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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
333-32134
(COMMISSION FILE NUMBER)
------------------------
TYCOM LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
BERMUDA NOT APPLICABLE
(JURISDICTION OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
THE ZURICH CENTRE, SECOND FLOOR, SUITE 201, 90 PITTS BAY ROAD, PEMBROKE, HM 08,
BERMUDA
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
441-298-9770
(REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/. (The registrant became
subject to the reporting requirements of the Securities and Exchange Act of 1934
on July 26, 2000.)
The number of common shares outstanding as of September 7, 2000 was
520,300,000.
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TYCOM LTD.
INDEX TO FORM 10-Q
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PAGE
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<S> <C>
PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
June 30, 2000 (unaudited)............................... 1
Consolidated Statements of Operations for the Quarters and
Nine Months ended
June 30, 2000 and 1999 (unaudited)...................... 2
Consolidated Statements of Cash Flows for the Nine Months
ended June 30, 2000 and 1999 (unaudited)................ 3
Notes to Consolidated Financial Statements (unaudited).... 4
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Item 3--Quantitative and Qualitative Disclosures About
Market Risk............................................... 13
PART II--OTHER INFORMATION:
Item 1--Legal Proceedings................................... 14
Item 2--Changes in Securities and Use of Proceeds........... 14
Item 6--Exhibits and Reports on Form 8-K.................... 14
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
TYCOM LTD.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 2000
SEPTEMBER 30, ---------------------
1999 ACTUAL PRO FORMA
------------- --------- ---------
(NOTE 1)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12.1 $ 18.8 $1,951.7
Short-term advances to parent............................. 505.5 112.3 112.3
Receivables, less allowance for doubtful accounts of $19.8
at September 30, 1999 and $54.3 at June 30, 2000........ 278.7 338.4 338.4
Contracts in process...................................... 432.9 156.1 156.1
Inventories............................................... 108.7 130.6 130.6
Deferred income taxes..................................... 36.9 53.7 53.7
Other current assets...................................... 18.1 19.7 19.7
-------- -------- --------
Total current assets...................................... 1,392.9 829.6 2,762.5
CONSTRUCTION IN PROGRESS--TYCOM GLOBAL NETWORK.............. -- 6.4 6.4
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 464.4 544.2 544.2
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 348.6 320.6 320.6
DEFERRED INCOME TAXES....................................... 112.5 105.7 105.7
OTHER ASSETS................................................ 73.8 43.9 43.9
-------- -------- --------
TOTAL ASSETS............................................ $2,392.2 $1,850.4 $3,783.3
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt.... $ 2.3 $ 2.2 $ 2.2
Accounts payable.......................................... 175.3 173.6 173.6
Accrued expenses and other current liabilities............ 176.0 217.1 217.1
Income taxes payable...................................... -- 52.6 52.6
Contracts in process--billings in excess of costs......... 849.1 476.6 476.6
Deferred revenue.......................................... 12.4 45.1 45.1
-------- -------- --------
Total current liabilities................................. 1,215.1 967.2 967.2
LONG-TERM DEBT.............................................. 608.2 655.0 655.0
OTHER LONG-TERM LIABILITIES................................. 14.7 16.5 16.5
-------- -------- --------
TOTAL LIABILITIES....................................... 1,838.0 1,638.7 1,638.7
MINORITY INTEREST........................................... 55.7 52.5 52.5
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDER'S EQUITY:
Preference shares, $1.00 par value, 600,000,000 million
authorized;
none issued and outstanding............................... -- -- --
Common shares, $0.25 par value, 3,000,000,000 authorized;
520,300,000 issued and outstanding on a pro forma basis... -- -- 130.1
Share premium............................................... -- -- 1,997.1
Parent company investment................................... 501.3 194.3 --
Currency translation adjustment............................. (2.8) (35.1) (35.1)
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY.............................. 498.5 159.2 2,092.1
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.............. $2,392.2 $1,850.4 $3,783.3
======== ======== ========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
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TYCOM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTERS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue from product sales................................ $638.5 $376.9 $1,834.7 $ 985.4
Service revenue........................................... 37.9 54.7 117.5 145.5
------ ------ -------- -------
NET REVENUE............................................... 676.4 431.6 1,952.2 1,130.9
Cost of product sales..................................... 456.7 279.2 1,390.8 716.2
Cost of services.......................................... 22.2 28.3 67.6 63.1
Sales and marketing....................................... 3.3 4.7 10.4 13.4
Research and development.................................. 15.9 13.7 42.6 40.2
General and administrative................................ 26.4 18.3 68.7 48.1
------ ------ -------- -------
OPERATING INCOME.......................................... 151.9 87.4 372.1 249.9
Interest expense, net..................................... (7.5) (10.0) (8.7) (33.6)
Minority interest......................................... (4.1) (4.5) (10.8) (12.0)
------ ------ -------- -------
Income before income taxes................................ 140.3 72.9 352.6 204.3
Income tax provision...................................... (51.6) (28.3) (128.7) (82.3)
------ ------ -------- -------
NET INCOME................................................ $ 88.7 $ 44.6 $ 223.9 $ 122.0
====== ====== ======== =======
NET INCOME PER SHARE (NOTE 5):
Basic................................................... $ 0.20 $ 0.10 $ 0.50 $ 0.27
Diluted................................................. 0.20 0.10 0.50 0.27
AVERAGE COMMON SHARES USED IN COMPUTING NET INCOME PER
SHARE (NOTE 5):
Basic................................................... 450.0 450.0 450.0 450.0
Diluted................................................. 450.0 450.0 450.0 450.0
</TABLE>
See notes to consolidated financial statements (unaudited).
2
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TYCOM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $223.9 $122.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................ 43.5 26.3
Goodwill and other intangible amortization.............. 7.6 4.8
Deferred income taxes................................... (10.0) 41.9
Provisions for losses on receivables and inventory...... 63.2 0.5
Minority interest expense............................... 10.8 12.0
Other non-cash items.................................... 11.3 --
Changes in assets and liabilities, net of the effects of
acquisitions:
Receivables........................................... (99.6) (142.0)
Contracts in process.................................. (95.7) 447.2
Inventories........................................... (45.8) (22.6)
Other current assets.................................. (1.7) (15.1)
Accounts payable...................................... (1.4) 13.5
Accrued expenses and other current liabilities........ 44.0 (61.6)
Income taxes payable.................................. 52.6 --
Deferred revenue...................................... 33.1 (10.4)
------ ------
Net cash provided by operating activities........... 235.8 416.5
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress--TyCom Global Network.............. (6.4) --
Purchase of property, plant and equipment................... (136.1) (56.6)
Acquisition related costs, net of cash acquired............. (0.1) (2.9)
Increase in investments..................................... -- (9.3)
Decrease/(Increase) in long-term receivables................ 18.2 (59.4)
Other....................................................... 2.5 --
------ ------
Net cash used in investing activities............... (121.9) (128.2)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term advances from/(to) Parent........................ 388.2 (220.9)
Repayments of long-term debt................................ (1.1) (1.3)
Net proceeds on long-term loans from Parent................. 48.6 1.3
Change in Parent company investment......................... (530.9) (97.7)
Distributions to minority interest.......................... (14.1) (19.0)
Other....................................................... 2.1 (0.3)
------ ------
Net cash used in financing activities............... (107.2) (337.9)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 6.7 (49.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 12.1 49.7
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 18.8 $ 0.1
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Net assets of acquired businesses contributed by Parent..... $ -- $280.0
</TABLE>
See notes to consolidated financial statements (unaudited).
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
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.
The unaudited consolidated financial statements presented herein include the
consolidated accounts of TyCom and its subsidiaries. Tyco International Ltd. and
its subsidiaries, excluding TyCom and its subsidiaries, are referred to herein
as the "Parent" or "Tyco." The financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles in the United States. These statements should be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended September 30, 1999 and other information included in Amendment No. 6 to
the Company's Registration Statement on Form S-1 filed on July 26, 2000.
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.
The consolidated financial statements have not been examined by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations.
The accompanying balance sheet as of June 30, 2000 has been presented on a
pro forma basis to reflect the establishment of the Company's capital structure
and the impact of the pricing of the initial public offering ("IPO") of the
Company's common shares in July 2000. Prior to the IPO, the Company had
3,000,000,000 common shares authorized with a par value of $0.25 per share and
600,000,000 undesignated preference shares authorized with a par value of $1.00
per share. In connection with the establishment of the Company's capital
structure, the assets and liabilities of the Company and its subsidiaries, which
were previously owned by Tyco, were transferred from Tyco to Tycom and
450,000,000 common shares of TyCom were issued to Tyco. In July 2000, the
Company sold 70,300,000 or 14% of its common shares in the IPO. Net proceeds to
TyCom from the IPO, after deducting the underwriting discount and commissions
were approximately $2.1 billion. Of that amount, $200 million was paid as a
dividend to Tyco and the remaining amount is expected to be used toward the
deployment of the TGN.
2. CONSTRUCTION IN PROGRESS--TYCOM GLOBAL NETWORK
The Company 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. The Company is applying its
capabilities to construct its own global undersea fiber optic network, known as
the TyCom Global Network ("TGN"), and sell its bandwidth capacity to others.
Costs incurred prior to the completion of a cable segment of the TGN are stated
at cost and reflected as construction in progress in the accompanying
consolidated balance sheets. Capitalized costs to date include land costs for
cable stations, marine survey costs and other costs related to the deployment of
the TGN.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 2000
------------- --------
(IN MILLIONS)
<S> <C> <C>
7.2% loan from Parent due 2001 (i)..................... $398.8 $ --
8.0% peseta denominated note due 2003.................. 9.2 7.2
6.7% loan from Parent due 2008 (i)..................... 202.5 --
7.3% loan from Parent due 2010 (i)..................... -- 200.0
7.5% loan from Parent due 2012 (i)..................... -- 250.0
7.5% loan from Parent due 2015 (i)..................... -- 200.0
------ ------
Total debt............................................. 610.5 657.2
Less current portion................................... (2.3) (2.2)
------ ------
Long-term debt......................................... $608.2 $655.0
====== ======
</TABLE>
------------------------
(i) 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.
4. INTEREST EXPENSE, NET
Interest expense, net is comprised of the following:
<TABLE>
<CAPTION>
FOR THE QUARTERS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Third party interest income.......................... $ 0.4 $ -- $ 0.7 $ --
Third party interest expense......................... (0.1) -- (0.4) --
Interest income-short-term advances to Parent........ 4.5 0.6 25.3 1.2
Interest expense-short-term loans from Parent........ (0.3) -- (0.7) (3.0)
Interest expense-long-term loans from Parent......... (12.0) (10.6) (33.6) (31.8)
------ ------ ----- ------
Interest expense, net................................ $ (7.5) $(10.0) $(8.7) $(33.6)
====== ====== ===== ======
</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.
5. NET INCOME PER SHARE
TyCom's capital structure was established immediately prior to the IPO of
its common shares in July 2000. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, the capitalization of common shares
has been retroactively reflected for the purposes of presenting income per share
for the quarters and nine months ended June 30, 2000 and 1999.
Net income per share has been computed by dividing net income by
450.0 million common shares, which is the number of shares outstanding prior to
the IPO. There were no dilutive common share equivalents outstanding prior to
the close of the Company's IPO.
6. COMPREHENSIVE INCOME
Total comprehensive income was approximately $86.6 million and
$44.6 million for the quarters ended June 30, 2000 and 1999, respectively, and
$191.6 million and $122.0 million for the nine months ended
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. COMPREHENSIVE INCOME (CONTINUED)
June 30, 2000 and 1999, respectively, which consists of net income and the net
change in foreign currency translation adjustment.
7. PARENT COMPANY INVESTMENT
In March 2000, TyCom paid a $550.0 million cash dividend to Parent for
accumulated investment balance prior to the IPO. During the quarter and nine
months ended June 30, 2000, net transfers from Parent for business operations
were $0 and $19.1 million, respectively.
8. SUPPLEMENTARY BALANCE SHEET INFORMATION
Selected supplementary balance sheet information is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 2000
------------- --------
(IN MILLIONS)
<S> <C> <C>
Inventories:
Purchased materials and manufactured parts.......... $ 66.9 $ 95.2
Work in process..................................... 40.3 33.5
Finished goods...................................... 1.5 1.9
------- -------
$ 108.7 $ 130.6
======= =======
Property, Plant and Equipment:
Land................................................ $ 2.9 $ 5.4
Buildings........................................... 40.3 52.8
Machinery and equipment............................. 197.1 280.4
Ships and submersibles.............................. 326.5 312.2
Leasehold improvements.............................. 7.5 10.5
Betterments in process.............................. 38.8 74.0
Accumulated depreciation............................ (148.7) (191.1)
------- -------
$ 464.4 $ 544.2
======= =======
</TABLE>
Accrued expenses and other current liabilities include the following:
<TABLE>
<S> <C> <C>
Accrued warranties and liquidated damages........... $ 84.1 $ 104.3
======= =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
As reported in the Company's Registration Statement on Form S-1, as amended,
filed July 26, 2000 in connection with the IPO, the Company and its subsidiaries
are involved in litigation with IDT Corp. and IDT Europe B.V.B.A. and litigation
and arbitration with Global Crossing Ltd. The following developments have
occurred since the date of the Registration Statement.
IDT LITIGATION
In the action filed by IDT Europe B.V.B.A. against Tyco Group (S.a.r.l.),
TyCom (US) Inc. (formerly known as Tyco Submarine Systems Ltd.), Tyco and Tyco
International (US) Inc. in the Superior Court of New Jersey, Law Division,
Morris County, the court granted on August 18, 2000, the defendants' motion to
dismiss on comity grounds, without prejudice and on condition that defendants
may not defend any subsequent action by plaintiff on the grounds of statute of
limitations.
GLOBAL CROSSING LITIGATION
In the litigation brought against TyCom (US) Inc. (formerly known as Tyco
Submarine Systems Ltd.) by Global Crossing Ltd. in the Southern District of New
York, the court has set February 28, 2001, as the
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
date for completion of all fact discovery, and TyCom (US) Inc. has moved for
judgment on the pleadings seeking dismissal of the plaintiffs' claims for
defamation, fraudulent inducement, fraudulent concealment and breach of alleged
agreement to inform Global Crossing Ltd. of opportunities to bid on or develop
competing subsea cable systems and to refrain from investing in the Pacific
segment of the TGN.
GLOBAL CROSSING ARBITRATION
In the arbitration proceeding brought by affiliates of Global Crossing Ltd.
against TyCom (US) Inc., each party has nominated an arbitrator, and the
party-nominated arbitrators have agreed on a third arbitrator to serve as
chairman of the arbitral panel. In addition, the parties have settled their
disputes under the operation, administration and maintenance agreement pursuant
to which Tycom (US) Inc. had provided maintenance and certain other services to
affiliates of Global Crossing Ltd. with respect to the Atlantic Crossing-1
system. Specifically, the parties agreed to terminate that agreement in exchange
for mutual releases, payments to TyCom (US) Inc. totaling approximately
$19 million and a dismissal of claims arising out of the agreement from the
arbitration. The other disputes relating to the development and construction
agreement and the sales agency agreements in this arbitration remain pending.
10. RELATED PARTY TRANSACTIONS
Certain services are provided to the Company by the Parent, primarily
related to financial, treasury, tax, legal, audit, human resource and risk
management functions. The Company recorded a service charge of 1.0% of net
revenue related to these services in each of the quarters and nine months ended
June 30, 2000 and 1999, which is included in general and administrative expenses
in the Consolidated Statements of Operations.
The Company purchases various operational services, such as fire protection
and engineering, and 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 these related parties were $10.1 million,
$3.6 million, $26.0 million, and $10.2 million during the quarters and nine
months ended June 30, 2000 and 1999, respectively. Amounts due under these trade
activities were $1.9 million and $2.1 million as of June 30, 2000 and
September 30, 1999, respectively, and are included in accounts payable in the
Consolidated Balance Sheets.
Short-term loans have been provided by the Parent to fund the purchase of
significant expenditures related to construction contracts. These expenditures
are generally expensed to cost of product sales in accordance with our revenue
recognition policy. The short-term loans are repaid when the Company receives
payment for customer contracts. Amounts outstanding under these types of
short-term loans were $6.7 million and $10.3 million as of September 30, 1999
and June 30, 2000, respectively, and are included in accrued expenses and other
current liabilities in the Consolidated Balance Sheets. See Note 3 for a
discussion of loans from Parent included in long-term debt.
11. SUBSEQUENT EVENTS
In July 2000, the Company entered into an agreement with C2C Pte. Ltd.
("C2C"), a private cable development company led by Singapore
Telecommunications, for the supply of a 17,000-kilometer undersea fiber optic
system connecting major cities in Asia, which is valued at over $1 billion. In
connection with the supply agreement, the Company entered into a joint venture
with, among other investors, C2C AsiaPac Pte. Ltd. and committed to fund
approximately $140 million for a 15% ownership in C2C. In August 2000, the
Company announced it had received an order from Asia Global Crossing for
upgrades to their Pacific Crossing Cable System, valued at approximately
$100 million.
7
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are 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 are applying our capabilities
to construct our own global undersea fiber optic network, known as the TyCom
Global Network ("TGN"), and sell our bandwidth capacity to others.
We expect revenue through fiscal 2001 to 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 of the TGN in the second half of calendar 2001, we
expect our revenues to be derived primarily from the sale of bandwidth capacity
on the TGN. We plan to continue to provide our products and services to others
while deploying the TGN. During construction of the transatlantic portion of the
TGN, revenues and operating income may decrease from current levels. 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. However, we anticipate total fiscal 2001
operating income will increase slightly over expected fiscal 2000 levels.
RESULTS OF OPERATIONS
Net income was $223.9 million for the nine months ended June 30, 2000, as
compared to $122.0 million for the nine months ended June 30, 1999. The
operating results, which are presented in accordance with generally accepted
accounting principles ("GAAP") in the United States, are supplemented by a
discussion of earnings before interest, income taxes, depreciation and
amortization ("EBITDA"). As the operations of our business transition to
deploying the TGN 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.
Cost of product sales and services include all direct project and
maintenance costs, including manufacturing, marine installation, cable station
equipment and related installation costs, project management and engineering
support costs. Operating expenses include costs associated with sales and
marketing, research and development, and general and administrative expenses.
General and administrative expenses include executive, legal, finance, human
resources, information technology and service charges from Tyco. See Note 9 to
the Consolidated Financial Statements for further discussion of the service
charges from Tyco.
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
REVENUES
Net revenue increased 56.7% during the quarter ended June 30, 2000 to
$676.4 million from $431.6 million in the quarter ended June 30, 1999. Revenue
from product sales increased 69.4% to $638.5 million from $376.9 million. The
major projects driving product revenue growth included SAm-1 (an increase of
$227 million) and Hibernia (an increase of $188 million), partially offset by
Pacific Crossing-1 (a decrease of $88 million) and Americas II (a decrease of
$50 million). The SAm-1 system was contracted in July 1999 and connects major
telecommunications centers around South America. The Hibernia system was
contracted in June 1999 and consists of a 12,300 kilometer four fiber pair ring
between the United States, Canada, the United Kingdom and Ireland. The Pacific
Crossing-1 system was
8
<PAGE>
contracted in April 1998 and connects the United States and Japan. The Americas
II system was contracted in February 1998 and connects South America, the
Caribbean and the United States.
Service revenue decreased 30.7% to $37.9 million from $54.7 million. Service
revenue decreased primarily due to a decline of $18.2 million in capacity sales
commissions related to the Atlantic Crossing-1 project.
Additionally, net revenue increased in part due to the acquisition of
Telecomunicaciones Marinas, S.A., known as Temasa, in May 1999. Excluding the
impact of Temasa, net revenue increased approximately 55.1% in the quarter ended
June 30, 2000.
OPERATING RESULTS
Operating income increased $64.5 million, or 73.8%, to $151.9 million in the
quarter ended June 30, 2000. The increase in operating income was primarily due
to increased project revenue and the inclusion of the full quarter's results of
Temasa in the current quarter, partially offset by increased operating expenses.
In the quarter ended June 30, 2000, operating income was negatively impacted by
an increase in the expense for product warranty reserves and bad debt reserves
of $16.8 million and $5.0 million, respectively. Operating income was 22.5% of
net revenue in the quarter ended June 30, 2000, as compared to 20.3% in the
quarter ended June 30, 1999. The increase in operating income as a percentage of
net revenue is primarily due to the increase in project revenue, partially
offset by the increases in operating expenses, discussed below.
During the quarter ended June 30, 2000, we incurred $3.3 million in sales
and marketing costs compared to $4.7 million during the quarter ended June 30,
1999. The decrease in sales and marketing costs was primarily due to lower
personnel costs associated with the transition from being solely a supplier, to
also being an owner of undersea cable. Sales and marketing expenses were 0.5%
and 1.1% of net revenue during the quarters ended June 30, 2000 and 1999,
respectively. The decrease in sales and marketing costs as a percentage of net
revenue also reflects higher project revenue for the current period. We expect
these costs to increase both in absolute dollars and as a percentage of net
revenue as we build the sales and marketing staff and begin to sell bandwidth
capacity on the TGN.
Research and development costs were $15.9 million and $13.7 million in the
quarters ended June 30, 2000 and 1999, respectively. Research and development
expenses increased due to higher personnel and equipment depreciation costs.
Research and development expenses were 2.4% and 3.2% of net revenue during the
quarters ended June 30, 2000 and 1999, respectively. The decrease in research
and development costs as a percentage of net revenue was due to higher project
revenue for the current period.
During the quarter ended June 30, 2000, we incurred $26.4 million in general
and administrative costs compared to $18.3 million during the quarter ended
June 30, 1999. The increase in general and administrative costs was due
primarily to an increase in bonus expense of $4.5 million as a result of
increased profits, an increase in the service charge from Tyco of $2.4 million,
related to the increase in net revenue, and an increase in goodwill and other
intangible amortization of $0.5 million due to the acquisition of Temasa in
May 1999. General and administrative expenses were 3.9% and 4.2% of net revenue
during the quarters ended June 30, 2000 and 1999, respectively. The decrease in
general and administrative costs as a percentage of net revenue was due to
higher project revenue for the current period.
EBITDA increased $70.8 million, or 71.4%, to $170.0 million in the quarter
ended June 30, 2000. Depreciation and amortization expense for the quarter ended
June 30, 2000 was $18.1 million compared to $11.8 million for the quarter ended
June 30, 1999. The increase of $6.3 million was principally due to an increase
in depreciation of $5.7 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, goodwill and other intangible amortization increased $0.5 million due
to the acquisition of Temasa in May 1999.
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INTEREST EXPENSE, NET
Interest expense, net, was $7.5 million for the quarter ended June 30, 2000,
as compared to $10.0 million for the quarter ended June 30, 1999. The decrease
of $2.5 million was principally due to higher interest income associated with
advances to Parent, slightly offset by higher interest expense on loans from
Parent.
INCOME TAX EXPENSE
The effective income tax rate was 36.8% and 38.8% during the quarters ended
June 30, 2000 and 1999, respectively. The decrease was 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.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
REVENUES
Net revenue increased 72.6% during the nine months ended June 30, 2000 to
$1,952.2 million from $1,130.9 million in the nine months ended June 30, 1999.
Revenue from product sales increased 86.2% to $1,834.7 million from
$985.4 million. The major projects driving product revenue growth included SAm-1
(an increase of $538 million), Hibernia (an increase of $278 million), Yellow
(an increase of $219 million), and Pacific Crossing-1 (an increase of
$140 million), partially offset by China-US (a decrease of $164 million) and
Americas II (a decrease of $84 million). 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 19.2% to $117.5 million from $145.5 million.
Service revenue decreased primarily due to a decline of $53.0 million in
capacity sales commissions related to the Atlantic Crossing-1 project, partially
offset by an increase of $11.4 million associated with the acquisition of Temasa
in May 1999.
Additionally, net revenue increased in part due to the acquisition of Temasa
in May 1999. Excluding the impact of Temasa, net revenue increased approximately
69.2% in the nine months ended June 30, 2000.
OPERATING RESULTS
Operating income increased $122.2 million, or 48.9%, to $372.1 million in
the nine months ended June 30, 2000. The increase in operating income was
primarily due to increased project revenue and the inclusion of the results of
Temasa for the full nine months ended June 30, 2000, partially offset by an
increase in cost of product sales and operating expenses and the recording of
$53.0 million in income from capacity sales commissions related to the Atlantic
Crossing-1 project during the nine months ended June 30, 1999. In the nine
months ended June 30, 2000, operating income was negatively impacted by
recording $39.3 million for receivable allowances and bad debt provisions;
$24.7 million for inventory provisions for potential excess and obsolete
inventory due to technology changes on terminal equipment; a provision of
$19.9 million primarily related to the delayed delivery of Americas II, a system
which we installed in conjunction with other suppliers; an increase of
$16.8 million in the expense recorded for product warranty reserves; and
recording a $5.0 million provision related to loss on a contract. Operating
income was 19.1% of net revenue in the nine months ended June 30, 2000, as
compared to 22.1% in the nine months ended June 30, 1999. The decrease in
operating income as a percentage of net revenue is primarily due to the increase
in cost of product sales and services and operating expenses, discussed below,
partially offset by the increase in net revenue.
During the nine months ended June 30, 2000, we incurred $10.4 million in
sales and marketing costs compared to $13.4 million during the nine months ended
June 30, 1999. The decrease in sales and marketing costs was primarily due to a
decrease in personnel costs, associated with the transition from
10
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being solely a supplier, to also being an owner of undersea cable. Sales and
marketing expenses were 0.5% and 1.2% of net revenue during the nine months
ended June 30, 2000 and 1999, respectively. The decrease in sales and marketing
costs as a percentage of net revenue also reflects higher project revenue for
the current period. We expect these costs to increase both in absolute dollars
and as a percentage of net revenue as we build the sales and marketing staff and
begin to sell bandwidth capacity on the TGN.
Research and development costs were $42.6 million and $40.2 million in the
nine months ended June 30, 2000 and 1999, respectively. Research and development
costs increased due to higher spending related to additional personnel, higher
equipment depreciation and higher overhead costs incurred in connection with a
new TyCom research and development facility, partially offset by one-time costs
associated with moving to the facility incurred in the prior year. Research and
development expenses were 2.2% and 3.6% of net revenue during the nine months
ended June 30, 2000 and 1999, respectively. The decrease in research and
development costs as a percentage of net revenue was due to higher project
revenue for the current period.
During the nine months ended June 30, 2000, we incurred $68.7 million in
general and administrative costs compared to $48.1 million during the nine
months ended June 30, 1999. The increase in general and administrative costs was
due to an increase in the service charge from Tyco of $8.2 million as a result
of the increase in net revenues, an increase in bonus expense of $7.4 million as
a result of increased profits and an increase in goodwill and other intangible
amortization of $2.8 million due to the acquisition of Temasa in May 1999.
General and administrative expenses were 3.5% and 4.3% of net revenue during the
nine months ended June 30, 2000 and 1999, respectively. The decrease in general
and administrative costs as a percentage of net revenue was due to higher
project revenue for the current period.
EBITDA increased $142.2 million, or 50.6%, to $423.2 million in the nine
months ended June 30, 2000. Depreciation and amortization expense for the nine
months ended June 30, 2000 was $51.1 million compared to $31.1 million for the
nine months ended June 30, 1999. The increase of $20.0 million was principally
due to an increase in depreciation of $17.2 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, goodwill and other intangible amortization
increased $2.8 million due to the acquisition of Temasa in May 1999.
INTEREST EXPENSE, NET
Interest expense, net, was $8.7 million for the nine months ended June 30,
2000, as compared to $33.6 million for the nine months ended June 30, 1999. The
decrease of $24.9 million was principally due to higher interest income
associated with advances to Parent, slightly offset by higher interest expense
on loans from Parent.
INCOME TAX EXPENSE
The effective income tax rate was 36.5% for the nine months ended June 30,
2000, as compared to 40.3% in the nine months ended June 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
We estimate that the total cost to implement the first phase of the TGN will
be approximately $5.7 billion over the next three fiscal years. We believe that
our cash flow from operations, together with net proceeds from our recently
completed IPO and available financings under our revolving credit agreements
with Tyco, will be adequate to fund our operations and meet the anticipated
capital requirements of deploying the first phase of the TGN.
In March 2000, we paid a $550.0 million cash dividend to Parent for
accumulated investment balance. During the nine months ended June 30, 2000, net
transfers from Parent for business operations were $19.1 million.
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In July 2000, we sold approximately 14% of our common shares in an IPO. Our
net proceeds from the offering were approximately $2.1 billion. Of that amount,
we paid $200.0 million as a dividend to Tyco and the remaining amount is
expected to be used toward the deployment of the TGN.
As presented in the consolidated statement of cash flows, net cash provided
by operating activities was $235.8 million in the nine months ended June 30,
2000. The significant changes in working capital in the nine months ended
June 30, 2000 were a $99.6 million increase in receivables and a $95.7 million
increase in contracts in progress.
For the nine months ended June 30, 2000, receivables increased due to a
$155.2 million customer billing on the SAm-1 project, partially offset by
collection of a $68.3 million receivable related to the Pacific Crossing-1
project. The increase in contracts in process was due principally to a decrease
in billings in excess of costs for SAm-1 ($143 million), Pan American Crossing
($95 million) and Pacific Crossing-1 ($71 million), partially offset by a
decrease in contracts in process balances for China-US ($93 million) and
Americas II ($32 million).
During the nine months ended June 30, 2000, we used cash of $136.1 million
to purchase property, plant and equipment, primarily associated with
manufacturing machinery and equipment and research and development test
equipment, and $6.4 million to begin construction of the TGN.
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 us on an
as needed basis. Short-term advances decreased in the nine months ended
June 30, 2000 due primarily to a $550 million cash dividend paid to Tyco in
March 2000, partially offset by an increase in long-term loans from Tyco and
positive cash flow for the period.
Short-term loans have been provided by Tyco to fund the purchase of
significant expenditures related to construction contracts. At June 30, 2000,
short-term loans of $10.3 million were outstanding and are included in accrued
expenses and other current liabilities on our consolidated balance sheet.
In March 2000, we refinanced our long-term debt from Parent and increased
our 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.
At June 30, 2000, our total debt was $657.2 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 us 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 requires a redemption premium of up to 5%.
In July 2000, we entered into an agreement with C2C Pte. Ltd. ("C2C"), a
private cable development company led by Singapore Telecommunications, for the
supply of a 17,000-kilometer undersea fiber optic system connecting major cities
in Asia, which is valued at over $1 billion. In connection with the supply
agreement, we entered into a joint venture, among other investors, with C2C
AsiaPac Pte. Ltd. and committed to fund approximately $140 million for a 15%
ownership in C2C.
BACKLOG
At June 30, 2000, we had a backlog of unfilled orders of approximately
$2,498.0 million, compared to a backlog of approximately $3,535.4 million at
September 30, 1999. Backlog decreased from September 30, 1999 to June 30, 2000,
due to a decline in system supply contract bookings as the business shifts its
focus to the construction of the TGN and due to the timing of signing and
performance of its long-term contracts.
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Backlog includes maintenance contracts of $795.8 million and $529.7 million
as of June 30, 2000 and September 30, 1999, respectively. Maintenance backlog
increased from September 30, 1999 to June 30, 2000 due to booking maintenance
contracts for the Hibernia and SAm-1 systems.
ACCOUNTING AND TECHNICAL PRONOUNCEMENTS
In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." These statements
establish 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 Nos. 133 and 138 also require 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. SFAS No. 138 shall be adopted concurrently with SFAS No. 133. We
are currently analyzing these standards.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000. We do not expect the application of FIN 44 to have a
material impact on our financial position or results of operations.
FORWARD LOOKING INFORMATION
Certain statements in this report are "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may vary materially
from the expectations contained in the forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: the timing of
construction and the successful operation of the TGN, changes in
telecommunications technology, changes in demand for bandwidth capacity, receipt
of necessary licenses and regulatory approvals, competitive factors in the
undersea fiber optics cable industry and in the telecommunications industry
generally, overall economic and business conditions, changes in the regulatory
environment, the outcome of litigation, risks associated with conducting
business in international markets, and other risks described in our Form S-1
Registration Statement (as amended) filed with the SEC. We are under no
obligation to (and expressly disclaim any obligation to) update or alter our
forward-looking statements whether as a result of new information, future events
or otherwise.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk from changes in interest rates, foreign currency
exchange rates and commodity prices has not changed materially from its exposure
as of the most recent year ended September 30, 1999.
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PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
As reported in the Company's Registration Statement on Form S-1, as amended,
filed July 26, 2000 in connection with the initial public offering, the Company
and its subsidiaries are involved in litigation with IDT Corp. and IDT Europe
B.V.B.A. and litigation and arbitration with Global Crossing Ltd. The following
developments have occurred since the date of the Registration Statement.
IDT LITIGATION
In the action filed by IDT Europe B.V.B.A. against Tyco Group (S.a.r.l.),
TyCom (US) Inc. (formerly known as Tyco Submarine Systems Ltd.), Tyco and Tyco
International (US) Inc. in the Superior Court of New Jersey, Law Division,
Morris County, the court granted on August 18, 2000, the defendants' motion to
dismiss on comity grounds, without prejudice and on condition that defendants
may not defend any subsequent action by plaintiff on the grounds of statute of
limitations.
GLOBAL CROSSING LITIGATION
In the litigation brought against TyCom (US) Inc. (formerly known as Tyco
Submarine Systems Ltd.) by Global Crossing Ltd. in the Southern District of New
York, the court has set February 28, 2001, as the date for completion of all
fact discovery, and TyCom (US) Inc. has moved for judgment on the pleadings
seeking dismissal of the plaintiffs' claims for defamation, fraudulent
inducement, fraudulent concealment and breach of alleged agreement to inform
Global Crossing Ltd. of opportunities to bid on or develop competing subsea
cable systems and to refrain from investing in the Pacific segment of the TyCom
Global Network.
GLOBAL CROSSING ARBITRATION
In the arbitration proceeding brought by affiliates of Global Crossing Ltd.
against TyCom (US) Inc., each party has nominated an arbitrator, and the
party-nominated arbitrators have agreed on a third arbitrator to serve as
chairman of the arbitral panel. In addition, the parties have settled their
disputes under the operation, administration and maintenance agreement pursuant
to which Tycom (US) Inc. had provided maintenance and certain other services to
affiliates of Global Crossing Ltd. with respect to the Atlantic Crossing-1
system. Specifically, the parties agreed to terminate that agreement in exchange
for mutual releases, payments to TyCom (US) Inc. totaling approximately
$19 million and a dismissal of claims arising out of the agreement from the
arbitration. The other disputes relating to the development and construction
agreement and the sales agency agreements in this arbitration remain pending.
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 26, 2000, we conducted an initial public offering of 61,130,435
common shares (70,300,000 shares including the 9,169,565 over-allotment shares),
$0.25 par value per share pursuant to a final prospectus dated July 26, 2000.
The prospectus was contained in the Company's Registration Statement on
Form S-1, which was declared effective by the Securities and Exchange Commission
(SEC File No. 333-32134) on July 26, 2000. An aggregate of 70,300,000 common
shares were registered. All of the common shares (including over-allotment
shares) offered were sold. The aggregate offering price was $2.2 billion, with
net proceeds to TyCom of $2.1 billion, after deduction of the underwriting
discounts and commissions of $0.1 billion and the estimated offering expenses of
approximately $4.3 million. Goldman, Sachs & Co., Salomon Smith Barney, and
Merrill Lynch & Co., acted as lead underwriters for the initial public offering.
We used $200.0 million of the net proceeds to pay a dividend to Tyco and the
remaining net proceeds are expected to be used toward the deployment of the
TyCom Global Network.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Employee Confidentiality, Invention Assignment and
Non-Competition Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 7th day of September 2000.
<TABLE>
<S> <C> <C>
TYCOM LTD.
By: /s/ MARK H. SWARTZ
-----------------------------------------
Mark H. Swartz
VICE PRESIDENT
(DULY AUTHORIZED OFFICER)
By: /s/ DAVID W. VAN ROSSUM
-----------------------------------------
David W. Van Rossum
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL
OFFICER)
</TABLE>
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