rate risks and our net
income may suffer due to currency translations.
Although we expect to invoice our sales of bandwidth capacity on the TyCom
Global Network and of network systems and related services in U.S. dollars,
many of our prospective customers derive their revenues in currencies other
than U.S. dollars. The obligations of customers with substantial revenues in
other currencies may be subject to unpredictable and indeterminate increases in
the event that those currencies lose value against the U.S. dollar. These
customers may also become subject to exchange control restrictions limiting
their ability to convert their revenue currencies into U.S. dollars, in which
case they may not be able to pay us in U.S. dollars. We are also directly
subject to exchange rate risks related to expenses we incur in other
currencies, particularly those relating to our overseas operations and our non-
U.S. dollar denominated debt obligations. As we expand the geographic reach of
the TyCom Global Network, we may choose to invoice certain customers in
currencies other than the U.S. dollar, which would further increase our direct
exposure to currency risk. Please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quantitative and
Qualitative Disclosures About Market Risk--Exchange Rate Sensitivity."
We may be unable to develop effective business support systems to implement
customer orders and to provide and bill for services.
Achieving success for the TyCom Global Network depends upon our ability to
develop sophisticated business support systems. This is a complicated
undertaking requiring significant resources and expertise and support from
third-party vendors. We will need business support systems for:
. implementing customer orders for bandwidth capacity sales and related
services;
. enhanced functionality at network operating centers and their interface
with our network management systems and applied software;
. delivering these sales and services and providing responsive customer
care;
. financial and management information systems to monitor, track and
analyze capacity sales and related allocations of resources; and
. periodic billing for these sales and services.
We also need to develop business support systems quickly enough to meet our
expected schedule for the introduction of new products and services and the
expansion of our business as a provider of bandwidth capacity.
11
<PAGE>
We may be unable to maintain cable landing licenses and other regulatory
approvals that are required to install and operate the TyCom Global Network or
to obtain those that we do not currently have.
We cannot assure you that we will be able to obtain the authorizations that
we need to implement our business plan and enter new markets or that these
authorizations, if obtained, will not be later revoked. In the ordinary course
of installation, maintenance and operation of the TyCom Global Network, we will
be required to obtain and maintain various permits, licenses and other
authorizations in the jurisdictions where our cables will land. Such licenses
are typically issued for a term of years, subject to renewal. Moreover, the
licenses may subject our business and operations to varying forms of
regulation, which could change over time. Generally, regulation of the
telecommunications industry is changing rapidly, with effects on our
opportunities, competition and other aspects of our business. In addition, the
regulatory environment varies substantially from country to country and
restricts our ability to compete in some markets. Should we elect to construct
our own links to terrestrial networks in certain markets, we would also become
subject to regulations that are significantly more complex and onerous than
those currently applicable to the owners and operators of undersea cable
network systems. For more information, you should read "Business--Regulation."
We may be adversely affected by the environmental, health and safety
regulations to which we are subject.
We are subject to various environmental protection and health and safety
laws and regulations governing, among other things, waste management and
disposal, air emissions, water discharge, remediation of hazardous substances,
procedures for the operation of certain vessels, such as our cable laying and
maintenance ships, and employee health and safety. We cannot assure you that we
have been or will be at all times in full compliance with such laws,
regulations and permits. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators
or, in certain cases, in connection with the operation of our ships, be denied
access to, or be detained at, certain ports. Although we have made and will
continue to make capital and other expenditures to comply with environmental
laws and regulations, we cannot assure you that our costs of complying with
current and future environmental laws and regulations, and our liabilities
arising from past or future releases of, or exposure to, hazardous substances
will not be material. For more information about our environmental compliance
and potential environmental liabilities, see "Business--Environmental Matters."
Tyco has significant control over us, which could adversely affect our public
shareholders.
After completion of this offering, Tyco will indirectly own at least 80% of
our common shares. As a result, Tyco will be in a position to cause us to take
actions that benefit only Tyco and that may adversely affect our public
shareholders. As long as Tyco continues to beneficially own more than 50% of
our outstanding common shares, Tyco will be able to exercise a controlling
influence over us, including:
. the composition of our board of directors and, through it, our direction
and policies, including the appointment and removal of officers;
. mergers or other business combinations;
. acquisitions or dispositions of our assets;
. future issuances by us of common shares or other securities;
. our incurrence of debt;
12
<PAGE>
. amendments, waivers and modifications to the agreements between us and
Tyco entered into in connection with the offering; and
. payment of dividends on our common shares.
Conflicts of interest may arise between us and Tyco which could be resolved in
a manner unfavorable to us.
Conflicts of interest could arise relating to the nature, quality and
pricing of services or products provided by Tyco to us, our borrowings from
Tyco and general issues relating to maintaining or increasing our
profitability. In addition, one of our directors is both an officer and
director of Tyco, and three of our directors are also executive officers of
Tyco. These individuals and a number of our executive officers own substantial
amounts of Tyco shares and options for Tyco shares. There could be potential
conflicts of interest when these directors and officers are faced with
decisions that could have different implications for us and Tyco, such as
acquisitions, financings and other corporate opportunities that may be suitable
for both us and Tyco. As a result, it is possible that these directors and
executive officers could place the interests of Tyco ahead of our interests
when the two are incompatible.
We rely on Tyco for services which it could cease to provide to us; we may be
unable to replace these services in a timely manner or on favorable terms.
We have never operated as a stand-alone company. While Tyco is contractually
obligated to provide us with certain services, we cannot assure you that these
services will be sustained at the same level as when we were wholly-owned by
Tyco or that we will obtain the same benefits. We cannot assure you that, after
the expiration of these various arrangements, we will be able to replace these
services in a timely manner or on terms and conditions, including cost, as
favorable as those we will receive from Tyco.
These agreements were negotiated in the context of a parent-subsidiary
relationship in connection with the offering. They were not the result of arm's
length negotiations between independent parties. We cannot provide any
assurance, therefore, that these agreements or the transactions which they
provide for, will be on terms as favorable to us as could have been obtained
from unaffiliated third parties. For more information about these arrangements,
see the section of this prospectus entitled "Relationship With Tyco After The
Offering and Certain Transactions."
Risk Factors Relating to the Telecommunications Industry
We may have overestimated the future demand for or underestimated the future
supply of bandwidth capacity.
The demand growth that we expect may not occur. In addition, installed and
announced bandwidth supply may exceed demand, and the supply of bandwidth
capacity may expand more rapidly than we expect as a result of technological
changes, new market entrants or other factors beyond our control. Failing to
predict either supply or demand accurately would have a negative impact on our
ability to maintain profitability. At the same time, the international
telecommunications industry is changing rapidly due to, among other things,
regulatory liberalization, the privatization of established carriers, the
expansion of telecommunications infrastructure, the growing use of the
Internet, the globalization of the world's economies and the developing
technology for wireless and satellite communication. A number of these factors,
however, including the growth in the use of the Internet and other bandwidth
intensive applications and the expansion of satellite and wireless
communications, are relatively recent phenomena, and their future course is
inherently difficult to predict.
13
<PAGE>
Continued pricing pressures from our competitors are expected to cause prices
for our services to be provided through the TyCom Global Network to decline.
We anticipate that prices for our services specifically, and transmission
services in general, will decline over the next several years due primarily to:
. price competition as various network providers continue to install
networks that will compete with our network;
. technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber; and
. strategic alliances or similar transactions, such as long distance
capacity purchasing alliances, that increase the parties' purchasing
power.
If pricing pressures are greater than we anticipate or if we are unable to
offset these pricing pressures by achieving significant cost reductions derived
from continued technology improvements and new applications and manufacturing
advances, our margins may be reduced.
We face competition from a wide variety of sources in the telecommunications
industry and we may be unable to compete successfully.
Competition in the telecommunications industry could cause us to suffer
price reductions, fewer large sales, under-utilization of resources, reduced
operating margins and loss of market share. Many of our competitors have, and
potential new competitors are likely to enjoy, substantial competitive
advantages, including the following:
.greater name recognition in certain regions;
.greater financial, technical, marketing and other resources;
.larger customer bases;
.well-established relationships with current and potential customers; and
. the ability to deploy and operate global undersea and terrestrial
networks before we deploy the TyCom Global Network.
Significant new and potentially larger competitors could enter our market as
a result of regulatory changes or the establishment of cooperative
relationships. In addition, the ongoing consolidation of the telecommunications
industry may create new competitors with an interest in entering the business
of manufacturing, owning, operating, maintaining and selling bandwidth capacity
on undersea fiber optic networks. Recent technological advances may also
greatly expand the capacity of existing and new fiber optic systems and could
lead to even greater competition.
We plan to compete as a:
. seller of bandwidth capacity and related services;
. supplier of new undersea fiber optic cable systems and upgrades; and
. provider of maintenance services for undersea fiber optic cable systems.
Competition as a Seller of Bandwidth Capacity and Services. As we deploy the
TyCom Global Network, we will face competition and pricing pressure from
existing and planned fiber optic cable networks, satellite providers and, on
certain routes, terrestrial networks. As we expand our range of
14
<PAGE>
available products and services, we expect to face competition from various
entities offering comparable products and services. In addition, the first
phase of the TyCom Global Network will compete with some of our customers,
including Global Crossing, 360networks and various participants in cable system
consortia. Our planned expansion of the TyCom Global Network beyond the first
phase will likely result in competition with some of our other customers.
Additionally, carriers hold ownership positions in some of these competing
systems that may impact their purchase of additional capacity on our system.
Accordingly, there can be no assurance that we will be able to compete
successfully against systems to which our prospective customers have made long-
term commitments.
There are a number of telecommunications companies that are pursuing global
networks, including FLAG Telecom, Global Crossing, MCI WorldCom, Teleglobe, CTR
Group Limited, the sponsor of Project Oxygen, and New Millennium Development
Group. Other companies may also from time to time explore the merits of global
networks. For more information regarding competition with the TyCom Global
Network in specific regions, please refer to "Business--Competition."
Competition as a Supplier of Undersea Fiber Optic Cable Systems. Competition
to design, manufacture and install undersea fiber optic cable systems remains
intense. Participants in this market compete on the basis of, among other
things, price, technology, time-to-market, the provision of financing and
regional and long-term relationships. In the future, we will be offering less
of our cable system design, manufacturing and installation capacity to our
customers and we believe that our existing competitors and potential new cable
system suppliers will play a more significant role in the undersea cable system
market.
Competition as a Provider of Undersea Cable Maintenance Services. The market
for undersea cable maintenance services is competitive, although long-term
contracts for cable maintenance services typically accompany contracts for the
manufacture and installation of an undersea cable system. As a result, the
basis for competition in the undersea cable maintenance market generally
mirrors the undersea cable supply market.
Intellectual property rights relating to fiber optic cable systems are key to
our business and we may expend significant resources enforcing our rights or
defending claims against us.
If we fail to successfully maintain, enforce or defend our intellectual
property rights, our competitive position could suffer. We may be required to
spend significant resources to maintain, enforce and defend our intellectual
property rights. We may not be able to detect infringement and may lose
competitive position in the market before we do so. In addition, competitors
may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some
jurisdictions, which could make it harder for us or easier for our competitors
to capture market share.
Our pending patent and trademark and service mark registration applications
may not be allowed or competitors may challenge the validity or scope of these
patent applications or trademark and service mark registrations. We cannot
assure you that licenses of intellectual property important to us will be
available in the future on favorable terms or at all.
We may be unaware of intellectual property rights of others that may cover
some of our cable system components or technology. Any litigation regarding
patents or other intellectual property could be costly and time-consuming, and
divert our management and key personnel from our business operations. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Actual or potential claims of
intellectual property infringement might require us to enter into royalty or
license agreements, which we may not be
15
<PAGE>
able to obtain on acceptable terms, or at all. We also may be subject to
significant damages or injunctions against development and use of certain of
our cable system components or technologies which may be integrated into our
network or other cable systems we supply.
Risks Relating to the Offering
Because the price you pay for our common shares exceeds the average price paid
by our existing shareholder, you will be immediately and substantially diluted.
If you purchase our common shares in this offering, you will experience
immediate and substantial dilution of $19.82 per common share, based upon an
estimated initial public offering price of $22.50 per common share, the mid-
point of the estimated offering range, because the price you pay will be
substantially greater than the net tangible book value per share of $2.68 for
the common shares you acquire. This dilution is due in large part to the fact
that the consideration paid by TGN Holdings Ltd. amounted to an average price
of $ per common share when it obtained its common shares, which is
substantially less than the initial public offering price. To the extent
outstanding options to purchase common shares are exercised, there will be
further dilution. You should read "Dilution" for a more in-depth description of
the dilutive effects of this offering.
Future sales of our common shares may adversely affect our common share price.
If our shareholders sell a large number of common shares, or if we issue a
large number of our common shares in connection with future acquisitions,
financings, or other circumstances, the market price of our common shares could
decline significantly. Moreover, the perception in the public market that our
shareholders might sell common shares could depress the market price of the
common shares. Immediately after this offering, the public market for our
common shares will include only the 40 million common shares that are being
sold in this offering, or 46 million common shares if the underwriters exercise
their over-allotment option in full. After the offering, we intend to register
common shares which are reserved for issuance under our benefit plans. Once
we register these shares, they can be sold in the public market upon issuance,
subject to restrictions under the securities laws applicable to resales by
affiliates. We will not be able to issue the common shares, however, without
the consent of Goldman, Sachs & Co. and Salomon Smith Barney Inc. during the
180 days after the date of this prospectus. You should read the section in this
prospectus entitled "Shares Eligible for Future Sale" for additional
information on this topic.
In addition, we have agreed that we will, upon the request of Tyco, use our
commercially reasonable best efforts to effect the registration under
applicable federal and state securities laws of the common shares indirectly
owned by Tyco following the offering.
Our directors and officers, who are expected to have beneficial ownership of
common shares and of outstanding options in the aggregate as of
, 2000, Tyco and TGN Holdings Ltd., have entered into lock-up
agreements in which they have agreed that they will not sell, directly or
indirectly, any common shares for a period of 180 days from the date of this
prospectus without the prior written consent of Goldman, Sachs & Co. and
Salomon Smith Barney Inc.
Our common shares have no prior public market, and we cannot assure you that an
active trading market will develop.
Prior to this offering, there has been no market for our common shares.
Although we have filed applications to have our common shares listed on the New
York Stock Exchange and the
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<PAGE>
Bermuda Stock Exchange, our applications may not be approved and an active
public market may not develop for our common shares. The initial public
offering price of our common shares will be determined by negotiations between
ourselves and the underwriters. We cannot provide any assurance that the prices
at which the common shares will sell in the public market after this offering
will not be lower than the price at which the common shares are sold in this
offering. Investors may encounter difficulties in selling our common shares.
The price of our common shares is likely to fluctuate and may be affected by
numerous market conditions beyond our control.
Our share price is likely to fluctuate in the future due to the volatility
of the stock market in general and a variety of factors, many of which are
beyond our control, including:
. quarterly variations in actual or anticipated results of our operations;
. changes in financial estimates by securities analysts;
. actions or announcements by our competitors;
. regulatory actions;
. market outlook for the telecommunications industry generally and the
fiber optic cable industry specifically;
. departures of our key personnel; and
. future sales of our common shares.
Because we are at an early stage in the development of our network, our actual
results could differ materially from those anticipated in the forward-looking
statements contained in this prospectus.
We are at an early stage in the development of the TyCom Global Network,
which we expect will account for a significant portion of our business in the
future. Accordingly, all statements in this prospectus that are not clearly
historical in nature are forward-looking. Discussions containing forward-
looking statements are found in the material set forth under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in this
prospectus generally. When used in this prospectus, the words "anticipate,"
"believe," "expect," "estimate" and similar expressions are generally intended
to identify forward-looking statements. Examples of forward-looking statements
include the statements concerning our operations, prospects, size and growth of
world telecommunications traffic, growth of the use of the Internet and other
bandwidth intensive applications, technological and customer support
capabilities, pricing, new product and services development, potential
expansions to our network, potential customers and liquidity and working
capital needs, estimated demand forecast, and information concerning
characteristics of competing systems. These forward-looking statements are
inherently predictive and speculative and we cannot assure you that any of such
statements will prove to be correct. Actual results and developments may be
materially different from those expressed or implied by such statements. You
should carefully review the other risk factors set forth in this section of
this prospectus for a discussion of factors which could result in any of such
forward-looking statements proving to be inaccurate.
Our historical financial information is not representative of our results as a
separate company focused on the sale of network capacity.
The historical financial information we have included in this prospectus has
been carved out from Tyco's and AT&T Corp.'s consolidated financial statements
and does not reflect what our financial
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<PAGE>
position, results of operations and liquidity would have been had we been a
separate, stand-alone entity during the periods presented. Tyco did not account
for us, and we were not operated as, a single stand-alone entity for these
periods. The historical financial information is also not necessarily
indicative of what our results of operations, financial positions and liquidity
will be in the future. In particular, the historical financial information is
based on our traditional business as a systems supplier and maintenance
provider and does not in any way reflect the significant changes in our
revenues, cost structure, and operations that will result from our
transformation into a company focused on the sale of bandwidth capacity of
undersea fiber optic cable networks. The historical financial data also does
not reflect changes in our operations that will result from our separation from
Tyco or the increased costs associated with being a public, stand-alone
company.
Since most of our assets will be located outside of the United States, it may
be difficult to bring and enforce suits against us.
We are incorporated in Bermuda and most of our assets will be located
outside of the United States. As a result, it may be difficult for our
shareholders to serve notice of a lawsuit on us within the United States. It
may also be difficult for our shareholders to enforce in Bermuda, judgments of
United States courts. Appleby Spurling & Kempe, our counsel in Bermuda, has
advised us that there is some doubt as to the enforcement in Bermuda, in
original actions or in actions for enforcement of judgments of United States
courts, of liabilities predicated upon United States federal securities laws.
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<PAGE>
USE OF PROCEEDS
We will receive estimated net proceeds from this offering of approximately
$868,500,000, assuming an initial public offering price of $22.50, the mid-
point of the range appearing on the cover of this prospectus, after deducting
the estimated underwriting discount. We intend to apply approximately $ of
the net proceeds towards the deployment of the first phase of the TyCom Global
Network, and use the remainder to pay a dividend to TGN Holdings Ltd. Tyco will
pay all of the expenses of the offering. Pending these uses, we intend to
invest the proceeds under our deposit agreement with Tyco.
Although we currently intend to use the net proceeds as stated, the precise
allocation of funds will depend on future commercial, technological, regulatory
and other developments which may affect our business, the competitive climate
in which we operate and the emergence of future opportunities. Because of the
number and variability of factors that determine our use of the net proceeds of
the offering, we cannot assure you that our application of the net proceeds
will not vary substantially from our current intentions.
If the underwriters exercise their over-allotment option and purchase shares
from TGN Holdings Ltd., we will not receive any of the proceeds from the sale
of those shares.
DIVIDENDS
We currently anticipate that we will retain all available funds for use in
the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will be
dependent upon then existing conditions, including our financial condition,
results of operations, contractual and other relevant legal and regulatory
restrictions, capital requirements, business prospects, and other factors our
board of directors deems relevant.
CORPORATE STRUCTURE AND REORGANIZATION
TyCom Ltd. was formed on March 8, 2000 and is a wholly-owned indirect
subsidiary of Tyco International Ltd. Prior to the offering, Tyco will
effectuate a restructuring that will result in TyCom owning the operating
entities that comprise the TyCom business. In exchange, TGN Holdings Ltd. will
receive 190,000,000 common shares of TyCom. After the offering, Tyco will
indirectly own at least 80% of the common shares of TyCom, assuming no exercise
of the over-allotment option.
We anticipate that before the closing of the offering TyCom will declare a
dividend payable to TGN Holdings Ltd., its sole shareholder, in an amount
calculated to result in TyCom retaining $ in net proceeds from the
offering. This dividend will be paid promptly after the closing of the offering
out of the net proceeds from the offering. Investors in this offering will not
receive this dividend.
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CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000:
. on an actual basis; and
. on an as adjusted basis to reflect the issuance of 190,000,000 common
shares to TGN Holdings Ltd. in connection with the formation of TyCom
and our receipt of the estimated net proceeds from the sale of
40,000,000 common shares in the offering.
This table should be read in conjunction with "Selected Consolidated
Financial Data," our consolidated financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
-------------------
Actual As Adjusted
------ -----------
(in millions)
<S> <C> <C>
Cash and cash equivalents................................. $ 15.3 $ 883.8(1)
Short-term advances to Tyco............................... 87.1 87.1
Current portion of long-term debt......................... $ 2.2 $ 2.2
Long-term debt:
Revolving credit facility from Tyco...................... $ -- $ --
8.0% Peseta denominated note due 2003.................... 7.3 7.3
7.3% loan from Tyco due 2010............................. 200.0 200.0
7.5% loan from Tyco due 2012............................. 250.0 250.0
7.5% loan from Tyco due 2015............................. 200.0 200.0
------ --------
Total debt.............................................. 657.3 657.3
Less: current portion................................... (2.2) (2.2)
------ --------
Total long-term debt.................................... 655.1 655.1
------ --------
Minority interest......................................... 53.5 53.5
------ --------
Shareholder's equity:
Preference shares, $1.00 par value, 600,000,000
authorized; none issued
and outstanding......................................... -- --
Common shares, $0.25 par value, 3,000,000,000 authorized;
230,000,000 issued and outstanding...................... -- 57.5
Share premium............................................ -- 916.6
Tyco investment.......................................... 105.6 --
Currency translation adjustment.......................... (33.0) (33.0)
------ --------
Total shareholder's equity................................ 72.6 941.1
------ --------
Total capitalization...................................... $781.2 $1,649.7
====== ========
</TABLE>
- --------
(1)Assumes all $868.5 million of estimated net proceeds is retained by TyCom.
In connection with the formation of TyCom and the related organizational
restructuring of Tyco, all of our long-term loans from Tyco were refinanced
with new long-term loans from Tyco, which have maturities of at least 10 years.
TyCom also intends to enter into a revolving credit facility with Tyco for
borrowings of up to $ that will be available for a period of not less than
three years. Before the closing of the offering, we intend to declare a
dividend payable to TGN Holdings Ltd. in an amount calculated to result in
TyCom retaining an amount, which together with cash from operations and funds
drawn under the credit agreement with Tyco, is adequate to fund the first phase
of the TyCom Global Network, or approximately $ million. Please see the
Overview section in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations".
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DILUTION
Our pro forma net tangible book value as of March 31, 2000 was a deficit of
($251.1) million (excluding goodwill and other intangible assets of $323.7
million) or ($1.32) per common share. Pro forma net tangible book value per
share is determined by dividing our tangible net worth, total tangible assets
less total liabilities, by the aggregate number of common shares outstanding.
After giving effect to the sale by us of the 40,000,000 common shares in this
offering, at an assumed initial public offering price of $22.50 per share, the
midpoint of the range set forth on the cover page of this prospectus, and the
receipt and application of the net proceeds, our pro forma net tangible book
value at March 31, 2000 would have been $617.4 million or $2.68 per share. This
represents an immediate increase in pro forma net tangible book value to our
existing shareholder of $4.00 per share and an immediate dilution to new
investors of $19.82 per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $22.50
Pro forma net tangible book value per share as of March 31,
2000......................................................... ($1.32)
Increase in pro forma net tangible book value per share
attributable to new investors................................ 4.00
------
Pro forma net tangible book value per share after offering...... 2.68
------
Dilution per share to new investors............................. $19.82
======
</TABLE>
Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the initial public offering price per share. The
following table sets forth, on a pro forma basis, as of March 31, 2000, the
number of common shares purchased from us, the total consideration paid, or to
be paid, and the average price per share paid, or to be paid, by our existing
shareholder and by the new investors, at an assumed initial public offering
price of $22.50 per common share, the midpoint of the range set forth on the
cover page of this prospectus, before deducting the underwriting discount:
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration
-------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholder...... % $ % $
New investors.............
Total................... 100% $ 100%
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial
information for the fiscal years ended September 30, 1995, 1996, 1997, 1998 and
1999 and the six months ended March 31, 1999 and 2000. TyCom is a wholly-owned
indirect subsidiary of Tyco International Ltd., a company incorporated in
Bermuda. The following financial information presents the consolidated
financial position and results of operations of TyCom as a subsidiary of Tyco,
including adjustments necessary for a fair presentation of the business. The
information as of September 30, 1998 and 1999 and for each of the three years
ended September 30, 1997, 1998 and 1999 were derived from the audited
consolidated financial statements of TyCom included elsewhere in this
prospectus. The unaudited information as of September 30, 1995, 1996 and 1997
and March 31, 1999 and 2000, for the years ended September 30, 1995 and 1996
and for the six months ended March 31, 1999 and 2000 were derived from the
historical books and records of TyCom and its subsidiaries. The financial
information presented may not be indicative of our future results as an owner-
supplier or the results that would have been achieved had TyCom operated as a
stand-alone entity. This selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------------------ ------------------
(Unaudited) (Unaudited) (Unaudited)
1995 1996 1997 1998 1999 1999 2000
----------- ----------- -------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue from product
sales................. $154.3 $162.6 $ 342.6 $1,187.0 $1,450.0 $ 608.5 $1,196.2
Service revenue........ -- -- 32.9 94.6 187.6 90.8 79.6
------ ------ -------- -------- -------- -------- --------
Net revenue............ 154.3 162.6 375.5 1,281.6 1,637.6 699.3 1,275.8
Cost of product sales.. 97.2 98.0 226.0 821.7 1,093.2 437.0 934.1
Cost of services....... -- -- 20.9 69.7 86.5 34.8 45.4
Sales and marketing.... 2.1 2.5 7.4 23.4 17.6 8.7 7.1
Research and
development........... -- -- 9.5 39.5 52.7 26.5 26.7
General and
administrative........ 4.1 5.1 16.2 65.0 64.0 29.8 42.3
Write-off of in-process
research and
development........... -- -- 361.0(1) -- -- -- --
------ ------ -------- -------- -------- -------- --------
Operating income
(loss)................ 50.9 57.0 (265.5) 262.3 323.6 162.5 220.2
Interest income
(expense), net........ -- -- 1.8 (9.9) (39.3) (23.6) (1.2)
Minority interest...... -- -- (3.8) (14.1) (15.2) (7.5) (6.7)
------ ------ -------- -------- -------- -------- --------
Income (loss) before
income taxes 50.9 57.0 (267.5) 238.3 269.1 131.4 212.3
Income tax (expense)
benefit............... (18.3) (20.0) 110.9 (86.3) (106.1) (54.0) (77.1)
------ ------ -------- -------- -------- -------- --------
Net income (loss)...... $ 32.6 $ 37.0 $ (156.6) $ 152.0 $ 163.0 $ 77.4 $ 135.2
====== ====== ======== ======== ======== ======== ========
Pro forma income (loss)
per common share:
Basic..................
Diluted................
Other Data:
Capital expenditures... $ 5.2 $ 3.7 $ 18.7 $ 28.2 $ 97.4 $ 39.0 $ 66.1
Net cash provided by
operating activities.. 33.1 35.2 272.4 46.9 773.5 147.0 135.7
Net cash used in
investing activities.. (5.2) (3.7) (29.2) (110.3) (172.1) (67.5) (57.3)
Net cash provided
(used) by financing
activities............ (25.7) (31.6) (243.2) 113.1 (639.0) (58.1) (75.2)
EBITDA (2)............. 55.6 61.7 (253.9) 298.8 370.7 181.8 253.2
Consolidated Balance
Sheet Data:
Total assets........... $ 48.7 $ 53.3 $1,364.4(3) $1,366.8 $2,392.2 $1,569.8 $1,870.0
Long-term debt......... -- -- -- 600.0 608.2 601.3 655.1
Shareholder's equity... 32.5 38.0 676.8(3) 213.7 498.5 212.1 72.6
</TABLE>
- -------
(1) Represents a charge for the write-off of purchased in-process research and
development related to the acquisition of the submarine systems business of
AT&T Corp. in July 1997.
(2) The operating results, which are presented in accordance with generally
accepted accounting principles, are supplemented by a discussion of EBITDA.
As the operations of our business transition to deploying the TyCom Global
Network and selling bandwidth capacity, management will begin to view
results on an EBITDA basis. EBITDA is commonly used in the communications
industry to analyze companies on the basis of operating performance.
EBITDA, however, should not be considered an alternative to operating or
net income as an indicator of the performance of our business, or as an
alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles.
(3) Unaudited.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion in conjunction with the consolidated
financial statements and notes thereto and other financial information included
elsewhere in this prospectus.
Introduction
TyCom Ltd., a Bermuda company, was incorporated in March 2000, as a wholly-
owned subsidiary of Tyco International Ltd. to serve as the holding company for
its undersea fiber optic cable communications business.
The consolidated financial statements of TyCom included elsewhere in this
prospectus include Simplex Technologies, acquired by Tyco in 1974, for all
periods presented. The consolidated financial statements also include Tyco
Submarine Systems Ltd., formerly AT&T's submarine systems business, acquired by
Tyco on July 1, 1997, and Telecomunicaciones Marinas, S.A., known as Temasa,
acquired by Tyco on May 18, 1999. Tyco Submarine Systems Ltd. and Temasa are
included in the consolidated financial statements from their respective dates
of acquisition.
Overview
TyCom is an independent provider of undersea fiber optic networks and
services, engaged in the design, engineering, manufacture, installation and
maintenance of undersea fiber optic networks. We operate manufacturing
facilities that produce undersea cables, optical amplifiers and land-based
terminal transmission equipment. We operate a fleet of eleven cable ships that
installs undersea systems and participate in maintenance agreements to service
existing systems. Our backlog of supply and service contracts is $2.7 billion
as of March 31, 2000.
We plan to apply our capabilities to construct our own global undersea fiber
optic network and sell its bandwidth capacity to others. We estimate that the
total cost to implement the first phase of the TyCom Global Network, as
currently contemplated, will be approximately $5.7 billion. We expect the first
phase to be operational by the end of calendar 2002. Our current estimate of
spending to deploy the first phase of the TyCom Global Network in each of the
next three fiscal years is summarized below.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
2000 2001 2002
------ ------ ------
(in millions)
<S> <C> <C> <C>
Network system construction................................ $400 $2,400 $1,700
Land-based infrastructure.................................. -- 100 550
Maintenance................................................ -- 50 150
---- ------ ------
Total network costs.................................... 400 2,550 2,400
General capital expenditures............................... 100 100 100
---- ------ ------
Total first phase costs................................ $500 $2,650 $2,500
==== ====== ======
</TABLE>
We expect to fund the total cost of the first phase of the network with cash
from operations, including current contracts and bandwidth capacity sales on
our network, a portion of the net proceeds from this offering and funds drawn
under our credit agreement with Tyco. Network construction beyond the first
phase is expected to be funded with operating cash flow, principally earned
from selling bandwidth capacity and related services on completed portions. The
first revenue producing portion of the TyCom Global Network, the transatlantic
portion, is expected to be operational in the second half of calendar 2001.
23
<PAGE>
Our revenue through fiscal 2001 will be derived primarily from our
historical business of providing systems and maintenance services under
customer contracts currently in backlog. Following the completion of the
transatlantic portion of the first phase, we expect our primary revenue source
to be the sale of bandwidth capacity on the TyCom Global Network. We plan to
continue to provide our products and services to others while we are deploying
our network. Beginning in our fiscal year 2002, we expect that revenue from
bandwidth capacity sales and related services will account for more than 75% of
our annual revenue.
During construction of the transatlantic portion of the TyCom Global
Network, our revenues and operating income may decrease from current levels.
Based on the current project backlog, product revenues are expected to decline
each quarter through June 30, 2001. During the same period, operating expenses
are expected to increase due to building our infrastructure, including network
operations, sales and marketing, research and development, and administration.
This may result in our having an operating loss during the first half of
calendar 2001 as we begin to sell capacity on the TyCom Global Network. In
keeping with industry practice, we intend to sell capacity on the TyCom Global
Network primarily in the form of indefeasible rights of use on terms tailored
to our customers' particular needs. Each agreement is expected to provide that,
in return for payment of the purchase price, the customer will receive
beneficial ownership of the relevant capacity. In addition, the customer will
become responsible for paying the network maintenance charges.
In June 1999, the Financial Accounting Standards Board issued Interpretation
No. 43, "Real Estate Sales, an interpretation of FASB Statement No. 66." This
interpretation clarifies that sales of real estate with property improvements
or integral equipment that cannot be removed and used separately from the real
estate without incurring significant costs should be accounted for under FASB
Statement No. 66, "Accounting for Sales of Real Estate". The interpretation and
application of FASB Interpretation No. 43 as it relates to the
telecommunications industry and the sale of capacity on undersea communications
systems is still evolving and is currently under discussion with the accounting
standard setting boards. The application of this interpretation may result in
our delaying the recognition of revenue for cash received for certain capacity
sales contracts on undersea communications systems that do not satisfy the
requirements of FASB Statement No. 66. To the extent that contracts satisfy the
requirements for sales type lease accounting, revenue may be recognized without
deferral.
Further clarification of FASB Interpretation No. 43 may result in our
deferring the recognition of future revenue and earnings related to the sale of
bandwidth capacity. However, we do not believe that deferring the recognition
would have any impact on our future business operations or the reporting of our
future cash flows.
Results of Operations
References to fiscal 1999, fiscal 1998 and fiscal 1997 are to the twelve
month fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Net income was $135.2 million for the six months ended March 31, 2000, as
compared to $77.4 million for the six months ended March 31, 1999. Net income
(loss) was $163.0 million in fiscal 1999, as compared to $152.0 million in
fiscal 1998 and ($156.6) million in fiscal 1997. Net loss for fiscal 1997
included an after-tax charge of $220.2 million, $361.0 million pre-tax, for the
write-off of purchased in-process research and development costs associated
with the acquisition of the submarine systems business of AT&T. The operating
results, which are presented in accordance
24
<PAGE>
with GAAP, are supplemented by a discussion of EBITDA. As the operations of our
business transition to deploying the TyCom Global Network and selling bandwidth
capacity, we will begin to view results on an EBITDA basis. EBITDA is commonly
used in the communications industry to analyze companies on the basis of
operating performance. EBITDA, however, should not be considered an alternative
to operating or net income as an indicator of the performance of our business,
or as an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
When we make an acquisition, the acquired company is immediately integrated
with our existing operations. Consequently, we do not separately track the
operating results of acquired companies. The discussion below includes
estimated revenue comparisons that exclude the effects of acquisitions.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Revenues
Net revenue increased 82.4% during the six months ended March 31, 2000 to
$1,275.8 million from $699.3 million in the six months ended March 31, 1999.
Revenue from product sales increased 96.6% to $1,196.2 million from $608.5
million. The major projects driving product revenue growth included SAm-1 (an
increase of $311 million), Pacific Crossing-1 (an increase of $228 million) and
Yellow (an increase of $164 million), partially offset by a decrease in revenue
of $145 million from China-US. The SAm-1 system was contracted in July 1999 and
connects major telecommunication centers around South America. Pacific
Crossing-1 was contracted in April 1998 and connects the United States and
Japan. The Yellow cable system was contracted in June 1999 and connects the
United States and the United Kingdom. China-US was contracted in December 1997
and connects the United States and China.
Service revenue decreased 12.3% to $79.6 million from $90.8 million. Service
revenue decreased primarily due to a decline of $34.7 million in capacity sales
commissions related to the Atlantic Crossing-1 project.
Additionally, net revenue increased in part due to the acquisition of Temasa
in May 1999. Excluding the impact of Temasa, net revenue increased 77.2% in the
six months ended March 31, 2000.
Operating Results
Operating income increased $57.7 million, or 35.5%, to $220.2 million in the
six months ended March 31, 2000. Operating income was 17.3% of revenues in the
six months ended March 31, 2000, as compared to 23.2% in the six months ended
March 31, 1999. The increase in operating income was primarily due to increased
project revenue and the inclusion of the results of Temasa in the six months
ended March 31, 2000, partially offset by increased operating expenses. In the
six months ended March 31, 2000, operating income was negatively impacted by
recording $34.3 million in receivable allowances and bad debt reserves;
recording $24.7 million in inventory reserves for potential excess and obsolete
inventory due to technology changes on terminal equipment; recording a reserve
of $19.9 million primarily related to the delayed delivery of Americas II, a
system which we installed in coordination with other suppliers; and recording
$5.0 million in reserves related to loss on a contract. In the six months ended
March 31, 1999, $34.7 million in income was generated from capacity sales
commissions related to the Atlantic Crossing-1 project.
During the six months ended March 31, 2000, we incurred $7.1 million in
sales and marketing costs compared to $8.7 million during the six months ended
March 31, 1999. Sales and marketing
25
<PAGE>
expenses were 0.6% and 1.2% of total revenues during the six months ended March
31, 2000 and 1999, respectively. The decrease in sales and marketing costs was
primarily due to a decrease in travel and entertainment and personnel costs,
associated with the transition from being a supplier to an owner of undersea
cable. The decrease in sales and marketing costs as a percentage of revenue
also reflects higher project revenue for the current period. We expect these
costs to rise to a higher level as we build the sales and marketing staff and
begin to sell bandwidth capacity on the TyCom Global Network.
Research and development costs were $26.7 million and $26.5 million in the
six months ended March 31, 2000 and 1999, respectively. Research and
development expenses remained relatively unchanged, as higher spending related
to additional personnel, higher depreciation and higher overhead costs incurred
in connection with a new TyCom research and development facility were
substantially offset by a decrease in research and development expenses
reflecting a one-time charge for moving expenses related to the new facility
and incurred in the prior year. Research and development expenses were 2.1% and
3.8% of total revenues during the six months ended March 31, 2000 and 1999,
respectively. The decrease in research and development costs as a percentage of
revenue was due to higher project revenue for the current period.
During the six months ended March 31, 2000, we incurred $42.3 million in
general and administrative costs compared to $29.8 million during the six
months ended March 31, 1999. General and administrative expenses were 3.3% and
4.3% of total revenues during the six months ended March 31, 2000 and 1999,
respectively. The increase in general and administrative costs was due
primarily to an increase in an allocation for charges for services performed by
Tyco of $5.7 million, an increase in goodwill amortization of $2.2 million due
to the acquisition of Temasa in May 1999 and an increase in bonus expense of
$1.7 million as a result of increased profits. The decrease in general and
administrative costs as a percentage of revenue was due to higher project
revenue for the current period.
EBITDA increased $71.4 million, or 39.3%, to $253.2 million in the six
months ended March 31, 2000. Depreciation and amortization expense for the six
months ended March 31, 2000 was $33.0 million compared to $19.3 million for the
six months ended March 31, 1999. The increase of $13.7 million was principally
due to an increase in depreciation of $11.5 million related to the addition of
a new cable ship, the C.S. Tyco Provider, and the establishment of a new
manufacturing facility. In addition, amortization of goodwill increased $2.2
million due to the acquisition of Temasa in fiscal 1999.
Interest Expense, net
Interest expense, net, was $1.2 million for the six months ended March 31,
2000, as compared to $23.6 million for the six months ended March 31, 1999.
Interest expense, net, decreased due primarily to an increase in interest
income on short-term advances to Tyco. The balance of short-term advances to
Tyco fluctuates due to the timing of contracts. The weighted average rate of
interest on all long-term debt during the six months ended March 31, 2000 and
1999 was unchanged at 7.1%.
Income Tax Expense
The effective income tax rate was 36.3% during the six months ended March
31, 2000, as compared to 41.1% in the six months ended March 31, 1999. The
decrease in the effective income tax rate was primarily due to higher earnings
in tax jurisdictions with lower income tax rates.
We believe that we will generate sufficient future income to realize the tax
benefits related to our deferred tax assets.
26
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Revenues
Net revenue increased 27.8% during fiscal 1999 to $1,637.6 million from
$1,281.6 million in fiscal 1998. Revenue from product sales increased 22.2% to
$1,450.0 million from $1,187.0 million. This increase was due primarily to
higher industry demand driving backlog and project activity. Fiscal 1999
product revenues were favorably impacted by several large projects, including
Pacific Crossing-1 (an increase of $364 million), Pan American Crossing (an
increase of $191 million), and China-US (an increase of $128 million). The Pan
American Crossing system connects California, Mexico, Panama, Venezuela and St.
Croix.
Service revenue increased 98.3% to $187.6 million from $94.6 million. This
increase was primarily due to the inclusion of $45.0 million in commissions
recognized by TyCom for assisting customers in selling capacity on their
systems and $20.0 million in operations and maintenance revenue related to the
Atlantic Crossing-1 project.
Additionally, net revenue increased in part due to the acquisition of Temasa
in May 1999. Excluding the impact of Temasa, net revenue increased an estimated
26.2%.
Operating Results
Operating income increased $61.3 million, or 23.4%, to $323.6 million in
fiscal 1999. Operating income was 19.8% of revenues in fiscal 1999, as compared
to 20.5% in fiscal 1998. Operating income increased due to higher project
revenues, offset in part by several lower margin projects and costs associated
with completing one project. In addition, service revenues were higher due to
operations and maintenance revenue for the Atlantic Crossing-1 project. Also,
operating income was approximately $45 million higher due to bandwidth capacity
sales commissions on the Atlantic Crossing-1 project. Operating income as a
percentage of revenue decreased primarily as a result of several lower margin
projects and costs associated with completing one project, partially offset by
capacity sales commissions. In addition, the inclusion of Temasa favorably
impacted operating income for the period.
During fiscal 1999, we incurred $17.6 million in sales and marketing costs
compared to $23.4 million during fiscal 1998. Sales and marketing expenses were
1.1% and 1.8% of total revenues during fiscal 1999 and fiscal 1998,
respectively. The decrease in sales and marketing costs was primarily
attributable to a reduction in sales personnel, who were previously selling
bandwidth capacity for Atlantic Crossing-1, and related expenditures.
Research and development costs were $52.7 million and $39.5 million in
fiscal 1999 and fiscal 1998, respectively. The $13.2 million increase was due
to additional personnel and related costs of $9.9 million and higher overhead
costs of $3.3 million related to the new TyCom Laboratories research and
development facility. Research and development expenses were 3.2% and 3.1% of
total revenues during fiscal 1999 and fiscal 1998, respectively. Research and
development costs as a percentage of revenue remained substantially the same
due to total research and development expenses increasing at a rate consistent
with the increase in total revenues.
During fiscal 1999, general and administrative costs of $64.0 million
remained relatively constant at $64.0 million, as compared to $65.0 million
incurred during fiscal 1998. General and administrative expenses were 3.9% and
5.1% of total revenues during fiscal 1999 and fiscal 1998, respectively.
General and administrative expenses as a percentage of revenues decreased due
to higher revenues.
EBITDA increased $71.9 million, or 24.1%, to $370.7 million. Depreciation
and amortization expense in fiscal 1999 was $47.1 million compared to $36.5
million in fiscal 1998. The increase of
27
<PAGE>
$10.6 million was principally due to an increase in depreciation of $7.7
million related to the purchase of a cable ship, the C.S. Tyco Provider, during
fiscal 1999 and additional research and development equipment. In addition,
amortization of goodwill of $2.9 million associated with the Temasa acquisition
contributed to this increase.
Interest Expense, net
Interest expense, net, was $39.3 million for fiscal 1999 as compared to $9.9
million for fiscal 1998. Interest expense, net, increased due primarily to
incurring $600.0 million of long-term indebtedness to Tyco in February and
March 1998. The weighted average rate of interest on all long-term debt during
fiscal 1999 and 1998 was 7.1% and 7.2%, respectively.
Income Tax Expense
The effective income tax rate was 39.4% during fiscal 1999, as compared to
36.2% in fiscal 1998. The increase in the effective income tax rate was
primarily due to the generation of fewer tax credits, partially offset by
higher earnings in tax jurisdictions with lower income tax rates.
Fiscal 1998 Compared to Fiscal 1997
Revenues
Net revenue increased 241.3% during fiscal 1998 to $1,281.6 million from
$375.5 million in fiscal 1997. This increase was due primarily to inclusion for
a full year of the AT&T submarine systems business acquired in July 1997.
Excluding the impact of this acquisition, revenues increased an estimated
27.3%. Revenue from product sales increased 246.5% to $1,187.0 million from
$342.6 million. The primary reasons for the project revenue growth, excluding
the impact of the AT&T submarine systems business, were increases in the
revenues recognized on Atlantic Crossing-1 (an increase of $354 million),
Columbus III (an increase of $84 million) and Americas II (an increase of $74
million) systems, partially offset by a $337 million decrease in revenue for
the FLAG system. The Columbus III contract was signed in February 1998 and the
system connects the United States, Azores, Portugal, Spain and Italy. The FLAG
system was contracted in December 1994 and connects Europe, the Middle East and
Asia.
Service revenue increased 187.5% to $94.6 million from $32.9 million
primarily because we did not offer service and maintenance until we acquired
our own ships as part of the AT&T submarine systems acquisition on July 1,
1997, partially offset by some ships being used for installation work rather
than maintenance in fiscal 1998.
Operating Results
Excluding the write-off of purchased in-process research and development,
operating income increased $166.8 million, or 174.7%, to $262.3 million in
fiscal 1998 from $95.5 million in fiscal 1997 and represented 20.5% of revenues
in fiscal 1998, as compared to 25.4% in fiscal 1997. The increase in operating
income was due to a full year inclusion of the AT&T submarine systems business,
with Atlantic Crossing-1, Columbus III and Americas II contributing to these
higher results. The decrease in operating income as a percentage of revenues
was due to the inclusion of AT&T's submarine systems business, which was a
lower margin business than Simplex.
Operating expenses increased substantially on a relative basis due to the
inclusion of the results of AT&T's submarine systems business for a full year
in fiscal 1998. During fiscal 1998, we incurred $23.4 million in sales and
marketing costs compared to $7.4 million during fiscal 1997. Sales and
marketing expenses were 1.8% and 2.0% of total revenues during fiscal 1998 and
fiscal
28
<PAGE>
1997, respectively. Research and development costs were $39.5 million and $9.5
million in fiscal 1998 and fiscal 1997, respectively. During fiscal 1998, we
incurred $65.0 million in general and administrative costs compared to $16.2
million during fiscal 1997. General and administrative expenses were 5.1% and
4.3% of total revenues during fiscal 1998 and fiscal 1997, respectively.
EBITDA, excluding the write-off of purchased in-process research and
development, increased $191.7 million, or 179.0%, to $298.8 million in fiscal
1998 from $107.1 million in fiscal 1997. Depreciation and amortization expense
in fiscal 1998 was $36.5 million compared to $11.6 million in fiscal 1997. The
increase was principally due to a full year inclusion of the AT&T submarine
systems business and capital expenditures related to research and development
equipment.
In connection with the acquisition of AT&T's submarine systems business, we
considered an appraisal of the intangible assets, which valued acquired in-
process research and development at $361.0 million. The acquired in-process
research and development was expensed in the quarter ended September 30, 1997.
In addition, intangible assets associated with prior generation technology,
alternative use patents and other technology and patents were valued at $41.0
million and are being amortized over 17 years. See Note 3 to the Consolidated
Financial Statements.
Interest Expense, net
Interest expense, net was $9.9 million for fiscal 1998 as compared to
interest income of $1.8 million for fiscal 1997. Interest expense increased due
to amounts outstanding on long-term loans from Tyco made in February and March
1998.
The weighted average rate of interest on all long-term debt during fiscal
1998 was 7.2%. There was no long-term debt outstanding during fiscal 1997.
Income Tax Expense
The effective income tax rate was 36.2% during fiscal 1998, as compared to
32.0% in fiscal 1997, excluding the impact related to the write-off of
purchased in-process research and development. The increase in the effective
income tax rate was primarily due to utilization of tax credits in fiscal 1997
on a smaller taxable income base.
Liquidity and Capital Resources
We expect to fund the total cost of the first phase of the TyCom Global
Network with cash flow from operations, including bandwidth capacity sales on
our network and current contracts, a portion of the net proceeds from this
offering and funds drawn under our credit agreement with Tyco. This facility,
under which we can borrow up to $ , will be available for a period of not
less than three years. It is anticipated that before the closing of the
offering, TyCom will declare a dividend payable to its sole shareholder, using
cash proceeds from the offering in an amount calculated to result in TyCom
retaining $ in net proceeds from the offering. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" for further discussion of the source and use of funds related to the
TyCom Global Network.
As presented in the consolidated statement of cash flows, net cash provided
by operating activities was $135.7 million in the six months ended March 31,
2000 and $773.5 million in fiscal 1999. The significant changes in working
capital in the six months ended March 31, 2000 were a $156.5 million increase
in accounts receivable and a $54.5 million increase in accrued expenses and
other current liabilities. The significant changes in working capital in fiscal
1999 were a $725.5 million decrease in contracts in process and a $183.6
million increase in accounts receivable.
For the six months ended March 31, 2000, accounts receivable increased due
to the $108 million customer billing on the SAm-1 project, $80 million customer
billing on the Hibernia project
29
<PAGE>
and $48 million customer billing on the Americas II project, partially offset
by collection of an $80 million receivable related to the Pacific Crossing-1
project. The Hibernia system was contracted in June 1999 and consists of a
12,300 kilometer four fiber pair ring between the United States, Canada, United
Kingdom and Ireland. The increase in accrued expenses and other current
liabilities was due principally to the $38 million customer advance received in
connection with the SAm-1 project scheduled for closing in the third quarter of
fiscal 2000.
For fiscal 1999, contracts in process decreased due to billings in excess of
costs related to SAm-1, Yellow, Hibernia, Pacific Crossing-1, and Pan American
Crossing contracts. All of these balances will be reduced to zero over the
lives of the related contracts. The increase in accounts receivable reflects
the increase in business volume and timing of billing milestones for the
applicable contracts. Specifically, accounts receivable for Pacific Crossing-1
increased by $80 million, Atlantic Crossing-1 increased by $38 million,
Americas II increased by $35 million, Hibernia increased by $19 million, and
Yellow increased by $16 million. We expect to collect these balances in fiscal
2000.
Our accounts receivable are largely comprised of a few major customers. At
March 31, 2000, three customers comprised approximately 60% of total accounts
receivable. At September 30, 1999, one customer comprised approximately 52% of
total accounts receivable. We mitigate such concentrations of credit risk
through a review of a customer's credit history before extending credit and
evaluating customers' ability to perform obligations under its agreements. We
do not expect our customers to fail to meet their obligations under contracts
given their credit rating or the financing in place for the applicable
contracts. In addition, we establish an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends, and other information. As we expand our undersea cable business to
become a provider of bandwidth services, we believe the concentrations of
credit risk will decrease due to an increased number of customers.
During the six months ended March 31, 2000 and fiscal 1999, we used cash of
$66.1 million and $97.4 million, respectively, to purchase property, plant and
equipment. Our level of capital expenditures, excluding those relating to the
TyCom Global Network, is expected to increase moderately during fiscal 2000,
and the primary source of funds for such expenditures is expected to be cash
from operating activities and short-term financing provided by Tyco under the
revolving credit facility discussed below.
During fiscal 1999, Tyco acquired Temasa for cash of $280.0 million. This
business was contributed to us by Tyco subsequent to the acquisition. In
addition, during the six months ended March 31, 2000 and fiscal 1999, we paid
out cash of $0.8 million and $8.5 million, respectively, for purchase
accounting liabilities established in connection with the acquisitions of
Temasa and the AT&T submarine systems business.
Short-term advances to Tyco reflect cash balances generated from our
operating activities that we transferred to Tyco to be included in Tyco's
consolidated cash management activities. The advances are available to TyCom on
an as needed basis. Short-term advances decreased in the six months ended March
31, 2000 due primarily to a $550 million cash dividend paid to Tyco affiliates
in March 2000, partially offset by an increase in long-term loans from Tyco and
positive cash flow for the period. Short-term advances increased in fiscal 1999
due to positive cash flow for the period.
Tyco has provided short-term and long-term borrowings to us to finance our
cash flow needs. Short-term loans have been provided by Tyco to fund the
purchase of significant expenditures related to projects. At March 31, 2000,
short-term loans of $12.0 million were outstanding and are included in accrued
expenses and other current liabilities on our consolidated balance sheet.
30
<PAGE>
At March 31, 2000, our total long-term debt was $655.1 million, primarily
consisting of long-term loans from Tyco. In connection with the formation of
TyCom and related organizational restructuring of Tyco which occurred in March
2000, all of our long-term loans from Tyco were refinanced with new long-term
loans from Tyco, which have maturities of at least 10 years. We believe
interest rates on these loans are no less favorable than those available to
TyCom from a third party commercial lender. These new loans are prepayable
without penalty at par value at any time after March 2005. Prepayment of
amounts outstanding prior to March 2005 require a redemption premium of up to
5%. In addition, Tyco has caused the TyCom operating entities to dividend
$550.0 million up to it as part of this same organizational restructuring which
occurred in March 2000.
You should also read "Business--Legal Proceedings" and "Risk Factors--We may
face substantial damages or be enjoined from pursuing important activities as a
result of existing or future litigation, arbitration or other claims" for
information relating to the potential impact of certain litigation.
Backlog
At March 31, 2000, we had a backlog of unfilled orders of $2,659.7 million,
compared to a backlog of $3,535.4 million at September 30, 1999 and $2,480.7
million at September 30, 1998. Backlog decreased from September 30, 1999 to
March 31, 2000, due to a decline in contract bookings. Backlog increased from
September 30, 1998 to September 30, 1999 due to increased industry demand
driving contract bookings for the period. Major contracts booked included SAm-
1, Hibernia and Yellow cable systems. We expect backlog to continue to decline
as we begin to focus on the development of the TyCom Global Network.
Backlog includes maintenance contracts of $689.0 million, $529.7 million and
$544.2 million as of March 31, 2000, and September 30, 1999 and 1998,
respectively. Maintenance backlog increased from September 30, 1999 to March
31, 2000 due to booking maintenance contracts for the Hibernia and SAm-1
systems. Maintenance backlog decreased from September 30, 1998 to September 30,
1999 due to revenue recognition on outstanding maintenance arrangements,
partially offset by the inclusion of the Temasa backlog due to the acquisition
of this business in May 1999.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in interest rates,
currency exchange rates and certain commodity prices. In order to manage the
volatility relating to our more significant market risks, we enter into
interest rate swaps and commodity swaps. We do not anticipate any material
changes in our primary market risk exposures in fiscal 2000.
We utilize risk management procedures and controls in executing derivative
financial instrument transactions. We do not execute transactions or hold
derivative financial instruments for trading purposes. Derivative financial
instruments related to interest rate, forward currency exchange contracts and
exchange rate sensitivity of debt obligations as well as commodity price
exposures are used with the goal of mitigating a significant portion of these
exposures when it is cost-effective to do so. Counter-parties to derivative
financial instruments are limited to financial institutions with at least an AA
long-term credit rating.
Interest Rate Sensitivity
The table below provides information about our financial instruments as of
September 30, 1999 that are sensitive to changes in interest rates, including
debt obligations and interest rate
31
<PAGE>
swaps. For debt obligations, the table presents cash flows of principal
repayment (in millions) and weighted average interest rates. For interest rate
swaps, the table presents notional amounts (in millions) and weighted average
interest rates. Notional amounts are used to calculate the contractual payments
to be exchanged under the contract. The amounts included in the table below are
in U.S. dollars.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------ ------ ------ ---------- ----- -----
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total debt:
Fixed rate (Spanish
Peseta denominated)... 2.3 2.6 2.8 1.5 -- -- 9.2 8.7
Average interest
rate................ 8.0% 8.0% 8.0% 8.0% -- --
Fixed rate (US$)(2).... -- 398.8 -- -- -- 202.5 601.3 601.3
Average interest
rate................ -- 7.2% -- -- -- 6.7%
Interest rate swap:
Fixed to variable
(Spanish Peseta
denominated).......... 2.3 2.6 2.8 1.5 -- -- 9.2 0.5
Average pay rate
(1)................. 3.0% 3.0% 3.0% 3.0% -- --
Average receive
rate................ 8.0% 8.0% 8.0% 8.0% -- --
</TABLE>
- --------
(1) Weighted average variable interest rates are based on applicable rates as
of September 30, 1999 per the terms of the contracts of the related
financial instruments.
(2) In March 2000, we refinanced our U.S. dollar denominated debt and
increased our borrowings by entering into $200.0 million, $250.0 million
and $200.0 million notes payable to Tyco, which bear interest at fixed
rates of 7.3%, 7.5% and 7.5% and are due in March 2010, March 2012 and
March 2015, respectively.
Exchange Rate Sensitivity
The table below provides information about our financial instruments as of
September 30, 1999 that are sensitive to currency exchange rates. These
instruments include debt obligations, interest rate swaps and forward currency
exchange contracts. For debt obligations, the table presents cash flows of
principal repayment and weighted average interest rates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates.
For forward currency exchange contracts, the table presents notional amounts
and weighted average contractual strike prices. Notional amounts are used to
calculate the contractual payments to be exchanged under the contract. The
amounts included in the table below are in U.S. dollars.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------ ------ ------ ---------- ----- -----
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total debt:
Fixed rate (Spanish
Peseta denominated)... 2.3 2.6 2.8 1.5 -- -- 9.2 8.7
Average interest
rate................ 8.0% 8.0% 8.0% 8.0% -- --
Interest rate swap:
Fixed to variable
(Spanish Peseta
denominated).......... 2.3 2.6 2.8 1.5 -- -- 9.2 0.5
Average pay rate
(1)................. 3.0% 3.0% 3.0% 3.0% -- --
Average receive
rate................ 8.0% 8.0% 8.0% 8.0% -- --
Forward contracts:
Received US$ / Pay
Euro.................. 16.2 -- -- -- -- -- 16.2 1.1
Average contractual
exchange rate....... 1.14 -- -- -- -- --
</TABLE>
- --------
(1) Weighted average variable interest rates are based on applicable rates as
of September 30, 1999 per the terms of the contracts of the related
financial instruments.
32
<PAGE>
Commodity Price Sensitivity
The table below provides information about our financial instruments as of
September 30, 1999 that are sensitive to changes in commodities prices. Total
contract dollar amounts and notional quantity amounts are presented for forward
commodity contracts. Contract amounts are used to calculate the contractual
payments to be exchanged under the contracts.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------ ------ ------ ---------- ----- -----
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Forward contracts:
Copper
Contract amount
(US$)............... 9.0 9.4 2.3 -- -- -- 20.7 1.1
Contract quantity (in
000 metric tons).... 5.1 5.5 1.4 -- -- -- 12.0
</TABLE>
Our exposure to market risk from changes in currency exchange rates and
commodity prices has not changed materially from our exposure as of the most
recent year ended September 30, 1999.
Accounting and Technical Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued SFAS No. 137 which defers the effective date
of SFAS No. 133 to fiscal years beginning after June 15, 2000. We are currently
analyzing this standard.
During fiscal 1999, we adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income (loss) and its components in financial statements. The
purpose of reporting comprehensive income (loss) is to report a measure of all
changes in equity, other than transactions with shareholders. Total
comprehensive income (loss) is included in the consolidated statements of
shareholder's equity.
Year 2000 Compliance
Our Year 2000 compliance programs and systems modifications were completed
on time, and the conversion process was successful. Our business has not been
adversely affected due to the failure of key third parties to successfully
complete the Year 2000 conversion. Although there can be no assurances that all
of our material third-party relationships had successful conversion programs,
we do not expect that any such failure would have a material adverse affect on
our financial position, results of operations or liquidity. The costs of our
Year 2000 program to date have not been material, and we know of no further
required modifications to our information technology or embedded technology
systems that would have a material impact on our financial position, results of
operations or liquidity.
Conversion to the Euro
On January 1, 1999, 11 European countries began using the "Euro" as their
single currency, while still continuing to use their own notes and coins for
cash transactions. Banknotes and coins denominated in Euros are expected to be
put in circulation and local notes and coins will cease to be legal tender
during 2002. Temasa, along with the rest of Spain, will convert to the Euro in
2002. Introduction of the Euro has not and is not expected to result in any
material adverse impact upon our business.
33
<PAGE>
BUSINESS
We are a leading independent provider of undersea fiber optic networks and
services. We are pioneers in the undersea fiber optic network industry, having
designed the first fiber optic cable system using optical and electrical signal
regeneration and the first transoceanic system using only light signal
amplification. We have designed, manufactured and installed over 300,000
kilometers of undersea cable and have played a principal role in the deployment
and maintenance of most of the world's major undersea cable networks.
Our reputation is built on the technological accomplishments of TyCom
Laboratories, which has its origins in Bell Labs. Transoceanic fiber optic
cable systems require specialized technology that is significantly more
sophisticated than that currently used in their terrestrial counterparts. Our
scientists and design engineers work closely with our manufacturing and product
engineering personnel to be the first-to-market with leading edge fiber optic
cable systems and services. We are also one of a small number of undersea fiber
optic cable system suppliers to have a large fleet of specially designed cable
laying and maintenance ships stationed around the globe. The TyCom fleet
currently participates in the maintenance of more than 300,000 kilometers of
undersea cable.
We plan to apply our expertise to establish ourselves as the first undersea
telecommunications fiber optic network owner-supplier. We intend to design,
manufacture, install, own, operate, maintain and sell bandwidth capacity on
what we believe, based on the current features of existing and publicly
announced networks, will be the world's most extensive and most technologically
advanced global undersea fiber optic network--the TyCom Global Network. We are
launching the TyCom Global Network to satisfy the increasing demand for
undersea bandwidth capacity driven by the growth of the Internet and other
bandwidth-intensive applications. We believe that our record of technological
innovation and our experience in the supply, maintenance and operation of
undersea systems uniquely position us to address this increasing demand for
undersea bandwidth capacity.
Through the TyCom Global Network, we plan to provide expanded undersea
bandwidth capacity, system support and select value-added services to our
targeted customer base, including traditional and emerging telecommunications
providers, Internet and application service providers, and others requiring
significant bandwidth capacity. As we deploy the TyCom Global Network, we
remain dedicated to meeting the needs of our existing systems customers by
completing our backlog. We also intend to reserve design, manufacturing,
installation and maintenance capacity to enable us to continue to supply
systems customers, but on a more limited basis than in the past.
We plan to deploy the TyCom Global Network in a number of phases over the
next ten years. Ultimately, we expect our network will span approximately
250,000 undersea kilometers, linking terrestrial networks on all six inhabited
continents. We expect to connect first to those telecommunications centers
around the world where voice, video, data and Internet demand for bandwidth is
the greatest. We have begun implementation of the first phase of our network,
which is scheduled for completion in 2002. Our first phase is designed to offer
bandwidth capacity upgradeable to a minimum of 2.56 terabits per second, span
approximately 70,000 undersea kilometers and connect 27 major
telecommunications centers around the globe. We expect to utilize technology
developed by TyCom Laboratories to design and manufacture the necessary cable,
optical signal amplifiers and land-based terminal transmission equipment. We
also plan to design, build, equip and staff the network operating centers and
cable stations necessary to monitor and route the bandwidth traffic over our
network. Our construction and maintenance division, including our fleet of
cable ships, will install and maintain the TyCom Global Network.
34
<PAGE>
Our senior management team has built strong relationships with the top
executives of the traditional and emerging telecommunications carriers to whom
we have supplied cable systems. These carriers comprise a significant number of
the potential customers we have targeted for the sale of bandwidth capacity on
the TyCom Global Network. We intend to capitalize on those relationships and
our reputation for the delivery of undersea cable systems as we expand our
global sales and marketing staff to meet the challenge of selling bandwidth
capacity and related services.
Our Market Opportunity
We are building the TyCom Global Network to capitalize on several
significant trends in the telecommunications industry:
Increases in Global Telecommunications Demand. Recent research conducted for
TyCom by The Yankee Group projects that transatlantic fiber optic traffic
volume will increase at a compound annual growth rate of approximately 123%
from 2000 through 2005. As a result of the rapid development of terrestrial
networks in the United States and Europe over the last few years, demand for
undersea bandwidth capacity to link to those and other networks is increasing.
This need for interconnectivity requires the deployment of large bandwidth
transoceanic systems. According to The Yankee Group, transpacific traffic
volume will increase at a compound annual growth rate of approximately 129%
from 2000 through 2005. Demand for large bandwidth transoceanic systems is
developing, in part as a result of the use of wireless Internet and the ongoing
deployment of terrestrial networks in the region. This projected demand for
increased undersea bandwidth capacity will provide a significant opportunity to
system and bandwidth capacity providers, especially those that have the
technology, capital and infrastructure required for fast deployment and
reliable maintenance of undersea fiber optic cable systems.
Continuing Global Deregulation and the Emergence of New Telecommunications
Services Providers. The ongoing process of deregulation and privatization
continues to create opportunities for new entrants in the lines of business
historically serviced by the traditional carriers. The emergence of new
technologies has resulted in the creation of entirely new categories of
competitors, including wireless operators, Internet and application service
providers, and others requiring significant bandwidth capacity. In many cases,
these new entrants have attempted to enhance their competitive position by
focusing on providing bandwidth-intensive services, such as data transmission
and Internet access. We expect this dynamic and highly competitive market to
continue to provide significant opportunities for expanding undersea fiber
optic bandwidth capacity.
Transformation of the Undersea Cable System Market. Historically, consortia
of national telecommunications carriers planned, constructed and owned undersea
cable systems. This model has become increasingly less effective in a market
where carriers' capital is best deployed elsewhere and carriers have found
themselves in competition with each other. As a result, today's undersea cable
system market is marked by the emergence of independent developers building
systems and selling bandwidth capacity and related services on a flexible,
market-driven basis.
Our Business Strategy
Our goal is to become a leading provider of undersea fiber optic bandwidth
solutions. We expect to achieve our goal by deploying the TyCom Global Network
to capitalize on our leading edge technology, fast time to market, integrated
range of services and other competitive advantages in the marketplace. The
principal elements of our business strategy will be to:
35
<PAGE>
Deploy the World's Most Extensive and Technologically Advanced Global
Undersea Fiber Optic Network. We intend to build what we believe will be the
most extensive undersea fiber optic network in the world. We expect that the
TyCom Global Network will ultimately span approximately 250,000 undersea
kilometers and link terrestrial networks on all six inhabited continents. Our
network will be developed using our proprietary, leading edge fiber optic
technology designed to permit rapid, on-demand capacity upgrades at our land-
based cable stations.
Our plan is to build the TyCom Global Network in phases over the next ten
years. We plan to deploy our first phase on the high volume East/West traffic
routes of the Atlantic and the Pacific where anticipated demand for bandwidth
is the greatest. We plan to use a variety of methods to obtain the link,
commonly known as backhaul, between our undersea network and terrestrial
networks. These methods include swapping terrestrial capacity for undersea
capacity, buying or leasing unused optical fiber, known as dark fiber, and
constructing our own backhaul from our cable landing stations to gateways,
typically located in major metropolitan areas, where terrestrial networks
converge. We intend to obtain backhaul from a variety of providers so we do not
alienate our bandwidth customers.
Transform TyCom into a Provider of Undersea Bandwidth Services. We intend to
build upon our core competencies and competitive advantages to become a global
provider of upgradable undersea bandwidth capacity and reliable network-to-
network connectivity. We expect that our customers will be traditional and
emerging carriers and new bandwidth service providers seeking to connect with
geographically diverse terrestrial networks. We are actively expanding our
existing sales and marketing organization to focus on sales of bandwidth
capacity on the TyCom Global Network. We do not expect to compete with our
customers for retail end-users since our network primarily targets
telecommunications carriers and other bandwidth service providers, thus
providing us with the opportunity to become a neutral owner-supplier of
communications infrastructure to those customers.
Maintain and Expand Our Technological Advantage. We intend to continue to
develop our next-generation fiber optic system and related technologies, which
will enable us to meet our customers' evolving needs ahead of our competition
and provide reduced transmission cost per bit of capacity. Our development of
dense wavelength division multiplexing applications, which significantly
increase available bandwidth by transmitting signals of different wavelengths
through a single optical fiber, has generally enabled us to be the first to
market with higher capacity undersea systems. Our plan is to increase
investment in TyCom Laboratories to fuel further applied research advancements
in bandwidth capacity and transmission speeds. In addition, our forward-looking
research team is exploring how our proprietary undersea fiber optic technology
might be utilized in terrestrial networks and other commercial applications.
Develop a Broad Range of Network Products and Services. We intend to
capitalize on the expanding demand for new telecommunications services
resulting from deregulation and technological advances. We intend to develop
and offer in the future managed bandwidth services, including customized point-
to-point voice, video and data communication links, virtual private networks,
choice of bandwidth speeds, large data file transfers and selected Internet
communications products and services. The development of these products and
services will be carried out in consultation with our customers to provide them
with the flexibility to buy services from us rather than build these
capabilities themselves.
Continue to Serve Our Existing Customers. We remain dedicated to meeting the
needs of our existing undersea systems supply customers by completing our
backlog, which stood at $2.7 billion as of March 31, 2000. Consistent with our
commitment to maintain our supplier role in the marketplace, we intend to
reserve design, manufacturing, installation and maintenance capacity to supply
our systems customers, but on a more limited basis than in the past.
36
<PAGE>
Our Competitive Advantages
Technology Leadership. We intend to engineer and construct the TyCom Global
Network using the most advanced fiber optic network designs, optical signal
amplifiers, dense wavelength division multiplexing, advanced forward error
correction, which is a mathematically based process for recognizing and
correcting errors in transmission of data, and other technology developed by
TyCom Laboratories. We believe our experience in developing, rapidly
integrating and upgrading this technology will give the TyCom Global Network
significant capacity, quality and reliability advantages over existing systems.
Integrated Capabilities Drive Cost and Deployment Advantages. Our integrated
capabilities to design, manufacture, install, operate and maintain undersea
fiber optic cable networks enable us to supply our systems customers faster,
more reliably and more cost-effectively than our competitors. We believe that
our experience in controlling product quality and system delivery schedules and
supplying on-demand bandwidth capacity upgrades will greatly benefit the TyCom
Global Network. As the owner-supplier of our network, we believe we will be
able to react more effectively than our competitors to changes in network
capacity demand and other market opportunities.
Proven Ability to Execute. Accelerating bandwidth demand provides
opportunities to system owners who can capitalize on rapid deployment. Our
continued drive to reduce fiber optic cable system delivery time has made us an
industry leader. Prior to Tyco's 1997 acquisition of AT&T's submarine systems
business, we had an annual undersea cable manufacturing capacity of
approximately 22,000 kilometers. Two years after the acquisition, we had an
annual undersea cable manufacturing capacity of 45,000 kilometers, which we
expect to increase to 60,000 kilometers by mid-calendar year 2000. Further,
from 1997 to 1999, we reduced our cable system delivery time by nearly 40%.
During 1999, we completed eight undersea fiber optic cable systems which
comprised over 44,000 undersea kilometers of cable, reaching 26 landing points
in 22 countries. In addition to providing network operating services for the
Atlantic Crossing-1 system, we sold in excess of $300 million of bandwidth
capacity on that system in less than one year to a variety of traditional and
emerging carriers.
Strong Management Team and Customer Relationships. Our management team has
successfully engineered a significant improvement of our submarine systems
business since its acquisition from AT&T in 1997. Since the acquisition, our
annual revenues have increased from approximately $950 million to over $1.6
billion. Our backlog has increased nine-fold to $2.7 billion. Our management's
performance and industry reputation has provided us with access to top
executives of the world's major telecommunications carriers that are among the
targeted customers to which we intend to offer bandwidth capacity on the TyCom
Global Network.
37
<PAGE>
The TyCom Global Network
On January 17, 2000, we announced plans to design, manufacture, install,
operate, maintain and sell bandwidth capacity on our own global undersea fiber
optic communications network-- the TyCom Global Network. We expect that, upon
completion, our network will total over 250,000 undersea kilometers and link to
terrestrial networks on all six inhabited continents. The TyCom Global Network
will be constructed in a number of phases. The first phase of the network is
planned to offer a minimum upgradeable bandwidth capacity of 2.56 terabits per
second, will span approximately 70,000 kilometers of undersea fiber optic cable
and connect the following 27 major telecommunications centers:
. Amsterdam, Netherlands . Los Angeles, United States
. Athens, Greece . Madrid, Spain
. Barcelona, Spain . Marmaris, Turkey
. Bilbao, Spain . New York, United States
. Palermo, Italy
. Cairo, Egypt
. Copenhagen, Denmark . Paris, France
. Gdansk, Poland
. Portland (Oregon), United States
. Guam . Rome, Italy
. Hamburg, Germany
. Seattle, United States
. Hawaii, United States . Stockholm, Sweden
. Helsinki, Finland
. St. Petersburg, Russia
. Hong Kong, China
. Tel Aviv, Israel
. Lisbon, Portugal
. Tokyo, Japan
. London, United Kingdom
We expect the transatlantic portion of the first phase to be operational in
the second half of 2001 and the remainder, of the first phase, consisting of
the transpacific and various European portions, by the end of 2002. The timing
and sequence of implementing additional phases of the network will be based on
future requirements of global and regional demand. The following tables show
the initial anticipated characteristics of the first phase of the TyCom Global
Network upon installation:
<TABLE>
<CAPTION>
Western Western Eastern UK-
Atlantic Pacific Mediterranean Europe Mediterranean Baltic Germany
-------- ------- ------------- ------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Approximate cable length
(in undersea
kilometers)............ 13,000 32,250 5,000 6,250 6,900 3,500 1,350
Number of segments...... 2 7 3 4 18 6 2
Fiber pairs............. 4 6-8 2 4 2 2 4
Initial operational
capacity
(in gigabits per
second)................ 280 360 120 240 120 80 280
</TABLE>
Each cable segment will contain between one and eight optical fiber pairs,
and each fiber pair will be capable of carrying a minimum of 640 gigabits per
second of bandwidth capacity. The transatlantic portion will be configured as a
ring consisting of northern and southern cable segments connecting the cable
stations in Brean, United Kingdom and Wall Township, New Jersey.
Deployment of the transatlantic portion of our network is underway. We have
filed an application for a license to land and operate a private undersea fiber
optic cable network in the United States and an application for a license to
provide international facilities-based
38
<PAGE>
telecommunications services in the United Kingdom. We have entered into a
contract for the purchase of land for the United States- and United Kingdom-
based cable stations and anticipate timely closings. The initial study for the
undersea cable route necessary for the first phase is near completion.
We expect to provide maintenance for the undersea portion of our network
through our SEAHORSE/SM/ maintenance program. In addition to the current
SEAHORSE Atlantic and SEAHORSE South America programs, we intend to add similar
programs in the Pacific, Mediterranean, and Baltic. As SEAHORSE expands to
maintain the TyCom Global Network, it will service existing, as well as future,
customers.
The undersea cable will terminate in specially designed cable stations.
Drawing upon our experience in the design, construction, and operation of cable
stations, we plan to build cable stations that feature advanced technical and
operational design elements and allow customers to locate their equipment in
designated areas of these cable stations for access from our undersea network
to the customer's terrestrial network. To provide our customers with increased
terrestrial network-to-network connectivity, we will establish links from our
cable stations to our terrestrial gateway facilities located in close proximity
to a point where the terrestrial systems of major carriers converge. This will
allow our customers to interconnect with their own terrestrial network or the
terrestrial carrier of their choice, providing true one stop network-to-network
connectivity for all cities served by the TyCom Global Network.
Sales and Marketing
We intend to market and sell undersea bandwidth capacity on the TyCom Global
Network to a broad range of customers. Our potential customers include
traditional and emerging telecommunications providers, Internet and application
service providers and others requiring significant bandwidth capacity. We
believe access to key decision-makers at these targeted customers is critical
to the success of our sales and marketing effort. Our performance and
reputation for reliability as a system supplier has allowed our senior
management to develop relationships with the top executives of most of the
world's major telecommunications carriers. In addition, in less than one year,
we sold bandwidth capacity valued in excess of $300 million on the Atlantic
Crossing-1 system to a variety of carriers.
Since the commercial introduction of fiber optic cable in 1988, we have sold
approximately 210,000 undersea kilometers of fiber optic cable systems valued
at over $8 billion, with $3 billion being sold within the past three years, to
many of the traditional and emerging telecommunications carriers, and to most
of the private developers of undersea telecommunications systems.
Our current sales and marketing organization consists of over 60
professionals with extensive telecommunication, technical or service
backgrounds. We have begun a global recruiting process to secure additional
sales personnel for the TyCom Global Network marketing team from among those
individuals with experience in bandwidth capacity sales. We have sales and
marketing offices in Bermuda, France, Singapore and the United States. We
anticipate adding sales and marketing offices in London by June 2000 and in
Hong Kong by the end of 2000 and will establish additional offices as required
by demand for undersea network capacity. Further, we will establish a global
customer care center in Bermuda by the end of 2000.
In keeping with industry practice, we intend to sell bandwidth capacity on
the TyCom Global Network primarily in the form of indefeasible rights of use
whereby a customer acquires the right to use capacity on our network in minimum
increments of 155 megabits per second for the life of
39
<PAGE>
the system on terms tailored to our customer's particular needs. We will offer
a competitive pricing schedule for capacity sales on our network.
The integration of all network customer related activities will be designed
to provide TyCom with the means of addressing the specific needs of our
customers. TyCom has always linked system design and development with the
systems sales process. This same principle is being applied for the evolution
to a capacity sales oriented organization. In coordination with major
purchasers of bandwidth capacity on our network, we will expand the design and
development process to include traffic engineering and demand analysis for the
ongoing deployment plans of the TyCom Global Network.
Technology and Research and Development--TyCom Laboratories
TyCom Laboratories, our research and development group, has contributed to
many of the latest advancements in undersea fiber optic technology and
continues to develop leading edge applications in capacity, transmission speeds
and other bandwidth solutions. During the last nine years, TyCom Laboratories
has achieved milestones in the laboratory environment by increasing the amount
of data that can be transmitted on undersea fiber optic cables. The majority of
our scientists and researchers were previously part of Bell Labs, which
pioneered the use of fiber optic technology for undersea communication. While
part of Bell Labs, many of our current employees led the design and development
of the first fiber optic repeatered system, incorporating optical and
electrical signal regeneration, and the first transoceanic optically amplified
system, using only light signal amplification.
The TyCom Laboratories team is comprised of over 250 people, nearly a third
of whom hold Ph.D. degrees. Many of our scientists and engineers are recognized
as leaders in their fields. The research performed by TyCom Laboratories is an
applied science; that is, our scientists and researchers work closely with our
system design and manufacturing teams to allow their technological
breakthroughs to be rapidly incorporated in our latest undersea systems.
TyCom Laboratories' intellectual property portfolio includes many key
enabling technologies involving terminal transmission and power equipment,
optical signal amplifiers, cable and fiber, network management systems and
software, installation and repair technologies and network integration. We
continue to augment our research and development capabilities to achieve
greater transmission speeds and increased fiber capacity for the purpose of
integrating these advances in our latest undersea systems. We have expertise in
developing transmission technologies that maintain the integrity of an optical
signal which is being transmitted over a fiber under the extremely adverse and
confined conditions of transoceanic distances. We believe our knowledge in this
area is transferable and of great utility to long-distance terrestrial
applications and have begun to explore potential opportunities in this and
other areas.
Our scientists and research staff are at the forefront of the key areas of
fiber optic technology, including:
. Introduction of dense wavelength division multiplexing technology, a
technology which dramatically increases the transmission capacity of
fiber optic cables by allowing optical signals to be transmitted
simultaneously at different wavelengths along the same optical fiber at
rates of ten gigabits per second;
. The development of optical signal amplifiers providing wider bandwidths,
less signal degradation and more output power than previous generation
amplifiers;
. Introduction of advanced forward error correction, a technology in which
an optical signal transmitter sends additional information which is used
by the receiver to protect against
40
<PAGE>
and correct transmission errors, to provide up to four times greater
transmission capacity on today's fibers. Second generation forward error
correction, which is in development at TyCom Laboratories, permits a near
doubling of that enhanced transmission capacity. Our scientists are
currently working on a third generation of forward error correction to
further increase bandwidth capacity;
. Advancement of network management systems to maintain and control complex
network architectures, including advanced software and hardware
technologies to monitor our cable systems and provide fault
identification, performance management, fiber/data capacity allocation,
network configuration and network inventory management; and
. Development of higher fiber count undersea cable, which results in the
doubling of the maximum volume of data that can be sent at fixed
transmission rates. Historically, due to mechanical, electrical and
spatial constraints related to handling and the powering of optical
signal amplifiers, known as repeaters, within an undersea cable system,
the number of optical fibers contained in such a system was limited.
Despite these constraints, through our advanced technology, we are able
to increase the number of transmission fibers in our undersea cables and
increase system capacity.
The scientists and staff of TyCom Laboratories conduct their research in 47
laboratories at our facility located in Eatontown, New Jersey that was
specifically designed for our undersea research and development activities.
Advancements are designed, developed, and tested under simulations of actual
conditions, and adapted for rapid integration into system components. The
staff at TyCom Laboratories also works closely with fiber optic component
suppliers around the globe to advance critical elements of the systems we
design, including optical signal amplifiers, fiber optic cable, terminal
transmission equipment, network management systems, and emerging new network
technologies.
41
<PAGE>
Components of Our Undersea Fiber Optic Cable Systems
TyCom designs and manufactures each of the primary components which make up
an undersea fiber optic cable system. In the land-based dry plant portion of
the network, as shown below, voice, video and data signals coming from
terrestrial networks are converted to a proprietary long distance optical
format that is more capable of being transmitted over transoceanic distances.
These voice, video and data signals, which exist as pulses of light travelling
on an optical fiber, would degrade over these distances if they were not
amplified and converted into this special format. The repeaters are positioned
at particular points along the undersea portion of the fiber optic cable. The
undersea portion of the cable and the repeaters are the main components of the
wet plant portion of the network, as shown below. Each system includes at least
two cables for redundancy purposes in the event of a cable break or other
malfunction. Upon the arrival of the optical signal at the receiving dry plant,
the signal is again converted to allow transmission of the voice, video and
data signals to a terrestrial network. The integral system components which
TyCom designs and manufactures and their role in the transmission of
information are further illustrated below:
[GRAPHIC APPEARS HERE]
Dry Plant
The dry plant consists of the equipment and facilities that enable and
distribute the undersea system's transmission capacity to the terrestrial
networks. These components are housed in cable stations located on shore near
each landing point of the undersea cable. The dry plant equipment converts the
terrestrial transmission signals into formats which are suitable for long
distance undersea transmission and converts these signals back to standard
terrestrial transmission signals. The dry plant equipment also monitors,
controls and powers the undersea wet plant equipment and provides the
maintenance features necessary to allow the identification and location of
faults which affect transmission performance. The primary components of the dry
plant housed within the cable station are described below.
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Line Termination Equipment. Line termination equipment is a general term
which includes three distinct components: high performance optical equipment,
wavelength termination equipment and transmission line amplifiers.
High Performance Optical Equipment. Our proprietary high performance
optical equipment primarily consists of optical transceivers, which
transmit and receive terrestrial optical signals representing voice,
video and data. The high performance optical equipment receives voice,
video and data signals from various types of terrestrial networks and
converts these signals to a proprietary long distance transmission
format that provides the high power, high fidelity and precise
wavelengths necessary for transoceanic transmission distances of up to
12,000 kilometers. On the receiving side, the high performance optical
equipment converts the long distance transmission signals back to a
format for terrestrial transmission.
Wavelength Termination Equipment. Our wavelength termination
equipment performs dense wavelength division multiplexing, which is the
combining of transmitted signals of different wavelengths received from
the high performance optical equipment onto a single fiber. On the
receiving end, the wavelength termination equipment then separates the
signals back into different wavelengths.
Transmission Line Amplifiers. Before launching the long distance
optical transmission signal onto the undersea cable, the transmission
line amplifiers increase the signals to the level needed for
transmission. On the receiving side, the terminal line amplifiers
increase the received signal to the level needed to separate the
individual wavelengths before they are processed in the high
performance optical equipment.
Power Feed Equipment. Our power feed equipment, specially designed for
undersea data transmission applications, provides a constant current source for
powering the undersea optical signal amplifiers, which are known as repeaters.
This equipment is designed to support a variety of applications, including
point-to-point single cable networks, as well as complex networks which have
multiple segments or branches.
Line Monitoring Equipment. Our line monitoring equipment performs diagnostic
monitoring of the network, providing preventive maintenance and fault detection
and location in the event of a cable fault or break.
Network Management System. The network management system is used to monitor
all of the components of the undersea network. This equipment is the gathering
point for information regarding fault management, performance management,
security management and configuration management across the undersea network.
The network management equipment provides all functions required for the
operations and maintenance staff to track network performance and configure
transmission paths within a network.
Wet Plant
The wet plant consists of the equipment that is installed in the undersea
environment from shore to shore and can be subdivided into two groups of
equipment. The passive equipment is comprised of undersea cables which house
and protect the fibers that propagate the optical signals. The active equipment
is comprised of repeaters, which periodically amplify the optical signal along
the cable route, and undersea branching units, which connect and route fibers,
transmission traffic and power from three or more cable ends.
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Undersea Cables. We build our undersea TeraWave(TM) Cables to precise
specifications, as described in the following table:
<TABLE>
<CAPTION>
TeraWave Cables SL 21 SL 17 SL 12
- --------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Outside Diameter 21 millimeters 17 millimeters 12 millimeters
Breaking Strength 24,000 pounds 17,900 pounds 10,000 pounds
Working Load 17,500 pounds 12,800 pounds 5,500 pounds
Maximum Fiber Pairs 8 pairs 4 pairs 12 pairs
System Type Supported Repeatered Repeatered Non-repeatered
</TABLE>
The various cables utilized for repeatered systems can generally support up
to eight pairs of optical fibers encased in a structure of steel, copper, and
extruded polyethylene with a final outer diameter of up to 21 millimeters. The
copper tube serves as an electrical conductor to feed power from the cable
stations to the submerged amplifiers and to provide resistance to undersea
pressure. Steel wires provide tensile strength, which is especially critical
when the cable is deployed or recovered for repair. The polyethylene screen
acts as an electrical insulator. In shallower waters, the cable typically has
additional steel armor to provide protection from abrasion and damage from
fishing trawlers and anchors. The following illustration of our SL 17 cable
depicts the basic structure and features of our TeraWave cables.
[GRAPHIC OF TERAWAVE(TM) SL17 CABLE]
Repeaters. Our repeaters are specialized undersea equipment designed to
house and protect optical amplifiers that amplify voice, video and data signals
as they travel across fiber optic cable. Used typically in systems spanning
between 300 and 12,000 kilometers, repeaters provide the ability to amplify
optical signals without first converting these signals to their electrical
equivalents. Our repeaters include up to 16 amplifiers, each capable of
amplifying optical signals on each of up to eight fiber pairs. Repeaters are
integrated into the cable at periodic intervals during the cable assembly
process.
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Gain Equalization Units. Gain equalization units are used to compensate for
the uneven gain of optical signal amplifiers so that each transmission signal
is amplified by substantially the same amount. This allows the complete
transmission bandwidth of an optical amplifier to be used, thus maximizing the
capacity of the undersea system.
Undersea Branching Units. Undersea branching units allow for the independent
routing of optical fibers, transmission traffic, and system power along
different segments of an undersea system.
Manufacturing Capabilities
Our manufacturing facilities employ equipment and quality assurance methods
which support our strategy of manufacturing key components for successful
integration into undersea fiber optic cable systems. We rely on third party
suppliers for certain components using a procurement philosophy which
emphasizes dual sourcing and close interaction among our own manufacturing
operations and our suppliers. We believe that our manufacturing infrastructure
is readily scalable to allow us to meet our customers' needs as well as the
requirements of the TyCom Global Network.
We have three manufacturing facilities which produce the dry and wet plant
components.
Exeter Manufacturing Facility. Our high performance optical transmission
products manufacturing facility is located in Exeter, New Hampshire and began
manufacturing operations in 1999 to add capacity for product lines previously
manufactured at our Clark, New Jersey Manufacturing Center. Exeter currently
utilizes 75,000 square feet of manufacturing floor space, and is expected to
double its size to 150,000 square feet by the end of 2000. Exeter utilizes the
following proprietary manufacturing technology in the manufacture of its
terminal products which include optical transceivers, multiplexers and
amplifiers:
. Automated high speed optical testing (including bit error rate testing);
. Electronic database tools for testing circuit packs;
. Electronic work instructions with hypertext;
. High technology component critical parameter management; and
. Specialty optical splicing methods and designs.
Simplex Technologies, Inc. Simplex is one of the world's largest undersea
cable factories, with more than 500,000 square feet of manufacturing space and
the capability to simultaneously load two of the industry's largest cable ships
at its own deep water pier. From 1997 to 1999, Simplex increased its annual
production of undersea cable from 22,000 kilometers to an estimated 45,000
kilometers. By mid-calendar year 2000, Simplex's annual manufacturing capacity
will be 60,000 kilometers. Simplex can also integrate repeaters and other wet
plant components and can store 60,000 kilometers of assembled wet plant. Today,
about 200,000 kilometers of Simplex undersea fiber optic cable is in service,
the largest installed base in the market.
Simplex's 85-acre facility on the shores of the Piscataqua River in
Newington, New Hampshire houses custom designed equipment including:
. Computer controlled fiber optic cabling production lines;
. Thermoplastic extruders that produce insulating and jacketing layers;
. Cabling and twisting machines; and
. Cable armor lines.
Simplex manufactures each type of our TeraWave cable.
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Clark Manufacturing Center. We also operate an electrical and optical
equipment manufacturing facility located in Clark, New Jersey. Clark pioneered
some of the world's most innovative manufacturing processes related to optical
transmission technology, including fiber handling and inspection, specialized
tools and fixtures and splicing and testing techniques. To date, Clark has
manufactured over 8,300 repeaters for more than 70 undersea cable systems in
its 103,500 square-foot facility. We are currently in the process of expanding
Clark's floor space by 20,000 square feet, with completion of the expansion
planned for June 2000.
Clark manufactures the following equipment for undersea application:
. Repeaters;
. Gain equalization units; and
. Branching units.
Network Engineering, Construction, Operations and Maintenance
TyCom's network engineering, construction, operations and maintenance
department operates one of the world's largest and most modern fleets
specifically designed for installing, maintaining and repairing undersea fiber
optic cable systems. This department also performs all other aspects of cable
installation and maintenance, including: route surveys, installation
engineering, land cable installation and maintenance, installation of terminal
equipment and construction, operation and maintenance of cable stations and
metropolitan gateways.
Fleet. We operate 11 specially designed cable laying and maintenance ships
and are preparing to increase our fleet with the construction of two new state-
of-the art cable ships scheduled for completion in 2002. Our five United States
flagged vessels are each owned by a limited partnership of which we are the
managing general partner and Teleglobe is the limited partner. Teleglobe owns a
25% interest in three of the limited partnerships and a 45% interest in the
remaining two. We plan to add up to 21 additional ships over the course of the
deployment of the TyCom Global Network, primarily in a maintenance capacity. We
have deep-water ports in Newington, New Hampshire; Baltimore, Maryland;
Portland, Oregon; Honolulu, Hawaii; and Valencia and Vigo, Spain, as well as
various wet plant storage depots around the world. We plan to add additional
deep-water ports as needed to meet our growing needs. Our ships can remain at
sea for up to 60 days without refueling, and can carry as much as 6,000
kilometers of cable.
The following table sets forth a description of each of the ships in our
fleet and their significant operating characteristics:
<TABLE>
<CAPTION>
Primary Year Service Length- Cable Capacity-
Ship Mission Built Speed-Knots Meters Metric Tons
- ---- ------------ ----- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
C.S. Charles L. Brown* Maintenance 1954 13 100 1,100
C.S. Long Lines* Maintenance 1963 15 156 6,000
C.S. Global Link* Maintenance 1990 15 146 6,000
C.S. Global Sentinel* Maintenance 1990 15 146 6,000
C.S. Global Mariner* Maintenance 1992 14 146 5,000
C.S. Tyco Provider Installation 1978 12 141 6,000
C.S. Coastal Connector Installation 1979 14 88 1,500
B.C. Atlantida Maintenance 1984 13 114 2,500
B.C. Teneo Maintenance 1993 12 81 1,100
B.C. Iberus Installation 1978 13 136 5,000
M.V. Dock Express 20** Installation 1983 13 170 9,000
</TABLE>
- --------
* United States flagged vessels.
** Under long-term charter
46
<PAGE>
Our survey engineers map the ocean floor with sonar and other sophisticated
equipment to determine the best path for the cable with consideration given to
earthquake faults, currents, shipping and deep-sea fishing routes. The majority
of our ships are outfitted with computerized dynamic positioning systems, which
control their propulsion systems to accurately maintain their position to
within a few meters. The cable control rooms have sonar equipment for profiling
the sea floor which allow cable engineers to precisely evaluate pre-surveyed
areas of the seabed for optimum installation over the engineered cable route.
The ships carry some of the most advanced cable machinery, sea plows, and
robotic submersible vehicles used to install and maintain cable systems. Each
ship generally carries a crew of 60 to 100 marine and technical personnel
depending on the assigned task.
Network Operations and Administration. Our network operations team consists
of a hierarchy of network operating center, regional operations center, cable
station and telehouse experts. Our network operations and administration
division performs all aspects of network operations and administration
services, including customer care services, network operations planning,
information systems planning, service provisioning, and network fault
management.
Our planned customer care center will provide a single point of contact for
all customer inquiries. The center will maintain an enhanced interactive
customer Internet site. This site will enable customers to monitor the
performance of their bandwidth capacity, initiate service activation, report
trouble and receive status on work in progress. Additionally, the center will
manage all customer capacity sales billing and collection functions.
The network operating center provides for control of our network by
continuously monitoring the system to detect faults or breaks in the network
cables and their precise location. The center manages and coordinates the
location and repair of network faults, network performance and all cable
station and gateway activities. Our network operating center manages the
engineering and implementation of all service provisioning and the network's
restoration needs. It also develops and implements cable awareness and damage
prevention programs to minimize the occurrence of external aggression through
educating shipping traffic about the location of the cable. Until September
1999, we provided the full suite of operations, administration and maintenance
services for the Atlantic Crossing-1 cable system, including network
operations, and we continue to provide dry and wet plant maintenance services.
We are also planning the deployment of a network operating center and cable
station operations in four countries for the Hibernia cable system.
We will deploy regional network operations centers concurrent with the
implementation of the transpacific and European portions of our network. These
centers will be strategically located to provide direct control of the
expanding segments of our network. One or more regional operations centers will
serve as the back-up disaster recovery site for the network operation center.
All regional operations centers will report directly to the network operation
center. Our network operation center and all regional operations centers will
be staffed seven days a week, 24 hours a day.
Dry Plant Maintenance. The cable stations and gateways are normally staffed
five days a week, 12 hours a day when no faults exist. During fault periods the
cable stations are manned continuously as required. The cable station and
gateway personnel are responsible for all on-site repair and provisioning
activities, including those required to address the co-location and
interconnection requirements of our customers. Additionally, our cable station
and gateway staff are responsible for routine, preventive and corrective
maintenance for the terrestrial based cable.
Wet Plant Maintenance. The expanding reach of undersea fiber optic cable
systems worldwide has created a need for undersea maintenance capabilities in
new areas of the world. We offer wet
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<PAGE>
plant maintenance capabilities to serve these new regions as well as the
regions that have traditionally required such service. Our new wet plant
maintenance program, SEAHORSE, is intended to respond to customers' needs for
more flexible, responsive and reliable maintenance services.
Our SEAHORSE maintenance program features all-inclusive fixed fees,
exclusively dedicated cable ships, full maintenance authority functions,
spares management, fault location and cable awareness and damage prevention
programs. Stationing of our cable ships and shore-based storage depots is
planned to provide the optimum coverage and shortest transit times, resulting
in minimum repair times and maximum cable availability.
The undersea maintenance services we provide are performed exclusively by
our vessels. We charter vessels to augment the installation capabilities of
our fleet. Traditionally, we have utilized our own ships for approximately 50%
of the installation services we perform, relying on chartered vessels to
perform the remaining portion. A typical charter agreement lasts from three to
twelve months, with options to renew. We expect our use of chartered vessels
to decrease as new vessels are added to our fleet.
Quality System Overview
Our manufacturing facilities have a well developed quality system which
includes computer controlled product routing and backward and forward
component/product traceability, a procedure for identifying all components of
a product during all stages of production, delivery and installation. We
conduct manufacturing line reviews to qualify all new products and processes
and have an extensive corrective action system. We utilize exhaustive failure
mode analysis techniques in order to ensure the reliability of our products.
We also have comprehensive training plans in place for all employees.
We were re-certified to ISO 9001 standards in October 1999 by Det Norske
Veritas. This certification includes TyCom Laboratories in Eatontown, New
Jersey, our offices in Morristown, New Jersey, and the Clark and Simplex
manufacturing facilities. Exeter, our newest facility, received its ISO 9001
certification in February 2000. In addition, we undergo internal quality
audits performed on a regular basis.
Recent TyCom Undersea Fiber Optic Cable Systems
The following table shows the significant undersea fiber optic networks
that we have recently installed or are currently installing.
<TABLE>
<CAPTION>
Contracted Undersea
Project Customer Service Date System Length Location
- ------- ------------------------ -------------- ----------------- ----------------------------
<S> <C> <C> <C> <C>
Hibernia 360networks March 2001 12,200 kilometers US--Europe
SAm-1 Telefonica Internacional January 2001 22,000 kilometers South America--US
China-US Cable* Carrier Consortium November 2000 30,000 kilometers US--Asia
Yellow Level 3 September 2000 6,150 kilometers US--United Kingdom
Pacific Crossing-1 Global Crossing July 2000 21,000 kilometers US--Japan
Americas II* Carrier Consortium April 2000 8,300 kilometers US--Caribbean--South America
MAYA-1* Carrier Consortium March 2000 4,700 kilometers Caribbean
Pan American Crossing Global Crossing February 2000 7,000 kilometers Panama, Caribbean--
April 2000 2,700 kilometers Venezuela, US--Mexico
Columbus III* Carrier Consortium November 1999 10,000 kilometers US--Europe
Guam-Philippines* Guam-Philippines Cable March 1999 3,600 kilometers Pacific
Atlantic Crossing-1 Global Crossing February 1999 14,000 kilometers US--Europe
Alaska United General Communications December 1998 4,000 kilometers North Pacific--US
PanAm* Carrier Consortium June 1998 9,000 kilometers Caribbean--South America
FLAG* FLAG Telecom September 1997 27,000 kilometers Europe--Asia
</TABLE>
- --------
* System provided in conjunction with other suppliers.
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TyCom Undersea Systems Maintenance
We have a long history of providing undersea maintenance services to cable-
owning consortiums in the Atlantic, Pacific and Mediterranean regions. In
recent years, we have expanded our customer base to include undersea cable
systems not owned by traditional consortia. In addition, in October 1999 we
agreed to provide all wet plant maintenance services for Hibernia through our
SEAHORSE Atlantic Wet Maintenance Service program.
The following table summarizes recent maintenance agreements we have entered
into with customers.
<TABLE>
<CAPTION>
Undersea Type of
Project/Program Customer System Length Maintenance Region
- --------------- ------------------------ ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
SEAHORSE Atlantic 360networks 12,000 kilometers Wet Plant North Atlantic
SEAHORSE South America Telefonica 22,000 kilometers Wet Plant South America
Internacional
Atlantic Crossing Global Crossing 14,000 kilometers Wet Plant North Atlantic
Atlantic Cable Various including 177,000 kilometers Wet Plant North Atlantic
Maintenance Concert, France Telecom,
Agreement Cable & Wireless,
Telefonica, and
others
North America Zone Various including AT&T, 19,000 kilometers Wet Plant North East
Teleglobe and others Pacific Ocean
Hawaii Zone Various including AT&T, 21,000 kilometers Wet Plant Central North
KDD and others Pacific
Pan American Cable Various including AT&T, 3,600 kilometers Wet Plant Central America
System Telefonica, CTC Mundo
and others
Mediterranean Cable Various including 80,000 kilometers Wet Plant Mediterranean
Maintenance Agreement France Telecom,
Telefonica and
others
Atlantic Crossing Global Crossing N/A Dry Plant North Atlantic
Hibernia 360networks N/A Dry Plant North Atlantic
Bus-1 TeleBermuda 1,340 kilometers Repair Authority North Atlantic
and Cable
Protection
</TABLE>
Intellectual Property
Because of our long history of designing, installing, maintaining and
operating undersea fiber optic systems, both as a part of AT&T and as Tyco
Submarine Systems Ltd., we own or have rights to intellectual property in key
technology areas including long distance optical transmission and receiving
technologies and equipment, network management systems and software, undersea
cables and fiber, optical amplifiers, power feed equipment, component and
system manufacturing technologies, network integration and system installation
and repair technologies. A significant portion of our intellectual property has
been generated by TyCom Laboratories. As a result of Tyco's acquisition of AT&T
Submarine Systems in July of 1997, certain intellectual property assets,
including issued United States and non-United States patents and patent
applications, know-how, trade secrets and other intellectual property were
assigned to Tyco Submarine Systems Ltd. The process of making the filings
required to transfer ownership of several issued patents assigned to Tyco
Submarine Systems Ltd. from AT&T is continuing. As of April 14, 2000, we owned
159 issued patents, including 55 United States patents and 104 non-United
States patents. In addition, as of April 14, 2000, we had 332 pending patent
applications, including 179 United States patent applications and 153 non-
United States patent applications. We vigorously defend our intellectual
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<PAGE>
property portfolio and enforce our rights if infringement or misappropriation
occurs with respect to any and all of our intellectual property.
We require our employees and consultants to execute agreements, upon
commencement of employment or consulting relationships, that assign any
intellectual property developed by an individual during the term of his or her
employment to TyCom as well as corollary confidentiality agreements with
respect to proprietary information.
We have pending trademark registration applications for TyCom, TyCom
Networks and TeraWave. We also have pending service mark registration
applications for TyCom, TyCom Networks and SEAHORSE.
Sources and Availability of Materials and Suppliers
We make significant purchases of electronic components, fiber, optical
components, synchronous digital hierarchy equipment and other materials and
components from many sources. We have been able to obtain sufficient materials
and components from sources around the world to meet our needs. We also develop
and maintain alternative sources for essential materials and components.
Our suppliers are selected based on their ability to consistently meet
quality, reliability, delivery, cost and performance requirements. We purchase
the fiber that we use in manufacturing undersea cable from Lucent and Corning.
We purchase certain optical components for use in the manufacture of our
repeaters from Lucent, Corning, JDS-Uniphase, and FDK. In the event that any of
these suppliers were unable to continue as our supplier of optical components,
alternative sources of supply are available. General Dynamics Advanced
Technology Systems currently supplies our power feed equipment under an
exclusive manufacturing arrangement which expires in approximately two years.
If General Dynamics Advanced Technology Systems were unable to continue as our
supplier, we have the capability of manufacturing the power feed equipment
ourselves. There are currently five major suppliers of synchronous digital
hierarchy equipment: Nortel, Lucent, NEC, Toshiba and Alcatel, as well as a
number of smaller suppliers. We do not have a concentration of sources of
supply of materials, labor, services or other rights that, if suddenly
eliminated, could severely impact our operations. Please see "Risk Factors--We
are dependent on a small number of suppliers, including specialized equipment
and component manufacturers" for more information.
We also purchase undersea cable from Hitachi Cable Limited of Japan on an
as-needed basis to enhance the capabilities of Simplex. Our relationship with
Hitachi provides us with certain advantages in the supply of Asian systems,
including proximity and the ability to satisfy possible local content concerns.
Competition
The telecommunications industry is highly competitive. We plan to compete
as a:
. seller of bandwidth capacity;
. supplier of new undersea fiber optic cable systems and upgrades; and
. provider of maintenance services for undersea fiber optic cable systems.
Significant new and potentially larger competitors could enter our market as
a result of regulatory changes or the establishment of cooperative
relationships. In addition, the ongoing consolidation of the telecommunications
industry may create new competitors with an interest in
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entering the business of manufacturing, owning, operating, maintaining and
selling bandwidth capacity on undersea fiber optic networks. Recent
technological advances may also greatly expand the capacity of existing and new
fiber optic systems and could lead to even greater competition. Competition
could cause us to suffer price reductions, fewer large-volume sales, under-
utilization of resources, reduced operating margins and loss of market share.
Competition as a Seller of Capacity. As we deploy the TyCom Global Network,
we will face competition and pricing pressure from existing and planned fiber
optic cable networks, satellite providers and, on certain routes, terrestrial
networks. As we expand our range of available products and services, we expect
to face competition from various entities offering comparable products and
services. In addition, the first phase of the TyCom Global Network will compete
with certain of our customers, including Global Crossing, 360networks and
various participants in cable system consortia. Our planned expansion of the
TyCom Global Network beyond the first phase will likely also result in
competition with some of our other customers. Additionally, carriers hold
ownership positions in some of these competing systems that may impact their
purchase of additional capacity on our system. Accordingly, there can be no
assurance that we will be able to compete successfully against systems to which
prospective customers have made long-term commitments.
There are a number of telecommunications companies that are pursuing global
networks, including FLAG Telecom, Global Crossing, MCI WorldCom, Teleglobe, CTR
Group Limited, the sponsor of Project Oxygen, and New Millennium Development
Group. Other telecommunications companies may also from time to time explore
the merits of global networks.
The planned routes underlying the first phase of the TyCom Global Network
are currently served by several undersea cables as well as satellites. Primary
sources of competition with our network may result from the following systems,
identified by system name and sponsor in the regions where we intend to install
segments of our network during the first phase of the deployment:
MEDITERRANEAN:
ATLANTIC/WESTERN EUROPE:
FLAG (FLAG Telecom)
Hibernia (360networks)
Yellow/AC-2 (Level 3/Global SEA-ME-WE3 (Consortium)
Crossing)
Atlantic Crossing-1 (Global BALTIC:
Crossing) Pangea (Pangea Ltd.)
TAT-14 (Consortium)
FLAG Atlantic (FLAG Telecom)
PACIFIC:
Japan-US (Consortium)
Pacific Crossing-1 (Global
Crossing)
The continued expansion of terrestrial networks will also affect competition
in the regional undersea cable markets.
Many of our capacity sales competitors have, and potential new competitors
are likely to enjoy, substantial competitive advantages, including the
following:
. greater name recognition in certain regions;
. greater financial, technical, marketing and other resources;
. larger customer bases; and
. well-established relationships with current and potential customers.
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Competition as a Supplier of Undersea Fiber Optic Cable Systems. Competition
to design, construct and install undersea fiber optic cable systems remains
intense. Participants in this market compete on the basis of, among other
things, price, technology, time-to-market, the provision of financing and
regional and long-term relationships. In the future, we will be offering less
of our cable system design, manufacturing and installation capacity to our
customers and our existing competitors and potential new cable system suppliers
will play a more significant role in the undersea cable system market. There
are currently two other major providers of undersea fiber optic systems:
Alcatel Submarine Networks S.A. and KDD Submarine Cable Systems Inc. Other
smaller players compete on a more limited basis, either as subcontractors to
other providers or as suppliers of regional or non-repeatered systems.
Competition as a Provider of Undersea Cable Maintenance Services. The market
for undersea cable maintenance services is competitive, although long-term
contracts for cable maintenance services typically accompany contracts for
construction and installation of an undersea cable system. As a result, the
basis for competition in the undersea cable maintenance market generally
mirrors that for the undersea cable supply market. There is currently one
significant competitor in the undersea maintenance market, Global Marine
Systems Limited, a subsidiary of Global Crossing Ltd., and other smaller
players who own or lease vessels which from time to time participate in
maintenance agreements.
Regulation
In connection with the construction, installation, operation and maintenance
of the TyCom Global Network, we must obtain and comply with terms of various
permits, licenses and other authorizations in jurisdictions where our network
lands. Specifically, we must obtain a cable landing license from the Federal
Communications Commission in the United States and comparable facilities and
services licenses in other jurisdictions. Generally, landing licenses are
granted for a term of years. Such licenses may subject our business and
operations to varying forms of regulation, which may change over time. Failure
to obtain or renew such a license, or a material adverse change in the nature
of the regulation to which our business is subject, could have a material
adverse effect on our business. Additionally, our international operations may
be affected from time to time by political developments and national and local
laws and regulations and may be subject to risks such as the imposition of
governmental controls, license requirements and changes in tariffs. We have a
well-established history of obtaining and maintaining all permits, licenses and
other authorizations required for submarine cable systems worldwide. We have
filed the applications for the United States and United Kingdom landing
licenses required for the first phase of our network from the United States to
the United Kingdom.
In the United States, we must obtain from the FCC a license to land and
operate a submarine cable in accordance with "An Act Relating to the Landing
and Operation of Submarine Cables in the United States," 47 U.S.C. (S)(S) 34-
39. The Act allows the FCC to deny an application for a cable landing license
if to do so would "assist in securing rights for the landing or operation of
cables in foreign countries, or in maintaining the rights or interests of the
United States or of its citizens in foreign countries, or will promote the
security of the United States or may grant such license upon such terms as
shall be necessary to assure just and reasonable rates and service in the
operation and use of cables so licensed," 47 U.S.C. (S) 35. The FCC also
reserves the right to deny or condition the grant of cable landing licenses
where the applicant is, or is affiliated with, a foreign carrier having market
power in a destination country for the submarine cable. We believe that none of
these concerns is likely to be raised by our application. The FCC applies a
presumption in favor of licensing submarine cables that connect the United
States with other World Trade Organization-member countries, such as the United
Kingdom, and we are neither a foreign carrier nor affiliated with a foreign
carrier in countries where we plan to land our cables, including the
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United Kingdom. Furthermore, the FCC has a well-established policy of
encouraging private submarine cable systems as a means to increase competition
in the undersea cable market. The grant of cable landing licenses for the TyCom
Global Network would further the FCC's policy of favoring competition because
it will offer other alternatives for traffic on the routes we plan to serve.
For private submarine cable systems (i.e., non-common-carrier submarine cable
systems that provide capacity on a wholesale, or carriers' carrier, basis),
such as the TyCom Global Network, the FCC requires only a cable landing
license. For common carrier submarine cable systems (and for common-carrier
customers who purchase capacity on private submarine cable systems), however,
the FCC also requires a Section 214 authorization, pursuant to the
Communications Act of 1934, to provide international common carrier services.
Section 214 authorization subjects a licensee to tariff, contract filing,
traffic reporting, and non-discrimination requirements, as well as the
international settlement rates regime for circuit-switched traffic. Future
changes in our network's offerings could lead to FCC classification of such
offerings as common carrier services. Such a classification would require us to
seek an international services authorization under Section 214 of the
Communications Act of 1934, and subject us to additional regulation.
In the United Kingdom, we will be required to obtain a Public
Telecommunications Operator License from the Secretary of State for Trade and
Industry pursuant to the Telecommunications Act of 1984. This is a new,
standard form, license and is available on application to the Secretary and on
payment of the application fee of UK(Pounds)40,000. Similar to the FCC's pro-
competition policy, the Secretary follows a policy of promoting effective
competition and the prevention of abuse of market power or monopoly. These
licenses are granted to operations, such as the TyCom Global Network, which
demonstrate they meet certain basic requirements and that they have a business
need. They generally last for a period of 25 years, with annual fees of not
more than 0.08% of United Kingdom turnover and not less than UK(Pounds)3,000.
Continuing Global Deregulation. The World Trade Organization Agreement on
Basic Telecommunications, concluded in 1997, greatly accelerated deregulation
of international telecommunications facilities and services. Commitments under
the WTO Agreement vary by country, but the 73 countries making commitments as
of January 1999 generally agreed to greater market access, relaxed foreign
ownership and investment rules, and pro-competitive regulatory principles. The
WTO Agreement also gives WTO members the right to enforce other countries'
commitments and seek penalties for non-compliance from the WTO's Dispute
Resolution Body. Those 73 countries making telecom commitments must offer such
benefits not just to each other, but to the entire WTO membership. The WTO
continues to conduct negotiations in 2000 to liberalize further trade in
telecommunications services, particularly as they relate to the Internet.
To implement its commitments under the WTO Agreement, the United States
largely abandoned its long-standing requirement that the destination country
grant reciprocal landing rights to U.S. cables and carriers prior to licensing
in the United States. Instead, it adopted a presumption that submarine cables
landing in WTO-member countries are in the public interest. For non-WTO
destination countries, submarine cable operators must still demonstrate to the
FCC that they lack market power in the destination country, or that the
destination country affords effective competitive opportunities to U.S.
international carriers. The United States also continues to license private
submarine cables, which are exempt from common carrier regulation by the FCC.
Environmental and Health and Safety Matters
We are subject to various environmental protection and health and safety
laws and regulations. These laws and regulations govern, among other things,
waste management and disposal, air emissions, water discharge, procedures for
the operation of certain vessels, such as our cable laying and maintenance
ships, and employee health and safety. We are also required to obtain permits
from governmental authorities for certain operations. We cannot assure you that
we have been, or will be at
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all times, in full compliance with such laws, regulations and permits. If we
violate or fail to comply with these laws, regulations or permits, we could be
fined or otherwise sanctioned by regulators or in certain cases, in connection
with the operation of our ships, be denied access to, or be detained at,
certain ports. Although we have made, and will continue to make, capital and
other expenditures to comply with environmental laws and regulations, we do not
expect these expenditures to be material in 2000 or 2001. However, because
environmental laws change frequently and have become more stringent over time,
we cannot assure you that our costs of complying with current and future
environmental and health and safety laws, and our liabilities arising from past
or future releases of, or exposure to, hazardous substances will not adversely
affect our business, results of operations or financial condition.
We are also subject to environmental laws requiring the investigation and
cleanup of contamination at properties we currently own or operate or formerly
owned or operated, at disposal or treatment facilities to which we sent or
arranged to send hazardous wastes or in connection with the ships we own or
operate. We are aware of contamination at certain of our properties. In
particular, one of our facilities is the subject of cleanup under the New
Jersey Industrial Site Recovery Act. The prior owner has assumed all
responsibility and costs for the cleanup of contamination at this property and
has also agreed to indemnify us in the event that we incur any other costs
related to this cleanup. In addition, we have been named as a potentially
responsible party under the United States Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, more commonly known as
Superfund, at a site in New Hampshire. We are one of a group of parties that is
participating in the investigation and cleanup of this site. Although we
believe that any costs or liabilities in connection with this site will not
materially adversely affect our business, results of operations or financial
condition, we cannot assure you that these costs and liabilities will not
exceed the current amount of our reserves for this site or that any amounts in
excess thereof or other environmental cleanup costs and liabilities will not be
material.
Employees
As of March 31, 2000, TyCom employed approximately 2,500 full-time and six
part-time employees. Approximately 480 of our employees at the Clark
Manufacturing Center located in Clark Township, New Jersey are covered under a
union contract that expires in January 2005. TyCom's manufacturing facilities
in Newington and Exeter, New Hampshire are not unionized. We consider our
relationship with our employees to be good and have not experienced any
significant interruptions of operations due to labor disagreements.
Our fleet officers and crew who work on our ships are provided from several
different maritime sources, although the engineers in charge of the
installation and maintenance operations are our employees. Our United States
flag officers are sourced from the American Maritime Officers union. This
contract expires in June 2000 and renewal negotiations are ongoing. Crew on our
United States flagged ships are provided by the Seafarers International Union
under a contract that expires in June 2001. Crew for our ships which fly non-
United States flags are provided by third party ship management companies. We
contract all licensed officers and unlicensed seamen through the identified
unions and ship management companies. In 1999, through these contracts we
provided full-time employment to approximately 440 personnel and part-time
employment to an additional 1,300 personnel. Since 1963, there has been no
labor strike involving any of our maritime crewing contracts.
Properties
Our operations are conducted in facilities throughout the world aggregating
1.2 million square feet of floor space, of which about 800,000 square feet are
owned and approximately 400,000
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square feet are leased. Manufacturing facilities total approximately 800,000
square feet of owned and leased floor space in New Hampshire and New Jersey.
Wet plant port and storage depot facilities total approximately 185,000 square
feet of floor space and are located in Maryland and Oregon in North America as
well as Hawaii, St. Croix, Guam, and Spain. Our research and development
facility totals about 140,000 square feet located in Eatontown, New Jersey.
Headquarters, sales and administration offices total approximately 80,000
square feet and are located in Bermuda, New Jersey, Singapore, Spain, and
France.
Legal Proceedings
Tyco Submarine Systems Ltd. On January 31, 2000, a complaint was filed in
the United States District Court for the District of New Jersey asserting
claims against Tyco Submarine Systems Ltd. and Tyco Group S.a.r.l., a
Luxembourg subsidiary of Tyco. The claims arise out of negotiations conducted
by Tyco Group with IDT Europe B.V.B.A., a Belgian corporation, concerning the
possible formation of a joint venture for the development of an undersea fiber
optic telecommunications system to be supplied by Tyco Submarine Systems Ltd.,
which the complaint alleges was to be substantially similar to the proposed
TyCom Global Network. The plaintiff, IDT Europe B.V.B.A., alleges that Tyco
Group breached a Memorandum of Understanding dated November 9, 1999 (which
expired in December 1999), and alleged implied covenants of good faith and fair
dealing, in various ways, including by failing to negotiate in good faith to
complete and finalize various agreements relating to the proposed joint
venture. The plaintiff seeks, among other relief such as attorneys' fees and
costs, specific performance of Tyco Group's alleged obligation to negotiate and
execute such agreements, as well as compensatory and punitive damages. The
plaintiff also alleges that Tyco Group tortiously interfered with contractual
relations, business relations and fiduciary duties relating to an agreement to
reserve required manufacturing intervals and undertake certain long-lead time
activities which plaintiff claims it had with Tyco Submarine Systems Ltd.
With respect to Tyco Submarine Systems Ltd., the plaintiff alleges breach of
an "Instruction to Proceed", an agreement by which the plaintiff reserved
manufacturing capacity for the cable system and authorized the undertaking of
certain long-lead time activities which was the subject of the joint venture.
Plaintiff also alleges that Tyco Submarine Systems Ltd. failed to negotiate in
good faith a system supply agreement for the cable system. The plaintiff also
claims breach of an alleged implied covenant of good faith and fair dealing.
The plaintiff seeks, among other relief such as attorneys' fees and costs,
compensatory damages of $1 billion and injunctive relief precluding Tyco
Submarine Systems Ltd. from undertaking any business activity contrary to the
terms of the Instruction to Proceed. Tyco Submarine Systems Ltd. believes that
the claims asserted against it are without merit and intends to defend itself
vigorously.
Tyco Group S.a.r.l. and Tyco Submarine Systems Ltd. have filed a motion to
dismiss the complaint in the United States District Court for the District of
New Jersey on the ground that the court lacks subject matter jurisdiction.
Plaintiffs have opposed that motion, which is pending before the court.
On March 24, 2000, Tyco Group S.a.r.l., Tyco Submarine Systems Ltd., Tyco
International Ltd., Tyco International (US) Inc., and TyCom Ltd. filed a
complaint in the Supreme Court of the State of New York, County of New York,
asserting claims against IDT Europe B.V.B.A. and IDT Corporation (collectively
"IDT"). The complaint alleges that IDT filed a baseless lawsuit in federal
court in New Jersey seeking to enforce non-binding provisions of the Memorandum
of Understanding and the
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Instruction to Proceed, improperly disclosed confidential information to the
press, and otherwise engaged in a pattern of conduct with the purpose and
effect of obstructing efforts to build the TyCom Global Network and to finance
it principally through the initial public offering of TyCom shares. The
complaint asserts five causes of action, including breach of contract and
tortious interference with both contract and prospective business relations,
and demands compensatory damages of at least $1 billion, punitive damages, and
declaratory and injunctive relief. IDT has moved to dismiss the complaint. Tyco
Group S.a.r.l and the other plaintiffs have served their papers in opposition
to that motion.
Simplex. Simplex has been named as a defendant in nearly one hundred
asbestos personal injury cases involving a total of 3,400 individual
plaintiffs. In defense of these cases, Simplex has established that, for all
periods relevant to the litigation, the wire and cable products produced by
Simplex did not contain asbestos. Simplex is determined to resist the claims
aggressively and to refuse even nominal settlement demands. In most cases, the
litigation against Simplex has either been summarily dismissed based upon lack
of product identification or voluntarily dismissed.
Two New Jersey cases were tried in October of 1996 and December of 1997,
respectively, in which juries found Simplex without any liability. By early
1999, all the remaining litigation had been dismissed summarily by the court or
voluntarily by the plaintiffs. Simplex was named in several new cases in late
1999 and early 2000, and we believe that Simplex will be dismissed from these
cases.
Simplex has been reimbursed by its insurance carriers for all defense fees
and costs incurred by it in connection with this litigation, and the carriers
are currently paying the defense fees and costs on the remaining active cases.
Other proceedings. We are a defendant in a number of other pending legal
proceedings incidental to present and former operations, including various
workers' compensation and personal injury claims. We do not expect the outcome
of these proceedings, either individually or in the aggregate, to have a
material adverse effect on our financial position, results of operations or
liquidity.
Undersea Cable System Issues
In the normal course of business, Tyco Submarine Systems Ltd. enters into
system supply, maintenance and related contracts under which any failure to
perform or delay in performance on our part can result in liability to our
customers. These system supply and maintenance contracts generally call for
amicable settlement of disputes, differences or claims by mutual discussion.
The types of issues that typically arise include liquidated damages for our
delay or failure to perform, force majeure costs claimed by us, items that
customers assert must be completed or rectified prior to final acceptance of an
undersea system, breach of product warranty, termination charges and a variety
of other, often offsetting, obligations owed by us to customers or by customers
to us. Failing amicable settlement, our system supply and maintenance contracts
provide for settlement through arbitration. Historically, we have resolved our
system supply, maintenance and related contract differences in a commercial
manner in the context of ongoing customer relationships. Over the past ten
years, neither we nor any of our customers have issued a demand for arbitration
under any of these contracts. We believe that our practices in this regard are
fairly typical in the industry. Currently, TyCom is in the process of resolving
differences with system supply and maintenance customers involving system final
acceptance, force majeure, liquidated damages, capacity sales commissions owed
to us, termination charges and other contract issues in connection with a
number of agreements, including several large contracts with a single customer.
On the basis of past experience and ongoing discussions with customers relating
to these contracts, we anticipate resolution of these differences in a manner
that will not have a
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material adverse effect on our financial condition, results of operations or
liquidity. We cannot provide any assurance that arbitration or litigation
involving material claims against us will not arise out of these or other
contracts.
Insurance
We have policies of insurance in full force and effect for risks usual to
our business including, but not limited to, protection against property damage
to our assets and third party liability exposures.
Exchange Controls
Under Bermuda law, we have been designated as non-resident for exchange
control purposes. Consequently, there are currently no restrictions imposed by
Bermuda law that apply to us with respect to the export or import of capital,
including foreign exchange controls, or that affect the remittance of
dividends, interest or other payments (other than in local Bermuda currency) to
non-Bermuda resident holders of our common shares.
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MANAGEMENT
Directors, Executive Officers and Key Management
The following table sets forth certain information regarding the directors
and executive officers of TyCom Ltd., and other key management of some
principal business functions of TyCom (US) Inc., a wholly-owned subsidiary of
TyCom Ltd., as of , 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Directors and Executive
Officers
L. Dennis Kozlowski..... 53 Executive Chairman and Director, TyCom Ltd.
Neil R. Garvey.......... 44 President, Chief Executive Officer and Director,
TyCom Ltd.
Mark H. Swartz.......... 39 Vice President and Director, TyCom Ltd.
Claire L. Calandra...... 49 Executive Vice President and Chief Operating
Officer, TyCom (US)
David W. Van Rossum..... 38 Vice President and Chief Financial Officer, TyCom
Ltd.
Other Key Management
Ronald L. Armstrong..... 43 Vice President--Project Management and Quality,
TyCom (US)
Frederick M. Hamilton... 55 Vice President--Network Construction and
Maintenance, TyCom (US)
William S. Jackson...... 46 Vice President--Manufacturing and Business
Development, TyCom (US)
Byron S. Kalogerou...... 39 Vice President, General Counsel and Secretary,
TyCom Ltd.
Robert M. Paski......... 44 Vice President--Network Engineering and Operations,
TyCom (US)
Brian P. Roussell....... 44 Vice President--Sales and Marketing, TyCom Global
Marketing Ltd.
Peter K. Runge.......... 60 Vice President--Research and Development and Chief
Technical Officer, TyCom (US)
</TABLE>
L. Dennis Kozlowski. Mr. Kozlowski is Executive Chairman of TyCom and is one
of our directors. Mr. Kozlowski has been Chairman of the Board, President and
Chief Executive Officer of Tyco since July 1997, and served as Chairman of the
Board of Tyco International (US) Inc. from January 1993 until July 1997, Chief
Executive Officer of Tyco US since July 1992, President of Tyco US since 1989,
and had been associated with Tyco US since 1975. Mr. Kozlowski has a B.S. from
Seton Hall University.
Neil R. Garvey. Mr. Garvey has been President and Chief Executive Officer of
Tyco Submarine Systems Ltd. since July 1997 when the company was acquired by
Tyco International Ltd. from AT&T. Previously, Mr. Garvey was President of
Simplex Technologies, Inc. from July 1995. Before becoming its president, Mr.
Garvey held a variety of positions over an 18-year career at Simplex
Technologies, Inc., including Vice President--Finance and Administration, Vice
President--Marketing and Vice President--Marketing and Subsidiary Operations.
Mr. Garvey has a B.A. from St. Anselm College and an M.B.A. from New Hampshire
College.
Mark H. Swartz. Mr. Swartz is a Vice President of TyCom Ltd. and is one of
our directors. Mr. Swartz has been Executive Vice President and Chief Financial
Officer of Tyco since July 1997, Vice President and Chief Financial Officer of
Tyco US since February 1995; Director of Mergers and Acquisitions of Tyco US
from 1993 to 1995 and associated with Tyco US since 1991. Mr. Swartz holds a
B.A. from the University of California at San Diego.
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Claire L. Calandra. Ms. Calandra has been the Executive Vice President and
Chief Operating Officer of Tyco Submarine Systems Ltd. since January 1999.
Previously, Ms. Calandra was the Vice President and General Counsel for Tyco
Submarine Systems Ltd. from July 1997 when the company was acquired from AT&T.
During 14 years with AT&T, Ms. Calandra held a variety of legal and business
positions, including Chief of Staff in the Office of the Vice Chairman of AT&T,
Director of International at AT&T and Chief Counsel of AT&T General Business
Systems. Ms. Calandra received her undergraduate degree from Douglass College,
Rutgers University and a J.D. from Rutgers Law School. Ms. Calandra is a member
of the Bar in New Jersey and Washington D.C.
David W. Van Rossum. Mr. Van Rossum has been Vice President and Chief
Financial Officer for Tyco Submarine Systems Ltd. since July 1997 when the
company was acquired by Tyco International Ltd. Previously, Mr. Van Rossum was
the Director of Finance and Contracts for Simplex Technologies, Inc. between
1996 and 1997. During a 15-year career at Simplex Technologies Inc., Mr. Van
Rossum held a number of other positions, including Director of Business
Development and Controller. Mr. Van Rossum has a B.S. in Business
Administration from the University of New Hampshire and an M.B.A. from New
Hampshire College.
Ronald L. Armstrong. Mr. Armstrong has served as Vice President of Project
Management and Quality Implementation for Tyco Submarine Systems Ltd. since
July 1, 1997. Prior to that, Mr. Armstrong had a 16-year career with Tyco,
including positions at Simplex Technologies as Contracts Manager, Director of
Quality Assurance and Vice President of Engineering. Mr. Armstrong holds a B.S.
in Engineering from Lowell Technological Institute, an M.B.A. from
New Hampshire College and a J.D. from Suffolk University Law School. Mr.
Armstrong is a member of the Bar in Maine, Massachusetts and New Hampshire.
Frederick M. Hamilton. Mr. Hamilton has served as Vice President of Network
Construction and Maintenance for Tyco Submarine Systems Ltd. since 1995. Prior
to that, Mr. Hamilton served for over 25 years as an officer in the U.S. Coast
Guard in a wide variety of responsible leadership assignments. Mr. Hamilton
holds a B.S. in General Engineering from the U.S. Coast Guard Academy, an M.S.
in Mechanical Engineering and an M.S. in Naval Architecture and Marine
Engineering, both from the Massachusetts Institute of Technology, and an M.B.A.
in Management from the Massachusetts Institute of Technology, Sloan School of
Management.
William S. Jackson. Mr. Jackson has served as Vice President of
Manufacturing and Business Development since 1997 and President of Simplex
since 1997. Prior to that, Mr. Jackson served as Vice President of Marketing,
Sales and Project Management from 1995, Vice President of Finance and
Administration from 1989, and Director of Business Development from 1987. Mr.
Jackson holds a B.S. in Business Administration from the Whittemore School of
Business and Economics of the University of New Hampshire.
Byron S. Kalogerou. Mr. Kalogerou has been the Vice President and General
Counsel for Tyco Submarine Systems Ltd. since January 2000. Mr. Kalogerou is
also Vice President and Assistant Secretary of Tyco International Ltd. Mr.
Kalogerou joined Tyco in 1990 and has held a variety of positions, including
Associate General Counsel and General Counsel of Tyco's International
Operations. Mr. Kalogerou was previously Associate General Counsel of United
Dominion Industries, Inc. Mr. Kalogerou holds a B.A. from Dartmouth College and
a J.D. from Vermont Law School. Mr. Kalogerou is a member of the Bar in
Massachusetts.
Robert M. Paski. Mr. Paski has been Vice President of Network Engineering
and Operations for Tyco Submarine Systems Ltd. since February 2000. Previously,
Mr. Paski had been Vice President of Terminal Products since August, 1998 and
prior to that, the Managing Director of Management Services and Atlantic
Crossing for Tyco Submarine Systems Ltd. since July 1997 when the company was
acquired from AT&T. While with AT&T and Bell Labs beginning in 1977,
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Mr. Paski held a variety of positions including Director-Management Services
and Quality Implementation, District Manager-Submarine Cable System
Installation and Technical Manager-Development of Sub-System Components. Mr.
Paski has a B.S. and M.S. in Electrical Engineering from Purdue University and
attended the Global Telecommunications Management Program at Thunderbird
American Graduate School.
Brian P. Roussell. Mr. Roussell has been the Vice President--Sales and
Marketing for TyCom Global Marketing Ltd. since April 2000. Mr. Roussell was
Vice President of Finance of the Tyco Printed Circuit Group from August 1997 to
April 2000. Prior to that, Mr. Roussell spent nine years with Alcatel Submarine
Networks as Director of Sales and Marketing for Alcatel's U.S. operations and
thereafter served as Vice President--Americas for Alcatel. Mr. Roussell also
spent six years with Simplex where he held a variety of positions. Mr. Roussell
has a B.A. from Monmouth University and an M.B.A. from the University of
Oregon.
Peter K. Runge, Ph.D. Dr. Runge has been Vice President--Research and
Development and Chief Technical Officer for Tyco Submarine Systems Ltd. since
August 1998. Previously, Dr. Runge had been Managing Director-System
Implementation for Tyco Submarine Systems Ltd. since July 1997 when the company
was acquired from AT&T. While with AT&T and Bell Labs, Dr. Runge held a variety
of positions over a 30-year career in the field of optical undersea
communications networks. Dr. Runge has a B.S., M.S. and Ph.D. in Electrical
Engineering from the Technical University Braunschweig in Germany.
Additionally, Dr. Runge has numerous professional awards in honor of his work,
most recently receiving the 1996 AT&T Laboratories Fellow Award, and has 16
patents to his credit.
Board Composition
The board is composed of the following employee directors: L. Dennis
Kozlowski, Neil R. Garvey and Mark H. Swartz and the following three
independent directors: , and .
Board Committees
The audit committee is comprised of three independent directors. The audit
committee reviews the internal financial controls of TyCom. It meets with
appropriate financial personnel as well as TyCom's independent auditors. The
audit committee reviews the scope and results of the professional services
provided by TyCom's independent auditors and the fees charged for such services
and makes such recommendations to the board of directors as it deems
appropriate, including recommendations as to the appointment of independent
auditors.
The compensation committee is comprised of two independent directors. The
compensation committee sets the compensation and benefits for our executive
officers and key managers.
Director Compensation
Each director will be entitled to receive such compensation as the board of
directors determines from time to time. The current compensation for each
independent director is a cash payment of up to per annum and the
grant of options to acquire up to common shares as of the first day of
each fiscal year. In addition, each independent director may be entitled to
receive options to acquire common shares of Tyco. Each director's total
compensation package for the fiscal 2000 year is the annualized cash fee of
, prorated for the number of full or partial months remaining in the
fiscal year as of the closing of the offering and options to acquire
common shares at the offering price.
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Independent directors may make an irrevocable election each year to receive
some or all of their annual cash fee in the form of additional stock options.
Options are granted under the Long Term Incentive Plan, have an exercise price
that is equal to the fair market value of a TyCom common share at the time of
grant, and have a term of ten years from date of grant. Each such option will
provide for an automatic grant of a restoration option to the extent a director
uses TyCom common shares towards payment of his or her option exercise price.
The options that all independent directors receive as part of their
compensation package vest and are exercisable the first day of the fiscal year
following the year for which they are granted, except that the options granted
at the time of the offering vest and become exercisable on the first
anniversary of the date of grant. The options that independent directors elect
to receive in lieu of cash compensation are immediately vested, but are not
exercisable until the first day of the fiscal year following the year for which
they are granted.
Directors are eligible to participate in the Long Term Incentive Plan and
directors who are also employees of TyCom may participate in the Employee Share
Purchase Plan. See "Long Term Incentive Plan" and "Employee Share Purchase
Plan."
Executive Compensation
The table below presents the annual and long-term compensation for services
in all capacities to Tyco and its subsidiaries for the Chief Executive Officer
of TyCom and the other four most highly compensated executive officers of TyCom
during fiscal 1999. All compensation for the named officers was paid by Tyco
and/or one of its subsidiaries and all share awards or options relate to shares
in Tyco.
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Annual Compensation(2) Long-Term Compensation
----------------------------------- ------------------------------------
Shares
Underlying
Restricted Stock Long-term All Other
Cash Stock Stock Options Incentive Compensation
Name & Principal Position Year Salary Bonus(3) Bonus Awards (4) Payouts (6)
- ------------------------- ---- ---------- ---------- -------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L. Dennis Kozlowski...... 1999 $1,350,000 $3,200,000 $25,707,178(5) 6,621,834 $387,001
Executive Chairman, 1998 1,250,000 2,500,000 20,140,000 3,832,800 901,002
TyCom Ltd. 1997 1,250,000 2,544,260 6,600,000 $6,508,125 108,125
Neil R. Garvey........... 1999 425,000 1,940,000 $570,996(4) -- 178,500 195,076
Chief Executive Officer 1998 400,000 1,675,000 787,313 -- -- 84,761
and President, TyCom 1997 256,000 501,500 -- -- 300,000 2,850
Ltd.
Mark H. Swartz........... 1999 750,000 1,600,000 12,029,641(5) 2,976,480 150,014
Vice President, TyCom 1998 559,500 1,250,000 10,070,000 2,764,666 256,878
Ltd. 1997 559,500 1,272,130 2,200,000 2,169,375 31,994
Claire L. Calandra....... 1999 268,750 1,500,000 -- -- 60,000 -- 146,246
Executive Vice President
and Chief Operating
Officer, TyCom (US)
David W. Van Rossum...... 1999 190,750 775,000 -- -- -- -- 59,364
Vice President and Chief
Financial Officer, TyCom
Ltd.
</TABLE>
- --------
(1) The salary information presented for fiscal 1997 for the named officers
reflects their annual salaries as of July 2, 1997 and other additional
compensation and long-term incentives for the period from July 2, 1997
through the end of Fiscal 1997.
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In September 1997, Tyco changed its fiscal year end from December 31 to
September 30. The change in year end resulted in a short fiscal year
covering the nine month transition period from January 1 to September 30,
1997. References to fiscal 1999 and fiscal 1998 and fiscal 1997 refer to
the twelve months ended September 30, 1999 and 1998 and the nine month
transition period ended September 30, 1997, respectively.
(2) Under the Tyco Deferred Compensation Plan, the amount of total salary and
bonus that has been deferred for fiscal 1999 is as follows: Mr. Garvey:
$970,000; Mr. Swartz: $1,975,000; Ms. Calandra: $525,000; and Mr. Van
Rossum: $155,000. None of the named officers had "Other Annual
Compensation" in excess of $50,000.
(3) The bonus amount shown in the table for Mr. Garvey reflects an annual bonus
payment that was based solely on the performance of Mr. Garvey's division,
which included Tyco Submarine Systems Ltd., Simplex Technologies, Inc.,
Telecommunicaciones Marinas, S.A., Tyco Printed Circuit Group LP, and The
Rochester Corporation during fiscal year 1999, as determined using
performance objectives established early in the fiscal year. The bonus
amounts shown in the table for Messrs. Kozlowski and Swartz reflect annual
bonus payments that were based on the performance of Tyco International
Ltd. during fiscal year 1999, as determined using performance objectives
established early in the fiscal year. The bonus amounts for Mr. Van Rossum
and Ms. Calandra reflect an annual bonus payment that was based on a
combination of the performance of Tyco Submarine Systems Ltd., Simplex
Technologies, Inc., Telecommunicaciones Marinas, S.A., Tyco Printed Circuit
Group LP, and The Rochester Corporation during fiscal year 1999 and
individual objectives.
(4) For fiscal 1999, Mr. Garvey received 13,860 Tyco shares as a bonus payment.
The number of shares that vested for the year was determined using
performance objectives established early in the fiscal year. The amount
listed in the table reflects the fair market value of the shares
($41.19735) on the date shares vested (October 18, 1999).
(5) The amounts shown are the value of restricted shares awarded to the named
individuals as determined using specific performance criteria (e.g.,
increase in earnings per share that is a minimum of 17.5% over the prior
year) established early in the fiscal year. Shares may also be subject to
time-based vesting criteria. Any shares not vested within three years are
forfeited. Recipients of all restricted shares have the right to vote such
shares and receive dividends. For fiscal 1999, the amount shown is based on
the market value of Tyco common shares on the date of the grant ($41.19735
on October 18, 1999). The shares vested on January 5, 2000.
(6) The amounts shown in the table reflect contributions made on behalf of the
named individuals under Tyco's qualified and non-qualified defined
contribution plans, as follows:
<TABLE>
<CAPTION>
Company Company
Matching Contribution
Contribution (non-
(qualified qualified
Name plan) plan)
---- ------------ ------------
<S> <C> <C>
Mr. Kozlowski...................................... $ 5,366 $234,675
Mr. Garvey......................................... 10,137 173,266
Mr. Swartz......................................... 8,073 78,875
Ms. Calandra....................................... 9,800 83,572
Mr. Van Rossum..................................... 11,119 46,541
</TABLE>
Deferred compensation plan interest for calendar year 1998 was credited to the
individuals' accounts as of December 31, 1998. The amounts shown in the table
include interest credited on deferred compensation in excess of 120% of the
applicable federal long-term rate as follows: Mr. Kozlowski: $81,960; Mr.
Garvey: $11,673; Mr. Swartz: $63,066: Ms. Calandra: $1,934; and Mr. Van Rossum:
$1,555. The amount shown in the table for Mr. Kozlowski also includes Tyco
director's fees of $65,000. The amount shown in the table for Ms. Calandra also
includes a taxable Employee Stock Purchase Plan match of $825, a merit bonus of
$50,000, and taxable insurance premium
62
<PAGE>
payments of $116. The amount shown in the table for Mr. Van Rossum also
includes a taxable Employee Stock Purchase Plan match of $90 and taxable
insurance premium payments of $60.
Option Grants in Last Fiscal Year
The following table shows all grants of Tyco stock options to the named
officers during fiscal 1999 under the Tyco International Ltd. Long Term
Incentive Plan (the "LTIP") and the Tyco International Ltd. Long Term Incentive
Plan II (the "LTIP II"). There were no outstanding TyCom options on September
30, 1999.
OPTIONS GRANTED IN THE LAST FISCAL YEAR (1999)
<TABLE>
<CAPTION>
Individual Grants(1)(2)
------------------------------------------------------------------------
Percent of
Number of Total Options
Securities Granted to Exercise Grant Date
Underlying Employees in Price Present
Name Options Granted Fiscal Year(5) ($/Share) Expiration Date Value(6)
- ---- --------------- -------------- --------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Dennis Kozlowski..... 141,600(3) 0.47% $27.45330 (9) (9)
584,000(3) 1.93 29.23095 (9) (9)
120,400(3) 0.40 39.00000 (9) (9)
40,000(3)(4) 0.13 44.62500 6/10/09 $423,800
2,305,114(5) 7.60 50.99245 7/17/07-10/22/08 27,626,791
3,420,720(5) 11.32 49.99995 7/17/07 40,431,035
Neil R. Garvey.......... 150,000(6) 0.49 25.90210 10/1/08 729,000
28,500(3) 0.09 29.23095 10/22/08 173,138
Mark H. Swartz.......... 312,000(3) 1.03 29.23095 (9) (9)
482,160(5) 1.59 50.99245 7/17/07 5,778,688
2,182,320(5) 7.20 49.99995 7/17/07-10/22/08 25,718,641
Claire L. Calandra...... 60,000(6) 0.20 28.75355 10/21/08 $334,200
David W. Van Rossum..... -- -- -- -- --
</TABLE>
(1) Shares and options have been retroactively restated to give effect to the
Tyco two-for-one stock split distributed on October 21, 1999, effected in
the form of a stock dividend.
(2) Certain options granted to the named officers include a restoration
feature whereby participants receive options to replace exercised options,
if the shares or share proceeds (1) are used to pay the exercise price of
stock options, (2) are applied to satisfy tax withholding obligations or
repay indebtedness to the company, or (3) are sold by trusts for tax
planning purposes. In certain cases, restoration options are granted to an
executive who has returned vested restricted stock to Tyco, enabling the
executive to maintain the level of his equity interest in Tyco.
Restoration options are granted at an exercise price which is equal to the
market price of the shares on the day such restoration options are
granted.
(3) Restoration options having the following terms: granted at fair market
value; immediately vested, not exercisable for two months; term equal to
ten years.
(4) Options transferred to and held by the KFT Family Partnership L.P.
(5) Restoration options having the following terms: granted at fair market
value; immediately vested, but not exercisable for two months; term equal
to the remaining term of the options they replaced.
(6) Options granted at fair market value on the date of the grant, vesting
100% at the end of three years, and expiring ten years from the date of
grant.
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<PAGE>
(7) Represents the percentage of all options granted in fiscal 1999 under the
LTIP and LTIP II.
(8) All options are granted at an exercise price equal to the market value of
Tyco's common shares on the date of grant. Therefore, if there is no
appreciation in that market value, no value will be realizable. As
permitted by the rules of the SEC, Tyco chose the Black-Scholes option
pricing model to estimate the grant date present value of the options set
forth in this table. The following assumptions were used: expected life of
three years; interest rates of 4.18%-5.90%, which represent the yield of a
zero coupon Treasury strip with a maturity date similar to the assumed
exercise period; assumed annual volatility of underlying stock of 22.88%-
24.06%, calculated based on 36 months of historical Tyco share price
movement; quarterly dividend payment of $0.0125 per share; and the vesting
schedule for each option grant as noted above.
(9) Options transferred to a family partnership, which then exercised the
options during fiscal 1999. The grant date present value for these options
was $799,332, $3,547,800, and $1,033,032, respectively, for Mr. Kozlowski
and $1,895,400 for Mr. Swartz.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Shown below is information with respect to aggregate Tyco option exercises
by the named officers in the fiscal year ended September 30, 1999 and with
respect to unexercised Tyco stock options held by them at September 30, 1999.
There were no outstanding TyCom options on September 30, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1999) AND FISCAL YEAR END
OPTION VALUE (1999)(/1/)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Number of Options at Fiscal Year the-Money Options, Held
Shares End at Fiscal Year End(2)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Dennis Kozlowski..... 6,312,400(3) $139,739,099 5,735,834 2,000,000 $2,823,139 $63,333,200
40,000(4) 247,914
Neil R. Garvey.......... -- 228,500 250,000 6,948,689 6,904,773
Mark H. Swartz.......... 2,752,668(5) 62,802,959 2,664,480 1,333,332 1,795,831 41,867,925
Claire L. Calandra...... -- 20,000 70,000 612,238 1,630,277
David W. Van Rossum..... -- 24,000 16,000 1,059,623 706,416
</TABLE>
(1) Shares and options have been retroactively restated to give effect to the
Tyco two-for-one stock split distributed on October 21, 1999, effected in
the form of a stock dividend.
(2) Based on the volume weighted average price of Tyco common shares on
September 30, 1999 of $50.82285.
(3) Shares issued on exercise of options transferred by Mr. Kozlowski to the
KFT Family Partnership L.P.
(4) Options held by the KFT Family Partnership L.P.
(5) Shares issued on exercise of options transferred by Mr. Swartz to the KMS
Family Partnership L.P.
Employment Agreements
We intend to enter into employment agreements with certain of our officers
and employees.
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<PAGE>
Long Term Incentive Plan
We have established the TyCom Ltd. Long Term Incentive Plan (the "Incentive
Plan") to provide additional incentive to our and our subsidiaries' employees,
officers and directors and directors of Tyco pursuant to which a total of
common shares have been reserved for issuance. The Incentive Plan was approved
by the board of directors on , 2000. Pursuant to the Incentive Plan, we may
grant incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock, stock bonuses and other stock-based awards. Our board
of directors has delegated authority to a committee to select the employees,
officers and directors to whom awards under the Incentive Plan are granted. No
options have been granted under the Incentive Plan. Concurrent with the
consummation of this offering, we intend to grant options to purchase common
shares at the initial public offering price to certain officers and employees,
including options for , , , and shares for Mr. Kozlowski, Mr.
Garvey, Mr. Swartz, Ms. Calandra and Mr. Van Rossum, respectively. All of these
options have ten-year terms and become vested and exercisable over a period
ending . In addition, options on shares for each independent director
of TyCom and options on shares for each independent director of Tyco will
be granted concurrent with the consummation of this offering at the initial
public offering price. These options will have ten-year terms and become fully
vested and exercisable on the first anniversary of the date of grant.
Subject to the terms and conditions of the Incentive Plan, the terms and
conditions of each individual option grant are evidenced by an agreement
between us and the optionee. Options granted under the Incentive Plan vest as
determined by the committee and as set forth in the agreement. The maximum term
of a stock option under the Incentive Plan is stated in the relevant agreement,
provided that the maximum term of an incentive stock option is ten years. If
the optionee at the time of grant has voting power over more than 10% of our
outstanding share capital, the maximum term of such incentive stock options
would be five years. Terms of any stock appreciation rights, restricted stock,
stock bonuses and any other awards shall be determined by the committee at the
time such awards are granted.
In the event of a change in control, if the acquiring company assumes and
continues awards granted under the Incentive Plan, vesting will continue
(provided that awards of employees terminated within 24 months after a change
in control due to such change in control will be 100% vested at termination),
and if the acquiring company does not assume the awards, all awards will be
100% vested.
Founders' Share Option Program
Under the TyCom Ltd. Founders' Share Option Program (the "Program") approved
by the board of directors on , 2000, approximately full-time employees
will receive a one-time grant of options to purchase shares at the time of the
offering at the offering price. The Program is only available to employees who
do not at that time receive grants under the Incentive Plan. The number of
options granted is based primarily on job category, with some discretion by the
committee administering the Program based on individual performance. In
addition, the employees hired into the same job categories within six months of
the offering will be eligible to also receive a one-time grant of options with
a purchase price that is the greater of the offering price or the fair market
value on the first day of the month concurrent with or following the date of
hire. One-third of these options vest each year over a total of three years,
assuming that the optionee continues to be employed by us. A total of
shares have been reserved for this purpose and the total number of options
granted is not expected to exceed the number of shares reserved. However, the
Executive Chairman of TyCom has the authority to increase the number of shares
reserved, if necessary, to correspond to the number of employees eligible for
and receiving a grant under the Program.
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<PAGE>
Employee Share Purchase Plan
The following groups of our employees are eligible to participate in an
employee share purchase plan: substantially all of our non-union full-time
employees in the United States, union employees where plan participation has
been collectively bargained and, where registered and approved in local
jurisdictions, substantially all full-time employees outside of the United
States. Eligible employees may authorize payroll deductions of up to % of
base salary to be made for the purchase of shares. We match a part of the
employee's payroll deduction. All shares purchased under the plan are purchased
on the open market by a designated broker.
Certain Other Plans
Tyco maintains a funded retirement savings and investment plan, which
contains a 401(k) feature, and our employees will continue to participate in
this plan. In addition, we will also maintain a supplemental unfunded plan
under which employees with annual compensation in excess of the Internal
Revenue Code limitations are credited with company matching contributions that
are not able to be deposited in the funded Tyco 401(k) plan because of Internal
Revenue Code limitations. The participant is an unsecured creditor of TyCom
under the supplemental plan and the participant's bookkeeping account balance,
which includes credits for earnings on the contribution credits, is paid out at
the time and in the manner elected by the participant. We also maintain an
unfunded deferred compensation plan under which a select group of executives,
including the executive officers and other key management employees, are
eligible to defer certain compensation amounts. We may add a company matching
contribution to the bookkeeping account of a participant for a given year,
which contributions shall be in the discretion of the committee administering
the plan. Amounts credited to a participant's account, plus earnings, are paid
out at the time and in the manner elected in advance by the participant. Both
of the unfunded plans are similar to comparable plans maintained by Tyco, and
the TyCom plans may assume the liabilities for TyCom employees under the Tyco
plans. It is estimated that the aggregate amount due to participants under the
unfunded plans at the time of the offering is $ . Neither Tyco nor TyCom nor
their subsidiaries maintain any defined benefit or actuarial retirement plans
in which the named officers participate.
Employee Corporate Loan Program
Tyco US established the 1983 Key Employee Corporate Loan Program, as
amended, to encourage ownership of Tyco common shares by key employees. Loans
are primarily used for the payment of taxes due as a result of the vesting of
restricted stock.
The Tyco compensation committee administers this loan program. The Tyco
compensation committee authorizes loans, which may not exceed the amount
allowable under any regulation of the United States Treasury or other
applicable statute or regulation. Loans may be required to be secured by Tyco
common shares owned by the employee or may be unsecured. Loans generally bear
interest at Tyco's incremental short-term borrowing rate of 5.5% for 1999.
Loans are generally repayable in ten years or when the participant reaches age
69, whichever occurs first, except that earlier payments must be made in the
event that the participant's employment with Tyco or its subsidiaries
terminates. The participant is also required to make loan payments upon the
sale or other disposition of Tyco common shares, other than gifts to certain
family members, with respect to which loans have been granted.
At September 30, 1999, the amount of loans outstanding under this loan
program totaled $18,569,137, of which $0 was loaned to Mr. Kozlowski, $304,363
was loaned to Mr. Garvey and $0 was loaned to Mr. Swartz. The largest amount of
indebtedness outstanding at any time since October 1, 1998 by Mr. Kozlowski was
$52,688,249, by Mr. Garvey was $1,153,645 and by Mr. Swartz was $17,435,319.
None of the other named officers had a loan under this program during the
fiscal year 1999.
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<PAGE>
RELATIONSHIP WITH TYCO AFTER THE OFFERING AND CERTAIN TRANSACTIONS
History. TyCom was incorporated in March 2000 to serve as the holding
company of the undersea fiber optic cable business of Tyco, which is the
product of the combination of three businesses which Tyco had acquired and
integrated. Simplex Wire and Cable Company, now known as Simplex Technologies,
Inc., was acquired by Tyco in 1974. In 1997, Tyco acquired the submarine
systems business of AT&T, to which Simplex had been a long-time supplier. In
1999, Tyco acquired Telecomunicaciones Marinas S.A., the undersea cable
installation and maintenance division of Telefonica S.A.
Stock Ownership and Participation in Management. After the offering, Tyco
will beneficially own at least 80% of our common shares. We have been advised
that Tyco has no present intention of disposing of any of our common shares
that it will own indirectly after the offering, although it is under no
obligation to refrain from disposing of TyCom shares beyond the 180-day period
after the date of this prospectus prescribed by the lock-up agreement with the
underwriters. As a result, we cannot provide any assurance that Tyco will
maintain its TyCom holdings after it is free of the restrictions of the lock-up
agreement.
Of the persons to be elected to our board, three are executive officers of
both Tyco and TyCom and the remaining three are independent. For so long as
Tyco continues to beneficially own more than 50% of our outstanding common
shares, it will be able to approve any matter, other than certain matters
requiring a greater majority vote, submitted to a vote of our shareholders
without the consent of our other shareholders, including, among other things,
the amendment of our memorandum of association and bye-laws and the election of
all members of the board of directors. In addition, through its controlling
beneficial ownership, Tyco will be able to exercise a controlling influence
over our company, including determinations with respect to mergers or other
business combinations, the acquisition or disposition of assets, our access to
the capital markets, the payment of dividends and any change of control of our
company. In these and other situations, various conflicts of interest between
us and Tyco could arise. Furthermore, ownership interests of our directors and
officers in Tyco's common shares or service as a director or officer of both us
and Tyco could create, or appear to create, potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for us and Tyco. We cannot assure you that conflicts of interest
will not arise or will be resolved in a manner favorable to us.
Continuing Agreements
We have historically been the beneficiary of certain corporate services
provided by Tyco to us. For purposes of governing certain on-going
relationships between Tyco and us, we have entered into various agreements or
arrangements, including those described below. The agreements described below
were negotiated in the context of the offering and are therefore not the result
of arm's length negotiations between independent parties. We cannot provide any
assurance, therefore, that these agreements, or the transactions which they
provide for will be on terms as favorable to us as could have been obtained
from unaffiliated third parties.
Services Agreements. We have entered into a services agreement with Tyco in
which Tyco agreed to provide various services after the offering. Those
services will include the following:
. Financial. General financial and treasury services with respect to the
preparation of TyCom's consolidated financial statements and annual
reports, oversight of its cash management systems, tax reporting and
compliance and other aspects of TyCom's financial management.
. Securities Filings. Services with respect to the preparation and filing
of any reports required to be filed by or with respect to TyCom with the
Securities and Exchange
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<PAGE>
Commission and all stock exchanges and markets for which such reports are
required to be filed.
. Professional Services. Services and advice with respect to obtaining
insurance, accounting, environmental, legal, treasury, human resources
and other professional services.
. Real Estate. Services with respect to leasing or purchasing necessary
facilities for TyCom's business.
. Investor Relations/Investment Advisory Services. Investor and shareholder
relations services and analysis, business and financial advice and
consulting services with respect to proposed ventures by TyCom and
proposed acquisitions or dispositions of the assets and business of
TyCom.
. Benefits and Share Option Plans. Administration of TyCom's employee
benefit, share option plan and other compensation plans.
Tax Indemnification Agreement. We have entered into a tax indemnification
agreement with Tyco in which Tyco has agreed to indemnify us against all of
our U.S. and non-U.S. income tax liabilities for periods prior to the offering
to the extent these liabilities are in excess of the income taxes previously
paid or accrued as an expense with respect to such periods. Pursuant to this
agreement, Tyco has the right to control all audits and contests relating to
the indemnified taxes. Although Tyco has agreed to indemnify us against these
tax liabilities, we will nonetheless be liable for such taxes in the event
that they are not discharged by Tyco. In addition, Tyco will not indemnify us
against, and we will remain responsible for, all of our non-income tax
liabilities for periods prior to the offering as well as all of our income and
non-income tax liabilities for periods after the offering.
Revolving Credit Facility. We have entered into a revolving credit facility
with Tyco to provide for borrowings by us, for any purpose in an amount up to
$ . The applicable interest rate and other material terms will be
negotiated on terms no less favorable than those generally available to TyCom
from a third party commercial lender. The duration of this agreement will not
be less than three years.
Deposit Agreement. We have entered into an agreement with Tyco pursuant to
which we will deposit our excess cash with Tyco for investment under Tyco's
cash management programs. Under these programs, cash is deposited into an
account, which may include cash from other participants in Tyco's cash
management programs, and then invested for each participant in the account.
Each participant may withdraw, as needed, deposited cash as well as its pro
rata share of investment income from such account minus its pro rata share of
costs attributable to such investment income.
Registration Rights Agreement. In addition, we have agreed that we will,
upon the request of Tyco, use our commercially reasonable best efforts to
effect the registration under applicable federal and state securities laws of
any common shares owned by Tyco.
Affiliate Purchases. We purchase various services and certain of the
components for integration into our fiber optic cable systems, including drawn
wire and multi-layered printed circuit boards, from subsidiaries of Tyco at
prices which approximate fair market value.
Expenses
All of the costs and expenses related to this offering, other than the
underwriting discount, will be paid by Tyco.
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<PAGE>
Tyco Equity Investments Related to Our Business
360networks
In September 1999, Tyco entered a shareholders agreement and share purchase
agreement under which it acquired an 8.3% equity interest in 360networks for
$125 million.
SAm-1
In December 1999, Tyco entered into a joint venture agreement with
Telefonica Internacional, S.A. for which a closing is scheduled to occur prior
to June 30, 2000. Tyco will subscribe to 15% of the share capital of the joint
venture company and Telefonica will hold 85% of the shares. The joint venture
company will own and operate the SAm-1 network.
360networks and Telefonica are customers of TyCom and may be competitors of
the TyCom Global Network.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
TGN Holdings Ltd., an indirect wholly-owned subsidiary of Tyco, owns all of
our outstanding common shares. Immediately after consummation of the offering,
assuming the underwriters do not exercise their over-allotment option, TGN
Holdings Ltd. will own 190,000,000 of our common shares, which will represent
approximately 83% of our outstanding common shares.
The following table sets forth certain information known to us regarding
beneficial ownership of our common shares as of , 2000, and as
adjusted to reflect the sale of shares offered hereby, held by:
. each person or group of affiliated persons known by us to beneficially
own more than 5% of our voting shares;
. each of our directors;
. our chief executive officer and each of our other four most highly
compensated executive officers; and
. all directors and executive officers as a group.
In accordance with the rules of the SEC, beneficial ownership includes
voting or investment power with respect to securities and includes the shares
issuable pursuant to options to purchase shares that are exercisable within 60
days of , 2000. Shares issuable pursuant to options are deemed
outstanding for computing the percentage of the person holding such options but
are not outstanding for computing the percentage of any other person. The
number of common shares outstanding after this offering includes shares being
offered for sale by us in this offering. The percentage of beneficial ownership
for the following table is presented as of , 2000 and based on
230,000,000 common shares outstanding after the completion of this offering.
Unless otherwise indicated, the address for each listed shareholder is: c/o
TyCom Ltd., The Zurich Centre, Second Floor, Suite 201, 90 Pitts Bay Road,
Pembroke HM 08, Bermuda. To our knowledge, except as indicated in the footnotes
to this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to all
shares.
<TABLE>
<CAPTION>
Percent of total
-----------------
Number of
shares Before After
beneficially the the
Name and Address of Beneficial Owner owned offering offering
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
TGN Holdings Ltd............................... 190,000,000 100% 83%(1)
The Zurich Center, Second Floor
90 Pitts Bay Road
Pembroke HM 08, Bermuda
Directors and Executive Officers:
L. Dennis Kozlowski.......................... --
Neil R. Garvey............................... --
Mark H. Swartz............................... --
Claire L. Calandra........................... --
David W. Van Rossum.......................... --
All Directors and Executive Officers as a
Group:
(8 people).................................... --
</TABLE>
- --------
(1) If the underwriters exercise their over-allotment option in full, TGN
Holdings Ltd. will sell 6,000,000 common shares and will own 184,000,000
common shares, or 80% of the total, after the offering.
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<PAGE>
DESCRIPTION OF SHARE CAPITAL
General
Immediately following the completion of this offering, our authorized share
capital will consist of 3,000,000,000 common shares, par value $0.25 per common
share and 600,000,000 undesignated preference shares, par value $1.00 per
share. Upon completion of this offering, there will be 230,000,000 outstanding
common shares and outstanding options to purchase common shares.
Common Shares
Prior to this offering, there were 190,000,000 common shares outstanding,
all of which were held of record by TGN Holdings Ltd. There will be 230,000,000
common shares outstanding, assuming no exercise of outstanding options, after
giving effect to the sale of the common shares offered hereby. The holders of
common shares present in person or by proxy at a general meeting are entitled,
on a vote by show of hands, to vote one vote each and, on a poll vote, to one
vote per share on all matters to be voted upon by the shareholders. The holders
of common shares are entitled to receive dividends out of assets legally
available for such purposes at times and in amounts as our board of directors
may from time to time determine. Cumulative voting for the election of
directors is not provided for in our memorandum of association or bye-laws,
which means that the holders of a majority of the shares voted can elect all of
the directors then standing for election. The common shares are not entitled to
preemptive rights and are not subject to conversion or redemption.
There are no sinking fund provisions applicable to the common shares.
Preference Shares
We have created 600,000,000 authorized preference shares, par value $1.00
per share, the rights and preferences of which are currently undesignated. The
board of directors has the authority to issue the preference shares in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the shareholders. Otherwise, the board may
issue additional preference shares and fix the rights and restriction with the
approval of a resolution of shareholders. The issuance of preference shares may
have the effect of delaying, deferring or preventing a change in control of us
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of common shares. At present, we have no plans
to issue any of the preference shares.
Options
As of , 2000, options to purchase a total of common shares were
outstanding or had been approved and up to additional common shares may be
subject to options granted in the future under our benefit plans. All of the
options are subject to standard anti-dilution provisions.
Bermuda Law
We are an exempted company organized under the Companies Act 1981 of
Bermuda. The rights of our shareholders, including those persons who will
become shareholders in connection with this offering, are governed by Bermuda
law and our memorandum of association and bye-laws. The Companies Act 1981 of
Bermuda differs in some material respects from laws generally
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<PAGE>
applicable to United States corporations and their shareholders. The following
is a summary of the material provisions of Bermuda law and our organizational
documents.
Dividends. Under Bermuda law, a company may pay dividends that are declared
from time to time by its board of directors unless there are reasonable grounds
for believing that the company is or would, after the payment, be unable to pay
its liabilities as they become due or that the realizable value of its assets
would thereby be less than the aggregate of its liabilities and issued share
capital and share premium accounts.
Voting Rights. Under Bermuda law, except as otherwise provided in the
Companies Act 1981 of Bermuda or our bye-laws, questions brought before a
general meeting of shareholders are decided by a majority vote of shareholders
present at the meeting. Our bye-laws provide that, subject to the provisions of
the Companies Act 1981 of Bermuda, any question proposed for the consideration
of the shareholders will be decided by a simple majority of the votes cast with
each shareholder present, and each person holding proxies for any shareholder,
entitled, on a show of hands, to one vote each and, on a poll vote, to one vote
for each common share held by the shareholder, except in certain exceptional
cases where a greater majority vote is required by our bye-laws.
Rights in Liquidation. Under Bermuda law, in the event of liquidation or
winding up of a company, after satisfaction in full of all claims of creditors
and subject to the preferential rights accorded to any series of preference
shares, the proceeds of the liquidation or winding up are distributed pro rata
among the holders of our common shares.
Meetings of Shareholders. Under Bermuda law, a company is required to
convene at least one general shareholders' meeting each calendar year. Bermuda
law provides that a special general meeting may be called by the board of
directors and must be called upon the request of shareholders holding not less
than 10% of the paid-up capital of the company carrying the right to vote.
Bermuda law also requires that shareholders be given at least 5 days' advance
notice of a general meeting but the accidental omission to give notice to any
person does not invalidate the proceedings at a meeting. Under our bye-laws, we
must give each shareholder at least 20 days' notice of the annual general
meeting and of any special general meeting.
Under Bermuda law, the number of shareholders constituting a quorum at any
general meeting of shareholders is determined by the bye-laws of a company. Our
bye-laws provide that the presence in person or by proxy of two or more
shareholders entitled to attend and vote constitutes a quorum (except in
certain exceptional cases where a greater number is required).
Access to Books and Records and Dissemination of Information. Members of the
general public have the right to inspect the public documents of a company
available at the office of the Registrar of Companies in Bermuda. These
documents include a company's certificate of incorporation, its memorandum of
association, including its objects and powers, and any alteration to its
memorandum of association. The shareholders have the additional right to
inspect the bye-laws of the company, minutes of general meetings and the
company's audited financial statements, which must be presented at the annual
general meeting. The register of shareholders of a company is also open to
inspection by shareholders without charge and by members of the general public
on the payment of a fee. A company is required to maintain its share register
in Bermuda but may, subject to the provisions of Bermuda law, establish a
branch register outside Bermuda. We maintain a share register in Hamilton,
Bermuda. A company is required to keep at its registered office a register of
its directors and officers which is open for inspection for not less than two
hours each day by members of the public without charge. Bermuda law does not,
however, provide a general right for shareholders to inspect or obtain copies
of any other corporate records.
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Election or Removal of Directors. Under Bermuda law and our bye-laws, our
directors are elected or appointed at the annual general meeting and serve
until re-elected or re-appointed or until their successors are elected or
appointed at the next annual general meeting, unless they are earlier removed
or resign. At each annual general meeting after this offering, all current
directors will be required to resign, but may offer themselves for re-election.
Under Bermuda law and our bye-laws, a director may be removed at a special
general meeting of shareholders specifically called for that purpose, provided
the director is served with at least 14 days' notice. The director has a right
to be heard at that meeting. Any vacancy created by the removal of a director
at a special general meeting may be filled at that meeting by the election of
another director in his or her place or, in the absence of any such election,
by the board of directors.
Board Actions. Our bye-laws provide that certain actions are required to be
approved by our board of directors. Actions must be approved by a majority of
the votes present and entitled to be cast at a properly convened meeting of our
board of directors.
Amendment of Memorandum of Association and Bye-laws. Bermuda law provides
that the memorandum of association of a company may be amended by a resolution
passed at a general meeting of shareholders of which due notice has been given.
An amendment to the memorandum of association, other than an amendment which
alters or reduces a company's share capital as provided in the Companies Act
1981 of Bermuda, also requires the approval of the Bermuda Minister of Finance,
who may grant or withhold approval at his or her discretion. Our bye-laws may
be amended by the board of directors if the amendment is approved by a vote of
a majority of the votes cast by our directors and by our shareholders by a
resolution passed by the holders of a majority of the issued common shares.
Under Bermuda law, the holders of an aggregate of no less than 20% in par
value of a company's issued share capital or any class of issued share capital
have the right to apply to the Bermuda Court for an annulment of any amendment
of the memorandum of association adopted by shareholders at any general
meeting, other than an amendment which alters or reduces a company's share
capital as provided in the Companies Act 1981 of Bermuda. Where such an
application is made, the amendment becomes effective only to the extent that it
is confirmed by the Bermuda Court. An application for the annulment of an
amendment of the memorandum of association must be made within 21 days after
the date on which the resolution altering the company's memorandum is passed
and may be made on behalf of the persons entitled to make the application by
one or more of their number as they may appoint in writing for the purpose. No
such application may be made by persons voting in favor of the amendment.
Appraisal Rights and Shareholder Suits. Under Bermuda law, in the event of
an amalgamation of a Bermuda company with another company, a shareholder who is
not satisfied that fair value has been paid for his shares in the Bermuda
company may apply to the Bermuda Court to appraise the fair value of his
shares. Under Bermuda law and our bye-laws, the amalgamation of TyCom with
another company requires the amalgamation agreement to be approved by the board
of directors and by meetings of the holders of the issued shares of TyCom.
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda Court, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company
to remedy a wrong done to the company where the act complained of is alleged to
be beyond the corporate power of the company or is illegal or would result in
the violation of the company's memorandum of association or bye-laws. Further
consideration would be given by the Bermuda Court to acts that are alleged to
constitute a fraud
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against the minority shareholders or, for instance, where an act requires the
approval of a greater percentage of the company's shareholders than that which
actually approved it.
When the affairs of a company are being conducted in a manner oppressive or
prejudicial to the interests of some part of the shareholders, one or more
shareholders may apply to the Bermuda Court for an order regulating the
company's conduct of affairs in the future or compelling the purchase of the
shares of any shareholder, by other shareholders or by the company.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. will serve as transfer agent and
branch registrar for the common shares in the United States. Reid Management
Limited will serve as transfer agent and principal registrar for the common
shares in Bermuda.
Listing
We have applied to have our common shares approved for listing on the New
York Stock Exchange and for a secondary listing on the Bermuda Stock Exchange
under the symbol "TCM" in each case. The New York Stock Exchange shares will be
listed on the New York Stock Exchange in U.S. dollars and settlement will take
place through The Depository Trust Company in U.S. dollars. The Bermuda-listed
shares may be exchanged for New York Stock Exchange shares, and vice versa,
through the applicable procedures of the relevant clearing agency.
Certain Foreign Issuer Considerations
We have been designated as non-resident of Bermuda for exchange control
purposes by the Bermuda Monetary Authority and are required to obtain the
permission of the Bermuda Monetary Authority for the issue and free
transferability of all of our shares.
The Bermuda Monetary Authority has given its consent for the issue and
transfer of all of the common shares that are the subject of this offering for
the purposes of the proposed public offering, and for free transferability of
all of our issued common shares following the offering, subject to the common
shares being listed on the New York Stock Exchange. Approvals or permissions
received from the Bermuda Monetary Authority do not constitute a guarantee by
the Bermuda Monetary Authority as to our performance or our creditworthiness.
Accordingly, in giving such consent or permissions, the Bermuda Monetary
Authority shall not be liable for the financial soundness, performance or
default of our business or for the correctness of any opinions or statements
expressed in this prospectus.
The transfer of our shares and the issue of shares within the current
authorised share capital after the completion of the offerings to or by such
persons may be effected without specific consent of the Bermuda Monetary
Authority under the Exchange Control Act of 1972 and regulations thereunder
subject to our shares continuing to be listed on the New York Stock Exchange.
Because we have been designated as non-resident for Bermuda exchange control
purposes, there are no restrictions on our ability to transfer funds in and out
of Bermuda or to pay dividends to non-Bermuda residents who are holders of
common shares, other than in respect of local Bermuda currency.
Share certificates will be issued in respect of the shares offered pursuant
to this prospectus. In the case of an applicant acting in a special capacity,
for example, as trustee, the share register may not record the capacity in
which the applicant is acting. We are not bound to recognise or investigate or
incur any responsibility in respect to the proper administration of any such
trust.
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We will take no notice of any trust applicable to any of our shares whether or
not we have notice of such trust.
As an exempted company, we are exempted from Bermuda laws which restrict the
percentage of share capital that may be held by non-Bermudians, but, as an
exempted company, we may not, except with the express authorization of the
Bermuda legislature or under a license granted by the Minister of Finance of
Bermuda, participate in certain business transactions including:
. the acquisition or holding of land in Bermuda, except that required for
our business and held by way of lease or tenancy for terms of not more
than 50 years or, with the consent of the Minister of Finance of Bermuda,
that required to provide accommodation or recreational facilities for our
employees and held by way of lease or tenancy for terms of not more than
21 years;
. the taking of mortgages on land in Bermuda to secure an amount in excess
of 50,000 Bermuda Dollars without the consent of the Minister of Finance
of Bermuda;
. the acquisition of any bonds or debentures secured on any land in Bermuda
except bonds or debentures issued by the Bermuda government or a public
authority; or
. the carrying on of business of any kind in Bermuda other than with
persons outside Bermuda, except in certain limited circumstances such as
doing business with another exempted company in Bermuda in furtherance of
our business carried on outside Bermuda.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 230,000,000 common shares outstanding,
excluding common shares reserved for issuance under our benefit plans. All
of the common shares sold in this offering will be freely tradeable under the
Securities Act, unless held by our "affiliates," as that term is defined by the
SEC. In addition, 190,000,000 common shares have been issued in transactions
that were not registered with the SEC and, thus, are "restricted securities,"
as that term is defined by the SEC, assuming no exercise of the underwriters'
over-allotment option. Upon the expiration of the lock-up agreements between
TyCom, Tyco, TGN Holdings, Ltd., certain directors and officers of TyCom and
Tyco and the underwriters, these common shares will become eligible for sale,
subject to compliance with Rule 144 of the Securities Act as described below.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned restricted securities for at least one year, can sell in any
three-month period a number of common shares that does not exceed the greater
of:
. 1% of the number of common shares then outstanding, or approximately
2,300,000 common shares immediately after this offering, or
. the average weekly trading volume of the common shares on the New York
Stock Exchange during the four calendar weeks immediately preceding the
date on which such sale is made.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about TyCom. A
shareholder who is not deemed to have been an affiliate at any time during the
90 days immediately preceding the sale and who has beneficially owned
restricted securities for at least two years is entitled to sell such shares
under Rule 144(k) without regard to the limitations and requirements described
above.
TyCom, Tyco, TGN Holdings Ltd. and the officers and directors of TyCom and
certain officers and directors of Tyco have agreed with the underwriters that,
for a period of 180 days after the date of this prospectus, they will not
directly or indirectly, offer, pledge, sell, contract to sell, sell any option
or contract to purchase or otherwise dispose of any common shares or any
securities convertible into or exercisable or exchangeable for common shares,
or in any manner transfer all or a portion of the economic consequences
associated with the ownership of the common shares, or cause a registration
statement covering any common shares to be filed, without prior written consent
of Goldman, Sachs & Co. and Salomon Smith Barney Inc. The lock-up agreements
described above may be released at any time as to all or any portion of the
shares subject to such agreements at the sole discretion of Goldman, Sachs &
Co. and Salomon Smith Barney Inc.
An aggregate of of our common shares are reserved for issuance under our
benefit plans. We intend to file registration statements on Form S-8 covering
the sale of the common shares issued under the benefit plans. Accordingly,
common shares registered under any such registration will be available for sale
in the public market upon issuance of such common shares pursuant to the
respective share plan, unless such shares are subject to vesting restrictions
and subject to limitation on resale by "affiliates" pursuant to Rule 144 and
under the lock-up agreements described above.
Registration Rights Agreement
We have agreed that we will, upon the request of Tyco, use our commercially
reasonable best efforts to effect the registration under applicable federal and
state securities laws of the common shares indirectly owned by Tyco following
the offering.
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TAX CONSIDERATIONS
Bermuda Tax Considerations
As of today, Bermuda law does not impose any of the following taxes on a
disposition of our common shares or on distributions by us with respect to our
common shares:
. income;
. corporation or profits;
. withholding;
. capital gains;
. capital transfer;
. estate duty; or
. inheritance.
Furthermore, we have received from the Minister of Finance of Bermuda under
the Exempted Undertakings Tax Protection Act of 1966 an undertaking that, in
the event of there being enacted in Bermuda any legislation imposing any of the
following taxes, it shall not be applicable to us or any of our operations, nor
to our shares nor to our obligations until March 28, 2016:
. taxes computed on profits or income;
. taxes computed on any capital asset, gain or appreciation; or
. any tax in the nature of estate duty or inheritance tax.
This undertaking does not, however, prevent either the imposition of property
taxes on us if we hold real property or leasehold interests in Bermuda or the
application of Bermuda taxes to persons ordinarily resident in Bermuda. We will
pay an annual government fee in Bermuda on our authorized share capital and
share premium.
United States Federal Income Tax Considerations
The following is a summary of the material United States federal income tax
considerations that apply as of today to your acquisition, ownership and
disposition of our common shares. This summary deals only with common shares
that are held as capital assets and does not address tax considerations
applicable to you if you are subject to special tax rules, including if you:
. are a dealer or trader in securities or currencies;
. are a financial institution;
. are an insurance company;
. are a tax-exempt entity;
. hold common shares as part of a straddle, conversion transaction,
constructive sale or other arrangement involving more than one position;
. have a principal place of business or tax home outside the United
States; or
. have a functional currency which is not the United States dollar.
In addition, the summary generally does not address the tax consequences to you
if you own (or are deemed for United States federal income tax purposes to own
under complex attribution and constructive ownership rules) 10% or more of our
voting stock. If you own 10% or more of our
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voting stock, you are advised to consult your own tax advisors regarding the
tax considerations incident to an investment in common shares.
The discussion below is based upon tax laws of the United States, including
the Internal Revenue Code of 1986, as amended. These laws may be repealed,
revoked or modified, perhaps with retroactive effect, resulting in United
States federal income tax consequences different from those discussed below.
Prospective investors are urged to consult their own tax advisors as to the
tax consequences of an investment in common shares. These consequences include
the application to their particular situations of the tax considerations
discussed below, as well as the application of state, local, foreign or other
federal tax laws and possible changes in tax law.
United States Persons
The following discussion applies to you if you are a United States person. A
United States person is:
. a citizen or resident of the United States for federal income tax
purposes;
. a corporation or partnership created or organized in or under the laws
of the United States or any of its political subdivisions;
. an estate whose income is subject to United States federal income
taxation regardless of its source; or
. a trust if a United States court is able to exercise primary supervision
over its administration and one or more United States persons have the
authority to control all of its substantial decisions.
Taxation of Dividends
Distributions you receive on our common shares will be treated as dividends
and taxable as ordinary income to the extent that such distributions are made
out of our current or accumulated earnings and profits as determined for United
States federal income tax purposes. Any excess will be treated first as a tax-
free return of capital to the extent of your tax basis in our common shares,
and then as capital gain from the sale or exchange of property. The United
States federal income tax treatment described in the immediately preceding
sentence applies whether or not such distributions are treated as a return of
capital for non-tax purposes. The amount of any distribution of property other
than cash will be the fair market value of the property on the date of
distribution by us. If you are a corporation, you will not be entitled to claim
a dividends received deduction with respect to distributions by us, because we
are a foreign corporation. We do not anticipate paying cash dividends in the
foreseeable future. See "Dividends."
For so long as stock representing 50% or more of the voting power or value
of our stock is owned, directly or indirectly, by United States persons,
distributions on our common shares that are taxable as dividends generally will
be treated for United States foreign tax credit purposes as either:
. foreign source passive income (or, in the case of some United States
persons, foreign source financial services income); or
. United States source income.
The treatment as either foreign source passive income or United States
source income will generally be in proportion to our earnings and profits in
the year of the distribution allocable to foreign and United States sources.
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Taxation of Dispositions
Gain or loss that you recognize on the sale, exchange or other taxable
disposition of our common shares will be subject to United States federal
income taxation as capital gain or loss. This gain or loss will be in an amount
equal to the difference between the amount realized on the sale, exchange or
other taxable disposition and your adjusted tax basis in the common shares
sold. The gain or loss will be long term capital gain or loss if your holding
period for our common shares is more than one year. Any gain or loss so
recognized generally will be United States source.
Information Reporting and Backup Withholding
Some United States persons may be subject to information reporting with
respect to payments of dividends on, and the proceeds of the disposition of,
our common shares. United States persons who are subject to information
reporting and who do not provide appropriate information when requested may be
subject to backup withholding at a 31% rate. You should consult your tax
advisors regarding the imposition of backup withholding and information
reporting with respect to distributions on and dispositions of our common
shares. Any amount withheld will generally be allowed as a credit against your
United States federal income tax liability, provided that the required
information is timely furnished to the Internal Revenue Service.
Non-United States Persons
The following discussion applies to you if you are not a United States
person.
Distributions and Disposition
In general, and subject to the discussion below under "Information Reporting
and Backup Withholding," you will not be subject to United States federal
income or withholding tax on income from distributions with respect to, or gain
upon the disposition of, our common shares, unless:
. the income or gain is effectively connected with your conduct of a trade
or business in the United States, or
. you are an individual who realizes a gain on a sale of our common
shares, you are present in the United States for 183 days or more in the
taxable year of the sale and other conditions specified in the Internal
Revenue Code are met.
Income or gain that is effectively connected with your conduct of a trade or
business in the United States generally will be subject to regular United
States federal income tax in the same manner as if the income or gain were
realized by a United States person. In addition, if you are a non-United States
corporation, the income or gain may be subject to a branch profits tax at a
rate of 30%, although a lower rate may be provided by an applicable income tax
treaty. Gain described in the second bullet above generally will be subject to
tax at a rate of 30%, or a lower rate provided by an applicable income tax
treaty.
Information Reporting and Backup Withholding
If you hold our common shares through a non-United States, and non-United
States related, broker or financial institution, information reporting and
backup withholding generally would not be required with respect to
distributions on and dispositions of our common shares. Information reporting,
and possibly backup withholding, may apply if you hold our common shares
through a
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United States, or United States related, broker or financial institution, and
you fail to provide required information. You should consult your tax advisors
regarding the imposition of backup withholding and information reporting with
respect to distributions on and dispositions of our common shares. Any amount
withheld will generally be allowed as a credit against your United States
federal income tax liability, provided that the required information is timely
furnished to the Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and TyCom has agreed to sell to such underwriter, the number of
common shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Goldman, Sachs & Co............................................
Salomon Smith Barney Inc.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
----------
Total........................................................ 40,000,000
</TABLE>
The underwriters are obligated to purchase all the common shares, other than
those covered by the over-allotment option described below, if they purchase
any of the common shares.
The underwriters, for whom Goldman, Sachs & Co., Salomon Smith Barney Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share on sales to
certain other dealers. If all of the shares are not sold at the initial
offering price, the representatives may change the public offering price and
the other selling terms.
TGN Holdings Ltd. has granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 6,000,000
additional common shares at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional common shares
approximately proportionate to such underwriter's initial purchase commitment.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of common
shares offered by them.
Merrill Lynch, Pierce, Fenner & Smith Incorporated will be facilitating
Internet distribution for this offering to certain of its Internet subscription
customers. Merrill Lynch intends to allocate a limited number of shares for
sale to its online brokerage customers. An electronic prospectus will be
available on the website maintained by Merrill Lynch. Other than the prospectus
in electronic format, the information on the Merrill Lynch website relating to
this offering is not a part of this prospectus. Neither TyCom nor the
underwriters will rely on third-party providers to comply with the prospectus
delivery requirements. All purchasers will receive a printed version of the
final prospectus.
In connection with the offering, TyCom, Tyco, TGN Holdings Ltd. and the
directors and officers of TyCom and certain directors and officers of Tyco have
agreed that, subject to certain limited exceptions, without the prior written
consent of Goldman, Sachs & Co. and Salomon Smith Barney Inc. on behalf of the
underwriters, they will not:
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(a) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any common shares or any securities convertible
into or exercisable or exchangeable for common shares, or
(b) enter into any swap or similar arrangement that transfers, in whole
or in part, any of the economic consequences of ownership of the common
shares,
whether any such transaction described in clause (a) or (b) of this paragraph
is to be settled by delivery of such common shares or such other securities, in
cash or otherwise, for a period of 180 days after the date of this prospectus.
The restrictions described in clause (a) and (b) of this paragraph shall not
apply to the common shares to be sold in this offering, including any common
shares sold pursuant to the over-allotment option described above.
We have applied to have the common shares approved for listing on the New
York Stock Exchange and for a secondary listing on the Bermuda Stock Exchange,
in each case under the symbol "TCM".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by TyCom in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common shares.
<TABLE>
<CAPTION>
Paid by TyCom
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
In connection with the offering, the underwriters may purchase and sell
common shares in the open market. These transactions may include over-
allotment, syndicated covering transactions and stabilizing transactions. Over-
allotment involves syndicate sales of common shares in excess of the number of
shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicated covering transactions involve purchases of
common shares in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of common shares made for the purpose of preventing
or retarding a decline in the market price of the common shares while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters in covering syndicate short positions or making stabilizing
purchases, repurchase common shares originally sold by that syndicate member.
Any of these activities may cause the price of the common shares to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the New
York Stock Exchange, the Bermuda Stock Exchange or in the over-the-counter
market, or otherwise and, if commenced, may be discontinued at any time.
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be $ , all of which will be paid by Tyco.
Each of the representatives have performed certain investment banking and
advisory services for TyCom and Tyco from time to time for which they have
received customary fees and expenses. The representatives may, from time to
time, engage in transactions with and perform services for TyCom and Tyco in
the ordinary course of their business.
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TyCom and Tyco International Ltd. have each agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the underwriters may be required
to make in respect of any of those liabilities.
Prior to this offering, there has been no public market for the common
shares. The initial public offering price will be determined by negotiations
between us and the representatives. Among the factors to be considered in
determining the initial public offering price will be our future prospects and
our industry in general, our sales, earnings and certain other financial
operating information in recent periods, and the price-earnings ratios, price-
sales ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to ours. The estimated
initial public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions
and other factors. There can be no assurance, however, that the prices at which
the shares will sell in the public market after this offering will not be lower
than the price at which they are sold by the underwriters or that an active
trading market in the common shares will develop and continue after this
offering.
LEGAL MATTERS
The validity of the issuance of the common shares offered in this
prospectus, the matter of enforcement of judgments in Bermuda and Bermuda tax
consequences will be passed on by Appleby Spurling & Kempe, Hamilton, Bermuda,
counsel to TyCom. United States legal matters related to the offering will be
passed upon for TyCom by Davis Polk & Wardwell, New York, New York, and for the
underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The financial statements of TyCom Ltd. as of September 30, 1998 and 1999 and
for each of the three fiscal years in the period ended September 30, 1999
included in this prospectus have been so included in reliance on the report,
which contains an explanatory paragraph relating to certain costs and expenses
presented in the financial statements which represent allocations and
management's estimates of the costs of services provided by Tyco International
Ltd., of PricewaterhouseCoopers, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of AT&T Submarine Systems, Inc. for the six months
ended June 30, 1997 included in this prospectus have been so included in
reliance on the report, which contains an explanatory paragraph relating to
certain costs and expenses presented in the financial statements which
represent allocations and management's estimates of the costs of services
provided by AT&T, of PricewaterhouseCoopers LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Telecomunicaciones Marinas, S.A. ("Temasa") as
of December 31, 1998 and for the year ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of BDO Audiberia
Auditores, S.L., independent accountants, given on the authority of said firm
as experts in auditing and accounting.
83
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration statement
on Form S-1 under the Securities Act with respect to the common shares offered
hereby. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. Certain
items are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to TyCom and our common shares, reference is
made to the registration statement and the exhibits and any schedules filed
therewith. A copy of the registration statement, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site at http://www.sec.gov, from
which interested persons can electronically access the registration statement,
including the exhibits and any schedules thereto.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain an
Internet site at http://www.submarinesystems.com. Our website and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are a Bermuda company and most of our assets are or may be located
outside the United States. As a result, it may be difficult for our
shareholders to serve notice of a lawsuit on us within the United States. It
may also be difficult for our shareholders to enforce, in the United States,
judgments obtained in United States courts. We have been advised by our legal
counsel in Bermuda, Appleby Spurling & Kempe, that there is some doubt as to
the enforcement in Bermuda, in original actions or in actions for enforcement
of judgments of United States courts, of liabilities predicated upon U.S.
federal securities laws (including civil liabilities under such laws), although
Bermuda courts will generally enforce foreign judgments for liquidated amounts
in civil matters subject to certain conditions and exceptions.
We have expressly submitted to the jurisdiction of the U.S. federal and New
York state courts sitting in the City of New York for the purpose of any suit,
action or proceeding arising out of this offering, and we have appointed
Puglisi & Associates to accept service of process in any such action.
This prospectus has been filed with the Registrar of Companies in Bermuda
pursuant to Part III of the Companies Act 1981 of Bermuda, as amended, and the
Bermuda Monetary Authority ("BMA") has given its consent to the issue and
transfer of up to of our common shares. In accepting this prospectus for
filing, the Registrar of Companies accepts no responsibility for the financial
soundness of any proposals or for the correctness of any statements made or
opinions expressed with regard to them. Approvals or permissions received from
the BMA do not constitute a guarantee by the BMA as to performance or our
creditworthiness. As a result, in giving such approvals or permissions, the BMA
shall not be liable for our performance or our default or for the correctness
of any opinions or statements expressed in this prospectus.
84
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
TyCom Ltd.:
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of September 30, 1998 and 1999 and March
31, 2000 (unaudited)..................................................... F-3
Consolidated Statements of Operations for the fiscal years ended September
30, 1997, 1998 and 1999 and the six months ended March 31, 1999 and 2000
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended
September 30, 1997, 1998 and 1999 and the six months ended March 31, 2000
(unaudited).............................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended September
30, 1997, 1998 and 1999 and the six months ended March 31, 1999 and 2000
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
<TABLE>
<S> <C>
Telecomunicaciones Marinas, S.A.:
Auditors' Report......................................................... F-27
Balance Sheets as of December 31, 1998 and 1997.......................... F-28
Profit and Loss Accounts for the years ended December 31, 1998 and 1997.. F-30
Notes to the Annual Accounts............................................. F-32
Unaudited Pro Forma Financial Data:
Introduction............................................................. F-49
Unaudited Pro Forma Combined Statement of Operations for the six months
ended March 31, 1999.................................................... F-50
Unaudited Pro Forma Combined Statement of Operations for the year ended
September 30, 1998...................................................... F-51
Notes to Unaudited Pro Forma Combined Statements of Operations........... F-52
AT&T Submarine Systems, Inc.:
Report of Independent Accountants........................................ F-53
Consolidated Statement of Operations for the six months ended June 30,
1997.................................................................... F-54
Consolidated Statement of Cash Flows for the six months ended June 30,
1997.................................................................... F-55
Notes to Consolidated Financial Statements............................... F-56
</TABLE>
F-1
<PAGE>
This is the form of report that we expect to issue upon the transfer of the
assets and liabilities to TyCom Ltd., as described in Note 1.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
March 3, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of TyCom Ltd.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholder's equity and cash flows
present fairly, in all material respects, the financial position of TyCom Ltd.
(the "Company") at September 30, 1998 and 1999, and the results of its
operations and its cash flows for the fiscal years ended September 30, 1997,
1998 and 1999, in conformity with accounting principles generally accepted in
the United States. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 1, the Company is an operating subsidiary of Tyco
International Ltd. Certain costs and expenses presented in the financial
statements represent allocations and management's estimates of the costs of
services provided to the Company by Tyco International Ltd. As a result, the
financial statements presented may not be indicative of the financial position
or results of operations that would have been achieved had the Company operated
as a nonaffiliated entity.
F-2
<PAGE>
TYCOM LTD.
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
(Unaudited)
September 30, March 31,
----------------- -----------
1998 1999 2000
-------- -------- -----------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 49.7 $ 12.1 $ 15.3
Short-term advances to parent................... 45.9 505.5 87.1
Receivables, less allowance for doubtful
accounts of $27.8 at September 30, 1998, $19.8
at September 30, 1999 and $49.3 at March 31,
2000........................................... 83.5 278.7 400.4
Contracts in process............................ 431.4 432.9 203.4
Inventories..................................... 89.8 108.7 118.9
Deferred income taxes........................... 69.1 36.9 48.7
Other current assets............................ 9.2 18.1 17.6
-------- -------- --------
Total current assets............................ 778.6 1,392.9 891.4
-------- -------- --------
Property, Plant and Equipment, Net.............. 287.8 464.4 491.0
Goodwill and Other Intangible Assets, Net....... 169.0 348.6 323.7
Deferred Income Taxes........................... 122.2 112.5 110.1
Other Assets.................................... 9.2 73.8 53.8
-------- -------- --------
Total Assets.................................. $1,366.8 $2,392.2 $1,870.0
======== ======== ========
Current Liabilities:
Loans payable and current maturities of long-
term debt...................................... $ -- $ 2.3 $ 2.2
Accounts payable................................ 116.9 175.3 155.4
Accrued expenses and other current liabilities.. 215.3 176.0 227.1
Contracts in process--billings in excess of
costs.......................................... 125.4 849.1 646.1
Deferred revenue................................ 17.9 12.4 42.6
-------- -------- --------
Total current liabilities....................... 475.5 1,215.1 1,073.4
Long-Term Debt.................................. 600.0 608.2 655.1
Other Long-Term Liabilities..................... 13.8 14.7 15.4
-------- -------- --------
Total Liabilities............................. 1,089.3 1,838.0 1,743.9
-------- -------- --------
Minority Interest............................... 63.8 55.7 53.5
Commitments and Contingencies (Note 9)
Shareholder's Equity:
Parent company investment....................... 213.7 501.3 105.6
Currency translation adjustment................. -- (2.8) (33.0)
-------- -------- --------
Total Shareholder's Equity.................... 213.7 498.5 72.6
-------- -------- --------
Total Liabilities and Shareholder's Equity.... $1,366.8 $2,392.2 $1,870.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TYCOM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended Six Months Ended
September 30, March 31,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from product
sales.................. $ 342.6 $1,187.0 $1,450.0 $ 608.5 $ 1,196.2
Service revenue......... 32.9 94.6 187.6 90.8 79.6
------- -------- -------- ------- ---------
Net revenue............. 375.5 1,281.6 1,637.6 699.3 1,275.8
Cost of product sales... 226.0 821.7 1,093.2 437.0 934.1
Cost of services........ 20.9 69.7 86.5 34.8 45.4
Sales and marketing..... 7.4 23.4 17.6 8.7 7.1
Research and
development............ 9.5 39.5 52.7 26.5 26.7
General and
administrative......... 16.2 65.0 64.0 29.8 42.3
Write-off of purchased
in-process research and
development............ 361.0 -- -- -- --
------- -------- -------- ------- ---------
Operating income
(loss)................. (265.5) 262.3 323.6 162.5 220.2
Interest income
(expense), net......... 1.8 (9.9) (39.3) (23.6) (1.2)
Minority interest....... (3.8) (14.1) (15.2) (7.5) (6.7)
------- -------- -------- ------- ---------
Income (loss) before
income taxes........... (267.5) 238.3 269.1 131.4 212.3
Income tax benefit
(provision)............ 110.9 (86.3) (106.1) (54.0) (77.1)
------- -------- -------- ------- ---------
Net income (loss)....... $(156.6) $ 152.0 $ 163.0 $ 77.4 $ 135.2
======= ======== ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TYCOM LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(in millions)
<TABLE>
<CAPTION>
Parent Currency
Company Translation Comprehensive
Investment Adjustment Income (Loss)
---------- ----------- -------------
<S> <C> <C> <C>
Balance at September 30, 1996............. $ 38.0 $ --
Comprehensive loss:
Net loss................................ (156.6) $(156.6)
-------
Total comprehensive loss.............. $(156.6)
=======
Net transfers from parent................. 795.4
------- ------
Balance at September 30, 1997............. 676.8 --
Comprehensive income:
Net income.............................. 152.0 $ 152.0
-------
Total comprehensive income............ $ 152.0
=======
Net transfers to parent................... (615.1)
------- ------
Balance at September 30, 1998............. 213.7 --
Comprehensive income:
Net income.............................. 163.0 $ 163.0
Currency translation adjustment......... (2.8) (2.8)
-------
Total comprehensive income............ $ 160.2
=======
Net transfers from parent................. 124.6
------- ------
Balance at September 30, 1999............. 501.3 (2.8)
Comprehensive income (unaudited):
Net income.............................. 135.2 $ 135.2
Currency translation adjustment......... (30.2) (30.2)
-------
Total comprehensive income............ $ 105.0
=======
Net transfers to parent (unaudited)....... (530.9)
------- ------
Balance at March 31, 2000 (unaudited)..... $ 105.6 $(33.0)
======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TYCOM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended Six Months Ended
September 30, March 31,
------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income (loss)................ $(156.6) $ 152.0 $ 163.0 $ 77.4 $135.2
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Write-off of purchased in-
process research and
development................... 361.0 -- -- -- --
Depreciation................... 10.9 31.9 39.6 16.4 27.9
Goodwill and other intangible
amortization.................. 0.7 4.6 7.5 2.9 5.1
Deferred income taxes.......... (121.7) (8.4) 41.8 48.7 (9.3)
Provisions for losses on
receivables and inventory..... 1.5 19.0 4.6 0.5 59.0
Minority interest expense...... 3.8 14.1 15.2 7.4 6.7
Other non-cash items........... -- -- -- -- 10.3
Changes in assets and
liabilities, net of the
effects of acquisitions:
Receivables................... 132.0 76.1 (183.6) (153.8) (156.5)
Contracts in process.......... (59.5) (146.5) 725.5 221.3 26.4
Inventories................... 50.4 10.7 (23.4) (21.5) (35.0)
Other current assets.......... (1.3) (6.0) (8.2) (3.2) 0.5
Accounts payable.............. 26.3 (41.9) 57.5 20.7 (19.6)
Accrued expenses and other
current liabilities.......... 6.7 (54.2) (55.9) (60.3) 54.5
Deferred revenue.............. 18.2 (4.5) (10.1) (9.5) 30.5
------- ------- ------- -------- -------
Net cash provided by operating
activities.................... 272.4 46.9 773.5 147.0 135.7
------- ------- ------- -------- -------
Cash Flows From Investing
Activities:
Purchase of property, plant and
equipment....................... (18.7) (28.2) (97.4) (39.0) (66.1)
Acquisition related costs, net of
cash acquired................... (4.3) (80.2) (8.5) (1.9) (0.8)
Increase in long-term
receivables..................... (4.0) (0.3) (56.0) (25.6) 9.3
Increase in investments.......... -- (2.0) (9.3) (1.0) --
Other............................ (2.2) 0.4 (0.9) -- 0.3
------- ------- ------- -------- -------
Net cash used in investing
activities.................... (29.2) (110.3) (172.1) (67.5) (57.3)
------- ------- ------- -------- -------
Cash Flows From Financing
Activities:
Short-term advances to parent.... (184.3) 138.4 (459.6) 28.8 416.0
Repayments of long-term debt..... -- -- (1.2) -- (1.1)
Net proceeds on long-term loans
from parent..................... -- -- 1.3 1.3 48.6
Change in parent company
investment...................... (54.6) (15.1) (155.4) (79.0) (530.9)
Distributions to minority
interest........................ (4.8) (18.0) (23.4) (9.5) (8.8)
Other............................ 0.5 7.8 (0.7) 0.3 1.0
------- ------- ------- -------- -------
Net cash provided by (used in)
financing activities.......... (243.2) 113.1 (639.0) (58.1) (75.2)
------- ------- ------- -------- -------
Net increase (decrease) in cash
and cash equivalents............ -- 49.7 (37.6) 21.4 3.2
Cash and cash equivalents at
beginning of period............. -- -- 49.7 49.7 12.1
------- ------- ------- -------- -------
Cash and cash equivalents at end
of period....................... $ -- $ 49.7 $ 12.1 $ 71.1 $ 15.3
======= ======= ======= ======== =======
Supplementary Cash Flow
Disclosure:
Interest paid, net............... $ -- $ 25.5 $ 37.3 $ 22.8 $ 21.9
======= ======= ======= ======== =======
Income taxes paid (net of
refunds)........................ $ 10.8 $ 94.7 $ 64.3 $ 5.3 $ 86.4
======= ======= ======= ======== =======
Supplemental Schedule of Noncash
Investing and Financing
Activities:
Net assets of acquired businesses
contributed by parent (Note 3).. $ 850.0 $ -- $ 280.0 $ -- $ --
======= ======= ======= ======== =======
Dividend in form of loan from
parent (Note 4)................. $ -- $ 600.0 $ -- $ -- $ --
======= ======= ======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
TyCom Ltd. (the "Company" or "TyCom"), a Bermuda company, was incorporated
on March 8, 2000 as a wholly-owned subsidiary of Tyco International Ltd. to
serve as the holding company for its undersea fiber optic cable communications
business. Tyco International Ltd. and its subsidiaries, excluding TyCom, are
referred to herein as the "Parent" or "Tyco."
The accompanying consolidated financial statements are derived from the
historical books and records of Tyco and include Simplex Technologies
("Simplex"), acquired by Tyco in 1974, for all periods presented. The
consolidated financial statements also include Tyco Submarine Systems Ltd.
("TSSL"), formerly AT&T's submarine systems business acquired by Tyco on July
1, 1997, and Telecomunicaciones Marinas, S.A. ("Temasa") acquired by Tyco on
May 18, 1999. TSSL and Temasa are included in the consolidated financial
statements from their respective dates of acquisition. Prior to the planned
initial public offering discussed below, the assets and liabilities described
herein will be transferred to TyCom.
Simplex is the cable manufacturing and integration facility of the Company.
TSSL includes research and development, system design, repeater and terminal
product manufacturing, and project management functions of the Company. In
addition, TSSL includes Transoceanic Cable Ship Company ("TCSC"), the cable
installation and maintenance operations of the Company based in the United
States. Temasa is the cable installation and maintenance operations of the
Company based in Spain. The Company operates a fleet of eleven cable ships. In
addition to the TCSC fleet, two ships are flagged in the U.S. Marshall Islands
under the Coastal Cable Ship Co. and C.S. Tyco Provider, Inc. Temasa's three
ships are flagged in the Canary Islands.
TyCom has designed, engineered, manufactured and installed over 300,000
kilometers of undersea cable and has played a principal role in the deployment
and maintenance of most of the world's major undersea cable networks. The
foundation of TyCom's industry leadership is the technological accomplishments
of the internationally recognized TyCom Laboratories, which has its origins in
Bell Laboratories.
On January 17, 2000, Tyco announced that its undersea fiber optics business
will design, build, install, operate and maintain its own global undersea fiber
optic communications network, the TyCom Global Network. Tyco also announced its
intention to offer up to 20% of its undersea fiber optic cable business for
sale in an initial public offering.
2. Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements have been
prepared in United States dollars in accordance with generally accepted
accounting principles in the United States. The consolidated financial
statements include the accounts of TyCom and its subsidiaries. Prior to the
completion of the planned public offering, Simplex, TSSL and Temasa will become
subsidiaries of TyCom and in exchange, TGN Holdings Ltd., a subsidiary of Tyco,
will receive common shares of TyCom. All significant intercompany transactions
and balances have been eliminated in consolidation.
These financial statements present the consolidated financial position and
results of operations of the Company as a subsidiary of Parent, including
adjustments necessary for a fair presentation of the business. The financial
statements presented may not be indicative of the results that would have been
achieved had the Company operated as a separate, stand-alone entity.
F-7
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interim Financial Information--The consolidated financial statements of the
Company as of March 31, 2000 and for the six months ended March 31, 1999 and
2000 are unaudited. Adjustments, consisting of normal recurring adjustments
and adjustments necessary to present the consolidated financial position and
results of operations of the Company as an operating subsidiary of Parent,
have been made which in the opinion of management are necessary for a fair
presentation. Results of operations for the six months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the
full year or for any future period.
Cash Equivalents--All highly liquid investments purchased with a maturity
of three months or less are considered to be cash equivalents.
Short-Term Advances to Parent--Short-term advances to Parent reflect cash
balances generated from operating activities that were transferred to Tyco to
be included in Tyco's consolidated cash management system. These advances are
subject to the terms of various cash management and loan agreements between
the Company and Parent. Under the terms of these agreements, the funds are
available to the Company on an as needed basis. Amounts outstanding on the
last day of each calendar quarter accrue interest at a rate equal to 1.25%
above the three-month United States Dollar LIBOR as in effect on the last day
of the prior calendar quarter. The effective interest rate on amounts
outstanding as of September 30, 1999 was 6.6%. The agreements terminate over a
period from July 2003 to August 2004.
Inventories--Inventories are recorded at the lower of cost (first-in,
first-out) or market value.
Property, Plant and Equipment--Property, plant and equipment is principally
recorded at cost less accumulated depreciation. Maintenance and repair
expenditures are charged to expense when incurred. The straight-line method of
depreciation is used over the estimated useful lives of the related assets as
follows:
<TABLE>
<S> <C>
Buildings and related improvements............ 10 to 40 years
Ships and submersibles........................ 5 to 20 years
Leasehold improvements........................ Remaining term of the lease
Machinery and equipment....................... 5 to 7 years
</TABLE>
Gains and losses arising on the disposal of property, plant and equipment
are included in the Consolidated Statements of Operations.
Goodwill and Other Intangible Assets--Goodwill, which is being amortized on
a straight-line basis over 40 years, was $129.3 million and $311.3 million,
net, at September 30, 1998 and 1999, respectively. Accumulated amortization
amounted to $4.0 million at September 30, 1998 and $9.1 million at September
30, 1999.
Other intangible assets were $39.7 million and $37.3 million, net, at
September 30, 1998 and 1999, respectively. These amounts include patents and
technology, which are being amortized primarily on a straight-line basis over
17 years. At September 30, 1998 and 1999, accumulated amortization amounted to
$1.3 million and $3.7 million, respectively.
Long-Lived Assets--The Company periodically evaluates the net realizable
value of long-lived assets, including, property, plant and equipment, goodwill
and other intangible assets, long-term investments and long-term receivables,
relying on a number of factors including operating results, business plans,
economic projections and anticipated future cash flows. An impairment in the
F-8
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
carrying value of an asset is assessed when the undiscounted, expected future
operating cash flows derived from the asset are less than its carrying value.
Fair values are based on quoted market prices and assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates,
reflecting varying degrees of perceived risk.
Investments--The Company accounts for its long-term investments that
represent less than twenty percent ownership using Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This standard requires that certain debt and
equity securities be adjusted to market value at the end of each accounting
period. Unrealized market gains and losses are charged or credited to earnings
if the securities are traded for short-term profit. Otherwise, such unrealized
gains and losses are charged or credited to shareholders' equity. Management
determines the proper classification of investments in obligations with fixed
maturities and marketable equity securities at the time of purchase and
reevaluates such designations as of each balance sheet date.
Warranties--Estimated warranty costs for each contract are determined based
on the contract terms and technology specific issues. These costs are included
in total estimated contract costs accrued over the construction period of the
respective contract.
Minority Interest--Five of the Company's ships, used to install and maintain
the undersea cable systems, are owned by partnerships. The partnerships consist
of a majority-owner general partner, TCSC, a wholly-owned subsidiary of the
Company, and a limited partner unaffiliated with the Company, Teleglobe Marine
Inc., a wholly-owned subsidiary of Teleglobe Holding Corp. The limited
partner's equity interest is 25% or 45% per vessel and the partnership terms
continue for the useful life of each vessel. The Company monitors and allocates
the utilization of these vessels between construction and maintenance
activities.
The Company charters the vessels from the partnership and operates them in
the conduct of its business. Accordingly, the Company reflects the limited
partner equity interest in the partnerships as minority interest in the
consolidated financial statements. Distributions to the limited partner are
based on its pro rata share of earnings during the prior quarter, adjusted for
certain noncash items and capital requirements.
Revenue Recognition--Product sales for the installation of undersea cable
systems are recorded on the percentage-of-completion method, whereby sales and
profits are recognized as work is performed based on the relationship between
actual costs incurred and total estimated costs to complete. Contracts in
process, included in current assets, are valued at cost plus accrued profits
not yet billed. Billings on uncompleted contracts in excess of incurred costs
and accrued profits are included in current liabilities. Revisions in cost
estimates as contracts progress have the effect of increasing or decreasing
profits in the current period. Provisions for anticipated losses are made in
the period in which they first become determinable. Bid and proposal costs are
expensed as incurred.
Revenue from the sale of maintenance and services is recognized over the
period the service is provided. Billings to customers before the relevant
criteria for revenue recognition are satisfied are included in deferred
revenue.
Income Taxes--Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred tax liabilities and
assets are determined based on the differences between the
F-9
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated financial statements and the tax basis of assets and liabilities,
using tax rates in effect for the years in which the differences are expected
to reverse.
Related Party Transactions--The Company buys certain of the components for
its manufactured products, such as wire and circuit boards, from subsidiaries
of Tyco at prices which approximate market. Purchases from related parties were
$0, $2.7 million, $16.4 million, $6.6 million and $15.8 million during fiscal
1997, fiscal 1998, fiscal 1999 and the six months ended March 31, 1999 and
2000, respectively. Amounts due under these trade activities were $0, $2.1
million and $2.9 million as of September 30, 1998 and 1999 and March 31, 2000,
respectively, and are included in accounts payable in the Consolidated Balance
Sheets.
Research and Development--Research and development expenditures are expensed
when incurred.
Advertising--Advertising costs are expensed when incurred.
Net Income Per Share--Historical net income per share has not been presented
because the Company did not operate as a separate legal entity of Tyco with its
own capital structure. Upon completion of the proposed public offering of TyCom
common shares, the Company will present its own capital structure.
Translation of Foreign Currency--Assets and liabilities of the Company's
subsidiaries operating outside the United States which account in a functional
currency other than U.S. dollars are translated into U.S. dollars using year-
end exchange rates. Revenues and expenses are translated at the average
exchange rates effective during the year. Foreign currency translation gains
and losses are included within shareholders' equity.
Gains and losses resulting from foreign currency transactions, the amounts
of which are not material, are included in net income (loss).
Financial Instruments--From time to time the Company enters into a variety
of foreign exchange contracts, forward commodity contracts and interest rate
swaps in its management of foreign currency, commodity and interest rate
exposures. The Company enters into letters of credit as required by its
contracts.
Realized gains or losses on foreign exchange contracts, acquired for the
purpose of reducing exposure to currency fluctuations associated with expected
cash flows denominated in currencies other than the functional currencies, are
reflected in general and administrative expenses. Unrealized gains or losses on
foreign exchange contracts are quantified, and if material, are marked to
market with the gain or loss reflected in general and administrative expenses.
Under forward commodity contracts, which hedge anticipated purchases of
copper used in manufacturing operations, payments are received or paid based on
the differential between the contract price and the actual price of the
underlying commodity. Gains or losses on forward commodity contracts are
recorded as adjustments to the value of the purchased commodity.
Interest rate swaps hedge interest rates on indebtedness and involve the
exchange of fixed and floating rate interest payment obligations over the life
of the related agreement without the exchange of the notional amount. The
interest differentials to be paid or received under interest rate swaps are
recognized on an accrual basis over the life of the underlying agreement or
indebtedness, respectively, as an adjustment to interest expense.
Use of Estimates--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make extensive use of certain
F-10
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reported periods. Significant estimates in these
consolidated financial statements include purchase accounting reserves,
allowances for doubtful accounts receivable, estimates of future cash flows
associated with assets, useful lives for depreciation and amortization, loss
contingencies, net realizable value of inventories, warranty reserves,
estimated contract revenues and related costs, income taxes and tax valuation
reserves, and the determination of discount and other rate assumptions for
pension and post-retirement employee benefit expenses. Actual results could
differ from those estimates.
Accounting Pronouncements--In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137
which defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company is currently analyzing this standard.
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components in financial
statements. The purpose of reporting comprehensive income (loss) is to report a
measure of all changes in equity, other than transactions with shareholders.
Total comprehensive income (loss) is included in the Consolidated Statements of
Shareholders' Equity.
3. Acquisitions
Fiscal 1999
On May 18, 1999, Temasa, a wholly-owned subsidiary of Telefonica S.A., was
acquired by Tyco for an aggregate cost of $290.4 million, consisting of cash of
$280.0 million and the assumption of $10.4 million in debt. Temasa installs and
maintains undersea cable systems. This business was contributed by Parent to
the Company subsequent to its acquisition. The acquisition was accounted for as
a purchase, and the results of operations of Temasa have been included in the
consolidated results of the Company from its acquisition date. As a result of
the acquisition, approximately $188.9 million in goodwill was recorded by the
Company, which reflects the adjustments necessary to allocate the purchase
price to the fair value of assets acquired, liabilities assumed and purchase
accounting liabilities recorded. In addition, $8.5 million of cash was paid
during fiscal 1999 for purchase accounting liabilities related to current and
prior years' acquisitions.
F-11
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the fair value of assets and liabilities and
purchase accounting liabilities recorded for Temasa:
<TABLE>
<S> <C>
Receivables....................................................... $ 11.0
Contracts in process.............................................. 3.3
Other current assets.............................................. 0.8
Property, plant and equipment..................................... 118.8
Goodwill.......................................................... 188.9
Other assets...................................................... 0.1
------
322.9
------
Accounts payable.................................................. 2.0
Accrued expenses and other current liabilities.................... 28.7
Other long-term liabilities....................................... 1.8
------
32.5
------
$290.4
======
Cash consideration paid (net of cash acquired).................... $280.0
Debt assumed...................................................... 10.4
------
$290.4
======
</TABLE>
Purchase accounting liabilities recorded for Temasa during fiscal 1999
include $12.0 million for transaction and other direct costs and $0.2 million
for severance costs. Transaction and other direct costs include legal,
accounting, financial advisory services and other direct expenses related to
the acquisition. Liabilities of approximately $6.9 million for transaction and
other direct costs and $0.2 million for severance related costs remained on the
balance sheet at September 30, 1999. The Company expects that all costs related
to this acquisition will be complete by the end of fiscal 2000.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if the acquisition of Temasa had been completed as
of the beginning of the periods presented. The pro forma data give effect to
actual operating results prior to the acquisition and adjustments to interest
expense, goodwill amortization and income taxes. No effect has been given to
cost reductions or operating synergies in this presentation. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisition had occurred as of the beginning of the
periods presented or that may be obtained in the future.
<TABLE>
<CAPTION>
Fiscal Year
Ended September
30,
-----------------
1998 1999
-------- --------
(in millions)
<S> <C> <C>
Net revenue............................................ $1,315.4 $1,658.8
Income before income taxes............................. 225.6 267.4
Net income............................................. 146.0 159.7
</TABLE>
Fiscal 1998
During fiscal 1998, the Company paid $67.0 million to AT&T Corp. as a result
of finalizing the adjusted balance sheet related to the acquisition of AT&T
Corp.'s submarine systems business,
F-12
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discussed below. In addition, the Company paid cash of $13.2 million during
fiscal 1998 for purchase accounting liabilities that were previously
established in connection with this acquisition.
Fiscal 1997
On July 1, 1997, AT&T Corp.'s submarine systems business was acquired by
Tyco for cash consideration of $850.0 million. This business was contributed by
Parent to the Company subsequent to its acquisition. The acquisition was
accounted for as a purchase, and its results of operations have been included
in the consolidated results of the Company from the acquisition date. As a
result of the acquisition, approximately $174.3 million in goodwill and other
intangibles, net of the write-off of purchased in-process research and
development, was recorded by the Company, which reflects the adjustments
necessary to allocate the purchase price to the fair value of assets acquired,
liabilities assumed and purchase accounting liabilities recorded. In addition,
$4.3 million of cash was paid during fiscal 1997 for purchase accounting
liabilities related to this acquisition.
Purchase accounting liabilities recorded in connection with the above
acquisition consist of $8.3 million for transaction and other direct costs,
$9.4 million for severance and related costs and $6.5 million for facility
related costs.
Transaction and other direct costs include legal, accounting, financial
advisory services and other direct expenses related to the acquisition. The
costs of employee termination benefits of $9.4 million relate to the
elimination of approximately 150 employees located primarily in the United
States, consisting of administrative, executive, sales and marketing and
product development personnel. Facility related costs of $6.5 million
principally relate to lease contract termination costs. At September 30, 1999,
the payout for employee severance and facility related costs was complete.
The following unaudited pro forma data summarize the results of operations
for fiscal 1997 as if the acquisition of AT&T Corp.'s submarine systems
business had been completed as of the beginning of the fiscal year. The pro
forma data give effect to actual operating results prior to the acquisition and
adjustments to interest expense, goodwill amortization and income taxes. No
effect has been given to cost reductions or operating synergies in this
presentation. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisition had occurred
as of the beginning of the period presented or that may be obtained in the
future.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30, 1997
------------------
(in millions)
<S> <C>
Net revenue............................................ $947.5
Loss before income taxes............................... (324.5)
Net loss............................................... (201.6)
</TABLE>
In connection with the acquisition of AT&T's submarine systems business, the
Company considered an appraisal of its intangible assets, which valued acquired
in-process research and development at $361.0 million. The acquired in-process
research and development was expensed in the quarter ended September 30, 1997.
In addition, intangible assets associated with prior generation technology,
alternative use patents and other technology and patents were valued at $41.0
million and are being amortized over 17 years.
F-13
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At July 1, 1997, the Company was engaged in developing wavelength division
multiplexing (WDM) technology, which allows for multiple channels of data to be
transmitted on a given fiber at different wavelengths, thus increasing overall
capacity. This technology had not yet reached technological feasibility and had
no alternative future uses as of the acquisition date.
While substantial research and development investment had been made in
developing WDM technology as of the acquisition date, it was estimated that the
expenditure of approximately $21 million was required between July 1997 and
December 1998 to complete the development of WDM technology. If this effort was
successful, WDM technology was expected to become a commercially viable
product.
TyCom utilized the income approach to value the in-process research and
development acquired. In applying the income approach, we estimated the value
of the development program by analyzing the present values of the free cash
flows expected to be generated by the cable systems sold incorporating WDM
technology, over the economic life of the technology. Specifically, we
estimated the economic useful life of WDM technology at six years (1998-2003),
with annual revenues in excess of $1 billion during the first four years and
declining revenues in years five and six, as new technology became available.
Cost of sales and selling, general and administrative expenses associated with
the revenues generated from the technology were estimated, along with research
and development costs associated with completing the technology. No significant
expense reductions/synergies are included in these estimates. The expenses were
deducted from revenues in each year to arrive at income before taxes. An
effective tax rate of 40% was used to determine net income for each year.
A discount rate of 20% was applied to the net free cash flows expected from
the technology. This rate reflects Tyco's blended cost of capital along with
the risks associated with developing and commercializing the WDM technology.
These discounted cash flows were then summed for the applicable fiscal years to
arrive at a valuation of the in-process research and development of
$361 million, pre-tax.
WDM technology has been successfully completed and commercialized. In fiscal
1998, Atlantic Crossing-1 was the first TSSL project to be put in service
utilizing WDM technology. TyCom continues to use WDM technology in fiscal 2000,
and expects this technology to be utilized in undersea cable systems for the
remainder of its estimated useful life. Revenues of approximately $1 billion
were generated in fiscal 1998 from WDM technology cable systems. This amount is
consistent with the original valuation. In fiscal 1999, WDM technology revenues
of approximately $1.4 billion were generated. Again, this is consistent with
TyCom's valuation. WDM technology revenues for the first six months of fiscal
2000 are approximately $1 billion. On an annualized basis, this is higher than
the original valuation. Actual expenses are approximately the same as those
used in the original valuation, with the exception of sales and marketing
expenses, which are lower, and general and administrative expenses, which are
higher. Overall, net income related to WDM technology was slightly higher than
that used in the valuation in fiscal 1998 and fiscal 1999 and significantly
higher in the first six months of fiscal 2000.
F-14
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Indebtedness
Long-term debt is as follows:
<TABLE>
<CAPTION>
(Unaudited)
September 30, March 31,
------------- -----------
1998 1999 2000
------ ------ -----------
(in millions)
<S> <C> <C> <C>
7.2% loan from Parent due 2001(ii)(iii).............. $500.0 $398.8 $ --
7.1% loan from Parent due 2001(ii)................... 100.0 -- --
8.0% peseta denominated note due 2003(i)............. -- 9.2 7.3
6.7% loan from Parent due 2008(ii)(iii).............. -- 202.5 --
7.3% loan from Parent due 2010(iii).................. -- -- 200.0
7.5% loan from Parent due 2012(iii).................. -- -- 250.0
7.5% loan from Parent due 2015(iii).................. -- -- 200.0
------ ------ ------
Total debt........................................... 600.0 610.5 657.3
Less current portion................................. -- (2.3) (2.2)
------ ------ ------
Long-term debt....................................... $600.0 $608.2 $655.1
====== ====== ======
</TABLE>
- --------
(i) In 1991, Temasa issued a 3.1 billion Pesetas (approximately $19.6 million)
8.0% amortizing note due March 2003. In connection with this note, Temasa
entered into an interest rate swap agreement to hedge the fixed rate
interest terms. Under the agreement, which expires in March 2003, Temasa
hedged the fixed rate terms of the note and will make floating rate
payments based on a variable rate of the three-month Madrid Interbank
Offered Rate less 0.1%.
(ii) In February and March 1998, the Company entered into $500.0 million and
$100.0 million loan agreements with Parent, which bear interest at fixed
rates of 7.2% and 7.1% and are due in March 2001 and April 2001,
respectively.
In December 1998, the Company entered into a $202.5 million loan agreement
with Parent, which bears interest at a fixed rate of 6.7% and matures in
December 2008. During fiscal 1999, the Company paid off $101.2 million of
the $500.0 million 7.2% loan due in March 2001 and the entire $100.0
million 7.1% loan due in April 2001.
(iii) In March 2000, the Company refinanced its long-term debt from Parent and
increased its borrowings by entering into $200.0 million, $250.0 million
and $200.0 million notes payable, which bear interest at fixed rates of
7.3%, 7.5% and 7.5 % and are due in March 2010, March 2012 and March
2015, respectively.
The weighted-average rate of interest on all long-term debt was 7.2% and
7.1% during fiscal 1998 and fiscal 1999, respectively. There was no interest-
bearing long-term debt from Parent prior to fiscal 1998.
At March 31, 2000, long-term debt matures as follows (in millions): $0.4 in
fiscal 2000, $2.6 in fiscal 2001, $2.8 in fiscal 2002, $1.5 in fiscal 2003 and
the remaining balance of $650.0 million in fiscal years 2010 through 2015.
Loans from Parent are pre-payable without penalty at par value at any time
after March 2005. Prepayment of amounts outstanding prior to March 2005
requires a redemption premium of up to 5%.
F-15
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Interest Income (Expense), Net
Interest income (expense), net is comprised of the following:
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended Six Months Ended
September 30, March 31,
------------------- ------------------
1997 1998 1999 1999 2000
---- ------ ------ -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Third party interest income.......... $ -- $ -- $ 1.3 $ -- $ 0.3
Third party interest expense......... -- -- (0.3) -- (0.3)
Interest income--short-term advances
to Parent........................... 1.8 15.6 2.3 0.6 20.8
Interest expense--short-term loans
from Parent......................... -- -- (0.1) (3.0) (0.4)
Interest expense--long-term loans
from Parent......................... -- (25.5) (42.5) (21.2) (21.6)
---- ------ ------ -------- --------
Interest income (expense), net....... $1.8 $ (9.9) $(39.3) $(23.6) $ (1.2)
==== ====== ====== ======== ========
</TABLE>
Interest expense associated with Parent's general corporate debt has not
been allocated to the Consolidated Financial Statements herein. Interest
expense approximates the estimated cost of borrowings that would have been
incurred on a stand-alone basis.
6. Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term advances to Parent, accounts receivable, long-term
investments, accounts payable, debt, letters of credit and derivative financial
instruments. The notional amounts of the derivative financial instruments were
as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1998 1999
------ ------
(in millions)
<S> <C> <C>
Foreign currency exchange contracts........................ $ -- $ 16.2
Forward commodity contracts................................ 12.6 20.7
Interest rate swaps........................................ -- 9.2
</TABLE>
While it is not the Company's intention to terminate the above derivative
financial instruments, fair values were estimated, based on quotes from brokers
and market rates, which represented the amounts that the Company would receive
or pay if the instruments were terminated at the balance sheet dates. These
fair values indicated that the termination of foreign currency exchange
contracts, forward commodity contracts and interest rate swaps at September 30,
1998 and 1999 would have resulted in a $1.3 million loss and $2.7 million gain,
respectively.
The fair value of cash and cash equivalents, short-term advances to Parent,
accounts receivable, long-term investments and accounts payable approximated
book value at September 30, 1998 and 1999. The fair value of debt was
approximately $600.0 million (book value of $600.0 million) and $610.0 million
(book value of $610.5 million) at September 30, 1998 and 1999, respectively,
based on discounted cash flow analyses using current interest rates. Letters of
credit are posted by the Company in accordance with the performance provisions
of contracts, and include both performance bonds and advance payment bonds. The
Company pays the commissions on the letters of credit and records these
payments as contract costs. At September 30, 1999, the Company's total
available letters of credit amounted to approximately $509 million, of which
none have been drawn upon.
F-16
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's financial instruments present certain market and credit risks.
At September 30, 1999, one customer comprised approximately 52% of total
accounts receivable of the Company and at September 30, 1998, three customers
comprised approximately 44% of total accounts receivable. The Company mitigates
such concentrations of credit risk through a review of a customer's credit
history before extending credit and evaluating the customers' ability to
perform obligations under its agreement. The Company does not expect its
customers to fail to meet their obligations under contracts given their credit
rating or the financing in place for the applicable contracts. In addition, the
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information. The Company does not require collateral or other security to be
furnished by the counterparties to its financial instruments.
7. Income Taxes
The Company's consolidated financial statements reflect a provision for
income taxes based on income as if the Company had been subject to income tax
on a stand alone basis. The income tax provision was computed in accordance
with SFAS No. 109, "Accounting for Income Taxes" and is based on current tax
rates.
The (benefit) provision for income taxes and the reconciliation between the
United States federal income taxes at the statutory rate on consolidated income
(loss) before taxes and the Company's income tax provision are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
----------------------
1997 1998 1999
------- ----- ------
(in millions)
<S> <C> <C> <C>
U.S. federal income taxes at the statutory rate....... $ (93.6) $83.4 $ 94.2
Adjustments to reconcile to the Company's income tax
provision:
U.S. state income tax (benefit) provision, net........ (13.0) 11.6 14.9
Non U.S. net earnings................................. -- (0.8) (1.9)
Nondeductible charges................................. 0.3 1.1 1.2
Foreign sales corporation benefit..................... (4.4) (8.3) (1.8)
Research and development benefit...................... (0.2) (0.7) (0.5)
------- ----- ------
(Benefit) provision for income taxes.................. (110.9) 86.3 106.1
Deferred (benefit) provision.......................... (121.7) (8.4) 41.8
------- ----- ------
Current provision..................................... $ 10.8 $94.7 $ 64.3
======= ===== ======
</TABLE>
The (benefit) provisions for fiscal 1997, fiscal 1998 and fiscal 1999
included $0, $0 and $0.3 million for non-U.S. income taxes and the non-U.S.
component of income before income taxes was $0, $2.2 million and $6.1 million,
respectively.
F-17
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the net deferred income
tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ ------
(in millions)
<S> <C> <C>
Deferred tax assets:
Inventories................................................... $ 5.4 $ 6.9
Accrued liabilities and reserves.............................. 65.2 32.5
Accrued postretirement benefit obligation..................... 2.2 2.4
In-process research and development........................... 115.8 107.4
Tax loss and credit carryforwards............................. 1.4 --
Other......................................................... 0.3 0.3
------ ------
190.3 149.5
------ ------
Deferred tax liabilities:
Property, plant and equipment................................. (1.8) (1.4)
Amortization.................................................. 0.8 1.5
------ ------
(1.0) 0.1
------ ------
Net deferred income tax asset................................... $191.3 $149.4
====== ======
</TABLE>
The Company entered into a tax indemnification agreement with Parent in
which Parent will agree to indemnify the Company against all of its U.S. and
non-U.S. income tax liabilities for periods prior to the planned initial public
offering to the extent these liabilities are in excess of the income taxes
previously paid or accrued as an expense with respect to such periods. Pursuant
to this agreement, Parent will have the right to control all audits and
contests relating to the indemnified taxes. Although Parent will agree to
indemnify the Company against these tax liabilities, the Company will
nonetheless be liable for such taxes in the event that they are not discharged
by Parent. In addition, Parent will not indemnify the Company against, and the
Company will remain responsible for, all of its non-income tax liabilities for
periods prior to the offering as well as all of its income and non-income tax
liabilities for periods after the offering.
8. Stock-Based Compensation Plans
Stock Options--Prior to its incorporation in March 2000, the Company had no
employee stock option plan; however, certain employees of the Company have been
granted stock options under the Tyco International Ltd. Long Term Incentive
Plan (the "Incentive Plan"). Options are granted under the Incentive Plan to
purchase common shares of Tyco at prices which are equal to or greater than the
market price of the common shares on the date the option is granted. Conditions
of vesting are determined at the time of grant. Options granted to employees of
the Company to date under the Incentive Plan have generally vested and become
exercisable over periods of up to five years from the date of grant and have a
maximum term of ten years. At September 30, 1999, approximately 5.6 million
options held by employees of the Company were outstanding, 2.4 million of which
were exercisable.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") allows
companies to measure compensation cost in connection with executive share
option plans and schemes using a fair value based method, or to continue to use
an intrinsic value based method which generally does not result in a
compensation cost. Tyco decided to continue to use the intrinsic value based
F-18
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method and accordingly, no compensation cost has been recorded in these
consolidated financial statements. Had the fair value based method been adopted
for the stock options awarded to the Company's employees under the Parent's
stock option plans pursuant to the provisions of SFAS 123, the Company's pro
forma net income (loss) would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Net income (loss)--pro forma (in millions).............. $(157.4) $148.8 $155.4
</TABLE>
The estimated weighted average fair value of options granted to the
Company's employees during fiscal 1997, fiscal 1998 and fiscal 1999 was $5.67,
$7.68 and $11.08, respectively, on the date of grant using the Black-Scholes
option-pricing model and the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected stock price volatility................ 22% 22% 30%
Risk free interest rate........................ 6.1% 5.6% 4.8%
Expected annual dividend yield per share....... $0.05 $0.05 $0.05
Expected life of options....................... 5.0 years 5.0 years 4.9 years
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of what the effects may be in future years.
During fiscal 2000, the Company established the TyCom Ltd. Long Term
Incentive Plan (the "Incentive Plan"), pursuant to which a total of
common shares have been reserved for issuance. No options have been granted
under this plan. Concurrent with the consummation of the proposed public
offering, TyCom intends to grant options to purchase common shares at the
initial public offering price to certain officers, employees and directors. All
of these options have ten year expiration terms.
During fiscal 2000, the Board of Directors approved the TyCom Ltd. Founders'
Share Option Program. A total of shares have been reserved under this
program which will provide a one-time grant of options to certain qualified
employees at a price equal to or greater than the offering price.
Employee Share Purchase Plan--Substantially all full-time employees of the
Company are eligible to participate in Tyco's employee stock purchase plan.
Eligible employees authorize payroll deductions to be made for the purchase of
shares. The Company matches a portion of the employee contribution by
contributing an additional 15% of the amount paid by the employee. All shares
purchased under the plan are purchased on the open market by a designated
broker.
During fiscal 2000, TyCom established its own employee share purchase plan,
which is available to substantially all full-time employees of the Company.
Consistent with the Tyco plan, the Company matches a portion of the employee
contribution by contributing an additional % of the amount paid by the
employee. All shares purchased under the plan are purchased on the open market
by a designated broker.
Restricted Stock--Certain executives of the Company participate in Tyco's
restricted stock ownership plan. Common shares are awarded subject to certain
restrictions with vesting varying over periods of up to ten years.
F-19
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The total compensation cost expensed for all stock-based compensation awards
was $0.5 million, $1.3 million and $2.8 million for fiscal 1997, fiscal 1998
and fiscal 1999, respectively.
9. Commitments and Contingencies
The Company occupies certain facilities under leases that expire at various
dates through the year 2021. Rental expense under these leases and a lease for
a ship was $2.9 million, $12.0 million and $13.5 million for fiscal 1997,
fiscal 1998 and fiscal 1999, respectively. At September 30, 1999, the minimum
lease payment obligations under noncancelable operating leases were as follows:
$14.2 million in fiscal 2000, $11.4 million in fiscal 2001, $7.3 million in
fiscal 2002, $7.1 million in fiscal 2003, $7.4 million in fiscal 2004 and an
aggregate of $60.7 million in fiscal years 2005 through 2021. The fiscal 2000
minimum lease payment obligation is net of sublease income of $1.5 million.
In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position or
results of operations.
In the normal course of business, the Company enters into construction
contracts providing for assessment of damages for nonperformance or delays in
completion. Claims may be brought against the Company by customers alleging
such deficiencies. At March 31, 2000, approximately $26.9 million for
liquidated damages is included in accrued expenses and other current
liabilities in the Consolidated Balance Sheet.
The Company is aware of contamination at certain of its properties. In
particular, one of its facilities is the subject of cleanup under the New
Jersey Industrial Site Recovery Act. AT&T has assumed all responsibility and
costs for the cleanup of contamination at this property and has also agreed to
indemnify the Company in the event that the Company incurs any other costs
related to this cleanup. In addition, the Company has been named as a
potentially responsible party under the United States Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
more commonly known as Superfund, at a site in New Hampshire. The Company is
one of a group of parties that is participating in the investigation and
cleanup of this site. The Company believes that any costs or liabilities in
connection with these or any other sites will not materially adversely affect
its business, results of operations or financial condition.
On January 31, 2000, a complaint was filed in the United States District
Court for the District of New Jersey asserting claims against TSSL and Tyco
Group S.a.r.l., a Luxembourg subsidiary of Tyco. The claims arise out of
negotiations conducted by Tyco Group with IDT Europe B.V.B.A., a Belgian
corporation, concerning the possible formation of a joint venture for the
development of an undersea fiber optic telecommunications system to be supplied
by TSSL, which the complaint alleges was to be substantially similar to the
proposed TyCom Global Network. The plaintiff alleges that Tyco Group breached a
Memorandum of Understanding dated November 9, 1999 (which expired in December
1999), and alleged implied covenants of good faith and fair dealing, in various
ways, including by failing to negotiate in good faith to complete and finalize
various agreements relating to the proposed joint venture. The plaintiff seeks,
among other relief such as attorneys' fees and costs, specific performance of
Tyco Group's alleged obligation to negotiate and execute such agreements, as
well as compensatory and punitive damages. The plaintiff also alleges that Tyco
Group tortiously interfered with contractual relations, business relations and
fiduciary duties relating to an agreement to reserve required manufacturing
intervals and undertake certain long-lead time activities which plaintiff
claims it had with TSSL.
F-20
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
With respect to TSSL, the plaintiff alleges breach of an "Instruction to
Proceed", an agreement by which the plaintiff reserved manufacturing capacity
for the cable system and authorized the undertaking of certain long-lead time
activities which was the subject of the joint venture. Plaintiff also alleges
that TSSL failed to negotiate in good faith a system supply agreement for the
cable system. The plaintiff also claims breach of an alleged implied covenant
of good faith and fair dealing. The plaintiff seeks, among other relief such as
attorneys' fees and costs, compensatory damages of $1 billion and injunctive
relief precluding TSSL from undertaking any business activity contrary to the
terms of the Instruction to Proceed. TSSL believes that the claims asserted
against it are without merit and intends to defend itself vigorously.
Tyco Group S.a.r.l. and Tyco Submarine Systems Ltd. have filed a motion to
dismiss the complaint in the United States District Court for the District of
New Jersey on the ground that the court lacks subject matter jurisdiction.
Plaintiffs have opposed that motion, which is pending before the court.
On March 24, 2000, Tyco Group S.a.r.l., Tyco Submarine Systems Ltd., Tyco
International Ltd., Tyco International (US) Inc., and TyCom Ltd. filed a
complaint in the Supreme Court of the State of New York, County of New York,
asserting claims against IDT Europe B.V.B.A. and IDT Corporation (collectively
"IDT"). The complaint alleges that IDT filed a baseless lawsuit in federal
court in New Jersey seeking to enforce non-binding provisions of the Memorandum
of Understanding and the
Instruction to Proceed, improperly disclosed confidential information to the
press, and otherwise engaged in a pattern of conduct with the purpose and
effect of obstructing efforts to build the TyCom Global Network and to finance
it principally through the initial public offering of TyCom shares. The
complaint asserts five causes of action, including breach of contract and
tortious interference with both contract and prospective business relations,
and demands compensatory damages of at least $1 billion, punitive damages, and
declaratory and injunctive relief. IDT has moved to dismiss the complaint. Tyco
Group S.a.r.l and the other plaintiffs have served their papers in opposition
to that motion.
The Company is a defendant in a number of other pending legal proceedings
incidental to present and former operations. The Company does not expect the
outcome of these proceedings, either individually or in the aggregate, to have
a material adverse effect on its financial position, results of operations or
liquidity.
10. Parent Company Investment
Certain services are provided to the Company by the Parent, primarily
related to the treasury, tax, legal, audit, human resource and risk management
functions. The Company recorded an annual fee of 1.0% of net revenue related to
these services in fiscal 1997, fiscal 1998 and fiscal 1999 and the six months
ended March 31, 1999 and 2000, which is included in general and administrative
expenses in the Consolidated Statements of Operations. Under the terms of
several service agreements between the Company and Parent, the Company is
charged 1.0% on the first $2.0 billion of net revenue, 0.75% on net revenue
over $2.0 billion up to $5.0 billion and 0.50% on net revenue in excess of $5.0
billion. The annual fee is reviewed and adjusted annually by mutual agreement
of the Company and Parent. Management believes these fees are reasonable and
approximate the estimated cost of services that would have been incurred on a
stand-alone basis for each period presented. Additional items, such as employee
benefit plans, insurance coverage, and other identifiable costs, are charged to
the Company by Parent based upon direct costs attributable to TyCom and its
subsidiaries.
F-21
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed in Note 2, the Company makes short-term advances to Parent to
participate in a mutually beneficial working capital cash management program.
In addition, the Parent has provided short-term and long-term borrowings to the
Company to meet its financing cash flow needs. Short-term loans have been
provided by the Parent to fund the purchase of significant expenditures related
to projects. These expenditures are generally capitalized and expensed as a
cost of the project. The short-term loans are repaid when the Company receives
payment for contracts. Amounts outstanding under these types of short-term
loans were $0, $6.7 million and $12.0 million as of September 30, 1998 and 1999
and March 31, 2000, respectively, and are included in accrued expenses and
other current liabilities in the Consolidated Balance Sheets. The effective
interest rate on short-term loans from Parent as of September 30, 1999 was
9.7%. See Note 4 for a discussion of loans from Parent included in long-term
debt.
The changes in the Parent Company Investment account are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30, (Unaudited)
------------------------- Six Months Ended
March 31,
1997 1998 1999 2000
------- ------- ------- ----------------
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 38.0 $ 676.8 $ 213.7 $ 501.3
Net (loss) income................. (156.6) 152.0 163.0 135.2
Business acquisitions contributed
by Parent........................ 850.0 -- 280.0 --
Dividend in form of loan from
Parent for partial payment of
contributed business............. -- (600.0) -- --
Dividend to Parent for payment of
contributed business............. -- -- (280.0) --
Dividend to Parent for accumulated
investment balance prior to IPO.. -- -- -- (550.0)
Net transfers (to) from Parent for
business operations.............. (54.6) (15.1) 124.6 19.1
------- ------- ------- -------
Balance at end of period.......... $ 676.8 $ 213.7 $ 501.3 $ 105.6
======= ======= ======= =======
</TABLE>
11. Retirement Plans
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
other Postretirement Benefits," which revises financial statement disclosure
requirements for pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans.
Defined Benefit Pension Plans--The Company participates in a noncontributory
defined benefit retirement plan covering certain of its unionized U.S.
employees. Company contributions are based on periodic actuarial valuations
which use the projected unit credit method of calculation and are charged to
the consolidated statements of operations on a systematic basis over the
expected average remaining service lives of current employees. The net pension
expense is assessed in accordance with the advice of professionally qualified
actuaries or is based on subsequent formal reviews for that purpose. The
Company's funding policy is to make annual contributions to the extent such
contributions are tax deductible as actuarially determined. The benefits under
the defined benefit plan are based on years of service and compensation.
F-22
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net periodic pension cost for the Company's defined benefit pension plan
includes the following components:
<TABLE>
<CAPTION>
Fiscal Year
Ended
September 30,
--------------
1997 1998 1999
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost.............................................. $0.1 $0.5 $0.6
Interest cost............................................. -- 0.1 0.1
Expected return on plan assets............................ -- -- (0.1)
---- ---- ----
Net periodic pension cost................................. $0.1 $0.6 $0.6
==== ==== ====
</TABLE>
The net pension cost recognized at September 30, 1998 and 1999 for the
defined benefit plan is as follows:
<TABLE>
<CAPTION>
September
30,
------------
1998 1999
----- -----
(in
millions)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year.......................... $ 1.1 $ 1.8
Service cost..................................................... 0.5 0.6
Interest cost.................................................... 0.1 0.1
Actuarial loss (gain)............................................ 0.1 (0.3)
----- -----
Benefit obligation at end of year................................ $ 1.8 $ 2.2
===== =====
Change in plan assets
Fair value of plan assets at beginning of year................... $ -- $ 0.6
Employer contributions........................................... 0.6 0.4
----- -----
Fair value of plan assets at end of year......................... $ 0.6 $ 1.0
===== =====
Funded status.................................................... $(1.2) $(1.2)
Unrecognized net actuarial loss (gain)........................... 0.1 (0.1)
----- -----
Net amount recognized............................................ $(1.1) $(1.3)
===== =====
Amounts recognized in the statement of financial position
Accrued benefit liability........................................ $(1.2) $(1.3)
Accumulated other comprehensive income........................... 0.1 --
----- -----
Net amount recognized............................................ $(1.1) $(1.3)
===== =====
Weighted-average assumptions as of September 30, 1998 1999
----- -----
Discount rate.................................................... 6.75% 7.75%
Expected return on plan assets................................... 9.25 8.50
Rate of compensation increase.................................... 4.50 4.50
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $1.7 million, $1.8 million and $0.5 million,
respectively, as of September 30, 1998 and $2.1 million, $2.2 million and $1.0
million, respectively, as of September 30, 1999.
F-23
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Defined Contribution Retirement Plans--Certain employees of the Company
participate in Tyco's defined contribution 401(k) matching plan and defined
contribution supplemental pension plan. Contributions by the Company for these
defined contribution plans are computed based on a percentage of participants'
compensation and the combined expense recorded for these plans was $1.9
million, $4.7 million and $6.3 million for fiscal 1997, fiscal 1998 and fiscal
1999, respectively.
Post-retirement Benefit Plans--The Company provides post-retirement medical
and life insurance coverage to certain of its employees.
Net periodic post-retirement benefit cost reflects the following components:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-------------------
1997 1998 1999
----- ----- -----
(in millions)
<S> <C> <C> <C>
Service cost (with interest)............................... $ -- $ 0.3 $ 0.2
Interest cost.............................................. 0.1 0.3 0.4
Amortization of prior service cost......................... (0.1) (0.1) (0.1)
----- ----- -----
Net periodic post-retirement benefit cost.................. $ -- $ 0.5 $ 0.5
===== ===== =====
</TABLE>
The components of the accrued post-retirement benefit obligation, all of
which are unfunded, are as follows:
<TABLE>
<CAPTION>
September
30,
------------
1998 1999
----- -----
(in
millions)
<S> <C> <C>
Benefit obligation at beginning of year.......................... $ 4.5 $ 5.6
Service cost..................................................... 0.3 0.2
Interest cost.................................................... 0.3 0.4
Actuarial loss (gain)............................................ 0.6 (0.9)
Expected net benefits paid....................................... (0.1) (0.2)
----- -----
Benefit obligation at end of year................................ $ 5.6 $ 5.1
----- -----
Funded status.................................................... $(5.6) $(5.1)
Unrecognized net loss (gain)..................................... 0.2 (0.7)
Unrecognized prior service cost.................................. (1.0) (0.9)
----- -----
Accrued postretirement benefit cost.............................. $(6.4) $(6.7)
===== =====
</TABLE>
For measurement purposes, in fiscal 1999, an 8.50% composite annual rate of
increase in the per capita cost of covered health care benefits was assumed.
The rate was assumed to decrease gradually to 4.75% by the year 2008 and remain
at that level thereafter. The health care cost trend rate assumption may have a
significant effect on the amounts reported. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
(in millions)
<S> <C> <C>
Effect on total of service and interest cost
components..................................... $0.1 $(0.1)
Effect on postretirement benefit obligation..... -- --
</TABLE>
F-24
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average discount rate used in determining the accumulated post-
retirement benefit obligation was 6.75% at September 30, 1998 and 7.75% at
September 30, 1999.
12. Consolidated Geographic Data
Net revenue, including work performed in international waters, is presented
below based on the jurisdiction of incorporation of the Company's customers.
For consortium projects, net revenue is attributed on the basis of the
jurisdiction of incorporation of the lead customers.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
------------------------
1997 1998 1999
------ -------- --------
(in millions)
<S> <C> <C> <C>
Net revenue:
United States................................. $175.3 $ 315.6 $ 442.3
Bermuda....................................... 132.4 618.5 807.9
Other Americas................................ 13.3 87.0 100.1
Europe--Africa--Middle East................... 26.7 131.9 145.5
Asia--Pacific................................. 27.8 128.6 141.8
------ -------- --------
$375.5 $1,281.6 $1,637.6
====== ======== ========
</TABLE>
Prior to fiscal 1999, substantially all of the assets of the Company were
located in the United States. As of September 30, 1999, approximately $300.0
million of total long-lived assets were located in Spain.
13. Supplementary Balance Sheet Information
Selected supplementary balance sheet information is presented below.
<TABLE>
<CAPTION>
(Unaudited)
September 30, March 31,
---------------- -----------
1998 1999 2000
------- ------- -----------
(in millions)
<S> <C> <C> <C>
Inventories:
Purchased materials and manufactured
parts.................................. $ 55.8 $ 66.9 $ 84.6
Work in process......................... 33.2 40.3 33.7
Finished goods.......................... 0.8 1.5 0.6
------- ------- -------
$ 89.8 $ 108.7 $ 118.9
======= ======= =======
Property, Plant and Equipment:
Land.................................... $ 2.9 $ 2.9 $ 2.9
Buildings............................... 35.7 40.3 50.7
Machinery and equipment................. 147.4 197.1 249.6
Ships and submersibles.................. 194.4 326.5 312.8
Leasehold improvements.................. -- 7.5 9.2
Betterments in process.................. 16.9 38.8 41.5
Accumulated depreciation................ (109.5) (148.7) (175.7)
------- ------- -------
$ 287.8 $ 464.4 $ 491.0
======= ======= =======
Accrued expenses and other current liabilities include the following:
Accrued warranties and liquidated
damages................................ $ 69.1 $ 84.1 $ 102.8
======= ======= =======
</TABLE>
F-25
<PAGE>
TYCOM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Supplementary Income Statement Information
In fiscal 1999, four projects comprised 60% of total net revenues of the
Company. One project comprised 40% of total net revenues in fiscal 1998 and two
projects comprised 44% of total net revenues in fiscal 1997. In addition, the
Company's fiscal 1997 net revenues include $118.1 million of sales to AT&T
Corp.'s submarine systems business prior to its acquisition in July 1997. The
post-acquisition operations and financial results of this acquired business are
included in the consolidated financial statements of TyCom.
15. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions Acquisitions,
Beginning Charged Disposals, Balance at
of Year to Income and Other Deductions End of Year
---------- --------- ------------- ---------- -----------
(in millions)
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful
Accounts:
Fiscal Year Ended
September 30, 1997... $ -- $ -- $ 9.6 $ -- $ 9.6
Fiscal Year Ended
September 30, 1998... 9.6 5.2 13.0 -- 27.8
Fiscal Year Ended
September 30, 1999... 27.8 -- 0.5 (8.5) 19.8
Accrued Warranties and
Liquidated Damages:
Fiscal Year Ended
September 30, 1997... $ -- $ -- $40.7 $ -- $40.7
Fiscal Year Ended
September 30, 1998... 40.7 28.6 -- (0.2) 69.1
Fiscal Year Ended
September 30, 1999... 69.1 14.2 1.3 (0.5) 84.1
</TABLE>
F-26
<PAGE>
Auditors' Report
To the shareholders of
Telecomunicaciones Marinas, S.A. Sole shareholder.
1. We have audited the annual accounts of Telecomunicaciones Marinas,
S.A., Company with a sole shareholder, which includes the balance sheet
at 31 December 1998, and the profit and loss account for the year then
ended. The preparation of this report is the responsibility of the
company's sole shareholder. Our responsibility is to express an opinion
on the annual accounts as a whole, based on the work carried out in
agreement with generally accepted auditing standards in Spain. This
required the examination of the annual accounts through selective
tests, the evaluation of their presentation, the accounting principles
applied and the estimates carried out.
2. In accordance with mercantile legislation, the sole shareholder shows
the prior year figures as well as those for the present year for each
of the items in the balance sheet, profit and loss account and
statement of funds. Our opinion refers exclusively to the annual
accounts for the year 1998. On 20 February 1998 other auditors issued
their opinion on the annual accounts for the year 1997.
3. In our opinion, the attached annual accounts for 1998 show a true and
fair view of the financial situation of Telecomunicaciones Marinas,
S.A. at 31 December 1998, the results of its operations and the
resources obtained and applied during the year then ended. They contain
the necessary information for their adequate interpretation and
comprehension in agreement with generally accepted audit principles in
Spain.
BDO Audiberia Auditores, S.L.
Madrid, 19 February 1999
/s/ Mario Herrero
Mario Herrero
Partner
F-27
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
BALANCE SHEETS
(in thousands of pesetas)
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Fixed Assets.......................................... 7,783,640 5,887,475
Intangible assets (note 5)
Computer applications............................. 86,319 66,712
Other intangible assets........................... 1,104 1,104
Depreciation...................................... (24,388) (14,640)
---------- ----------
63,035 53,176
Tangible assets (note 6)
Land and buildings................................ 325,204 466,829
Technical installations and machinery............. 10,649,552 10,406,973
Furniture......................................... 79,483 70,894
Computer equipment................................ 78,682 75,159
Tangible fixed assets in progress................. 2,585,356 0
Depreciation...................................... (6,003,099) (5,190,983)
---------- ----------
7,715,178 5,828,872
Financial assets (note 7)
Long term deposits................................. 5,427 5,427
---------- ----------
5,427 5,427
Expenses deferred over various years (note 8)......... 5,348 6,944
Long term advance taxes (note 16)..................... 17,500 46,200
Current assets........................................ 4,670,106 4,832,323
Stock (note 9)
Stock............................................. 11,653 19,516
Advances.......................................... 2,053 1,245
---------- ----------
13,706 20,761
Debtors (note 10)
Clients........................................... 1,400,511 1,368,835
Group company debtors............................. 139,855 19,873
Sundry debtors.................................... 49,505 24,702
Personnel......................................... 3,900 3,900
Public Administrations (note 16).................. 50,371 389,580
---------- ----------
1,644,142 1,806,890
Temporary financial investments
Loans to group companies (note 11)................ 2,572,607 2,993,551
Other loans....................................... 401,878 0
---------- ----------
2,974,485 2,993,551
Cash and banks...................................... 879 759
Accruals and prepayments............................ 36,894 10,362
TOTAL ASSETS.......................................... 12,476,594 10,772,942
========== ==========
</TABLE>
F-28
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
BALANCE SHEETS
(in thousands of pesetas)
SHAREHOLDERS' FUNDS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net equity (note 12)................................. 8,681,578 6,650,117
Subscribed share capital........................... 1,375,730 1,375,730
Reserves
Legal reserve.................................... 275,146 275,146
Other reserves................................... 4,999,241 4,401,093
---------- ----------
5,274,387 4,676,239
Profit and loss.................................... 2,031,461 1,883,148
Dividend on account paid during the year........... 0 (1,285,000)
Provisions for liabilities and charges (note 13)..... 230,444 254,870
Long term creditors.................................. 1,494,134 1,828,718
Amounts owing to financial entities (note 14)...... 1,449,864 1,784,448
Amounts owing to group companies (note 15)......... 44,186 44,186
Other creditors.................................... 84 84
---------- ----------
1,494,134 1,828,718
Short term creditors................................. 2,070,438 2,039,237
Amounts owing to financial entities (note 14)...... 334,584 309,800
Amounts owing to group companies (note 15)......... 64,535 105,416
Commercial creditors............................... 260,467 221,392
Other commercial debts
Public Administration (note 16).................. 15,033 13,639
Other non commercial debts....................... 482,811 169,715
Remuneration pending payment..................... 50,482 51,852
---------- ----------
548,326 235,206
Provisions for doubtful debts (note 18)............ 500,000 132,000
Accruals........................................... 812,526 1,035,423
TOTAL SHAREHOLDER'S FUNDS AND LIABILITIES............ 12,476,594 10,772,942
========== ==========
</TABLE>
F-29
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
PROFIT AND LOSS ACCOUNTS
(in thousands of pesetas)
DEBIT
<TABLE>
<CAPTION>
year ended year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating expenses.......................... 2,868,099 2,909,453
Supplies
Purchases (note 9)...................... 66,264 54,402
Variation in stock (note 9)............. 7,864 712
Work carried out by other companies..... 864,925 834,243
--------- ---------
939,053 889,357
Personnel costs (note 19).................... 388,532 370,714
Depreciation of fixed assets (notes 5 and
6)....................................... 873,559 907,448
Variation on provision for doubtful debts
(note 18)................................... (82,000) (54,500)
Other operating expenses
Services from group companies (note 15).... 205,994 204,902
External services (note 19)................ 509,104 556,878
Taxes, other than on income............. 2,836 3,777
Reversion fund.......................... 31,021 30,877
--------- ---------
748,955 796,434
OPERATING PROFIT............................ 2,188,366 1,959,529
Financial expenses.......................... 162,055 198,003
Interest payable and similar charges...... 157,360 183,883
Depreciation of expenses for debt
formalisation............................ 1,596 1,596
Negative exchange differences............. 3,099 12,524
POSITIVE FINANCIAL RESULT................... 13,425 53,020
PROFIT FROM ORDINARY ACTIVITIES............. 2,201,791 2,012,549
Losses from intangible and tangible fixed
assets (note 6).......................... 87,921 32,878
EXTRAORDINARY PROFITS....................... 0 33,548
PROFIT BEFORE TAX........................... 2,165,512 2,046,097
Corporation tax (note 17).................... 28,700 58,418
Other taxes............................... 105,351 104,531
PROFIT FOR THE YEAR......................... 2,031,461 1,883,148
========= =========
</TABLE>
F-30
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
PROFIT AND LOSS ACCOUNTS
(in thousands of pesetas)
CREDIT
<TABLE>
<CAPTION>
year ended year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating income...................................... 5,056,465 4,868,982
Operating income
Net sales and services............................ 4,829,582 4,549,102
Net sales to group companies (note 15)............ 163,244 237,639
Internal expenditure capitalised.................. 0 24,786
--------- ---------
4,992,826 4,811,527
Other operating income
Other income...................................... 63,639 49,833
Operating grants.................................. 0 550
Excess of provision for charges and
liabilities (note 13)............................ 0 7,072
--------- ---------
63,639 57,455
Financial income...................................... 175,480 251,023
Income from other securities and loans
Group companies (note 11).......................... 94,898 182,714
Other companies.................................... 73,078 56,095
--------- ---------
167,986 238,809
Positive exchange rate differences.................. 7,504 12,214
NEGATIVE FINANCIAL RESULT............................. 0 0
Profit from fixed assets............................ 0 12,557
Extraordinary income................................ 51,642 5,552
Income and profit from other years.................. 0 48,317
EXTRAORDINARY LOSSES (note 21)........................ 36,279 0
========= =========
</TABLE>
F-31
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS
1. Nature and principal activities
Telecomunicaciones Marinas, S.A. (hereafter "TEMASA" or "the company") was
constituted on February 15, 1985 as a limited company for an indefinite
period. The company has a sole shareholder, Telefonica de Espana, S.A.
The company's main activities consist of work and services related to the
submarine cable system, in particular the drilling, laying and repair thereof
as well as other oceanographic and marine work whether related or not to
submarine cables.
The main activity of the company is centered on submarine cable work in
accordance with the Atlantic Cables Maintenance Agreement of January 1, 1989
(A.C.M.A. 98) and the Mediterranean Cables Maintenance Agreement (MECMA I) of
January 1, 1993, and MECMA II from April 1, 1999 onwards. In this work the
company uses the cable vessels Atlantida and Teneo, based for operational
purposes in the ports of Vigo (Pontevedra) and Valencia, respectively.
2. Annual Accounts
The annual accounts are obtained from the company's accounting registers.
These have been drawn up following generally accepted accounting principles in
Spain and are presented in accordance with the provisions of the new General
Accounting Plan approved by Royal Decree on December 20, 1990.
All the amounts in the report are expressed in thousands of pesetas.
The Company's sole administrator estimates that the 1998 accounts will be
approved by the shareholder. The annual accounts for 1997 were approved in the
Shareholders' Meeting of 20 February 1998.
3. Distribution of results
The following results are to be submitted to the Shareholders' Meeting for
approval:
<TABLE>
<S> <C>
Profit and Loss................................................. 2,031,461
Distribution
To reserves for investment in Canary Islands.................. 1,830,441
To voluntary reserves......................................... 201,020
</TABLE>
During 1995 the company's legal reserve reached the limit of one fifth of
the share capital as required by Art. 214 of Company Law.
4. Accounting policies
The principal accounting polices followed in drawing up the annual accounts
are as follows:
a) Intangible fixed assets
Intangible fixed assets are stated at their acquisition cost less the
corresponding accumulated depreciation calculated on a straight-line basis
over a period of five years.
F-32
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS
b) Tangible fixed assets
Tangible fixed assets are stated at their acquisition cost less the
corresponding accumulated depreciation. Acquisition cost includes the
production cost or amount invoiced by the supplier and any other expenses
incurred in putting the fixed asset into operation. In the case of vessels, the
acquisition cost includes interest on financing during the construction period.
Depreciation of vessels, as well as other fixed assets, is calculated on a
straight-line basis applying the annual percentages representing the useful
life as follows:
<TABLE>
<CAPTION>
Useful
Asset life
----- ------
<S> <C>
Constructions...................................................... 16-33
Technical installations and machinery.............................. 7-25
Furniture.......................................................... 10
Computer equipment................................................. 4
Vehicles........................................................... 3
</TABLE>
Constructions include the cable depot in Vigo acquired from Telefonica de
Espana, S.A. in 1989 and the depot in Valencia.
Technical installations and machinery include, amongst others, the vessels
Atlantida and Teneo and their fittings.
Expenses for maintenance and repairs of fixed assets that do not improve or
prolong their useful life are charged to the profit and loss account.
c) Expenses deferred over various years.
Expenses incurred on loans are valued at cost and amortised on a straight-
line basis over the period of the loan.
d) Stock
Fuel and oil for the vessels are valued at average weighted cost.
e) Long and short term debts
Amounts owing are stated in the attached balance sheet in accordance with
the following criteria:
Long term: falling due at more than 12 months
Short term: falling due within 12 months.
f) Provisions for liabilities and charges
Reversion Fund
The Company maintains a Reversion Fund in respect of the exclusive
occupation rights under administrative concessions from the port authorities of
Vigo and Valencia.
The company has calculated the reversion fund on a straight-line basis for a
period of 17 years and 8 months for the Vigo base and 14 years and 5 months for
the Valencia base. At the end of the concession period, the amount of the Fund
is equal to the net accounting value forecast for
F-33
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS
the revertible asset at the moment of reversion and the estimated expenses for
leaving those assets in the conditions agreed in the concession documents. The
base for calculating the reversion fund comprising the revertible assets and
the estimated expenses amounted to 367,373 Th.Ptas. as at December 31, 1998
(508,998 Th. Ptas. as at December 31, 1997) (See note 13).
By December 31, 1998 the Valencia base was scrapped because of a change in
location in the port and, in consequence, the accumulated provision at that
date in the reversion fund, amounting to 63,446 ThPtas., was applied.
Provision for charges
The company makes an annual provision to cover extraordinary maintenance or
repairs to vessels carried out over a number of years.
g) Corporation Tax
Corporation tax is accounted for as an expense for the year and is
calculated on the basis of agreements with the parent company, Telefonica de
Espana, S.A., and in accordance with the I.C.A.C. accounting standard of
October 9, 1997 on the accounting treatment of taxation in companies under
Group Taxation schemes.
The company has also opted for taxation under article 76 of Law 19/1994 on
Changes to the Economic and Fiscal Arrangements for the Canary Islands, as
modified by Law 30/1996 (Fiscal, Administrative and Social Orders), whereby a
90% rebate on Corporation Tax payable (35% rebate up until December 31, 1996)
is applicable if the vessels are registered in the Santa Cruz de Tenerife
Special Vessel Register.
Furthermore, under article 27 of Law 19/1994, the company's transfers to the
Canary Islands Investment Reserve (IRC) entitles it to a deduction from its
taxable profits for 1998, as occurred in 1997. (note 17)
h) Foreign taxes of a similar nature to Corporation Tax
During 1998 the company carried a submarine cable installation in Greece,
the income on which is subject to 20% tax in Greece as no tax treaty exists
between the two countries. At December 31, 105 million pesetas had been paid
over to the Greek authorities out of the amounts already invoiced at that date.
The foreign tax was accounted for in accordance with the I.C.A.C. resolution of
October 9, 1997.
The taxes paid over to the Greek authorities are deductible from Spanish
corporation tax under the provisions of article 29 of Corporation tax law
43/1995.
i) Foreign currencies
As a general rule, operations in foreign currencies are valued at the
official exchange rate ruling at the time of the operation. These operations
are valued at the official exchange rate in force at the year-end. Unrealised
exchange differences are classified under the following two criteria:
--official convertibility, and
--balances with the same due date
Unrealised exchange gains and losses in each group are determined such that
an unrealised loss in each group is charged to losses for the period and an
unrealised profit treated in the balance sheet under liabilities as deferred
income.
F-34
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
5. Intangible assets
The amounts and movements under this heading are as follows:
Cost:
<TABLE>
<CAPTION>
Computer Other fixed
Applications assets Total
------------ ----------- -------
<S> <C> <C> <C>
Balance at December 31, 1997............ 66,712 1,104 67,816
Additions............................... 19,607 0 19,607
Disposals............................... 0 0 0
------- ------ -------
Balance at December 31, 1998............ 86,319 1,104 87,423
------- ------ -------
Depreciation:
<CAPTION>
Computer Other fixed
Applications assets Total
------------ ----------- -------
<S> <C> <C> <C>
Balance at December 31, 1997............ (13,711) (929) (14,640)
Additions............................... (9,579) (169) (9,748)
Disposals............................... 0 0 0
------- ------ -------
Balance at December 31, 1998............ (23,290) (1,098) (24,388)
------- ------ -------
</TABLE>
6. Tangible fixed assets
(a) This is made up of the following:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1997 Additions Disposals Transfers December 31, 1998
----------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Cost
Land and buildings............... 466,829 0 (141,625) 0 325,204
Technical installations and
machinery....................... 10,406,973 302,685 (60,106) 0 10,649,552
Furniture........................ 70,894 8,589 0 0 79,483
Computer equipment............... 75,159 4,855 (1,332) 0 78,682
Transport........................ 0 0 0 0 0
---------- --------- -------- --- ----------
Total assets in service.......... 11,019,855 316,129 (203,063) 0 11,132,921
Tangible assets in progress...... 0 2,585,356 0 0 2,585,356
---------- --------- -------- --- ----------
Total tangible assets............ 11,019,855 2,901,485 (203,063) 0 13,718,277
<CAPTION>
Balance at Balance at
December 31, 1997 Additions Disposals Transfers December 31, 1998
----------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Depreciation
Buildings........................ (185,410) (21,630) 27,309 0 (179,731)
Technical installations and
machinery....................... (4,910,821) (829,082) 23,054 0 (5,716,849)
Furniture........................ (34,285) (6,336) 0 0 (40,621)
Computer equipment............... (60,467) (6,763) 1,332 0 (65,898)
Transport........................ 0 0 0 0 0
---------- --------- -------- --- ----------
Total accumulated depreciation... (5,190,983) (863,811) 51,695 0 (6,003,099)
---------- --------- -------- --- ----------
Total net tangible fixed assets.. 5,828,872 2,037,674 (151,368) 0 7,715,178
</TABLE>
F-35
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
The detail of technical installations and machinery is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cost:
Arado/NAS/Nereus........................ 1,201,134 1,054,987
Scarab vehicles......................... 272,642 272,642
Atlantida Cable Vessel.................. 4,770,716 4,735,608
Teneo Cable Vessel...................... 3,841,831 3,831,551
Installations and equipment............. 563,229 512,185
---------- ----------
Subtotal.............................. 10,649,552 10,406,973
========== ==========
Accumulated depreciation:
Arado/BAS/Nereus........................ (394,001) (315,339)
Scarab vehicles......................... (272,642) (272,642)
Atlantida Cable Vessel.................. (3,104,203) (2,738,448)
Teneo Cable Vessel...................... (1,660,305) (1,358,632)
Installations and equipment............. (285,698) (225,760)
---------- ----------
Subtotal.............................. (5,716,849) (4,910,821)
========== ==========
Total................................. 4,932,703 5,496,152
========== ==========
(b) On December 31, 1998 and 1997 the totally depreciated elements were as
follows:
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Computer applications................... 11,591 9,156
Technical installations and machinery... 510,010 508,721
Furniture............................... 13,170 13,029
Computer equipment...................... 51,931 46,949
---------- ----------
Total................................. 586,702 577,855
========== ==========
</TABLE>
(c) The investment budget for 1998 was 2,920 million pesetas compared to
647 million for 1997, with 2,398 million pesetas for the installation vessel
(B.C. Iberus), 335 million pesetas on maintaining current vessels in optimum
operational state, and 187 million pesetas on transferring the Valencia base to
its new location.
(d) The company has taken out various insurance policies to provide cover
for all risks affecting assets used in its operations.
(e) The useful life of fixed assets is calculated using technical studies
carried out by the company. Said useful lives are distributed as stated in note
4(b).
7. Financial assets
Movement on financial assets was as follows:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1997 Additions Disposals Transfers December 31, 1998
----------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Deposits and
securities............. 5,427 0 0 0 5,427
</TABLE>
F-36
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
8. Expenses deferred over various years
This includes expenses on formalising the loan for the vessel Teneo.
<TABLE>
<CAPTION>
000' Ptas.
----------
<S> <C>
Balance at December 31, 1997................................. 6,944
Disposals.................................................... (1,596)
Balance at December 31, 1998................................. 5,348
</TABLE>
This is amortised as follows:
<TABLE>
<CAPTION>
Due date Amount
-------- ------
<S> <C>
1999............................................................. 1,596
2000............................................................. 1,596
2001............................................................. 1,596
Subsequent years................................................. 560
-----
Total.......................................................... 5,348
=====
</TABLE>
9. Stock
Stock consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Atlantida....................................... 6,058 12,605
Teneo........................................... 5,595 6,911
------ ------
Total....................................... 11,653 19,516
====== ======
</TABLE>
Stock consists exclusively of fuel and oil for the vessels.
Stock consumed amounted to 74,128 Th.Ptas, and 55,114 Th.Ptas as at December
31, 1998 and 1997 respectively.
Purchases for 1998 and 1997, solely fuel and oil for the vessels, amounted
to 66,264 Th.Ptas, and 54,402 Th.Ptas. respectively.
10. Debtors
The balances were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Clients......................................... 967,906 1,313,695
Clients pending invoicing....................... 432,605 55,140
--------- ---------
Sub-total..................................... 1,400,511 1,368,835
Amounts due from Group companies................ 139,855 19,873
Various debtors and advances.................... 49,505 24,702
Personnel....................................... 3,900 3,900
Tax Authorities (note 17)....................... 50,371 389,580
--------- ---------
Sub-total..................................... 243,631 438,055
--------- ---------
TOTAL......................................... 1,644,142 1,806,890
========= =========
</TABLE>
F-37
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
The more significant balances pending payment from clients at
December 31, 1998 and December 31, 1997 correspond to BT, who carry out the
central invoicing for ACMA (note 1), for an amount of 572,387 Th.Ptas.
(December 1998)- and 556,104 Th.Ptas. (December 1997); and France Cable Radio,
who carry out the central invoicing for MECMA (note 1) for an amount of 286,540
Th.Ptas. (December 1998) and 389,394 Th.Ptas. (December 1997).
Clients pending invoicing includes principally the invoicing for the fourth
quarter for the companies mentioned above.
Amounts due from Group companies includes balances receivable from
Telefonica de Espana, S.A. and Telefonica Servicios Moviles for the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Telefonica de Espana, S.A.
Cable depot rental............................ 45,508 19,554
Submarine installation systems................ 94,097 0
Other services................................ 0 319
Telefonica Servicios Moviles
Other services................................ 250 0
--------- ---------
Total....................................... 139,855 19,873
========= =========
11. Loans to group companies
Short-term loans to Group Companies
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Telefonia y Finanzas, S.A....................... 2,140,284 2,993,551
Telefonica--Group taxation...................... 432,323 0
--------- ---------
2,572,607 2,993,551
========= =========
</TABLE>
At December 31, 1998 and 1997 Telefisa includes the balance pending in
relation to the finance management contract signed with Temasa on July 1, 1990
with the modifications introduced on July 1, 1994.
This contract is in a mercantile current account with a three-year duration,
extendable on a yearly basis (unless one of the parties cancels the contract
renounces with a minimum of six months notice). The closure and liquidation of
the account (including interest) is at the end of each natural quarter and
incorporates the balance, unless agreed to the contrary by both parties, as the
opening balance of the following settlement. Neither of the parties to the
contract had cancelled this contract as at December 31, 1998.
F-38
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Interest at a variable rate applies on a monthly basis to both debtor and
creditor balances with 3 month MIBOR as from the penultimate working day of the
previous month. A margin applies to the rate for each month such that balances
due to Telfisa carry a maximum spread of 0.75 percentage points with the margin
on balances in favour of Temasa varying between -0.50 and 0.40 percentage
points, depending on the average balance during the period.
Interest accruing on the account with Telfisa was as follows:
<TABLE>
<CAPTION>
December December
31, 1998 31, 1997
-------- --------
<S> <C> <C>
Financial income........................................ 94,898 182,714
</TABLE>
12. Net Equity
At December 31, 1998 the movement was as follows:
<TABLE>
<CAPTION>
Distribution Of
Results Other movements
December December
31, 1998 31, 1997 1997 1998
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Share capital....................... 1,375,730 0 0 1,375,730
Legal reserve....................... 275,146 0 0 275,146
Voluntary reserve................... 4,401,093 598,148 0 4,999,241
Profit and loss..................... 1,883,148 (1,883,148) 2,031,461 2,031,461
Dividend on account................. (1,285,000) 1,285,000 0 0
---------- ---------- --------- ---------
Total............................. 6,650,117 0 2,031,461 8,681,578
========== ========== ========= =========
</TABLE>
The share capital at December 31, 1998 and 1997 was represented by 137,573
nominal shares of 10,000 pesetas each, totally subscribed and paid up. Since
December 16, 1993, Telefonica de Espana, S.A. has been owner of 100% of the
shares.
13. Provision for liabilities and charges
The movement was as follows:
<TABLE>
<CAPTION>
Reversion Provision
Fund for charges Total
--------- ----------- -------
<S> <C> <C> <C>
Balance at December 31, 1997..................... 228,870 26,000 254,870
Provision........................................ 31,021 21,000 52,021
Application...................................... (63,447) (13,000) (76,447)
Transfers and cancellations...................... 0 0 0
------- ------- -------
Balance at December 31, 1998..................... 196,444 34,000 230,444
======= ======= =======
</TABLE>
As stated in note 4(f), the Company has set up a reversion fund in order to
cover the net value by the reversion date of certain assets under
administrative concessions in the ports of Vigo and Valencia.
At December 31, 1998 the Company had moved from the Valencia based buildings
and applied the accumulated provision at this date from the provision for
reversion.
The provision for charges covers the obligatory extraordinary repair charges
to the vessels that are carried out over various years.
F-39
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Transfer to the provisions for charges and liabilities and to the reversion
fund are charged as other operating expenses in the attached profit and loss
account.
14. Amounts owing to financial entities
This account relates to the loan for financing the vessel Teneo, and is
classified in the balance sheet by due date.
The balances at December 31, 1998 and 1997 are:
<TABLE>
<CAPTION>
Balance at December 31, Balance at December 31,
1998 1997
--------------------------- ---------------------------
Short Long Short Long
Term Term Total Term Term Total
------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Teneo.................. 334,584 1,449,864 1,784,448 309,800 1,784,448 2,094,248
Total................ 334,584 1,449,864 1,784,448 309,800 1,784,448 2,094,248
</TABLE>
Due dates for the loans are as follows:
<TABLE>
<CAPTION>
Balance
December 31, Subsequent
1998 1999 2000 2001 years
------------ ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Teneo........................... 309,800 334,548 368,662 405,838 675,364
Total......................... 309,800 334,548 368,662 405,838 675,364
</TABLE>
The loan financing the Teneo vessel was granted on February 8, 1991 by the
Banco Exterior de Espana, S.A. for an amount of 3.098 million pesetas. The loan
is for a duration of 12 years with 19 half-yearly repayments. The first
repayment was on March 31, 1994 and the last falls due on March 31, 2003. The
fixed interest rate is 8%, which was calculated annually on the outstanding
capital sum as at the last day of each calendar quarter up until July 1, 1996.
On this date the company made an interest rate swap converting the fixed
interest to variable interest at three month Mibor less 0.10%. This is reviewed
quarterly.
Furthermore, on July 17, 1996 a loan amendment was signed whereby the bank
deposit certificates were released although the mortgage guarantee on the loan
is maintained.
15. Amounts with group companies
Long-term amounts with group companies
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Telefonica in respect of group taxation
(notes 16 and 17)........................... 44,186 44,186
</TABLE>
F-40
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Short-term amounts with group companies
These are shown as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cabitel....................................... 0 85
Antares, S.A. ................................ 292 242
Telefonica de Espana, S.A. ................... 27,101 0
Telefonica de Servicios Moviles, S.A., in-
voices pending............................... 713 0
Telefonica--invoices pending receipt.......... 36,429 50,210
Antares--invoices pending receipt............. 0 (1,500)
------ -------
64,535 49,037
Telefonica--Group taxation
(notes 16 and 17)............................ 0 56,379
------ -------
Total....................................... 64,535 105,416
====== =======
</TABLE>
Business operations carried out with group companies are detailed in the
following tables:
<TABLE>
<CAPTION>
December December
1998 1997
-------- --------
<S> <C> <C>
Net sales to group companies
Telefonica de Espana, S.A. ............................ 163,244 237,639
External services from group companies
Telefonica de Espana, S.A. ............................ 200,332 200,767
Telyco, S.A. .......................................... 84 13
Telefonica Servicios Moviles, S.A. .................... 5,578 4,122
------- -------
Total................................................. 205,994 204,902
======= =======
</TABLE>
Agreements with the sole shareholder:
The contract with Telefonica (19-1-96) remains in force for the storage
services for submarine cables at the Temasa bases in Vigo and Valencia, some
of the clauses thereof currently being reviewed.
In 1998 the Company carried out scrap work on cables at the Vigo and
Valencia depots for the Penca 2 and 3, Bracan, Columbus I and UKS-2 and 3
systems under a contract signed on August 27, 1998.
An installation contract for inter-island submarine connections in the
Canary Islands was signed on September 4, 1998 between Alcatel Submarina
Networks, Alcatel Espana, S.A. and Temasa with Telefonica de Espana, S.A.
F-41
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
16. Public Administrations
The balances with public administrations at December 31, 1998 and December
31, 1997 comprise the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Short-term creditors: public administrations
and other:
Income Tax withholding..................... 9,960 8,246
Social Security............................ 4,873 4,500
Other...................................... 200 893
------- -------
Total short-term public administrations...... 15,033 13,639
Telefonica creditor for Group taxation
(notes 15 and 17)........................... 0 56,379
------- -------
Total short-term............................. 15,033 70,018
Long-term creditors: public administrations
and other:
Telefonica creditor for Group taxation
(notes 15 and 17)......................... 44,186 44,186
------- -------
Total long-term.............................. 44,186 44,186
------- -------
Total creditor balance....................... 59,219 114,204
======= =======
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Short-term debtors: public administrations
and other:
Tax authorities for VAT (note 10).......... 50,371 19,401
Taxes paid in advance...................... 1 0
Corporation tax paid on account............ 0 370,179
Telefonica debtor for group taxation
(notes 11 and 17)......................... 432,323 0
------- -------
Total short-term............................. 482,695 389,580
Long-term debtors: public administrations and
other:
Taxes paid in advance:..................... 17,500 46,200
------- -------
Total long-term.............................. 17,500 46,200
------- -------
Total debtor balance......................... 500,195 435,780
======= =======
</TABLE>
17. Tax position
Profits for the year are subject to taxation at 35%. Taxable income for 1998
and 1997 were reduced by Pta.1,830 million and Pta. 538 respectively in respect
of provisions for RIC (reserve for investment in the Canary Islands) (note
4(g)). A deduction for double taxation applies to the remaining tax payable as
a result of taxes paid in Greece (note 4(h)). A rebate of 90% applies to
F-42
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
the remaining tax payable under the provisions of article 76 of Law 19/1994
(note 4 (g)). A further deduction applies in respect of investments in fixed
assets and in personnel training costs.
Corporation tax is calculated as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounting result for the year, before
taxation...................................... 2,165,512 2,046,097
Permanent differences.......................... (1,830,440) (538,422)
---------- ---------
Accounting tax base.......................... 335,072 1,507,675
Timing differences............................. 0 50,000
Reverse entries-- prior years.................. (82,000) (104,500)
---------- ---------
Taxable result 253,072 1,453,175
Corporation tax at 35%......................... 88,575 508,611
Deduction for international double taxation.... (88,575) (104,531)
Rebates........................................ 0 (363,672)
Deductions for investments..................... 0 0
Other deductions............................... 0 (1,065)
---------- ---------
Tax payable.................................. 0 39,343
Withholding tax on investment income........... (1) 0
---------- ---------
Tax charge payable to Telefonica under group
taxation.................................... (1) 39,343
========== =========
</TABLE>
On July 9, 1996, the holding company, Telefonica de Espana, S.A., notified
the Madrid tax authorities that the Company has opted for Group taxation as
Group 24/90 for the years 1996, 1997 and 1998 as established in the transitory
disposition No. 15 of Law 43/1995 of 27 December regulating Corporation tax.
This tax regime is subject to the requisites established in Chapter VII, part
VIII of Law 43/1995 on Corporation tax.
The following table shows the consolidated tax payments made by Telefonica
by years of origin:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Long term
1996............................................ 7,305 7,305
1995............................................ 14,306 14,306
1994............................................ 8,357 8,357
1993............................................ 14,218 14,218
-------- ------
Total long-term............................... 44,186 44,186
======== ======
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Short term
1998............................................ (27,394) 0
1997............................................ (404,929) 56,379
-------- ------
Total short term.............................. (432,323) 56,379
======== ======
</TABLE>
F-43
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Corporation tax payable is calculated as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
35% on accounting profit........................ 117,275 527,686
Deductions and rebates.......................... (88,575) (469,268)
------- --------
Charge for the year............................. 28,700 58,418
======= ========
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net tax charge.................................. 0 39,343
Advance taxation................................ 0 19,075
------- --------
Corporation tax payable......................... 0 58,418
======= ========
</TABLE>
At December 31, 1998, there were no deductions for investments pending
application in future years.
In accordance with current law, the various tax returns remain open until
they are subject to audit by the tax authorities or until a period of four
years has expired. As at December 31, 1998 all taxes since 1994 are open for
audit.
18. Provisions for business operations
The development of these provisions has been the following:
<TABLE>
<CAPTION>
Provision for
guarantees on
cable
installations
-------------
<S> <C>
Balances at December 31, 1997............................... 132,000
Transfers to provisions................................... 0
Application............................................... 0
Cancellation and transfers................................ (82,000)
-------
Balances at December 31, 1998............................... 50,000
=======
</TABLE>
The cancelled amount of Th.Ptas. 82,000 corresponds to the cancellation of
the provision made to cover the guarantee on the installation of the Adria I
and Barcelona-Savona cable lines.
19. Personnel costs
Personnel expenses comprised the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Salaries, wages and similar..................... 322,501 311,026
Social security charges......................... 43,867 42,615
Other social charges............................ 22,164 17,073
------- -------
Total......................................... 388,532 370,714
======= =======
</TABLE>
F-44
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
At December 31, 1998 and December 31, 1997 the wages and salaries for
personnel ceded by Telefonica amounted to 181,538 Th.Ptas. 180,725 Th.Ptas.
respectively, these amounts being reflected in the attached profit and loss
account under group company external services.
The following table shows the average number of employees by professional
categories.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Management staff................................ 15 13
Technical staff................................. 26 23
Administration staff............................ 20 18
--- ---
61 54
Telefonica personnel............................ 17 19
--- ---
Total......................................... 78 73
=== ===
</TABLE>
The staff of the ships Atlantida and Teneo is subcontracted from third
parties (note 20(b)).
20. Other information
(a) Directors' emoluments
The total amount paid to the Board Members as at December 1997 amounted to
1,621 Th.Ptas. On September 30, 1997, the shareholders in general meeting
dismissed the Board and appointed Mr. Manuel Badenes Moles as the Company's
Sole Administrator.
The Company has given no loans or credits to Board Members nor has it
contracted any pension obligations in their favour.
(b) Contingent liabilities
Under a contract dating from July 2, 1997 the company subcontracts
management services and crew for the vessels Atlantida and Teneo to
Remolcanosa and E.D.S.A. Agrupacion de Interes Economico, the initial duration
of the contract being for three years. On December 1, 1998 the services
provided by this company was extended to the new B.C. Iberus that will enter
service in 1999. Under labour legislation Temasa is jointly liable for the
salary and social security obligations for the staff contracted by Remolcanosa
and E.D.S.A. Agrupacion de Interes Economico for the vessels up to the limit
that would correspond to the Company if it had itself contracted personnel of
the same category or for the same position. Nevertheless, the Company does not
expect the contractor to fail to fulfil any of the above obligations.
F-45
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
21. Extraordinary results
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
Extraordinary expenses
----------------------
<S> <C> <C>
Losses on disposals of tangible and intangible
fixed assets................................. 87,921 32,878
------ ------
Total....................................... 87,921 32,878
<CAPTION>
Extraordinary income
--------------------
<S> <C> <C>
Profits on fixed assets....................... 0 12,557
Extraordinary income.......................... 0 5,552
Prior year income and profits................. 0 48,317
Income from Insurance Losses.................. 51,642 0
Extraordinary profits......................... 0 33,548
Extraordinary losses.......................... 36,276 0
</TABLE>
22. Source and application of funds
The following table shows the source and application of funds at December
31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
December 31, December 31,
Applications 1998 1997
------------ ------------ ------------
<S> <C> <C>
Acquisition of fixed assets
Intangible assets........................... 19,607 43,529
Tangible assets............................. 2,901,485 603,629
Financial assets............................ 0 0
Dividends..................................... 0 1,285,000
Cancellation or short term transfer of long
term debts................................... 334,584 326,836
Long term advance taxes....................... 0 17,500
Provisions for charges and liabilities........ 13,000 18,928
Income deferred over various years............ 0 2,625
--------- ---------
Total applications.......................... 3,268,676 2,298,047
Excess of sources over applications......... 0 598,322
--------- ---------
Total....................................... 3,268,676 2,896,369
========= =========
<CAPTION>
Sources
-------
<S> <C> <C>
Funds generated by operations................. 3,046,558 2,855,818
Long term advance taxes....................... 28,700 0
Long term creditors........................... 0 0
Disposal of fixed assets...................... 0 40,464
Short term transfer of financial assets
Other credits............................... 0 0
Long term deposits.......................... 0 87
Income deferred over various years............ 0 0
--------- ---------
Total origins............................... 3,075,258 2,896,369
Excess of applications over sources......... 193,418 0
--------- ---------
Total....................................... 3,268,676 2,896,369
========= =========
</TABLE>
F-46
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
The following shows the variations in current assets:
<TABLE>
<CAPTION>
Increases Decreases
------------------------- -------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Stock................... 0 113 7,055 0
Debtors................. 0 0 162,748 58,080
Short term creditors.... 0 1,020,207 254,098 0
Temporary financial
investments............ 0 0 19,066 402,621
Cash and banks.......... 120 0 0 414
Prepayments............. 26,532 0 0 1,548
Accruals................ 222,897 40,665 0 0
------- --------- ------- ---------
Subtotal.............. 249,549 1,060,985 442,967 462,663
Variation current
assets................. 193,418 0 0 598,322
------- --------- ------- ---------
Total................. 442,967 1,060,985 442,967 1,060,985
======= ========= ======= =========
</TABLE>
The reconciliation between the profit and loss balance and the funds
generated/applied in the business operations is shown in the following table.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Profit and loss (Profit)
Profit for the year............................ 2,031,461 1,883,148
Fixed asset depreciation....................... 873,559 907,448
Amortisation of debt formalisation charges..... 1,596 1,596
Transfer to reversion fund..................... 31,021 30,877
Transfer to provisions for expenses and
responsibilities.............................. 21,000 19,500
Cancellation provisions for expenses and
responsibilities.............................. 0 (7,072)
Net result on disposal of fixed assets......... 87,921 20,321
Prior year charges............................. 0 0
--------- ---------
Funds generated from business operations....... 3,046,558 2,855,818
========= =========
</TABLE>
23. Matters arising from the year 2000 effect
The Company has taken out an insurance policy covering possible risks
arising on all areas of the Company due to the "year 2000" effect.
Following recommendations of the insurance companies, Temasa has undertaken
a plan to prepare all of the equipment in its vessels using guides published by
Lloyd's Register.
24. Post balance sheet events
The ACMA 98 remains in force, guaranteeing the income from the B.C.
Atlantida for the following three years but at a constant price.
The MECMA 2 agreement has been approved and will shortly come into effect,
guaranteeing a large part of the B.C. Teneo income for the following five
years, although as with the ACMA, at a constant price.
F-47
<PAGE>
TELECOMUNICACIONES MARINAS, S.A. SOLE SHAREHOLDER
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
The conversion of the vessel acquired in May 1998 continues to be under
progress and it is expected that the vessel will enter service in February
1999.
The Company has various installation projects already contracted or in
progress for the year 1999; the most important of these are Columbus III
(various segments), Atlantis II and Trans-Candalta. This work is to be carried
out by the B.C. Iberus and the B.C.Teneo, with the B.C. Atlantida participating
on a certain segment of the Columbus work.
F-48
<PAGE>
Unaudited Pro Forma Combined Financial Data
Introduction
On May 18, 1999, Tyco acquired Telecomunicaciones Marinas, S.A. ("Temasa"),
a wholly-owned subsidiary of Telefonica, S.A. Accordingly, the accompanying
unaudited pro forma combined financial information gives effect to the
transaction in accordance with the purchase method of accounting. This business
was contributed by Tyco to the Company subsequent to its acquisition. The
unaudited pro forma combined financial information should be read in
conjunction with TyCom Ltd.'s and Temasa's financial statements and notes
thereto included herein.
The following unaudited pro forma combined financial information sets forth
the results of operations for the fiscal year ended September 30, 1998 and the
six months ended March 31, 1999 as if the acquisition had occurred on October
1, 1997. Temasa had a December 31 year end, which differs from the Company's
September 30 fiscal year end. The Unaudited Pro Forma Combined Statements of
Operations for the fiscal year ended September 30, 1998 and the six months
ended March 31, 1999 include the historical results of operations for Temasa
for the twelve months ended September 30, 1998 and the six months ended March
31, 1999, respectively.
The unaudited pro forma combined financial information has been prepared in
accordance with generally accepted accounting principles in the United States.
These principles require management to make extensive use of estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates. The
Unaudited Pro Forma Combined Statements of Operations are not necessarily
indicative of future operating results.
F-49
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
for the Six Months Ended March 31, 1999 (1)
(in millions)
<TABLE>
<CAPTION>
Combined
TyCom Temasa Adjustments Pro Forma
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue from product sales............... $608.5 $4.4 $ (2.1) $610.8
Service revenue.......................... 90.8 14.2 -- 105.0
------ ---- ------ ------
Net revenue.............................. 699.3 18.6 (2.1) 715.8
Cost of product sales.................... 437.0 2.2 0.2 (3) 439.4
Cost of services......................... 34.8 6.8 0.6 (3) 42.2
Sales and marketing...................... 8.7 0.4 -- 9.1
Research and development................. 26.5 -- -- 26.5
General and administrative............... 29.8 1.0 2.4 (4) 33.2
------ ---- ------ ------
Operating income......................... 162.5 8.2 (5.3) 165.4
Interest expense, net.................... (23.6) 0.1 (9.9)(5) (33.4)
Minority interest........................ (7.5) -- -- (7.5)
------ ---- ------ ------
Income before taxes...................... 131.4 8.3 (15.2) 124.5
Income taxes............................. (54.0) (0.7) 4.5 (6) (50.2)
------ ---- ------ ------
Net income............................... $ 77.4 $7.6 $(10.7) $ 74.3
====== ==== ====== ======
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of
Operations.
F-50
<PAGE>
Unaudited Pro Forma Combined Statement of Operations
for the Fiscal Year Ended September 30, 1998 (1)
(in millions)
<TABLE>
<CAPTION>
Combined
TyCom Temasa Adjustments Pro Forma
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue from product sales........... $1,187.0 $11.5 $ -- $1,198.5
Service revenue...................... 94.6 22.3 -- 116.9
-------- ----- ------ --------
Net revenue.......................... 1,281.6 33.8 -- 1,315.4
Cost of product sales................ 821.7 5.6 0.5 (3) 827.8
Cost of services..................... 69.7 11.3 1.1 (3) 82.1
Sales and marketing.................. 23.4 0.7 24.1
Research and development............. 39.5 -- 39.5
General and administrative........... 65.0 2.7 4.7 (4) 72.4
-------- ----- ------ --------
Operating income..................... 262.3 13.5 (6.3) 269.5
Interest expense, net................ (9.9) 0.3 (20.2)(5) (29.8)
Minority interest.................... (14.1) -- -- (14.1)
-------- ----- ------ --------
Income before taxes.................. 238.3 13.8 (26.5) 225.6
Income taxes......................... (86.3) (0.9) 7.6 (6) (79.6)
-------- ----- ------ --------
Net income........................... $ 152.0 $12.9 $(18.9) $ 146.0
======== ===== ====== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of
Operations.
F-51
<PAGE>
Notes to Unaudited Pro Forma Combined Statements of Operations
1. Temasa had a December 31 year end, which differs from TyCom's September 30
fiscal year end. The pro forma results of operations for the fiscal year
ended September 30, 1998 and the six months ended March 31, 1999 include
the historical results of Temasa for the twelve months ended September 30,
1998 and the six months ended March 31, 1999, respectively. The differences
between U.S. GAAP and Spanish GAAP were determined not to be material.
2. During the six months ended March 31, 1999, Temasa had installation sales
of $2.1 million to TyCom, related to the Columbus III project and incurred
prior to Temasa's acquisition by Tyco. There were no material transactions
between TyCom and Temasa during the year ended September 30, 1998.
3. Temasa's Statements of Operations included herein reflect certain
adjustments to depreciation expense associated with the fair value of fixed
assets acquired.
4. The excess of the purchase price over the fair value of the assets and
liabilities acquired of Temasa has been recorded as goodwill, which is
being amortized over a period of 40 years to general and administrative
expenses.
5. The increase in interest expense is due to the borrowing of long-term debt
used to make the cash payment of approximately $280.0 million to acquire
Temasa, calculated using TyCom's average borrowing rate of 7.2% and 7.1%
for the fiscal year ended September 30, 1998 and the six months ended March
31, 1999, respectively.
6. The income tax benefit associated with adjustments described above to
revenue from product sales, cost of product sales, cost of services and
interest expense have been calculated based on a statutory income tax rate
of 35%.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of TyCom Ltd.
In our opinion, the accompanying consolidated statements of operations and cash
flows of AT&T Submarine Systems, Inc. present fairly, in all material respects,
the results of its operations and its cash flows for the six months ended June
30, 1997, in conformity with accounting principles generally accepted in the
United States. These consolidated financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 1, the Company is an integrated business unit of AT&T.
Certain costs and expenses presented in the financial statements represent
allocations and management's estimates of the costs of services provided to the
Company by AT&T. As a result, the financial statements presented may not be
indicative of the results of operations that would have been achieved had the
Company operated as a nonaffiliated entity.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 3, 2000
F-53
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
CONSOLIDATED STATEMENT OF OPERATIONS
for the six months ended June 30, 1997
(in thousands)
<TABLE>
<S> <C>
Net revenue........................................................... $485,546
Cost of revenue....................................................... 396,480
Operating expenses.................................................... 66,920
--------
Operating income...................................................... 22,146
Minority interest..................................................... (7,053)
--------
Income before income taxes............................................ 15,093
Provision for income taxes............................................ (5,810)
--------
Net income............................................................ $ 9,283
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
CONSOLIDATED STATEMENT OF CASH FLOWS
for the six months ended June 30, 1997
(in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................... $ 9,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation..................................................... 16,792
Minority interest expense........................................ 7,053
Changes in operating assets and liabilities:
Accounts receivable.............................................. (162,891)
Costs and estimated earnings on contracts........................ 170,971
Inventory........................................................ (30,245)
Other current assets............................................. (610)
Accounts payable and accrued expenses............................ 14,368
Deferred revenues................................................ (3,190)
Warranty liability............................................... 474
---------
Net cash provided by operating activities...................... 22,005
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment......................... (6,725)
Long-term receivables.............................................. (741)
---------
Net cash used in investing activities.......................... (7,466)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to minority interest................................. (14,539)
---------
Net cash used in financing activities.......................... (14,539)
---------
Net increase in cash............................................... --
Cash, beginning of period.......................................... --
---------
Cash, end of period................................................ $ --
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. Description of Business and Basis of Presentation:
Description of Business
AT&T Submarine Systems, Inc. ("SSI") is a business unit of AT&T Corp.
("AT&T") (See Note 10). SSI designs, develops, constructs, installs and
maintains undersea telecommunication cable systems which provide voice, data,
video and networking communications between certain countries globally. These
consolidated financial statements describe the entity that existed at the time
it was owned by AT&T.
SSI conducts its business with a fleet of seven vessels and supporting
submersibles. One vessel is owned, one is leased by SSI and the other five
vessels are owned by partnerships (the "Partnerships") in which SSI is the
general partner. SSI charters such vessels from the Partnerships and
exclusively operates them in the conduct of its business. SSI monitors and
allocates the utilization of the fleet between construction and maintenance
activities.
As an integrated business unit of AT&T, SSI relies on AT&T and other AT&T
affiliates to provide administration, management and other services including,
but not limited to, management information systems, telecommunications,
accounting and financial reporting, treasury, cash management, human resources,
employee benefit administration, payroll, legal, tax planning and compliance
and other support. SSI is allocated costs from AT&T and AT&T affiliates for
these services (see Note 2); however, these costs may not be indicative of
those that would have been incurred had SSI operated autonomously or as an
entity independent of AT&T.
Basis of Presentation
The consolidated financial statements of SSI include the accounts of
Submarine Systems Inc., Transoceanic Cable Ship Company and Coastal Cable Ship
Company, wholly owned subsidiaries of AT&T. SSI consolidates the Partnerships
and all material inter-entity transactions and account balances have been
eliminated.
As an integrated business unit of AT&T, SSI does not prepare separate
financial statements in accordance with generally accepted accounting
principles in the normal course of operations. Accordingly, the accompanying
financial statements have been prepared from the historical financial records
of AT&T. The accompanying financial statements reflect the revenues and
expenses directly attributable to SSI, as well as allocations, deemed
reasonable by management, to present the results of operations and cash flows
of SSI on a stand alone basis. The actual costs that would have been incurred
if such services were performed by independent third parties may differ from
such allocations. The results of operations and cash flows of SSI may differ
from those that may have been achieved had SSI operated autonomously or as an
entity independent from AT&T. The allocation methodologies have been described
within the respective footnotes, where appropriate and management considers the
allocations to be reasonable.
Earnings per share disclosure has not been presented as SSI is a wholly
owned subsidiary of AT&T and earnings per share data is not considered
meaningful.
F-56
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies:
Revenue Recognition
Contract sales for the installation of undersea cable systems are recorded
on the percentage-of-completion method, whereby sales and profits are
recognized as work is performed based on the relationship between actual costs
incurred and total estimated costs to complete. Contracts in process, included
in current assets, are valued at cost plus accrued profits not yet billed.
Billings on uncompleted contracts in excess of incurred costs and accrued
profits are included in current liabilities. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
current period. Provisions for anticipated losses are made in the period in
which they first become determinable. Bid and proposal costs are expensed as
incurred.
Revenue from the sale of maintenance and services is recognized over the
period the service is provided. Billings to customers before the relevant
criteria for revenue recognition are satisfied are included in deferred
revenue.
Property, Plant and Equipment
SSI's investment in property, plant and equipment is stated at historical
cost. Depreciation has been calculated on the straight line method using
estimated useful lives ranging from 5 to 40 years. Depreciation expense
amounted to approximately $16.8 million for the six months ended June 30, 1997.
Upon sale or other dispositions of property, plant and equipment, the cost and
related accumulated depreciation are removed from SSI's accounts and any gain
or loss is recorded in the results of operations.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
Warranty Costs
Estimated warranty costs for each contract are determined based on the
contract terms and technology specific issues. These costs are included in
total estimated contract costs accrued over the life of the respective
contract.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses included in operating expenses amounted to approximately
$18.3 million for the six months ended June 30, 1997.
Operating Expenses
Operating expenses include expenses directly attributable to SSI's
operations as well as an allocation of certain AT&T operating expenses. The
allocated costs have been assigned to SSI based on the ratio of SSI's total
costs to AT&T's total costs and represent management's best estimate of the
costs which should be allocated to SSI. For the six months ended June 30, 1997,
operating expenses amounting to approximately $10.5 million were allocated to
SSI from AT&T.
F-57
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
SSI is not a separate taxable entity for federal and state income tax
purposes and the results of SSI's operations are included in the federal and
state tax returns of AT&T and its affiliates. SSI has provided for income taxes
as if it were a separate taxpayer.
Deferred income taxes have been accounted for under the liability method,
whereby deferred tax assets and liabilities are established for the differences
between the financial reporting and income tax basis of assets and liabilities,
as well as net operating losses and tax credit carryforwards. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Derivative Financial Instruments
SSI uses derivative financial instruments for purposes other than trading.
Derivatives are not used for speculative purposes. Forward exchange contracts,
used as part of SSI's risk management strategy, must be designated at inception
as a hedge and measured for effectiveness both at inception and on an ongoing
basis. Cash flows from the hedging transactions are classified in the same
category as the item being hedged.
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 at the
date of the financial statements. These estimates include, but are not limited
to, assumptions and estimates relating to the allowance for doubtful accounts,
the estimated future total costs on contracts accounted for under the
percentage of completion method, inventory valuation and the estimated useful
life of property, plant and equipment. Actual results could differ from those
estimates.
3. Employee Benefit Plans
SSI participates in various employee benefit plans, including pensions,
savings, post-retirement and post-employment plans, which are sponsored by
AT&T. Costs of these plans have been allocated to SSI as described in Note 2.
AT&T does not maintain plan data, including funding, on a business unit basis
and accordingly, such information is not available for SSI on a stand alone
basis.
4. Income Taxes
SSI has provided for income taxes as if it were a separate taxpayer, using a
38.5% effective rate. This statutory rate is deemed to be a current provision.
Deferred income taxes are not meaningful, because the tax basis of all of the
assets of this business were adjusted to fair value in connection with the sale
of SSI on July 1, 1997. (Note 10).
F-58
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the six months ended June 30, 1997, the provision for income taxes
consists of the following:
<TABLE>
<S> <C>
Current:
Federal............................................................ $5,282
State and local.................................................... 528
------
Total provision for income taxes..................................... $5,810
======
</TABLE>
5. Financial Instruments
In the normal course of business, SSI uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
SSI does not utilize financial instruments for speculative purposes. These
instruments include letters of credit and foreign exchange contracts.
Collateral is generally not required for these types of instruments. By their
nature all such instruments involve risk, including the credit risk of
nonperformance by counterparties, and the maximum potential loss may exceed the
amount recognized in the consolidated financial statements. As of June 30,
1997, it is management's opinion there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments.
Letters of credit are posted by SSI in accordance with the performance
provisions of its contracts. As of June 30, 1997, SSI's total available letters
of credit amounted to approximately $161.9 million, of which none have been
drawn upon.
6. Related Party Transactions
AT&T has an ownership interest in a number of cable systems being
constructed by SSI and is also a member of a number of consortiums for which
SSI provides maintenance. For the six months ended June 30, 1997, SSI has
billed approximately $28.2 million and $26.6 million for maintenance and
construction services, respectively, to AT&T and its affiliates.
7. Commitments and Contingencies
SSI leases land, buildings and equipment through operating leases that
expire in years through 2021. For the six months ended June 30, 1997, rental
expense under these contracts amounted to approximately $4.8 million. The
following table details SSI's future minimum lease payments due under
noncancelable operating leases:
<TABLE>
<S> <C>
Remainder of 1997.................................................... $ 5,469
1998................................................................. 10,622
1999................................................................. 1,103
2000................................................................. 182
2001................................................................. 118
2002................................................................. 118
Thereafter........................................................... 2,232
-------
$19,844
=======
</TABLE>
F-59
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1996, SSI entered into three vendor agreements under which SSI is
obligated to purchase product amounting to approximately $142 million through
1999. In addition, during 1997, SSI entered into an agreement with Lucent
Technologies ("Lucent") pursuant to which SSI will purchase products amounting
to approximately $300 million through the end of 1998.
In the ordinary course of business, SSI enters into construction contracts
providing for assessment of damages for nonperformance or delays in completion.
Claims may be brought against SSI by customers alleging such deficiencies.
Based upon management's evaluation of the status, completion requirements and
the provisions of SSI's contracts, management believes that all contracts will
be completed and operational in accordance with the terms and conditions of its
contracts. However, SSI may have exposure up to $36 million for liquidated
damages associated with late delivery of the FLAG system. No accrual for any
damages or penalties has been recorded in SSI's financial statements.
AT&T has an agreement with the State of New Jersey--Department of
Environmental Protection for its Clark, New Jersey shop facility to remediate
on-site and off-site historical soil and groundwater contamination. In this
regard, a $2.5 million liability has been recorded as of June 30, 1997, for the
estimated costs to remediate the soil. This estimated liability is based on
bids submitted by environmental consultants and has not been discounted.
Completion of this remediation effort is expected to take up to five years. Any
costs or liability arising in connection with this remediation effort has been
assumed by AT&T.
SSI performed drilling services for AT&T between St. Thomas and St. Croix,
U.S. Virgin Islands. A cease and desist order was issued from the U.S. Army
Corps of Engineers and the Virgin Island Coastal Zone Management and Department
of Planning Natural Resources (collectively referred to as "Government
Agencies") due to the release of drilling mud. Any liability arising out of the
government agencies' cease and desist order has been retained by AT&T.
SSI is subject to litigation, claims and assessments. Based on its knowledge
of the facts and circumstances relating to litigation, claims and assessments,
management does not believe that the ultimate resolution of such litigation,
claims and assessments will result in charges against net assets or operations
materially in excess of amounts provided for as of June 30, 1997.
8. Employee Stock Plan Participation
SSI participates in AT&T's 1987 Long-Term Incentive Program. Certain
employees of SSI have stock options and performance shares under this plan. The
exercise price of any stock option is equal to or greater than the stock price
when the option is granted. Generally, the options vest over three years and
are exercisable up to ten years from the date of grant. Performance share units
are awarded to key employees in the form of either common stock or cash at the
end of a three year period based on AT&T's return-to-equity performance
compared with a target.
SSI applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
plan. Accordingly, no compensation expense has been recognized for stock based
compensation plans other than for its performance based awards. Compensation
expense charged against income was not material to SSI's consolidated results
of operations, cash flows or net assets.
F-60
<PAGE>
AT&T SUBMARINE SYSTEMS, INC.
(a business unit of AT&T Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SSI has adopted the disclosure-only provisions of SFAS No. 123 "Accounting
for Stock-Based Compensation." The pro-forma impact of recognizing compensation
expense in accordance with SFAS No. 123 was immaterial to SSI.
9. Parent Company Transactions
To reflect SSI's financing costs on a stand alone basis, AT&T's net
investment has been allocated between permanent capital and interest bearing
intercompany advances. Such intercompany advances were calculated based upon
historical capital investments, working capital levels and operations. The
interest expense included in these financial statements has been calculated by
applying a weighted average of AT&T's long-term and short-term borrowing rates
to the intercompany advance as of the end of the period.
For the six months ended June 30, 1997, the accompanying statement of
operations reflects interest costs amounting to approximately $9.5 million.
10. Sale of SSI
On July 1, 1997, AT&T completed the sale of SSI to Tyco International Ltd.
("Tyco") for approximately $850.0 million in cash. The sale agreement provides
that AT&T will not directly or indirectly, engage in, invest in, own, manage,
operate, finance, control or participate in the ownership, management,
operation, financing or control of, or lend AT&T's name to any business or
other entity engaged in System Installation (as defined in the agreement) for
seven years or System Maintenance (as defined in the agreement) for five years
in any part of the world; provided however, that AT&T shall be allowed to
purchase up to a 10% interest in any such business or entity engaged in such
activities. In addition, should AT&T purchase an entity, which in part provides
System Installation or System Maintenance, AT&T must dispose of that part of
the entity engaged in such services within 18 months of the purchase of the
entity, and that AT&T shall provide Tyco with a right of first offer to
purchase the part of the entity.
Concurrent with the sale of SSI, AT&T acquired from Lucent certain rights to
intellectual property used by SSI which will allow AT&T access to such
intellectual property during and subsequent to the period described in the
noncompete provisions within the agreement.
F-61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
40,000,000 Shares
----------------
PROSPECTUS
, 2000
----------------
Goldman, Sachs & Co.
Salomon Smith Barney
Merrill Lynch & Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<CAPTION>
Amount
To Be
Paid
--------
<S> <C>
SEC Registration fee............................................... $303,600
NASD filing fee.................................................... 30,500
New York Stock Exchange fees....................................... *
Bermuda Stock Exchange fees........................................ *
Transfer agent's fees.............................................. *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue Sky fees and expenses......................................... *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
</TABLE>
Each of the amounts set forth above, other than the SEC Registration fee and
the NASD filing fee, which have been paid or are being paid herewith, is an
estimate.
- --------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers.
Sections 133 and 134 of the bye-laws of TyCom Ltd. (the "Registrant")
provide, in part, that the Registrant shall indemnify its directors and
officers for all costs, losses and expenses which they may incur in the
performance of their duties as director or officer, provided that such
indemnification is not otherwise prohibited under the Companies Act 1981, as
amended, of Bermuda. Section 98 of the Companies Act 1981, as amended, of
Bermuda prohibits such indemnification against any liability arising out of the
fraud or dishonesty of the director or officer. However, such section permits
the Registrant to indemnify a director or officer against any liability
incurred by him in defending any proceedings, whether civil or criminal, in
which judgment is given in his favor or in which he is acquitted or when other
similar relief is granted to him.
The Registrant maintains standard policies of insurance under which coverage
is provided (a) to its directors and officers against loss rising from claims
made by reason of breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the Registrant to such
officers and directors pursuant to the above indemnification provision or
otherwise as a matter of law.
The proposed form of Underwriting Agreement filed as Exhibit 1 to this
Registration Statement provides for indemnification of directors and officers
of the Registrant by the underwriters against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
Since three years before the date of the initial filing of this Registration
Statement, the Registrant has sold the following securities without
registration under the Securities Act of 1933:
None.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association*
3.2 Bye-Laws*
4.1 Form of Common Share Certificate*
5.1 Opinion of Appleby Spurling & Kempe
10.1 Form of Services Agreement between TyCom and Tyco*
10.2 Form of Tax Indemnification Agreement between TyCom and Tyco*
10.3 Form of Revolving Credit Facility between TyCom and Tyco*
10.4 Form of Deposit Agreement between TyCom and Tyco*
10.5 Form of Registration Rights Agreement between TyCom and Tyco*
10.6 TyCom Ltd. Long Term Incentive Plan*
10.7 TyCom Ltd. Employee Share Purchase Plan*
10.8 TyCom Ltd. Deferred Compensation Plan*
10.9 TyCom Ltd. Supplemental Executive Retirement Plan*
21.1 Subsidiaries of the Registrant*
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Appleby Spurling & Kempe (included in Exhibit 5.1)
23.4 Consent of The Yankee Group
23.5 Consent of BDO Audiberia Auditores, S.L.
24.1 Power of Attorney+
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
(b) Financial Statement Schedules:
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
Item 17. Undertakings
The undersigned hereby undertakes:
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the
II-2
<PAGE>
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 3rd day of May, 2000.
TyCom Ltd.
/s/ Byron S. Kalogerou
By: _________________________________
Name: Byron S. Kalogerou
Title: Vice President and General
Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended, and
The Companies Act of 1981 of Bermuda, as amended, this Amendment No. 1 to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Executive Chairman and May 3, 2000
______________________________________ Director
L. Dennis Kozlowski
* Principal Executive May 3, 2000
______________________________________ Officer and Director
Neil R. Garvey
* Principal Financial and May 3, 2000
______________________________________ Accounting Officer
David W. Van Rossum
* Vice President and May 3, 2000
______________________________________ Director
Mark H. Swartz
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Donald J. Puglisi Authorized Representative May 3, 2000
______________________________________ in the United States
Puglisi & Associates
By: Donald J. Puglisi
</TABLE>
/s/ Byron S. Kalogerou
*By: _______________________
Byron S. Kalogerou
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association*
3.2 Bye-Laws*
4.1 Form of Common Share Certificate*
5.1 Opinion of Appleby Spurling & Kempe
10.1 Form of Services Agreement between TyCom and Tyco.*
10.2 Form of Tax Indemnification Agreement between TyCom and Tyco.*
10.3 Form of Revolving Credit Facility between TyCom and Tyco.*
10.4 Form of Deposit Agreement between TyCom and Tyco.*
10.5 Form of Registration Rights Agreement between TyCom and Tyco.*
10.6 TyCom Ltd. Long Term Incentive Plan*
10.7 TyCom Ltd. Employee Share Purchase Plan*
10.8 TyCom Ltd. Deferred Compensation Plan*
10.9 TyCom Ltd. Supplemental Executive Retirement Plan*
21.1 Subsidiaries of the Registrant*
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Appleby, Spurling & Kempe (included in Exhibit 5.1)
23.4 Consent of The Yankee Group
23.5 Consent of BDO Audiberia Auditores, S.L.
24.1 Power of Attorney+
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
EXHIBIT 5.1
FORM OF OPINION TO BE DELIVERED BY APPLEBY SPURLING & KEMPE
-----------------------------------------------------------
. . 2000
TyCom Ltd.
The Zurich Centre
Second Floor
Suite 201
90 Pitts Bay Road
Pembroke HM 08
Dear Sirs
TyCom Ltd. (the "Company")
- --------------------------
We have acted as legal counsel in Bermuda to the Company in connection with the
preparation and filing by the Company with the Securities and Exchange
Commission under the Securities Act of 1933 of a registration statement (the
"Registration Statement") on form S-1 in relation to an offer (the "Offer") by
the Company and (if the over-allotment option is exercised) by TGN Holdings Ltd.
(the "Selling Shareholder") of an aggregate of up to common shares of par value
US$0.25 each in the Company ("Common Shares"). Of the total of Common Shares,
shares are being offered by the Company (the "Company Shares") and (if the over-
allotment option is exercised) up to shares will be offered by the Selling
Shareholder (the "Selling Shareholder Shares").
Unless otherwise defined in this opinion or the Schedule to it, capitalised
terms have the meanings assigned to them in the Registration Statement.
For the purposes of this opinion we have examined and relied upon the documents
listed (which, in some cases, are also defined) in the Schedule to this opinion
(the "Documents").
Assumptions
- -----------
In stating our opinion we have assumed:
(a) the authenticity, accuracy and completeness of all Documents (including,
without limitation, public records) submitted to us as originals and the
conformity to authentic original Documents of all Documents submitted to us
as certified, electronic or photostatic copies;
<PAGE>
-2-
(b) the genuineness of all signatures on the Documents;
(c) the authority, capacity and power of each of the persons signing the
Documents;
(d) that any factual statements made in any of the Documents are true, accurate
and complete;
(e) that the records which were the subject of the search made on . . 2000
of the Register of Companies at the office of the Registrar of Companies
referred to in paragraph 7 of the Schedule to this opinion were complete
and accurate at the time of such search and disclosed all information which
is material for the purposes of this opinion and such information has not
since such date been materially altered;
(f) that the Resolutions are in full force and effect, have not been rescinded,
either in whole or in part, and respectively accurately record the
resolutions passed by the board of directors of the Company in a meeting
which was duly convened and at which a duly constituted quorum was present
and voting throughout and by the sole shareholder of the Company as written
resolutions of the sole shareholder; and
(g) that the price at which the Company Shares are agreed to be issued pursuant
to the underwriting agreement as referred to in the Registration Statement
is equal to or greater than their par value per share of US$0.25.
Opinion
- -------
Based upon and subject to the foregoing, and subject to the reservations set out
below and to any matters not disclosed to us, we are of the opinion that:
(1) The Company is an exempted company incorporated with limited liability and
existing under the laws of Bermuda and is in good standing under the laws
of Bermuda.
(2) The Company Shares have been duly created as authorised but unissued Common
Shares and, when duly resolved by the board of directors of the Company to
be issued and allotted, and paid for, as contemplated by the underwriting
agreement as referred to in the Registration Statement, will be duly
authorised, validly issued, fully-paid and non-assessable shares of the
Company.
(3) The Selling Shareholder Shares, recorded in the Share Register as fully-
paid, are duly authorised, validly issued, fully paid and non-assessable
shares of the Company.
<PAGE>
-3-
Reservations
- ------------
We have the following reservations:
(a) We express no opinions as to any law other than Bermuda law and none of the
opinions expressed herein relates to compliance with or matters governed by
the laws of any jurisdiction except Bermuda. This opinion is limited to
Bermuda law as applied by the courts of Bermuda at the date hereof.
(b) Where an obligation is to be performed in a jurisdiction other than
Bermuda, the courts of Bermuda may refuse to enforce it to the extent that
such performance would be illegal under the laws of, or contrary to public
policy of, such other jurisdiction.
(c) Any reference in this opinion to shares being "non-assessable" shall mean,
in relation to fully-paid Common Shares, (subject to any contrary provision
in any agreement between the Company and the holders of such shares) that
no holder of such Common Shares shall be bound by an alteration of the
memorandum of association or bye-laws of the Company after the date on
which he became a shareholder, if and so far as the alteration requires him
to take, or subscribe for additional shares, or in any way increases his
liability to contribute to the share capital of, or otherwise to pay money
to, the Company.
(d) Searches of the Register of Companies at the office of the Registrar of
Companies are not conclusive and it should be noted that the Register of
Companies does not reveal:
(i) details of matters which have been lodged for filing or registration
which as a matter of general practice of the Registrar of Companies
would have or should have been disclosed on the public file but have
not actually been registered or to the extent that they have been
registered have not been disclosed or appear in the public records at
the date and time the search is concluded; or
(ii) details of matters which should have been lodged for registration but
have not been lodged for registration at the date the search is
concluded.
(e) In order to issue this opinion we have carried out the search referred to
in paragraph 7 of the Schedule to this opinion at [ ] am/pm on . .
2000 and have not enquired as to whether there has been any change since
that time and date.
(f) In this opinion, the term "good standing" means only that the Company has
received a certificate of compliance from the Registrar of Companies in
Hamilton, Bermuda.
<PAGE>
-4-
Disclosure
- ----------
This opinion is addressed to you in connection with the filing by the Company of
the Registration Statement with the Securities and Exchange Commission for the
purposes of registering its Common Shares under the Securities Act of 1933. We
consent to the filing of this opinion as an exhibit to the Registration
Statement. We also consent to the reference to our name under the heading
"Legal Matters" in the Registration Statement in the form in which it appears.
This opinion is addressed to the Company solely for the benefit of the Company
and (save as referred to in the preceding paragraph) is neither to be
transmitted to any other person, nor relied upon by any other person or for any
other purpose nor quoted nor referred to in any public document nor filed with
any governmental agency or person without our prior written consent, except as
may be required by law. Further, this opinion speaks as of its date and is
strictly limited to the matters stated herein and we assume no obligation to
review or update this opinion if applicable law or the existing facts or
circumstances should change.
This opinion is governed by and is to be construed in accordance with Bermuda
law. It is given on the basis that it will not give rise to any legal
proceedings with respect thereto in any jurisdiction other than Bermuda.
Yours faithfully
<PAGE>
-5-
THE SCHEDULE
------------
1. An electronic copy of Amendment No. . to the Registration Statement
(which includes a prospectus in relation to the Company) relating to the
Offer (excluding the exhibits thereto and the documents incorporated by
reference therein).
2. Certified copies dated . . 2000 of :-
2.1 the written resolutions of the sole shareholder of the Company passed
on . . 2000; and
2.2 the minutes of the meeting of the board of directors of the Company
held on . . 2000 [others ? - if more than one relevant board
minute]
(together, the "Resolutions");
3. Certified copies dated . . 2000 of :-
3.1 the certificate of incorporation of the Company;
3.2 the memorandum of association of the Company; and
3.3 the bye-laws of the Company
(together, the "Constitutional Documents").
4. A copy of a letter dated . . 2000 evidencing the consent of the Bermuda
Monetary Authority to the issue by the Company of the Company Shares and
the transfer by the Selling Shareholder of the Selling Shareholder Shares.
5. A certified copy dated . . 2000 of the register of shareholders of the
Company as at . . 2000 (the "Share Register").
6. [An officer's certificate dated . . 2000 and issued by [ ] as
[ ] of the Company on which we have relied for the purposes of our
statements in opinion paragraphs 2 and 3].
7. The entries and filings shown in respect of the Company on the file of the
Company maintained in the Register of Companies at the offices of the
Registrar of Companies in Hamilton, Bermuda, as revealed by a search on
. . 2000 in respect of the Company.
<PAGE>
-6-
8. A certificate of compliance dated . . 2000 issued by the Registrar of
Companies, Hamilton, Bermuda in respect of the Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No.
1 to Form S-1 (File No. 333-32134) of our report dated March 3, 2000 relating
to the financial statements of TyCom Ltd. which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers
Hamilton, Bermuda
May 3, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No.
1 to Form S-1 (File No. 333-32134) of our report dated March 3, 2000 relating
to the financial statements of AT&T Submarine Systems, Inc. which appears in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 3, 2000
<PAGE>
EXHIBIT 23.4
Byron S. Kalogerou
Vice President
TyCom Ltd.
The Zurich Centre
Second Floor, Suite 201
90 Pitts Bay Road
Pembroke HM 08, Bermuda
Dear Mr. Kalogerou:
This letter provides TyCom Ltd. with written consent from The Yankee Group
for the reproduction of the below stated reference, and approved variations, in
connection with TyCom Ltd.'s Form S-1 Registration Statement under the
Securities Act of 1933.
1. Recent research by The Yankee Group projects that transatlantic
traffic volume will increase at a compound annual growth rate of
approximately 123% from 2000 through 2005.
2. According to The Yankee Group, transpacific traffic volume will
increase at a compound annual growth rate of approximately 129% from 2000
through 2005.
(The Yankee Group: Assessing Demand for Bandwidth Capacity, May 2000)
Please feel free to contact me with any questions.
Best Regards,
/s/ Carlos Perry
Carlos Perry
Vice President, International
The Yankee Group
31 St. James Avenue
Boston, MA 02116
Tel: (617) 880-0245
Fax: (617) 210-0045
Email: [email protected]
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-32134) of our report dated February 19, 1999, on our audits of the
financial statements and financial statement schedules of Telecomunicaciones
Marinas, S.A.
BDO Audiberia
/s/ Mario Herrero
- -------------------------------------
Mario Herrero
Partner
Madrid, Spain
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF TYCOM LTD. AS OF AND FOR THE SIX MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 15,300
<SECURITIES> 0
<RECEIVABLES> 449,700
<ALLOWANCES> 49,300
<INVENTORY> 118,900
<CURRENT-ASSETS> 891,400
<PP&E> 666,700
<DEPRECIATION> 175,700
<TOTAL-ASSETS> 1,870,000
<CURRENT-LIABILITIES> 1,073,400
<BONDS> 655,100
0
0
<COMMON> 105,600
<OTHER-SE> (33,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,870,000
<SALES> 1,275,800
<TOTAL-REVENUES> 1,275,800
<CGS> 979,500
<TOTAL-COSTS> 979,500
<OTHER-EXPENSES> 76,100
<LOSS-PROVISION> 34,300
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> 212,300
<INCOME-TAX> 77,100
<INCOME-CONTINUING> 135,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,200
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
