UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number: 333-86461
GLOBENET COMMUNICATIONS GROUP LIMITED
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization)
2 Carter's Bay Road
Southside, St. David's DDBX
Bermuda
(Address, including zip code, of principal executive offices)
(441) 296-9000
(Registrant's telephone number, including area code)
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[x] No [ ]
The number of shares, $1.50 par value per share, of the registrant's common
shares outstanding as of March 31, 2000: 17,044,800 shares.
GLOBENET COMMUNICATIONS GROUP LIMITED
Table of Contents
Part I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets .......................................... 1
Consolidated Statements of Operations................................. 2
Consolidated Statements of Cash Flows................................. 3
Notes to Unaudited Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.......................................................... 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities and Use of Proceeds...................... 14
Item 3. Defaults Upon Senior Securities................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item 5. Other Information.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 14
PART I.
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GlobeNet Communications Group Limited
Consolidated Balance Sheets
(Unaudited)
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
March 31, December 31,
2000 1999
$ $
Assets
Current assets
Restricted cash 79,998 79,998
Accounts receivable (net of allowance of $224; 1999 - $224) 2,203 2,096
Other receivables 218 150
Prepaid expenses and deposits 1,535 1,632
------- -------
83,954 83,876
Restricted cash 357,994 448,399
Fixed assets 49,325 49,148
Construction in progress 141,780 98,062
Other assets 25,324 25,847
------- -------
658,377 705,332
------- -------
Liabilities
Current liabilities
Accounts payable 5,522 36,179
Accrued liabilities 10,807 21,117
------- -------
16,329 57,296
Long-term debt 400,000 400,000
Deferred revenue 6,389 6,455
------- -------
422,718 463,751
------- -------
Shareholders' Equity
Share capital
Class B shares, 2,000 shares authorized, par value $1.50 each
1,000 shares issued and outstanding 2 2
Common shares, 24,000,000 authorized, par value $1.50 each
17,044,800 (1999 - 17,043,900) shares issued and outstanding 25,566 25,566
Additional paid-in capital 249,702 246,866
Deficit (39,611) (30,853)
------- -------
235,659 241,581
------- -------
658,377 705,332
------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
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GlobeNet Communications Group Limited
Consolidated Statements of Operations
(Unaudited)
For the three months ended March 31, 2000 and 1999
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
2000 1999
$ $
Revenues
Telecommunications services 6,344 6,035
IRU capacity 79 77
------ ------
6,423 6,112
------ ------
Expenses
Carrier charges 2,449 2,705
General and administrative expenses 9,520 2,105
Amortization of fixed assets 688 406
------ ------
12,657 5,216
------ ------
Operating (loss) income (6,234) 896
Interest on long-term debt 9,608 861
Accrued contingent interest - 235
Interest income (7,110) (83)
------ ------
Loss before income taxes and equity
accounted for investments (8,732) (117)
Provision for income taxes (26) (9)
------ ------
Loss before equity accounted for investments (8,758) (126)
Loss from equity accounted for investments - (232)
------ ------
Net loss and comprehensive loss for the period (8,758) (358)
------ ------
Basic and fully diluted loss per common share
(note 5) (0.51) (0.10)
------ ------
The accompanying notes are an integral part of these consolidated financial
statements.
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GlobeNet Communications Group Limited
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 2000 and 1999
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
2000 1999
$ $
C>
Cash provided by (used in)
Operating activities
Net loss for the year (8,758) (358)
Items not involving cash
Amortization of fixed assets 688 406
Amortization of other assets 1,045 74
Loss from equity accounted for investments - 232
Accrued contingent interest - 235
Compensatory share options 2,836 -
Net change in non-cash operating items
Accounts receivable (107) (1,141)
Other receivables (68) 587
Note receivable (8) (7)
Prepaid expenses and deposits 97 38
Accounts payable 386 (622)
Accrued liabilities (10,310) 697
Deferred revenue (66) (76)
------- ------
Cash (used in) provided by operating activities (14,265) 65
------- ------
Financing activities
Payments of long-term debt - (2,400)
Deferred financing costs (589) (227)
------- ------
Cash (used in) financing activities (589) (2,627)
------- ------
Investing activities
Restricted cash 90,405 -
Purchase of fixed assets (865) (764)
Construction in progress (74,761) -
Change in other assets 75 2
Due from related party - 1,363
------- ------
Cash provided by investing activities 14,854 601
------- ------
Increase (decrease) in cash for the period - (1,961)
Cash - Beginning of period - 3,030
------- ------
Cash - End of period - 1,069
------- ------
Interest and income taxes paid
Interest 22,184 157
Income taxes 14 8
The accompanying notes are an integral part of these consolidated financial
statements.
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GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000 and 1999
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
1 Nature of operations
GlobeNet Communications Group Limited ("the Company") provides
international telecommunications services to both residential and commercial
customers and is a provider of telecommunications capacity. The Company is
currently developing a fibre optic submarine cable system called Atlantica-1
that will link Bermuda, North and South America and offer capacity between
major cities in the United States, Bermuda, Brazil, Venezuela and Argentina.
Atlantica-1 is currently being constructed.
In November 1997, the Company deployed a fibre optic submarine cable
system which connects Bermuda and the United States ("BUS-1"). The Company
provides international telecommunications services to both residential and
commercial customers in Bermuda through a subsidiary company, TeleBermuda
International Limited ("TBI") through the BUS-1.
On January 10, 1997, TBI was granted its public telecommunications service
licence in Bermuda under the provisions of the Telecommunications Act, 1986
and the Public Telecommunication Service (Licence) Regulations, 1988 for a
five-year term and began commercial operations in May 1997. TBI has an
interconnection agreement with the Bermuda Telephone Company ("BTC"), the
domestic carrier in Bermuda. No consideration was paid by the Company in
relation to these agreements
2 Interim unaudited consolidated financial statements
The unaudited consolidated balance sheet as at March 31, 2000 and the
unaudited consolidated statements of operations for the three months ended
March 31, 2000 and March 31, 1999 and the unaudited consolidated statements
of cash flows for the three months ended March 31, 2000 and March 31, 1999,
in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
necessary for the fair statement of the results of the interim periods. All
adjustments reflected in the consolidated financial statements are of a
normal recurring nature. The data disclosed in the notes to the consolidated
financial statements for these periods are also unaudited. Results for the
three month period ended March 31, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year.
3 Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal years beginning after June 15, 2000. SFAS 133,
as amended, requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow, and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative
instruments. Upon adoption, the Company will be required to adjust hedging
instruments to fair value in the balance sheet and recognize the offsetting
gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. Management has not determined the
impact of this statement on its financial position, results of operations and
cash flows.
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GlobeNet Communications Group Limited
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000 and 1999
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars, except share and per share amounts)
FASB Interpretation No. 43, "Real Estate Sales - an interpretation of FASB
Statement No. 66," was issued in June 1999. It clarifies the standards for
recognition of profit on all real estate sales transactions, including those
related to fibre optic cable that cannot be removed and used separately from
the real estate without incurring significant costs. This interpretation is
effective for all applicable transactions after June 30, 1999. However, no
such transactions have been entered into after June 30, 1999 and we have not
yet completed our analysis of the applicability or the impact of this
statement on future transactions.
4 Common share options
The Company awards options to employees, officers and directors of the
Company under the terms of the 1997 and 1998 Share Option and Incentive
Plans. In addition, the Board of Directors has the authority to grant options
outside of these plans under separate stock option agreements.
During the three months ended March 31, 2000, the Board of Directors
granted 477,521 options at an exercise price of $20.40 to employees and
certain officers and directors. These options vest over three years. The
difference between the market price and the exercised price on the grant date
has been reflected as deferred compensation in shareholders' equity and is
being amortized over the vesting period. As at March 31, 2000, stock options
covering 1,907,299 shares of common stock were outstanding.
The vesting terms of all options accelerate upon a change in control.
Deferred compensation is amortized over the expected vesting period.
5 Basic and fully diluted loss per common share
The basic loss per common share is calculated using the weighted average
number of common shares outstanding of 17,043,900 (1999 - 3,515,927). The
weighted average number of common shares on a fully diluted basis is
calculated on the same basis as the basic weighted average number of shares
as the Company is in a loss position and the effects of possible conversion
would be anti-dilutive.
6 Acquisition of the Company
On March 11, 2000, Worldwide Fiber, Inc. (which has since changed its name
to 360networks inc.) ("360networks") and the Company entered into an
Agreement and Plan of Arrangement pursuant to which 360networks will acquire
the Company in exchange for subordinate voting shares of 360networks. The
consummation of the transaction is subject to the fulfilment of a number of
conditions, including: (a) approval by shareholders, the Bermuda Supreme
Court and certain regulatory authorities; (b) the compliance by the Company
and 360networks with respective obligations under the agreement; and (c) the
completion of an underwritten public offering of 360networks' subordinate
voting shares. The transaction will likely result in 360networks assuming the
Company's long-term debt and the settlement of all outstanding common share
options.
-5-
ITEM 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
You should read the discussion in this section in conjunction with our
unaudited interim consolidated financial statements and the notes thereto
included elsewhere in this report. Certain information contained in this
section, including information with respect to our plans and expectations for
our business, is forward-looking. You should carefully consider the factors set
forth in this section under the caption "Forward-Looking Statements" and
elsewhere in this report and in the "Business--Risk Factors" section of the
Company's annual report on Form 10-K for the fiscal year ended December 31, 1999
(file no. 333-86461) on file with the Securities and Exchange Commission for a
discussion of important factors that could cause actual results to differ
materially from any forward-looking statements contained in this Form 10-Q.
Overview
GlobeNet Communications Group Limited was incorporated and registered on
June 25, 1998 as a Bermuda exempt company as part of a reorganization of the
TeleBermuda International Limited ("TBI") group of companies. Under the
reorganization, TBI, which was incorporated on January 6, 1995, became our
wholly owned subsidiary, and the issued shares of TBI were exchanged for our
common shares on a one-for-one basis with substantially the same rights and
privileges.
Historically, through our wholly owned subsidiary TBI, we have provided
retail international telecommunications services to, from and through Bermuda.
In November 1997, we successfully completed the deployment of the BUS-1 undersea
fiber optic cable system which connects Bermuda and the United States. The BUS-1
system established us as a full-service facilities-based provider, a company
that has its own long-distance transmission and switching facilities, of
international long-distance service for traffic originating and terminating in
Bermuda.
We plan to extend our business to become a provider of city-to-city
international telecommunications network solutions on a wholesale "carriers'
carrier" basis using a combination of undersea fiber optic cable systems and
terrestrial extensions. We are currently developing the Atlantica-1 Network, an
undersea fiber optic cable system, as part of this plan. We will incorporate the
BUS-1 system into the Atlantica-1 Network.
Our international telecommunications network solutions business is in the
development stage and, accordingly, our historical consolidated financial
information relates primarily to TBI's retail international telecommunications
business and is not necessarily indicative of future results.
We report our results in U.S. dollars, although historically a significant
portion of our revenues and expenses have been settled in Bermuda dollars, which
are pegged to the U.S. dollar at par. Therefore, currency fluctuations have not
affected the results of our existing operations. Substantially all of our costs
incurred in connection with the Atlantica-1 Network will be incurred in U.S.
dollars. While we expect to invoice a majority of our customers in U.S. dollars,
we may be required to invoice certain customers in other currencies. To the
extent we receive revenues in currencies other than U.S. dollars, our results of
operations may be impacted by currency fluctuations.
360networks inc. Transaction
On March 11, 2000, Worldwide Fiber, Inc. (which has since changed its name
to 360networks inc.) ("360networks") and we entered into an Agreement and Plan
of Arrangement pursuant to which 360networks will acquire us in exchange for
subordinate voting shares of 360networks (the "Scheme"). 360networks offers
broadband network services for telecommunications companies, Internet service
providers, application service providers and data-centric enterprises.
360networks is completing a technologically advanced 90,300-kilometer (56,100
mile) network, including a fiber optic terrestrial network in North America
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and Europe and undersea cables linking North America and Europe. 360networks and
its predecessors have been developing communications networks since 1988.
The consummation of the transaction is subject to the fulfillment of a
number of conditions, including (a) due approval of the Scheme by our
shareholders and the applicable governmental authorities (including the Supreme
Court of Bermuda pursuant to Article 99 of the Companies Act 1981 of Bermuda);
(b) expiration or termination of any waiting periods applicable to the
consummation of the Scheme under the Hart-Scott-Rodino Act and procurement of
all consents, registrations, approvals, permits and authorizations required to
be obtained from any governmental entity; (c) the compliance by us and
360networks with our respective obligations under our agreement; and (d) the
completion of an underwritten public offering of 360networks' subordinate voting
shares.
A number of conditions to the consummation of the transaction have now been
satisfied. 360networks completed its public offering of subordinate voting
shares in late April 2000, issuing 53,216,250 shares (which includes shares
subsequently issued pursuant to the underwriters' over-allotment option) at a
purchase price of $14 per share. On May 10, 2000, our two classes of
shareholders duly approved the Scheme. We anticipate that the transaction will
be completed in the second half of this year. Under our agreement with
360networks, our shareholders will receive, upon closing the transaction,
approximately 2.5 360networks' subordinate voting shares for every GlobeNet
common share held.
Revenues
Revenues from international long-distance services are derived from the
number of minutes of use billed by us and are recorded as the services are
rendered, after deducting an estimate for the traffic for which revenue will not
be collected. Historically deductions have not been material. Revenues from
prepaid calling cards are recognized at the time of usage or upon expiration of
the card. Revenues from private line services are recognized as earned on a
monthly basis.
Customers may enter into agreements to purchase capacity from us in the
form of the granting of indefeasible rights of use, or IRUs, portable IRUs or
capacity leases. Revenue from the sale of capacity by us is recognized at the
date a customer first has access to the capacity, provided certain conditions
are met. IRU and portable IRU sales are methods of transferring rights to fiber
optic cable capacity that grant to the purchaser an indefeasible right to use
the unit of capacity sold for the time, usually the remaining life of the
system, to which the IRU applies. Once the IRU is granted to the purchaser, the
purchase price is non-refundable and the purchaser is required to pay
operations, administration and maintenance fees for as long as connectivity is
maintained. The proceeds from the long-term operating lease of capacity are
deferred and amortized over the term of the contract.
Recent accounting pronouncements
FASB Interpretation No. 43, "Real Estate Sales - an interpretation of FASB
Statement No. 66", was issued in June 1999. It clarifies the standards for
recognition of profit on all real estate sales transactions, including those
related to fiber optic cable that cannot be removed and used separately from the
real estate without incurring significant costs. This interpretation is
effective for all applicable transactions after June 30, 1999. However, no such
transactions have been entered into after June 30, 1999 and we have not yet
completed our analysis of the applicability or the impact of this statement on
future transactions. In addition, we note that the accounting for sales of
capacity is evolving, and is currently under consideration by accounting
standard setters. Any change in accounting literature may affect the timing and
method of recognition of these revenues and related costs.
Carrier Charges and Cost of IRU Capacity
TBI's cost of services is comprised primarily of local access charges and
international termination costs. Local access charges are paid to the Bermuda
Telephone Company for each minute of traffic that we originate or terminate in
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Bermuda. As of January 1, 1999, the Minister of Telecommunications and
Technology's December 1998 directive reduced TBI's local access charge to $0.15
per minute for both originating and terminating traffic. The directive mandated
a second reduction on July 1, 1999 to $0.10 per minute, with a subsequent rate
determination expected in the first half of 2000.
International terminations are completed through our correspondent carriers
and are charged to us on the basis of prevailing international settlement rates.
We receive return traffic on the major routes that effectively offset our
payments for Bermuda-originated traffic. Our primary correspondent carriers are
MCI WorldCom and British Telecom. The current settlement rates with carriers in
the United States and the United Kingdom, which comprise the largest markets for
Bermuda-originated traffic, are $0.30 per minute and the equivalent of $0.48 per
minute, respectively. The rates for international terminations have declined
recently and we expect they will continue to decline as international
conventions are modified and competition among international carriers
intensifies.
For our wholesale carriers' carrier business, costs to build our systems
are capitalized. The cost of capacity sales are calculated on a pro rata basis
of total capacity sold in relation to the estimated total capacity.
Operating Expenses
Our operating expenses include network expenses and general and
administrative costs incurred to sustain and expand our Bermuda operations, as
well as to plan and finance the intended construction of the Atlantica-1
Network. As our systems develop, additional resources will be required to
provide for operations and for sales of capacity. Prior to the RFS date for the
connection from Tuckerton, New Jersey to Fortaleza, Brazil via Bermuda, we will
enter into an agreement with a third party that will provide operation,
administration and maintenance services on our systems. Following this RFS date,
we expect to recover a substantial portion of our operating, administration and
maintenance costs from periodic payments by customers. The amounts of these
payments will be based on the pro rata capacity purchased by the customer in
relation to the total capacity of the system. Each customer's pro rata share
will be capped and therefore, our share of operation, administration and
maintenance costs will be higher at the outset and will decline over time as
capacity is sold.
Results of Operations - Three Months Ended March 31, 2000 Compared With
Three Months Ended March 31, 1999
Revenues
Revenues increased to $6.4 million for the three months ended March 31,
2000 compared to $6.1 million for the three months ended March 31, 1999, an
increase of 4.9%.
Outbound revenues decreased to $4.8 million for the three months ended
March 31, 2000 compared to $5.0 million for the three months ended March
31,1999, a decrease of 4.0%. This decrease was the result of a decrease in the
average rate per minute partially offset by higher traffic volumes. The average
rate per outbound minute realized was $0.84 for the three months ended March 31,
2000 compared to $0.94 for the three months ended March 31, 1999. Outbound
traffic volumes increased to 5.7 million minutes for the three months ended
March 31, 2000 from 5.3 million minutes for the three months ended March 31,
1999. These volume increases were a response to an increase in marketing and
advertising by the Company and were reflective of a positive response to the
rate reductions.
Inbound revenue increased to $1.0 million during the three months ended
March 31, 2000 compared to $0.8 million during the three months ended
March 31, 1999, an increase of 25.0%. Further, revenue from TBI's debit card
product increased to $178,000 during the three months ended March 31, 2000
compared to $137,000 during the three months ended March 31, 1999,an increase of
30.0%. Sales of international private lines increased from $85,000 for three
months ended March 31, 1999 to $319,000 for the three months ended March 31,
2000 due to more effective marketing of this product.
-8-
Carrier Charges
Carrier Charges decreased to $2.5 million during the three months ended
March 31, 2000 compared to $2.7 million during the three months ended March 31,
1999, a decrease of 7.4%.
Local access charges for Bermuda originating and terminating traffic
decreased to $1.3 million for the three months ended March 31, 2000 from $1.4
million for the three months ended March 31, 1999. The decrease reflects
reductions in the settlement rates paid to the Bermuda Telephone Company which
were reduced from $0.27 per minute to $0.10 per minute for outbound traffic and
from $0.24 per minute to $0.10 per minute for inbound traffic. This impact of
lower settlement rates was partially offset by an increase in traffic volume.
Foreign settlements for the three months ended March 31, 2000 decreased to
$1.2 million from $1.3 million for the three months ended March 31, 1999, a
decrease of 7.7%. This decrease was largely due to a reduction in the settlement
rate to terminate calls to the U.S. which decreased from $0.35 to an average
rate of $0.21. The impact of lower settlement rates was partially offset by an
increase in traffic volume.
General and Administrative Expenses
General and administrative expenses increased during the three months ended
March 31, 2000 to $9.5 million compared to $2.1 million during the three
months ended March 31, 1999, an increase of 354.4%. This increase was
primarily due to marketing, promotions and administrative costs associated with
the Atlantica-1 Network and commitment fees related to the Atlantica-1 Network
financing. The increase also reflects costs of $0.9 million related to the
360networks inc. transaction as well as an increase in compensation expense of
$2.8 million resulting from the vesting of certain stock options to the
Company's directors and officers.
Amortization Expense
Amortization of capital assets for the three months ended March 31, 2000
increased to $0.7 million from $0.4 million for the three months ended March 31,
1999, an increase of 75.0%. This increase resulted largely from the amortization
expense attributed to increased ownership in the BUS-1 cable, which was acquired
in November 1999 when the Company increased its ownership in TeleBermuda
International L.L.C. from 20% to 100%. Pursuant to this transaction, the
Company's effective interest in the BUS-1 cable increased from 50% to 100%.
Amortization of deferred financing costs during the three months ended
March 31, 2000 increased to $1.0 million compared to $0.1 million for the
three months ended March 31, 1999. This increase resulted from the amortization
of deferred financing costs incurred as a result of the financing of the
Atlantica-1 Network.
Interest on Long-Term Debt
Interest on long-term debt increased to $8.6 million for the three months
ended March 31, 2000 from $0.8 million for the three months ended March 31,
1999, an increase of 975.0%. This increase was a result of interest costs on the
debt financing for the development of the Atlantica-1 Network secured by the
Company in July 1999.
Interest income
Interest income during the three months ended March 31, 2000 increased to
$7.1 million from $0.1 million during the three months ended March 31, 1999.
This increase was a result of investing certain proceeds from our July 1999
financing for the Atlantica-1 Network.
-9-
Liquidity and Capital Resources
On July 14, 1999, the Company secured financing totaling $986.0 million for
the development and construction of the Atlantica-1 fiber optic undersea cable
system that will link North America, Bermuda and South America. The financing is
comprised of the following components:
. A private placement of common shares issued at $20.40 per share (par
value $1.50) and Class B shares, which have special voting rights, for
aggregate proceeds of $270.6 million. The Company subsequently used $30.6
million of these proceeds to redeem 1,500,000 common shares at an
aggregate price of $20.40 per share (less expenses) from existing
shareholders.
. The issuance of debt in the principal amount of $300.0 million in the
form of 13% senior notes maturing July 15, 2007. Interest on these notes
accrues at a rate of 13% per annum, payable semi-annually in arrears on
each January 15 and July 15 commencing January 15, 2000. The notes are
unsecured.
. A bank credit facility of up to $400.0 million that consists of various
term facilities totaling $390.0 million and a $10.0 million revolving
credit facility. Our subsidiary GlobeNet Communications Holdings Ltd.
("Holdings"), the borrower under the credit facility, may also request an
additional facility of up to $50.0 million, subject to lender approval
and other restrictions. All loans under Holdings' bank credit facility
mature on June 30, 2005 except for one of the term facilities of $100.0
million, which matures on September 30, 2005. The interest rates on the
loans under the credit facility initially range from London Interbank
Offered Rate, or LIBOR, plus 3.5% to LIBOR plus 4.0%. Availability of
funds under the credit facility is subject to certain terms and
conditions. Substantially all of the assets of Holdings and of its
present and future direct and indirect subsidiaries have been pledged as
collateral for the credit facility. In addition, the ultimate parent
company of the supplier for the Atlantica-1 Network has provided an
initial guarantee of $100.0 million of one of the term facilities subject
to certain conditions and adjustments.
. The retirement of subordinated loans in the principal amount of $13.5
million when our former subordinated lenders elected to effectively
convert the principal and $1.9 million of accrued interest on their
subordinated loans into 1,635,286 common shares.
In September 1999, the Company borrowed $100 million under one of its term
facilities of Holdings' bank credit facility.
Future Capital Expenditures and Capital Resources
The development of the Atlantica-1 Network will require us to make
significant capital expenditures in connection with building the undersea cable
system and the related landing stations, and securing terrestrial capacity to
connect the landing stations with major cities. We estimate the total cost to
build the Atlantica-1 Network, including the secondary strand of the Rio
extension (which will connect Fortaleza, Brazil and Rio de Janeiro, Brazil),
landing stations and capital contingencies, will be $825 million. This $825
million estimate does not include potential capital costs, if any, associated
with securing terrestrial capacity, including any terrestrial extension to
Buenos Aires, Argentina. We expect the primary ring of the Atlantica-1 Network
(which will connect Tuckerton, New Jersey, St. David's, Bermuda, Fortaleza,
Brazil, Punta Gorda, Venezuela and Boca Raton, Florida) to be RFS in December
2000.
We have commitments under our supply contract with Alcatel Submarine
Networks and Alcatel Submarine Networks, Inc. (collectively, "Alcatel") to make
payment installments in varying amounts as construction milestones are achieved
on the Atlantica-1 Network. The total of these payment installments for the
years ending December 31, 2000 and December 31, 2001 are $465.6 million and
$62.1 million, respectively.
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We expect to use the net proceeds we received from the private offering of
our 13% senior notes, the private equity financing (net of the proceeds we used
to repurchase outstanding shares of the Company from existing shareholders) and
the exercise of warrants by our former subordinated lenders, together with
available funds under Holdings' bank credit facility, to finance:
. the construction of the Atlantica-1 Network, including the secondary
strand of the Rio extension, landing stations and capital contingencies,
and
. pre-RFS working capital requirements.
We have already repaid our subordinated loans and TBI's credit facility,
paid transaction costs related to our financings, paid certain working capital
requirements, made an initial payment under our contract with Alcatel and paid
commitment fees and interest on Holdings' bank credit facility from these funds.
We expect to incur up to an additional $85 million of senior debt in the
first half of 2000 to finance the acquisition of terrestrial capacity for the
Atlantica-1 Network. We are considering various options to obtain this
financing. We cannot assure you that we will be able to raise successfully
necessary capital. We may also incur further costs for terrestrial capacity in
the future.
Our expectations of required capital expenditures are based upon our
current estimates. Our actual capital expenditures could vary from our estimates
and these variations could be material.
The Company's use of cash is generally restricted under the terms of
Holdings' bank credit facility to operating and capital expenditures related to
the Atlantica-1 Network and to other telecommunications activities. The
investment of the cash is restricted to investments with a minimum credit rating
of A-1 by Standard & Poor's or P-1 by Moody's.
Historical Capital Expenditures and Capital Resources
We have incurred significant operating losses and capital expenditures
related to the development of TBI. We have financed these expenditures through a
combination of borrowings under TBI's retired credit facility and the retired
subordinated loans, and equity contributions.
Net cash used in operating activities was $14.3 million for the three
months ended March 31, 2000, as compared to net cash provided by operating
activities of $0.1 million for the three months ended March 31, 1999. The use
of cash by operations in 2000 was due primarily to operating losses and due to
the payment of the first interest installment on our 13% senior notes, which was
accrued at December 31, 1999.
Cash used in financing activities was $0.6 million for the three months
ended March 31, 2000 and primarily represents costs associated with preparing
and filing our registration statement in connection with our exchange offer for
our 13% senior notes. Cash used in financing activities was $2.6 million for the
three months ended March 31, 1999 and relates to repayments on our retired term
loan and operating credit facility.
Cash provided by investing activities was $14.9 million for the three
months ended March 31, 2000. These funds were provided from a reduction of $90.4
million in our restricted cash investments offset by $74.8 million costs on the
Atlantica-1 project. The cash provided by investing activities was $0.6 million
for the three months ended March 31, 1999 resulting from the receipt of a
related party receivable and offset by network asset purchases.
Seasonality
Our Bermuda operations experience seasonal fluctuations that are a function
of the volume of tourist traffic. Traffic declines during the winter months when
tourist traffic is low.
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Forward-Looking Statements
This report includes forward-looking statements. We may use words like
"believe," "anticipate," "expect," "estimate," "may," "will," "should" and
similar expressions to help identify these forward-looking statements. Forward-
looking statements contained in this report include, for example, statements
concerning our plans to design, construct, operate and sell capacity on our
planned cable systems, expectations as to funding our future capital
requirements and other discussions of future plans and strategies, anticipated
developments and other matters that involve predictions of future events.
We have based these forward-looking statements on our current expectations
and projections about future events. These forward-looking statements are
subject to risks and uncertainties, some of which may be outside of our control,
including, among other things:
. our failure to complete our planned cable systems within the currently
estimated time frame and budget,
. our failure to be early to market,
. our failure to sell capacity on our planned cable systems,
. our failure to obtain and maintain all necessary permits, licenses or
authorizations to construct, land and operate our planned cable systems,
. our failure to contract for or build any necessary backhaul facilities
to provide city-to-city connectivity on our planned cable systems,
. our failure to accurately project levels of demand for telecommunications
capacity,
. political, economic, legal or regulatory changes that negatively affect
our operations, and
. our failure to compete effectively in a rapidly evolving marketplace
characterized by intense price competition and incremental new capacity.
This list is only an example of some of the risks, uncertainties and
assumptions that may affect the forward-looking statements contained in this
report. In light of these and other risks, uncertainties or assumptions, the
actual events or results may be very different from those expressed or implied
in the forward-looking statements in this report or may not occur. For
additional factors that could affect the validity of our forward-looking
statements, you should carefully consider the risk factors in our annual report
on Form 10-K for the fiscal year ended December 31, 1999 (file no. 333-86461) on
file with the Securities and Exchange Commission and the other information in
this Form 10-Q. We do not intend to publish updates or revisions of any forward-
looking statement to reflect new information, future events or otherwise.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk.
We are exposed to various market risks relating to changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market prices and rates, such as foreign
currency exchange and interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
Foreign Currency Exposure
We are exposed to fluctuations in foreign currencies relative to the U.S.
dollar. Because the Bermuda dollar is pegged to the U.S. dollar, there is no
foreign currency exposure for transactions conducted in this currency. Our
foreign currency exposures as at March 31, 2000 were as follows:
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Note Receivable: We had a note receivable of (British Pounds)250,000 which
is non-interest bearing and due November 20, 2000.
Account Payable: We had an account payable of 962,179 SDR's, a notional
currency tied to a basket of European currencies, to one of our carriers. This
payable is current and non-interest bearing.
Settlements on International Traffic: Settlements on international traffic
are largely made in U.S. dollars. For the three months ended March 31, 2000,
approximately 15% of the Company's cost of sales and 1% of the Company's revenue
was denominated in a currency other than the U.S. dollar.
Interest Rate Exposure
Long-term debt: As at March 31, 2000, we owed $100.0 million of
variable-rate long-term debt which is due September 30, 2005. The interest rate
on this debt fluctuates with LIBOR. On December 22, 1999, we entered into an
interest rate cap transaction for $50.0 million of this debt, capping the
LIBOR rate at 7.0% for a three-year term. The interest rate exposure on this
debt is also mitigated by the fact that the proceeds from this debt are invested
in short-term investments, the return on which also fluctuates with market
interest rates. As at March 31, 2000, we also owed $300.0 million on our
outstanding senior notes, which is due July 15, 2007 and has a fixed interest
rate of 13%.
Short-term investments: We held $429.6 million in money market investments
at March 31, 2000. The return on this investment portfolio fluctuates with
market interest rates.
The table below provides information about the interest rates of our debt
obligations and the interest rate cap transaction. The table shows the amount of
debt and average interest rates as of March 31, 2000, by expected maturity
dates.
EXPECTED MATURITY DATES
2000 2001 2002 2003 2004 Thereafter Total Fair Value
03/31/2000 03/31/1999
---------------------------------------------------------------------------------------------------------
(in thousands)
U.S. DOLLAR
DEBT
13% Series B Senior Notes -- -- -- -- -- 300,000 300,000 300,000 N/A
due 2007
Average interest rates - fixed 13%
Bank Credit Facility due 2005 -- -- -- -- -- 100,000 100,000 100,000 N/A
Average interest rates - variable (1)
DERIVATIVE INSTRUMENTS
Interest Rate Cap for -- -- 50,000(2) -- -- -- 50,000 50,592 N/A
contract notional amount
_________________
(1) The interest rate is calculated at LIBOR plus 4.0%. The interest rate as of
March 31, 2000 was 10.25%.
(2) The interest rate cap fixes the LIBOR rate at 7% for $50,000 of Holdings'
bank credit facility.
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PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings.
We are, from time to time, a party to litigation that arises in the normal
course of our business operations. We are not a party to any litigation the
resolution of which we expect to have a material adverse effect on our business,
financial condition and results of operations.
ITEM 2. Changes In Securities And Use Of Proceeds.
Not applicable.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission Of Matters To A Vote Of Security Holders.
None.
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits And Reports On Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
2.1 Agreement and Plan of Arrangement between Worldwide Fiber Inc. (now
known as 360networks inc.) and GlobeNet Communications Group Limited
dated as of March 11, 2000 (incorporated by reference to Exhibit 10.31
to 360networks inc.'s Registration Statement on Form F-1 (File No.
333-95621)).
3.1 Memorandum of Association of GlobeNet Communications Group Limited
(incorporated by reference to Exhibit 3.1 to GlobeNet Communications
Group Limited's Registration Statement on Form S-4 (File No. 333-
86461)).
3.2 Bye-Laws of GlobeNet Communications Group Limited dated July 12, 1999
(incorporated by reference to Exhibit 3.2 to GlobeNet Communications
Group Limited's Registration Statement on Form S-4 (File No. 333-
86461)).
4.1 Indenture between GlobeNet Communications Group Limited and Bankers
Trust Company, dated as of July 14, 1999 (incorporated by reference to
Exhibit 4.1 to GlobeNet Communications Group Limited's Registration
Statement on Form S-4 (File No. 333-86461)).
4.2 Registration Rights Agreement among GlobeNet Communications Group
Limited, TD Securities (USA) Inc. and Credit Suisse First Boston
Corporation, dated as of July 14, 1999 (incorporated by reference to
Exhibit 4.2 to GlobeNet Communications Group Limited's Registration
Statement on Form S-4 (File No. 333-86461)).
4.3 Credit Agreement among GlobeNet Communications Holdings Ltd., Various
Financial Institutions and Other Persons, Toronto Dominion (Texas)
Inc., Credit Suisse First Boston, and TD Securities (USA) Inc., dated
as of July 14, 1999 (incorporated by reference to Exhibit 4.3(a) to
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GlobeNet Communications Group Limited's Registration Statement on Form
S-4 (File No. 333-86461)).
4.4 Guaranty by Alcatel in favor of Lenders under Holdings' Bank Credit
Facility (see Exhibit 4.3) and Toronto Dominion (Texas) Inc., dated as
of July 14, 1999 (incorporated by reference to Exhibit 4.3(b) to
GlobeNet Communications Group Limited's Registration Statement on Form
S-4 (File No. 333-86461)).
4.5 Reimbursement Agreement between GlobeNet Communications Holdings Ltd.
and Alcatel, dated as of July 14, 1999 (incorporated by reference to
Exhibit 4.3(c) to GlobeNet Communications Group Limited's Registration
Statement on Form S-4 (File No. 333-86461)).
10.1 Executive Employment Agreement dated March 3, 2000 between Jorge
Escalona and GlobeNet Communications Group Limited.
10.2 Stock Option Agreement dated March 3, 2000 between Jorge Escalona
and GlobeNet Communications Group Limited.
10.3 Supplemental Stock Option Agreement dated March 3, 2000 between
Jorge Escalona and GlobeNet Communications Group Limited.
10.4 Indemnity Agreement dated March 1, 2000 between Jorge Escalona and
GlobeNet Communications Group Limited. (director)
10.5 Indemnity Agreement dated March 1, 2000 between Jorge Escalona and
GlobeNet Communications Group Limited. (officer)
27.1 Financial Data Schedule
(b) Report on Form 8-K
GlobeNet filed a Form 8-K on March 24, 2000 discussing its pending
transaction with 360networks.
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SIGNATURE
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.
GLOBENET COMMUNICATIONS GROUP LIMITED
May 15, 2000 By: /s/ Greg Belbeck
-------------------------------------------
Name: Greg Belbeck
Title: Executive Vice President and Chief
Financial Officer
(duly authorized officer, principal financial
officer and chief accounting officer)
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