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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-88799
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INFONET SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4148675
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2160 East Grand Avenue, El Segundo, California 90245-1022
(Address of Principal Executive Offices)
(310) 335-2600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Class B Common Stock, $0.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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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 as 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Class B common stock held by non-affiliates of
the Registrant as of June 15, 2000 was approximately $810.5 million based on
the closing price on the New York Stock Exchange on June 15, 2000 of $12.875.
The number of shares of the Registrant's $.01 par value Class B common stock
that was outstanding as of June 15, 2000 was 302,818,000. The number of
outstanding shares of the Registrant's Class A Common Stock, par value, $.01,
was 167,403,000 as of June 15, 2000, all of which are held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (Items 10, 11, 12, and 13) is
incorporated by reference to portions of the Registrants definitive proxy
statement for the 2000 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days after the fiscal year
ended March 31, 2000.
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INFONET SERVICES CORPORATION
TABLE OF CONTENTS
Page
Item No. No.
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PART I................................................................... 1
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 23
Item 3. Legal Proceedings................................................ 24
Item 4. Submission Of Matters To A Vote Of Security Holders.............. 24
PART II.................................................................. 25
Item 5. Market For Registrant's Common Equity And Related Stockholder
Matters................................................................. 25
Item 6. Selected Consolidated Financial Data............................. 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 43
Item 8. Financial Statements and Supplementary Data...................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 43
PART III................................................................. 44
Item 10. Directors and Executive Officers of the Company................. 44
Item 11. Executive Compensation.......................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 44
Item 13. Certain Relationships and Related Transactions.................. 44
PART IV.................................................................. 45
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K....................................................................... 45
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PART I
Item 1. Business
All statements contained in this annual report that are not statements of
historical fact constitute "Forward-Looking Statements" within the meaning of
Section 21E of the Securities Exchange Act. These statements involve known and
unknown risks, uncertainties, and other factors that may cause our or our
industry's actual results to differ materially from those implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of these terms or other comparable words. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. Important
factors that may cause actual results to differ from expectations include those
discussed under the subheading "--Risk Factors" and elsewhere in this annual
report.
We are a leading provider of cross-border managed data communications
services to more than 2,400 corporations worldwide, including 35% of the top
500 corporations in Business Week's 1998 Global 1000. Our network, which we
refer to as The World Network, can be accessed from over 180 countries, making
it one of the world's largest data communications networks in terms of
geographic coverage. We own and operate our network, which allows us to provide
managed data services to our clients on a global basis, an advantage over
service providers that do not own an extensive global network. We sell our
services directly through our country representatives and indirectly through
major international telecommunications carriers, such as Deutsche Telekom, SBC
Communications, WorldCom and value-added resellers. Our country representatives
give us a significant local presence in more than 60 countries and strong
working relationships with leading local telecommunications providers in these
countries. Our diverse client base is comprised of multinational corporations
that require cross-border data communications services such as Allergan, Baan,
Microsoft, Nestle, Nokia, Pharmacia and Volkswagen.
We offer a broad range of integrated service solutions to our clients, such
as:
. Network Services--includes Frame Relay, ATM, remote access, intranet,
multimedia, Internet and IP services;
. Consulting, Integration and Provisioning Services--includes consulting,
design, and implementation; installation of leased lines and customer
premise equipment associated with the client's access to The World
Network and use of our Network Services, which we refer to as Global
Connect;
. Applications Services--includes e-mail, messaging, collaboration, Web
hosting and other value-added services; and
. Other Communications Services--includes X.25 transport services, service
access fees and other communications services.
We take a consultative, applications-oriented approach to identifying client
needs and developing customized solutions. In addition, we offer a consolidated
billing, management and support system which provides a complete solution for
all the external and internal data communications services our multinational
clients require. Our approach is to integrate our full range of services with
the data communications and network operations of our clients. We believe our
ability to provide a comprehensive solution to our clients gives us a key
competitive advantage because our solutions are costly to develop and difficult
to replicate.
We own and operate The World Network, an extensive and versatile ATM-enabled
network that provides the delivery platform for our integrated, enterprise-wide
communications solutions. The World Network has approximately 14,468 ports
connected by over 950,000 route-kilometers of data transmission circuits, most
of which are over fiberoptic routes. This global private network enables our
clients to deploy and manage applications effectively by combining reliability,
security, high performance and a broad range of functions using a variety of
network protocols.
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Our global sales and support structure, which in some countries is based on
non-exclusive partnerships with local telecommunications and other service
providers, gives us a strong presence in each of our markets. We believe this
structure also provides us with a competitive advantage over other data service
providers who do not have comparable levels of expertise as to local operating,
regulatory and market conditions. Our country representative structure emerged
from our historical relationships with major telecommunications companies, such
as Deutsche Telekom, France Telecom, Singapore Telecom and Telekom Malaysia.
Our current stockholders include six of the world's largest
telecommunications companies which, through ownership of our Class A and Class
B common stock, collectively possess approximately 95% of our total voting
power.
. KDD--KDD Corporation (Japan);
. KPN--KPN Telecom B.V. (The Netherlands);
. Swisscom--Swisscom AG (Switzerland);
. Telefonica--Telefonica International Holding B.V. (Spain);
. Telia--Telia AB (Sweden); and
. Telstra--Telstra Corporation Limited (Australia).
Market Opportunity
With developments in network technology, advances in communications service
offerings and the globalization of business, multinational corporations are
increasingly demanding integrated solutions for their mission-critical global
communications needs. In addition, the rapid expansion and adoption of the
public Internet are creating additional opportunities for corporations to
interact with a large number of geographically distributed offices, employees,
customers, suppliers and partners. However, the public Internet was not
designed with the reliability, consistency, response time and security required
for mission-critical applications. As a result, multinational corporations rely
on service providers to enhance the quality, reliability and security of their
data communications and to provide global access equivalent to the public
Internet. These corporations require integrated solutions that span multiple
countries, have guaranteed network availability, can deliver continuous
increases in speed and capacity and provide local service and support. The
demand for these managed data services has dramatically increased the size and
growth rate of the communications marketplace.
The size of the global communications market reached approximately $800
billion in 1998, according to the International Telecommunications Union. The
market for data communications is one of the fastest growing segments of this
market. According to IDC, a leading market research firm, the global data
communications services market, which includes Frame Relay, ATM, intranet
services, commercial Internet services and Web hosting, will be approximately
$27 billion in 2001, and will have a compound annual growth rate of 32% from
1998 to 2003. Within this market, we focus on cross-border managed data
communications services for multinational corporations, which is projected to
grow from $4.1 billion in 2000 to $15 billion in 2003, an estimated compound
annual growth rate of 53%.
Industry Drivers
We believe that there is an attractive opportunity for marketing managed
data communications services to multinational corporations which results from
the following factors:
. globalization of business and increased need for connecting international
locations;
. rapid expansion of Internet-based applications;
. rising importance of data communications as a service critical to a
corporation's success; and
. increased outsourcing of corporate data communications.
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Globalization of business and increased need for connecting international
locations. Over the past several decades, corporations have significantly
increased the international scope of their businesses. These corporations have
opened and made direct investments in branch offices, factories, and other
local representative facilities around the globe. It is critical for these
corporations to share information accurately and expediently between their
geographically dispersed locations, as well as with travelling and
telecommuting employees. New technologies and advanced remote access
alternatives are enabling these geographically dispersed employees to connect
to corporate and public networks at greater speeds, as well as from more varied
locations.
Rapid expansion of Internet-based applications. Internet-based applications
are rapidly expanding as an important medium for global communications and e-
commerce with the potential to connect a large number of geographically
dispersed offices, employees, customers, suppliers and partners. Internet-based
applications have emerged as a strategic component of business, and investment
in Internet services has increased dramatically. The public Internet's lack of
reliability and security for mission-critical data communications, however, has
forced many corporations to seek assistance from service providers and data
network companies to enhance the quality of their Internet communications or to
design and implement high performance private networks.
Rising importance of data communications as a service critical to a
corporation's success. An increasing number of businesses are investing in data
networks to achieve higher levels of productivity and lower operating expenses.
Increasingly, corporate intranets, public Internet Web sites, extranets and
other managed data networks are creating competitive advantages for companies
that use them to foster internal communications, e-commerce, source supplies,
recruit new employees, communicate with customers, penetrate new market
segments and collect market information. Corporations are demanding that their
networks deliver data quickly, consistently and globally and that these
networks can be upgraded as the complexity of the applications grows and
technologies change. Corporations also require networks that operate 24-hours a
day, seven days a week, and offer application support and a broad range of
functions, such as security, remote access and reliability.
Increased outsourcing of corporate data communications. Corporations are
focusing their resources on their core competencies. Investing in resources and
personnel required to maintain in-house private corporate networks is costly
and difficult, especially given the shortage of technical talent and risk of
technological change. The ongoing expansion of multinational businesses and
developments in technology, have made it difficult for in-house solutions to
keep pace with corporate needs. Therefore, corporations have sought third
parties to provide managed data communications services. Given the costs and
difficulties involved in implementing international network solutions, we
believe that multinational corporations are even more likely to outsource their
cross-border data communications needs.
Business Strategy
Our goal is to be the leading provider of global data communications
services to multinational corporations. We will continue to:
Focus on multinational clients that require data communications solutions
We will continue to focus on multinational corporations with cross-border
managed data communications needs. We believe that the rapid pace of
technological change, and the resultant complexity and cost of network
communications services, are causing large multinational corporations to
outsource their data communications services to focus on their core
competencies. Our flexible network architecture, local presence in more than
60 countries and consultative sales approach allow us to tailor our data
communications solutions to meet our clients' needs. Given the global reach of
our network, our local support services and our reputation for reliable and
innovative services, we believe we can further penetrate the market for global
data services. Between 1996 and 2000, we increased our penetration of the top
500 corporations in Business Week's 1998 Global 1000 from 21% to 35%. As part
of this strategy, we have launched a global branding program to increase
awareness of our services and the Infonet brand.
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Upgrade and expand our global network
We intend to continue to invest significant capital resources to upgrade and
expand further The World Network to maintain our competitive advantage. We are
in the process of making significant purchases of transmission capacity on
major terrestrial and undersea routes. We believe that these investments will
enable us to exploit economies of scale associated with high volume
transmission capacity and better meet our clients' requirements for higher
speed connections. Also, as part of this strategy, we continue to expand the
deployment of ATM backbone switches that will connect our core network nodes
around the world. We believe this ATM-enabled network will provide greater
capacity and improved functionality. We expect to use our ATM-enabled network
as a platform to offer a broader range of value-added services that combine
voice, video and data.
Develop innovative, value-added solutions
We are continually developing new solutions to meet our clients' rapidly
changing needs due to technological advances and the globalization of their
businesses. For example, we were the first to offer multiple levels of Frame
Relay service to our clients, providing them the flexibility to manage
standard, as well as mission-critical operations effectively through one
service. In 1998, we were awarded the Data Communications magazine "Hot Product
of the Year" award for our Frame Relay service, marking the sixth time in seven
years we have won this award for innovative services. With the expansion of our
ATM backbone we will begin to offer to our clients a broader range of
innovative, value-added services, including voice, video and data. We intend to
continue developing these services through internal expansion and partnerships
to allow us to derive additional revenue from our existing client base and to
attract new clients.
Strengthen our sales and customer support structure
Our country representatives play a major role in the sales and marketing,
local client support and implementation of our services on a global basis. Our
country representative strategy has allowed us to expand geographically without
the related financial and managerial costs associated with building large
numbers of wholly-owned multinational sales and support operations. We are
constantly evaluating new opportunities to expand our sales channels through
the addition of new country representatives and alternate sales channel
partners. In the last three years, we have expanded into seven new countries
and have added 14 new alternate sales channel partners. Our strategy is to
capitalize on the strength of our country representatives and alternate sales
channel partners to build market share among multinational corporations. We may
also pursue this strategy through targeting other companies for acquisition
that can supplement our core business.
Provide the highest level of quality, security and reliability for our
services
We are committed to maintaining the highest level of quality, security and
reliability in delivering data communications services over our network. Using
our network management tools and systems, we are able to proactively monitor
our global network operations and respond quickly to client problems, 24-hours
a day, seven days a week. We consistently meet or exceed our 99.7% quality
standard, reflecting our guarantee of network availability. In addition, we
support our clients through our extensive local operations. To ensure this
quality, we continue to make investments in client service and support, and
continually evaluate our performance in order to retain our valued clients. We
also continually hire and train experienced and technically sophisticated
network support and services personnel. We are committed to adhering to these
quality standards, in part by maintaining our ISO 9001 certification.
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Our Service Solutions
We provide services to meet clients' global data communications needs. We
offer clients either individual services that they can use as part of their own
networks or more integrated solutions that combine several of our services.
Examples of how our services and solutions meet our clients' needs include:
. For Leading Hotels of the World, Ltd., one of the world's oldest and
largest luxury hotel companies, we provide the global network that is
used to carry out the reservations and related activities of 300 hotels
in 66 countries;
. For Allergan, Inc., a global health care company, we manage data
communications between 40 offices, 4,500 desktop computers and 6,000
employees around the world;
. For KBC Bank NV, a major European commercial bank, we provide managed
data communications services to branch offices in 66 cities located in
Europe and Asia; and
. For Hellmann International Forwarders, Inc., a German freight services
company, we provide the global network to integrate their offices in 40
countries and integrate their different e-mail and messaging systems.
Our services are organized into four categories: Network Services;
Consulting Integration and Provisioning Services; Application Services; and
Other Communications Services.
Network Services
We offer multinational corporations and our sales channel partners private
managed data services. Our clients use these services to manage information
among their worldwide locations. For example, manufacturing companies use our
services to integrate production and inventory schedules, technology companies
use our services to transmit design files and financial institutions use our
services to connect their trading desks. Typically, clients employ these
services to transmit information that is critical to their daily operations.
Within Network Services, we offer Frame Relay, ATM, Private Internet, Global
Internet, MultiMedia and Remote Access.
Frame Relay Services. Our Global Frame Relay service is the largest
component of our Network Services. We offer three levels of Frame Relay service
to meet the specific performance characteristics of our clients' applications.
A premium level Frame Relay service is available for our clients' mission-
critical, interactive applications requiring the highest level of performance
and network availability. For example, clients use this service to enhance the
performance of and maximize their investment in enterprise resource planning
software. Clients use our second level Frame Relay service for multi-protocol
applications with less stringent response time requirements such as remote
printing, intranet browsing, collaborative software and large file transfers.
Our third level Frame Relay service is most suitable for clients using
applications with lower performance requirements which are less sensitive to
longer response times such as Internet browsing, e-mail and small file
transfers.
Broadband Services. Our Broadband services, more advanced than Frame Relay,
IP, and X.25 technology enable us to address the rapidly emerging requirements
for high speed integrated voice, video and data services, as well as the
delivery of bandwidth-intensive applications, such as video conferencing and
advanced voice, video and data services.
Private Internet Services. As part of our Network Services, we offer our
clients a private Internet solution. Our Private Internet Services use Internet
Protocol, or IP, to provide corporate networks functionality similar to the
public Internet but with the performance characteristics of The World Network.
This means that clients can effectively run mission-critical applications using
cost effective Internet development tools on our high performance private
network. Our Private Internet Services are ideal for corporations seeking to
establish extranets or to engage in e-commerce.
Global Internet Services. Global Internet Services provide dedicated and
dial-up connectivity to the public Internet. We offer our multinational clients
dedicated and dial-up public Internet access from our locations through a
series of peering agreements and transit relationships with other global
Internet Service
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Providers, or ISPs. This service is attractive because clients can deal with a
single provider instead of a different ISP in each country. We provide a
completely managed service with local support, network management and 24-hour
operations. We also produce one consolidated invoice for all services.
MultiMedia Services. We provide high quality packetized voice services,
referred to as our MultiMedia Services, which can be used independently or in
combination with our managed data services. We deliver high quality, cost-
effective voice services by using a technology that we developed with Nortel.
We can easily add office-to-office voice communications for clients that are
using our managed data services by connecting their voice telecommunications
systems to The World Network. We can also offer single-site companies such as
shippers, importers/exporters and telemarketers connections to the local public
telecommunications network. We can offer all of these voice services on a
single global invoice with location and call detail as well as customized dial-
plan capability. We expect to expand our MultiMedia Services to include video
services in the future.
Remote Access Services. We offer our clients a variety of remote access
services on a wireline and wireless basis. Our remote access services provide
our clients' employees, who are travelling or who are located remotely, with
access to the same network applications that would be available if they were at
their primary office. Using our services, applications such as enterprise
resource planning, file sharing, Internet access and e-mail are accessible with
higher levels of security and performance than would normally be provided by
accessing these networks via the public Internet. We contract with one of the
industry's leading suppliers of enhanced security products to offer these
security products to provide greater security than traditional password
systems. As a result, our remote access service provides connectivity for
"virtual offices" anywhere in the world, quickly, securely and cost-
effectively. We provide dial-up connectivity through The World Network to
insure secure access for our clients' employees, business partners and
customers. We also provide worldwide virtual private network connectivity for
remote offices and local area networks, or LANs, that support small office/home
office, business partner/client support networks and basic Internet access
requirements. We can offer this service through telecommuters' home computers,
through toll free dial-up service or via mobile phones connecting to our
network via the local public telecommunications network or via access methods
appropriate to wireless data telephony.
Consulting, Integration and Provisioning Services
We offer integration, provisioning and implementation services to our
clients to implement the "last-mile" part of the solution. Our country
representatives provide the on-the-ground support and local implementation
necessary to deliver these services on a global basis. As part of the
integrated solution, the country representatives provision leased lines to
connect our clients' sites to The World Network. In addition, they procure,
install and maintain the appropriate customer premises equipment. We believe
few other global data communications service providers can provide these
localized services on a global scale and our local presence is a significant
competitive advantage. As part of the comprehensive solutions we offer, we also
provide consulting services to assist our clients in integrating our data
communications services into their operations.
Application Services
Our Application Services include messaging and collaboration services that
provide an attractive alternative for businesses that prefer to outsource their
business messaging activities. We provide three types of messaging and
collaboration services. First, we host e-mail services for our clients using
Microsoft Exchange and Lotus Notes software. Our e-mail hosting activities
include management of the client servers, software support and service, and e-
mail translations to telex and fax. Second, we have developed a proprietary
global unified messaging and collaboration service and software solution called
MailMail. MailMail enables voicemail, fax, telex, paging and e-mail messages to
be aggregated and forwarded to a single e-mail location, accessible via the
public Internet. We offer MailMail as an alternate enterprise-wide e-mail
service to our multinational clients, and we license it to other ISPs. Third,
our X.400 service enables our clients to exchange information between different
e-mail systems in a seamless and secure manner.
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We offer hosting of Web sites, referred to as Web hosting services, to
clients who wish to outsource their Web sites and other Internet applications.
We run clients' servers for them at an operations center with high bandwidth
Internet connectivity, redundant power and disaster recovery provisioning. We
can connect hosting centers to the clients' private network, and we also offer
firewall and security services.
Other Communications Services
Our highly reliable, widely available and cost-efficient X.25 service is
typically used for lower performance applications requiring secure
connectivity. X.25 is a widely deployed and proven technology frequently used
in developing countries where high speed transmission capacity is not
available.
Global Network Management/Local Support
The World Network is the physical platform across which we deliver all of
our services. Our Global Network Management/Local Support infrastructure is the
combination of support, billing, management and personnel, which allows us to
offer our solutions seamlessly throughout the world.
We deliver our services through an infrastructure comprised of technology,
connectivity, tools, processes and personnel. We provide seamless global
performance through our network of nodes, switches, circuits and terminating
devices, combined with the management systems and processes for change,
configuration, security, billing and accounting. Changes, upgrades and
enhancements to our network are possible given our common information,
management and tracking infrastructure.
We develop client solutions through a collaborative effort among the country
representatives responsible for serving each client location. To ensure the
quality of the solution provided, an experienced global project management team
overseas the deployment of the client solution, using a highly-developed set of
systems, processes and infrastructure, which have been developed, tested and
improved over the last 30 years. After installation, our integrated global
billing system allows clients to receive a single invoice for all services. We
believe the time and capital required to duplicate our global capabilities
provides us with a significant competitive advantage.
Development of Innovative Services
We are recognized in the industry as an innovative developer of products and
services. For example, Data Communications, a leading magazine covering
enterprise networking, has repeatedly recognized our achievements. In January
1998, it awarded us a "Hot Product of the Year" award for our innovative Frame
Relay technology. This marked the sixth time in seven years that an Infonet
service earned this distinguished award. In addition, we released multiple
levels of Frame Relay service in 1998 and IP service in 1991, in each case,
more than one year before our competitors. Designing solutions for our clients
keeps us closely involved with new market requirements, the most promising of
which are added to our ongoing service development programs.
Client Base
We have more than 2,400 multinational clients which typically have between
15 and 25 locations and are diversified across both industry groups and
geographic regions. We provide our services to many of the world's largest
multinationals including Allergan, Baan, Microsoft, Nestle, Nokia, Pharmacia
and Volkswagen. Our 35% share of the top 500 corporations in Business Week's
1998 Global 1000, an annual list of the world's largest corporations, is
evidence of the central role that we play in the global data communications
industry. No single client comprised more than 2% of our revenues in fiscal
year 2000.
A substantial portion of our revenues are under contract for one to three
years. The act of switching service providers not only has the potential to
compromise the security and performance of the client's network, but also
presents a significant inconvenience, particularly to larger clients using a
number of our services. Therefore, we believe that our larger clients typically
are reluctant to terminate their contracts with us.
7
Country Representatives
Our country representative structure gives us global reach and strong local
presence in the countries in which we operate. The country representative
structure emerged from our historical relationship with major
telecommunications companies such as Deutsche Telekom, Embratel (Brazil),
France Telecom, Singapore Telecom and Telekom Malaysia. We have enjoyed strong
relationships with our 55 country representatives. A total of 14 country
representatives have been with us for more than ten years and 29 have been with
us for more than five years.
Our consolidated country representatives consist of nine separate country
representatives that provide service in 14 countries. Our consolidated country
representatives accounted for approximately $179.1 million of our revenues in
fiscal year 2000, representing about 37% of total revenues. In addition to our
consolidated country representatives, we have 46 non-consolidated country
representatives which, together with our consolidated country representatives,
provide service in more than 60 countries. In the aggregate, our country
representatives accounted for approximately 74% of our revenues in fiscal year
2000.
We are the principal service provider to our clients and control the
delivery of all services to them on an end-to-end basis. We centrally control
and configure our network and rely on our country representatives to deliver
our services and maintain The World Network locally. We rely on our country
representatives for insights into local operating, regulatory and market
conditions. They are involved in sales and marketing, operations, network
management and client support. Depending on the geographic location and needs
of a client, country representatives from different countries will collaborate
with each other when making sales presentations. Country representatives manage
accounts on a daily basis and are the first point of contact for clients,
generally providing service in the local language. To minimize our regulatory
hurdles, each country representative is a party to a legal contract with the
client. Once a new client has signed a contract, we configure the network for
the service and coordinate with other country representatives to implement the
solution for the client. Our country representatives take a lead role in
implementing the last-mile part of the solution by provisioning leased lines
and installing equipment at the client site. In addition, the country
representatives provide local support for our services, operating our local
network nodes and, in some cases, housing and operating components of the
infrastructure for specific services on our behalf.
Governance and Controls
We have service agreements with all of our country representatives that
govern our relationships. The agreements are generally non-exclusive and are
essentially the same for all country representatives and generally have five
year terms. These agreements provide the country representatives with:
. the right to market and sell our services;
. the right to use our trademarks and service marks;
. access to operational and marketing documentation; and
. training materials and sessions.
The agreements give us:
. the right to recommend prices;
. the right to jointly set revenue targets with the country
representatives;
. the ability to terminate the agreement if the country representative
fails to meet the revenue targets or if targets cannot be agreed upon for
two consecutive years;
. the ability to determine staffing of the local office jointly with the
country representatives; and
. in many cases, the right to appoint one of the three members of the
Advisory Review Board, which governs the relationship between us and the
country representative.
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The agreements outline the fees that the country representatives are
required to pay us for access to our network. In addition, the agreements
outline our compensation and pricing arrangements with the country
representatives.
The World Network
Overview
We own and operate The World Network, one of the world's largest commercial
global data networks in terms of geographic coverage accessible from over 180
countries. Our network supports several major protocols that allow us to offer
a broad range of services. Our network structure allows us to respond quickly
to our clients' changing needs for increased bandwidth, reliability and
security while enabling us to manage data traffic patterns efficiently. Because
we manage our network on an end-to-end basis, we are better able to control and
customize the services delivered to our clients. The World Network has 14,468
ports connected by over 950,000 route-kilometers of data transmission circuits,
most of which are over fiberoptic routes.
The World Network is based upon a three-tier hierarchical structure which we
believe provides a competitive advantage because it allows for efficient
traffic management, higher performance and reduced cost. This three-tiered
hierarchical structure is comprised of high bandwidth Global Switching Nodes,
mid bandwidth Regional Switching/Access Nodes and Local Access Nodes.
Global Switching Nodes: We use our Global Switching Nodes cost effectively
to aggregate and distribute interregional network traffic flows. Equipped with
Marconi high capacity ATM switches, these Global Switching Nodes are capable of
accepting multiple channel inputs of data in excess of 45 Mbps. Our Global
Switching Nodes are connected by fiberoptic transmission capacity and are
currently located in the following fifteen locations: Amsterdam, Brussels,
Dallas, Dusseldorf, Frankfurt, Kuala Lumpur, London, London-Docklands, Los
Angeles, New Jersey, New York, Paris, Stockholm, Sydney and Tokyo. We plan to
add additional Global Switching Nodes to further expand and enhance our ATM-
enabled network around the world and to increase our transmission capacity to
as high as 2.5 gigabits per second, or Gbps.
Regional Switching/Access Nodes: We use our Regional Switching/Access Nodes
to aggregate regional traffic and provide access to The World Network for
clients with bandwidth-intensive applications. These nodes are equipped with
Nortel Passport switches and Cisco hub and access routers. The Nortel Passport
switches provide Frame Relay capability as well as high capacity access (at
speeds of 2 Mbps to 45 Mbps) to the Global Switching Nodes through our
backbone. The Cisco hub and access routers provide high capacity local access
for our clients and aggregation services for regional IP traffic. The Cisco hub
routers can also use the Nortel Passport switches for connection to the Global
Switching Nodes to exchange data interregionally. Our 121 Regional
Switching/Access Nodes are located in 49 countries around the world.
Local Access Nodes: Our Local Access Nodes connect clients to The World
Network at speeds generally less than 2 Mbps. These nodes enable our clients to
connect to and use IP, X.25 and Frame Relay applications through dedicated and
dial-up access. The Local Access Nodes are equipped with Cisco access routers,
Nortel and Siemens X.25 devices and Ascend Dial Access devices. The Cisco
routers provide dedicated IP access, the Nortel and Siemens devices provide
dedicated access using X.25 and the Ascend devices provide dial-up access.
Local access is available in 125 locations in over 60 countries. We are also
able to extend our network reach to countries where the communications
infrastructure is not available by using satellite services, which are
integrated as part of The World Network.
Local Access
Clients can access The World Network either directly using a dedicated line
or through dial-up services by connecting through Local Access Nodes, Regional
Switching/Access Nodes, or via our interconnection with the national data
network of our local telecommunications partners. A country representative
arranges dedicated access through a leased line or via the national data
network of the local telecommunications partner. Dial-up
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services offer local and remote access to The World Network through the local
public telecommunications network. We plan to offer additional access methods
and adapt them to our backbone for increased efficiency. Among those services
planned or under review for clients that require higher speed access are ATM,
digital subscriber line or DSL, and broadband wireless remote access. In remote
locations clients can access The World Network via satellite services. Clients
can choose to have us manage their entire provisioning and support at and
between each client location.
Backbone Capacity
Our backbone connects all nodes on The World Network. Traditionally, we have
obtained backbone capacity from major telecommunications carriers through
short-term leases. We have begun, and expect to continue, to purchase capacity
on major international and regional routes where it is economical to do so and
where capacity is available for purchase or long-term lease. We are investing
significant capital resources to expand and upgrade our network in order to
maintain our competitive advantage. In collaboration with Hughes Electronics,
we are also using satellite technology as a fill-in strategy to provide
satellite links to The World Network where terrestrial connections or
alternative paths for specific high availability applications may not be
available. We increased our network capacity by more than 500% in 1999, and
have accelerated this plan to meet capacity requirements.
Network Protocols
Our network strategy is to support a wide range of managed data
communications services over a common infrastructure. As such, our global
network infrastructure supports a variety of protocols including X.25, Frame
Relay, IP and ATM. Our existing Frame Relay network is the basis for our
delivery of seamless managed data communications services on a worldwide basis.
Moreover, by using Frame Relay technology we are able to capitalize efficiently
on The World Network's bandwidth to transport a variety of data traffic. We are
implementing the new industry-standard IP versions and extensions to
differentiate our network from other competitive networks.
Our ATM-enabled network is able to support broadband services that require
asynchronous networking capabilities (for example, video services), as well as
provide transport for aggregated data between our Regional Switching/Access
Nodes and our Global Switching Nodes. We believe our ATM-enabled network will
be the transport platform for our managed data communications services in the
future. We expect our ATM-enabled network will allow for the efficient and
high-speed transport of voice, video and data traffic over a single network.
This capability will not only enable us to further leverage our network assets,
but also allow us to capitalize on the demand for anticipated new service
offerings that combine voice, video and data. Furthermore, as client demand for
additional bandwidth, faster transmission speeds and enhanced service quality
increases for applications such as desktop videoconferencing, we believe our
investment in ATM technology will position us as a leading provider of these
services.
Network Management
We manage our network and monitor its operation 24-hours a day, seven days a
week through two network control centers located in Los Angeles and Brussels
and three global customer assistance centers in Los Angeles, London and Tokyo.
The customer support operations consist of multilingual, technologically
experienced staff in over 60 countries.
Our network management infrastructure is an integral component of the
seamless delivery and management of our suite of services. We proactively
monitor the "real-time" status of over 10,000 network components that provide
performance feedback on a daily basis. Consistent information is available to
all global support entities using trouble tracking services, network alerts and
alarms, change configuration and security management processes. We continue to
enhance these capabilities by adding automation tools and providing on-going
training.
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Network Security
We have built and maintain an advanced security and control structure.
Because we manage our global network from end-to-end, we maintain central
control of network access, operations and maintenance. We protect our network
through various means including firewalls, intrusion detection platforms,
network address translation, filtering, and network architecture structures, as
well as various dedicated network and remote access authentication processes.
Backup Network Control Centers and Nodes
We also have backup network control centers in Sacramento, California and
Chantilly, Virginia, which we created to assume network control center
operations in the event of a disaster or similar emergency. In addition, in
order to lower the potential exposure from major failures or disasters
affecting a node, we have implemented second nodes capable of assuming the
traffic of our primary nodes. The fiber connections in the area and, where
feasible, client access lines are split between the two nodes. Thus, transit
traffic through a city can continue to flow in the event of a major failure or
disaster affecting one of the nodes. We have implemented second nodes in the
London-Docklands, Los Angeles, New York, New Jersey, San Francisco and
Sacramento metropolitan areas.
Circuit Diversity
Nodes are connected with other nodes with at least two redundant
connections, so that no single connection failure will result in the isolation
of the node. The failure of a connection results in the automatic rerouting of
traffic to one or more alternate network paths. In the event of a node outage,
transit traffic is automatically rerouted to paths around the failed node. In
addition, we have, over our operating history, sought to ensure that our
circuits are, as much as possible, diversely routed so that a major failure by
a carrier in a given route does not result in a total network outage to our
clients.
Disaster Recovery
Under our Disaster Recovery Plan, we distribute our critical operations over
two to three global regions which constantly share information with one
another. These network control centers and customer assistance centers are
essentially self-contained units located in diverse geographic regions, and
thus provide natural disaster backup for each other as described below:
. Network Control Centers in Los Angeles and Brussels;
. Global Customer Assistance Centers in Los Angeles, London and Tokyo;
. Second Level Customer Assistance in Los Angeles, Brussels and Tokyo; and
. Third Level Customer Assistance in Los Angeles and Brussels.
Within the backbone, we have attempted to minimize the risk of node outages
by placing our nodes in highly secure facilities, and by requiring dual cable
entrances, diversely routed circuits and uninterruptable power supplies.
However, clients who need quick recovery from disasters or failures affecting a
node can supplement their service with our Failure Recovery Service option,
which provides access to an alternate Infonet node via a leased line, dial-up
access backup or satellite services. We provide this service on an automatic or
manual backup basis.
Quality Standards
We perform ongoing quality system audits and conduct client satisfaction
surveys. As a result, we receive constant performance feedback to ensure that
our quality systems meet client needs and our guarantee of 99.7% network
availability. We have been awarded ISO 9001 certification for several of our
services.
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Sales and Marketing
Infonet employs a multi-tiered distribution strategy in order to maximize
growth, use of our network and economies of scale.
Our multi-tiered distribution strategy consists of:
. Direct Channels
. Alternate Channels
. Partners
. Resellers
. Licensed Distributors
Direct Channels
Direct Channel sales are carried out by our country representatives who are
responsible for all of our sales activities in their respective territories.
Each country representative maintains a sales force that directly calls on
clients, coordinates the contract signing process and manages accounts on a
daily basis. We begin our sales process by working with the client to gain an
understanding of its business needs so we can tailor a solution to meeting its
specific requirements. The sales force for each country representative applies
its knowledge of the local operation, regulatory and market conditions to
market our service offerings effectively to best meet the needs of the local
client base. In addition, we provide centralized sales and marketing support
for our country representatives. We conduct sales training centrally and within
each sales region and use computerized training to reinforce classroom
training. Direct sales channels accounted for approximately 74% of our revenues
in the year ended March 31, 2000.
Alternate Channels
Our Alternate Channels sales structure is comprised of partners, resellers
and licensed distributors.
The partner designation is given to major telecommunication companies that
are focused, as evidenced by a financial commitment, on selling global network
services provided by Infonet to multinational companies in its markets.
Partners are allowed to sell the totality of Infonet's product line. Deutsche
Telecom, KPN, SBC Communications, Swisscom and Telia are categorized as
partners.
Resellers are major telecommunication companies and other value added
resellers that sell very specific Infonet network services to multinational
companies in their market. WorldCom, Qwest, and Genuity are examples of
companies that make up our reseller channel.
Licensed distributors are telecommunication companies that are licensed to
sell Infonet services to multinational companies in their home market or in
extended markets. Arcor, Eircom and Siris are examples of companies that sell
our services as licensed distributors in their home markets. KDD and Telstra
sell Infonet service outside of their respective home markets as licensed
distributors.
In almost all cases, customers are fully aware that the provider of the
service is Infonet as the in-country support is provided by Infonet's Direct
Channel organization. Our Alternate Channels are primarily involved during the
pre-sales period and Infonet is primarily involved in the post-sales
activities, and during the post-sale period as the provider of the service.
Our Alternate Channel agreements are typically multi-year contracts.
Alternate Channels sales accounted for approximately 26% of our revenue in the
year ended March 31, 2000.
Promotion and Advertising
We recognize that strong brand development and increased name awareness is
crucial in obtaining market share. In addition to print advertising, our
promotional, merchandising and market communications programs
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during the year included participation in major industry events including
International Telecommunication's Tradeshows at Telecom '99 in Geneva and in
CommunicAsia '99 in Singapore. In addition we participated in a number of
industry business seminars and information/IT training sessions to expand the
awareness of our products and services.
In 1999, we began a new global promotional campaign to increase awareness of
the Infonet brand name and our service offerings. We increased our spending in
this program from approximately $3 million in 1998 to approximately $7 million
in 1999. This global program included an expanded presence of print advertising
in the world's leading newspapers such as the Financial Times, The
International Herald Tribune and the Wall Street Journal Europe. Increased
advertising placements were made in business magazines such as Business Week
Europe and Newsweek Europe. There was also an increase in the number of Infonet
promotional posters located in high traffic locations in many of the world's
major international airports including Hong Kong, Frankfurt Airport in Germany
and an expanded presence at Heathrow airport in London. Awareness was further
supported by a presence in industry trade magazines and newspapers and use of
selected in-flight magazines found on selected international air carriers such
as United Airlines and Singapore Airlines.
Our "e-marketing' efforts saw expanded use of and support of
www.infonet.com, our primary website available on the Internet. We also
continued with the publication of "Infonet client success stories' in a company
published magazine called Global Connection, which is published a number of
times throughout the year and most recently included client testimonial success
stories featuring Volkswagen, Leading Hotels, Nestle and Turner Broadcasting.
Access to Multinational Corporate Clients of KPN, Swisscom and Telia
In our ongoing efforts to sell our services to multinational corporations,
on September 30, 1999, we entered into agreements with AUCS Communications
Services N.V., Unisource, the owner of AUCS, and the three companies that own
Unisource, KPN, Swisscom and Telia.
Our agreements with KPN, Swisscom and Telia give us access to approximately
1,077 multinational corporate clients that were being served by AUCS as well as
additional multinational clients to which KPN, Swisscom and Telia may provide
services in the future. These agreements will increase the number of
multinational corporate clients to which we may offer our services.
We have assumed the obligation to provide the multinational clients with the
services currently provided to them by AUCS under the terms of an agreement
that assigns existing distribution agreements to us. We also intend to migrate
these multinational clients to our services as a supplement or replacement for
services previously provided by AUCS and over time as new services provided by
Infonet predominate. We expect that this will result in normal and transparent
migration of the multinational clients onto The World Network. During the
transition period, we will continue to use the AUCS platform to deliver all or
some of the services provided to the multinational clients, which for
convenience we refer to as the AUCS services.
We obtain the AUCS services provided to the multinational clients under the
terms of a services agreement with AUCS, which is based on our standard
services agreement. The pricing of the AUCS services provides us with an
agreed-upon approximately 20% gross margin on the provision of these services.
The services agreement is terminable upon 180 days' notice by any party.
We also entered into a call option for the underlying tangible assets of
AUCS. Until September 2002, the option allows us to purchase any and all of the
AUCS tangible assets at fair market value not to exceed $130 million. The call
right allows us to purchase the assets of AUCS so that we can continue to offer
the AUCS services to our clients if the services agreement is terminated. The
call option may be subject to regulatory approval and is conditioned upon AUCS
ability to continue to fulfill its contractual obligations to third parties.
We intend to migrate these multinational clients to The World Network as the
need for new or supplemental services arise. As of March 31, 2000, although it
is early in the process, the migration of
13
multinational clients onto The World Network has been slower than planned due
to the retraining of distributors and the implementation of other transition
activities.
Industry Participants and Competition
The growth and potential size of the data communications industry has
attracted many new entrants as well as existing businesses from several
industries. Current and prospective industry participants include multinational
alliances, long distance and local telecommunications providers, systems
integrators, cable television and satellite communications companies, software
and hardware vendors, wireless telecommunications providers and national, local
and regional ISPs. In addition, we expect that the predicted growth of the data
communications market will attract other established companies and
multinational alliances. Further, there are established and start-up companies
building global networks and beginning to offer data communications as part of
a comprehensive communications services portfolio. Our competitors include
AT&T, British Telecommunications PLC, or BT, Equant N.V., France Telecom, and
WorldCom, Inc. and new entrants such as Global Crossing Ltd. and Qwest
Communications International Inc. We compete in highly fragmented markets. Most
participants specialize in specific segments of the market, such as access
and/or backbone provision, managed access, such as intranets and extranets,
application services such as Web hosting; security services, and communication
services, such as IP-based voice, fax and video services and commercial e-mail.
Many of these existing and potential competitors have greater financial
resources than we do.
We believe that competition in the data communication market is mainly a
function of the ability to offer a broad variety of innovative services
available on a reliable network supported by an effective service organization.
We believe that the key factors to our competitive position in this market are:
. our global reach;
. our full range of value-added services;
. the reliability of our extensive global network; and
. our extensive country representative structure and the support it
provides to our clients.
Regulation in the United States
Overview
We operate as an unregulated provider of information services, as that term
is defined in the Communications Act of 1934, as amended, and as an enhanced
service provider, as that term is defined in the Federal Communications
Commission ("FCC") rules. The FCC currently does not regulate the data
communications systems we operate in the United States because our special
services features enhance the basic data transmission facilities offered to
clients by connecting them to data switches or processors. These networks
generally are referred to as value-added networks and are targeted to the data
transfer requirements of the specific clients. The FCC also does not regulate
value-added services such as voicemail, facsimile, database access, storage and
retrieval services, store-and-forward messaging services, network management
services, and Internet access, which are not encompassed in the FCC's
definition of "basic telecommunications services" and which we refer to as
enhanced services. Collectively, these services are classified for regulatory
purposes as "information services." In most foreign jurisdictions we operate as
a value-added network provider. Our operations currently are not regulated by
the FCC, the states or the governments in the other countries where we operate.
Although we do not operate as a common carrier, we hold authorizations to
provide international services in some countries on a common carrier basis. We
have obtained common carrier authorizations only in those countries in which
such authorizations are useful in securing more favorable terms in our capacity
or facilities leases or interconnection arrangements. These authorizations
require us to comply with specified regulatory filing and reporting
requirements. To the extent that we begin to offer regulated telecommunications
services as a common carrier, we will become subject to additional rules and
policies.
Various existing U.S. federal and state regulations are currently the
subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which the
telecommunications industry operates. In addition, some foreign governments are
actively considering
14
regulation of some of the services we offer. We cannot predict the outcome of
these proceedings, or the impact they may have on the telecommunications or
information services industries generally, or on us particularly. In addition,
we cannot assure you that future legislative, regulatory or judicial changes in
the United States or in other countries in which we operate will not have a
material adverse impact on our business.
FCC Policy on Enhanced Services
In 1980, the FCC created a distinction between "basic" services, which it
regulates as common carrier services, and enhanced services, which remain
unregulated. The FCC exempted enhanced service providers from federal
regulations governing common carriers, including the obligation to pay access
charges and contribute to universal service. The Telecommunications Act of 1996
established a similar distinction between "telecommunications services" and
"information services." Changing technology and changing market conditions,
however, have made it increasingly difficult to discern the boundary between
unregulated and regulated services.
In general, information services are value-added services that provide
access to regulated transmission facilities only as part of a services package
which also uses network or computer software to change or enhance the
information transmitted. We believe the services we provide come within this
definition. Because the regulatory boundaries in this area are unclear and
subject to dispute, however, the FCC could seek to characterize some or all of
our services as "telecommunications services." If that happens, our services
would become subject to FCC regulation, although the impact of that
reclassification is difficult to predict. In general, the FCC does not regulate
the rates, services, and market entry and exit of non-dominant carriers, but
does require them to contribute to universal service and comply with other
regulatory requirements.
U.S. Licenses
Although we do not currently provide regulated telecommunications services,
we are authorized under Section 214 of the Communications Act of 1934, as
amended, to provide global switched, data, voice, value-added and private line
services on a common carrier basis. We received authorization to provide these
services as a facilities-based common carrier in January 1999 and to provide
these services as a reseller in July 1999. We obtained these licenses because
we believe they allow us to procure the facilities and capacity we need between
the U.S. and foreign points under more favorable terms and at lower cost than
we could otherwise obtain. Although we do not currently provide regulated
telecommunications services, our FCC licenses subject us to certain reporting
and filing requirements.
FCC Regulatory Requirements
As noted above, our operation of networks does not currently subject us to
regulation in the U.S. either at the federal or state level. As an authorized
international common carrier, however, we are regulated by the FCC. In the
United States, authorized international carriers are subject to various annual
reporting requirements as a condition of their licenses. Each year, we must
submit data to the FCC concerning our international traffic as well as the
status of our international circuits. We must also file an annual employment
report to comply with the Commission's Equal Employment Opportunity policies.
International common carriers are also required to file a tariff containing the
rates, terms and conditions applicable to their services before initiating
international telecommunications services. If we fail to maintain proper
federal tariffs or certifications, or if there is any finding by the FCC that
we are not operating under permissible terms and conditions, this may result in
an enforcement action against us or an investigation, either of which could
impose upon us substantial penalties, including the loss of our licenses to
provide telecommunications services.
If we begin providing interstate, international telecommunications services
on a common carrier basis, we will be required to file additional reports
concerning our interstate and international traffic revenues. We also may be
required to contribute a percentage of these revenues to governmental funds
including Universal Service, Telecommunications Relay Service, Number
Portability, and the administration of the North American Numbering Plan. We
will also be subject to annual regulatory fees assessed by the FCC.
15
FCC Policies Applicable to Regulated International Traffic
If we begin to operate as a common carrier, we will be required to comply
with additional FCC policies governing international common carriers. For
example, the FCC requires carriers such as us to report "significant
affiliations," as defined by the FCC, with global carriers that have market
power in the countries in which we operate. In addition, the FCC administers a
variety of international service regulations, including the international
settlements policy. The international settlements policy governs the
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating traffic over each other's networks, as well as the accounting
rates for settlement. The FCC has considerably relaxed this policy in its
implementation of the 1997 World Trade Organization Agreement on Basic
Telecommunications ("WTO Agreement"), which went into effect in January 1998.
Representing 90% of worldwide telecommunications traffic, the 72 signatory
countries to the WTO Agreement agreed to open their telecommunications markets
to competition and foreign ownership. We believe that this agreement, and its
implementation by the signatory countries, will provide us with significant
opportunities to compete in markets in which we did not previously have access,
and to provide end-to-end facilities-based services to and from these
countries.
The regulatory requirements that may affect our operations continue to
evolve as a result of the WTO Agreement, federal legislation, court decisions
and new and revised policies of the FCC. In particular, the FCC continues to
refine its international service regulations in order to promote competition,
to reflect and encourage deregulation in foreign countries and to reduce
international accounting rates toward cost. Among other things, these changes
may increase competition and alter our ability to compete with other similar
service providers or to introduce new services. Any change in applicable
regulatory requirements may have an impact on our operations in a way that we
cannot predict.
Regulation in Non-U.S. Markets
Although most countries impose little or no regulation on our network
operations, the laws and regulations governing our services are under review in
many countries outside the U.S. and are subject to change. Consistent with our
strategy of obtaining licenses or authorizations to provide regulated services
when we are able to obtain more favorable facilities or capacity lease terms or
interconnection arrangements, we have obtained facilities-based authorization
to provide telecommunications services in the United Kingdom. We anticipate
filing requests for authorization in several other countries as well. In some
countries we are able to obtain the more favorable arrangements we seek simply
by notifying the relevant government authority that we intend to operate on a
common carrier basis. In other countries, we are engaging in discussions with
foreign regulators to determine whether we must apply for authorization in
order to acquire or lease facilities or interconnect with other carriers.
Employees
As of March 31, 2000, including our consolidated country representatives, we
had a total of approximately 859 employees, 219 of which are located
internationally. There are approximately 481 additional dedicated Infonet
personnel who are employed by our non-consolidated country representatives, all
of whom are based internationally. We have not experienced any work stoppages
and consider our relations with employees to be good. None of our employees is
represented by a labor union.
16
RISK FACTORS
Investing in our common stock involves a high degree of risk. If any of the
following risks actually occurs, our business, results of operations and
financial condition could be materially adversely affected, the trading price
of our Class B common stock could decline, and you could lose all or part of
your investment.
We may not be able to achieve our strategic objectives unless we successfully,
timely and cost-effectively expand our network and manage our growth.
We must continue to develop and expand our network infrastructure as the
number of clients and the amount of information they wish to transport as well
as the number of services we offer increases. The expansion and development of
our network infrastructure will require substantial financial, operational and
management resources. We may not be able to expand our network adequately to
meet the demand for increased usage. If we do not expand our network rapidly
enough, additional stress may be placed on our network hardware, traffic
management and other systems and operating facilities. Our network may be
unable to service a substantial number of additional clients while maintaining
high performance and competitive data transmission speeds.
A variety of factors, uncertainties and contingencies that are beyond our
control such as the availability of transmission capacity, price of
transmission capacity, continued deployment of our ATM-enabled network, local
regulations and availability of country representatives or other third-party
sales and support channels will affect the continued expansion of our network.
Currently, there is substantial volatility in the market price for transmission
capacity. We are investing significant capital in acquiring transmission
capacity at current fixed prices. These prices are anticipated to decline in
the future. We cannot assure you that actual expansion costs or the time
required to complete our network will not substantially exceed current
estimates. A failure to continue to expand our network may have a material
adverse effect on our ability to service our clients and to grow our business.
Our growth has placed, and our anticipated future growth in our operations
will continue to place, a significant strain on our management, financial
controls, operating and accounting systems, personnel and other resources. We
currently rely on a relatively small core management team. As we grow, we must
not only manage demands on this team but also increase its management
resources, among other things, to continue to expand, train and manage our
employee base and maintain close coordination among our technical, accounting,
finance, marketing and sales staff. In addition, our network infrastructure,
technical support and other resources may not be sufficient to facilitate our
growth. If we do not successfully manage our growth, we may be unable to
adequately support our clients' communications needs in the future.
If we are unable to maintain our country representative and third-party
sales channel relationships, then our ability to sell and support our services
may be negatively impacted.
We are and will continue to be significantly dependent on a number of third-
party relationships, including our non-consolidated country representatives, to
market and support our services. Many of our arrangements with third-party
providers are not exclusive and may be terminated at the convenience of either
party. We cannot assure you that these third parties regard our relationship
with them as important to their own respective businesses and operations, that
they will not reassess their commitment to us at any time in the future or that
they will not develop their own competitive services.
We may not be able to maintain or form new relationships with third parties
that supply us with clients, software or related products that are important to
our success. Accordingly, we cannot assure you that our existing or prospective
relationships will result in sustained business partnerships, successful
service offerings or the generation of significant revenues.
We rely on our country representatives for some of the support and local
implementation necessary to deliver our services on a global basis. We also
rely on these country representatives for insights into local
17
operating and market conditions. The failure of these country representatives
to perform their tasks or operate their business effectively could, in turn,
adversely affect our business. In addition, we sometimes provide our country
representatives with equipment and installation services to facilitate our
market participation. We may have limited recourse, or potentially no recourse,
if they do not perform the services that we expect them to perform, and we may
not be able to recover our equipment. Our recourse may be limited because the
local laws and judicial system may not be effective in enforcing our rights.
Also, our country representatives are parties to the legal contracts with
clients. If these agreements are terminated, the clients have no obligation to
purchase our services.
In addition, we frequently depend on our country representatives to obtain
the regulatory approvals and licenses that we need to offer our communications
services in other countries. In some cases, we cannot determine whether they
are complying with local regulatory laws or taking the steps necessary to
maintain proper licenses and permits. If any of our country representatives
lose their telecommunications licenses, whether by violating local laws or
otherwise, our business could suffer.
We continue to expend extensive managerial and operational resources to
transition the multinational clients of KPN, Swisscom and Telia which may not
ultimately provide a corresponding increase in revenues.
The multinational corporate clients of KPN, Swisscom and Telia, currently
using AUCS services, have no obligation to use our services. As a result, we
cannot assure you that any significant number of these clients will continue to
use the AUCS services we will provide or transition to The World Network during
the next 12 to 18 months or at all. We cannot assure you that the clients which
do transition to our network will continue to purchase our services or, if they
continue to use our services after the transition, that they will purchase as
many or more services from us than they did from AUCS. Thus, our access to this
additional client base may not yield substantial additional revenue.
Delays in receiving transmission capacity or delays in equipment delivery or
loss of our equipment suppliers could impair the quality of our service and our
growth.
We acquire, by lease or by purchase, transmission capacity from a wide range
of suppliers, both to connect client premises to our network and for other
network connections. We have from time to time experienced short-term delays in
receiving the requisite transmission capacity from suppliers. We cannot assure
you that we will be able to obtain these services in the future within the time
frames required by us and at a reasonable cost. Any failure to obtain
transmission capacity on a timely basis and at a reasonable cost in a
particular jurisdiction, or any interruption of local access services, could
have an adverse effect on our service levels and our growth.
The switches and routers used in our network are provided primarily by
Nortel Networks Corp. and Cisco Systems Inc. These suppliers also sell products
to our competitors and may become competitors themselves. We may experience
delays in receiving components from our suppliers or difficulties in obtaining
their products at commercially reasonable terms. If we are required to seek
alternate sources of switches and routers, we are likely to experience delays
in obtaining the requisite equipment we need and may be required to pay higher
prices for that equipment, increasing the cost of expanding and maintaining our
network.
If our network infrastructure is disrupted or security breaches occur, we may
lose clients or incur additional liabilities.
We and other network services providers may in the future experience
interruptions in service as a result of fire, natural disasters, power loss, or
the accidental or intentional actions of service users, current and former
employees and others. Although we continue to implement industry-standard
disaster recovery, security and service continuity protection measures,
including the physical protection of our plant and equipment, similar measures
taken by us or by others have been insufficient or circumvented in the past. We
cannot assure you that these measures will be sufficient or that they will not
be circumvented in the future. Unauthorized use of
18
our network could potentially jeopardize the security of confidential
information stored in the computer systems of or transmitted by our clients.
Furthermore, addressing security problems may result in interruptions, delays
or cessation of services to our clients. These factors may result in liability
to us or our clients.
The markets we serve are highly competitive and our competitors may have much
greater resources to commit to growth, new technology or marketing.
Our current and potential competitors include other companies that provide
data communications services to multinational businesses, systems integrators,
national and regional Internet Service Providers, or ISPs, wireless, cable
television and satellite communications companies, software and hardware
vendors, and global, regional and local telecommunications companies. In
addition, we expect that the predicted growth of the data communications market
will attract other established companies and multinational alliances. Further,
there are established and start-up companies building global networks and
beginning to offer data communications as part of a comprehensive
communications services portfolio. Our competitors, which may operate in one or
more of these areas, include companies such as AT&T, BT, Equant, France
Telecom, and WorldCom and new entrants such as Qwest and Global Crossing. Our
country representatives and suppliers could also become competitors either
directly or through strategic relationships with our competitors. We have in
the past and expect in the future to encounter competition as a result of the
formation of global alliances among large telecommunications providers, such as
the recently formed joint venture between AT&T and BT.
Several of our competitors have substantially greater financial, technical
and marketing resources, larger customer bases, greater name recognition and
more established relationships in the telecommunications industry than we do.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
. develop and expand their network infrastructures and service offerings
more quickly;
. adapt better to new or emerging technologies and changing client needs;
. take advantage of acquisitions and other opportunities more readily;
. devote greater resources to the marketing and sale of their products; and
. adopt more aggressive pricing policies.
Some of our competitors may also be able to provide clients with additional
benefits at lower overall costs. We cannot be sure that we will be able to
match cost reductions of our competitors. In addition, we believe it is likely
that there will be consolidation in our market, which could increase
competition in ways that may adversely affect our business, results of
operations and financial condition.
Because we have international operations, we face additional risks related to
global political and economic conditions.
We operate in and intend to expand further into international markets. We
cannot be sure that we will be able to obtain or build the necessary global
communications infrastructure in a cost-effective manner or compete effectively
in international markets. There are risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differing technology standards;
. employment laws and practices in foreign countries;
19
. weaker intellectual property protections;
. political, social and economic instability;
. costs of services tailored to specified markets;
. imposition of currency exchange controls; and
. potentially adverse tax consequences.
Any of these factors could adversely affect our operations. In addition, if
we are able to transition a substantial number of the AUCS multinational
clients to our system, or if we derive significant revenues from the delivery
of AUCS services, then a substantial portion of our revenues will be derived
from European clients. Therefore, a future slowdown or recession in the
European economy in particular could have a material adverse effect on our
revenues and profitability.
Adverse currency fluctuations and foreign exchange controls could decrease
revenues we receive from our international operations.
We invoice all sales of services to our country representatives and sales
channel partners in U.S. dollars. However, many of our country representatives
and sales channel partners derive their revenues and incur maintenance and
other costs in currencies other than U.S. dollars. The obligations of these
country representatives and sales channel partners whose revenues are largely
in foreign currencies will be subject to unpredictable and indeterminate
fluctuations if those currencies change relative to U.S. dollars. Furthermore,
these country representatives and sales channel partners may be or may become
subject to exchange control regulations which might restrict or prohibit the
conversion of their revenue currencies into U.S. dollars. The occurrence of any
of these factors could have a material adverse effect on our current or future
international operations.
Our exposure to exchange rate fluctuations may increase while we transition
multinational clients of KPN, Swisscom and Telia to The World Network because
our receivables from these clients and our payables to AUCS under the services
agreement for services provided to those clients will be denominated in
different foreign currencies.
Our ability to retain our clients and provide them with new and innovative
service offerings may suffer if we are not able to keep up with the rapid
technological developments in our industry.
The global communications industry is subject to rapid and significant
technological changes, such as continuing developments of alternative
technologies for providing high-speed data communications. We cannot predict
the effect of technological changes on our business. We may rely in part on
third parties, including some of our competitors and potential competitors, for
the development of and access to communications and networking technologies. We
expect that new services and technologies applicable to our market will emerge.
New products and technologies may be superior and/or render obsolete the
products and technologies that we currently use to deliver our services. Our
future success will depend, in part, on our ability to anticipate and adapt to
technological changes and evolving industry standards. We may be unable to
obtain access to new technologies on acceptable terms or at all, and we may be
unable to obtain access to new technologies and offer services in a competitive
manner. Any new products and technologies may not be compatible with our
technologies and business plan. We believe that the global communications
industry should set standards to allow for the compatibility of various
products and technologies. The industry, however, may not set standards on a
timely basis or at all.
If members of our senior management team leave Infonet, then our ability to
operate our business may be negatively affected.
Our future success depends to a significant extent on the continued services
of our senior management, particularly Jose A. Collazo, President and Chairman
of the Board of Directors, Akbar H. Firdosy, our Chief
20
Financial Officer, and other members of our executive management team. The loss
of the services of either of Mr. Collazo or Mr. Firdosy, or any other present
or future key employee, could have a material adverse effect on the management
of our business. We have employment agreements with Mr. Collazo and Mr.
Firdosy. We do not maintain "key person" life insurance for any of our
personnel.
Competition for highly-skilled personnel is intense and the success of our
business depends on our ability to attract, retain and manage key personnel.
Our future success depends on our continuing ability to attract, retain and
motivate highly-skilled employees. As we continue to grow, we will need to hire
additional personnel in all areas. Competition for personnel throughout the
data and voice communications industries is intense. We may be unable to
attract or retain key employees or other highly qualified employees in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining
highly-skilled employees with appropriate qualifications. If we do not succeed
in attracting sufficient new personnel or retaining and motivating our current
personnel, our ability to provide our services could diminish.
Your share ownership may grant you limited voting power because our Class A
common stockholders will control the outcome of stockholder votes.
Our Class A common stockholders, in the aggregate, beneficially own all of
our Class A common stock and approximately 80% of our Class B common stock, or
more than 95% of our voting power. These stockholders will be able to exercise
control over all matters requiring approval by our stockholders, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company, which could have a material adverse effect on
our stock price.
We entered into a stockholders agreement with all of our Class A
stockholders. This stockholders agreement provides that each Class A
stockholder holding at least 14.95 million shares of our Class A common stock
will have the right to designate one of our directors, and each Class A
stockholder will agree to vote all of its shares in favor of the directors
designated by the other Class A stockholders and for our president as a
director. Accordingly, seven of the nine directors on our board will be
appointed by our Class A stockholders.
In addition, our revised certificate of incorporation contains provisions
that require the approval of both 95% of the voting power of the Class A
stockholders and two-thirds of the voting power of the Class A and Class B
common stock voting together to take significant corporate actions such as
changes to our share capital, or a merger, consolidation or liquidation. Based
on the current ownership of our Class A common stock, we will not be able to
undertake these actions without the approval of each of our Class A
stockholders.
If we sustain continued operating losses, then your share value may be
negatively impacted.
We incurred operating losses of approximately $2.8 million and $28.8 million
for the years ended March 31, 1998 and 2000. We cannot assure you that we will
be able to achieve or sustain profitability from operations in the future.
Our quarterly operating results may vary which may cause volatility or a
decline in the price of our Class B common stock.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
. the size and timing of significant equipment and transmission capacity
purchases;
. the timing of new service offerings;
. changes in our pricing policies or those of our competitors;
21
. the timing and completion of our network expansion;
. market acceptance of data communications generally and of new and
enhanced versions of our services in particular;
. the length of our contract cycles; and
. our success in expanding our sales force and expanding our distribution
channels.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to global communications capacity,
depreciation, real estate and interest expenses and personnel, and therefore
our results of operations are particularly sensitive to fluctuations in
revenues. Due to the factors noted above and the other risks discussed in this
section, you should not rely on period-to-period comparisons of our results of
operations. Quarterly results are not necessarily meaningful and you should not
rely on them as an indication of future performance. It is possible that in
some future periods our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our Class B
common stock may fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face uncertain and changing regulatory restrictions which could limit our
operating flexibility and increase our costs.
The Federal Communications Commission, or the FCC, currently does not
regulate the data communications systems we operate in the United States
because our special services features enhance the basic data transmission
facilities offered to clients by connecting them to data switches or
processors. These networks generally are referred to as value-added networks
and are targeted to the data transfer requirements of the specific client. The
FCC also does not regulate value-added services such as voicemail, facsimile,
database access, storage and retrieval services, store-and-forward messaging
services, network management services, and Internet access, which are not
encompassed in the FCC's definition of "basic telecommunications services" and
which we refer to as enhanced services. Collectively, these services are
classified for regulatory purposes as "information services" and are currently
exempt from the common carrier regulations that apply to entities providing
"telecommunications services." As a result, most of the services we provide are
not currently subject to direct regulation by the FCC or the states. Future
changes in legislation or regulation, however, could result in some aspects of
our current operations becoming subject to regulation by the FCC or a state of
the United States. If the FCC or a state seeks to regulate some segments of our
activities as "telecommunications services," we cannot predict the impact, if
any, that future regulation or regulatory changes may have on our operations.
We currently hold common carrier authorizations to provide international
telecommunications services between the United States and other countries. We
apply for authorization as a common carrier in jurisdictions where we believe
this authorization will decrease our costs. We also hold an international
facilities license in the United Kingdom. Our licenses subject us to the
jurisdiction of the relevant regulatory body which, in turn, may require that
we make specified regulatory filings and pay attendant fees. Future regulatory,
judicial and legislative changes in countries in which we operate may impose
additional costs on us or restrict our activities. In addition, regulators or
third parties may raise material issues with regard to our compliance with
applicable regulations. Failure to comply with applicable laws or regulations
in the United States, or other countries in which we operate, could prevent us
from carrying on our operations cost effectively.
The law relating to the liability of online services companies and Internet
access providers for data and content carried on or disseminated through their
networks is currently unsettled and could expose us to unforeseen liabilities.
It is possible that claims could be made against online services companies
and Internet access providers under United States and/or foreign law for
defamation, negligence, copyright or trademark infringement, or other theories
based on data or content disseminated through their networks, even if a user
independently
22
originated this data or content. Several private lawsuits seeking to impose
liability upon online services companies and Internet access providers have
been filed in U.S. and foreign courts. While the United States has passed laws
protecting Internet access providers from liability for actions by independent
users in limited circumstances, this protection may not apply in any particular
case at issue. In addition, some countries, such as China, regulate or restrict
the transport of voice and data traffic in their jurisdiction. The risk to us,
as an Internet access provider, of potential liability for data and content
carried on or disseminated through our system could require us to implement
measures to reduce our exposure to this liability. This may require us to
expend substantial resources or to discontinue some of our services. Our
ability to monitor, censor or otherwise restrict the types of data or content
distributed through our network is limited. Failure to comply with any
applicable laws or regulations in particular jurisdictions could result in
fines, penalties or the suspension or termination of our services in these
jurisdictions. The negative attention focused upon liability issues as a result
of these lawsuits and legislative proposals could adversely impact the growth
of public Internet use. Our professional liability insurance may not be
adequate to compensate or may not cover us at all in the event we incur
liability for damages due to data and content carried on or disseminated
through our network. Any costs not covered by insurance that are incurred as a
result of this liability or alleged liability, including any damages awarded
and costs of litigation, could harm our business and prospects.
Volatility of our stock price may expose us to securities litigation.
The stock market has experienced significant price and volume fluctuations,
and the market prices of global communications companies have been extremely
volatile. The market price of our Class B common stock could be affected by:
. quarterly variations in our operating results;
. technological innovations of ours or of our competitors;
. changes in government regulations;
. conditions in the international data communications and
telecommunications industries;
. increased price competition;
. changes in earnings estimates by analysts; and
. changes in general economic conditions and volatility in the financial
markets.
In the past, following periods of volatility in the market price of a public
company's securities, securities class action litigation has often been
instituted against that company. This litigation could result in substantial
costs and a diversion of management's attention and resources.
Our certificate of incorporation and bylaws include provisions that may
discourage a takeover attempt.
Provisions contained in our revised certificate of incorporation, our
revised bylaws, Delaware law and our stockholders agreement could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders. Provisions of our bylaws and certificate of incorporation
impose various procedural and other requirements which could make it more
difficult for stockholders to effect certain corporate actions. Our certificate
of incorporation requires the approval of both 95% of the voting power of the
Class A common stock and two-thirds of the voting power of the Class A and
Class B common stock voting together to take significant corporate actions such
as changes to our share capital, or a merger, consolidation or liquidation.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of our Class B common stock and may have the
effect of delaying or preventing a change in control.
Item 2. Properties
Our headquarters are located in a facility consisting of approximately
150,000 square feet in El Segundo, California, which we purchased for $33.1
million on March 28, 2000 pursuant to a 15 year mortgage.
23
In addition, we lease sales offices domestically and internationally in a
variety of locations. These leases generally have terms of three to five
years. None of these offices is critical to our success, and we believe that
suitable additional or alternative space is available on commercially
reasonable terms as needed.
We also lease facilities for our network control centers, global customer
assistance centers and engineering offices around the world. We lease these
facilities at commercial rates under standard commercial leases. We believe
that suitable space for these operations is generally available on
commercially reasonable terms as needed.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this annual
report, we are not a party to any litigation that we believe could reasonably
be expected to have a material adverse effect on our business, financial
condition or results of operations and we have not been involved in any
litigation of that kind in the past three years.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended March 31, 2000.
24
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange, or the NYSE,
under the symbol "IN" and on the Frankfurt Stock Exchange under the trading
symbol "IN." As of June 15, 2000, there were approximately 450 shareholders of
record of our Class B common stock, par value $.01 per share. Our
Class B common stock began trading on the New York Stock Exchange on December
16, 1999, the date of our initial public offering. Prior to December 16, 1999,
there was no public market for our common stock. The following table sets
forth, for the period indicated, the high and low closing sales price for our
common stock reported on the NYSE.
High Low
---- ----
Third Quarter (from December 16, 1999 through December
31, 1999).............................................. $26 11/16 $22 1/8
Fourth Quarter.......................................... $32 15/16 $ 19
Dividend Policy
We do not expect to pay any dividends for the foreseeable future. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. Any determination to pay cash dividends in the future will be at
the discretion of our board of directors and will depend upon our results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at that time by our board of directors.
Sales of Unregistered Securities
During the past three years, we have issued and sold unregistered securities
as follows (adjusted for subsequent stock splits):
Pursuant to Rule 701 of the Act, in April 1999, we sold 9.44 million shares
of our common stock to our key employees pursuant to our 1998 Stock Purchase
Plan. In accordance with the provisions of the Stock Purchase Plan, some
employees purchased their shares for cash and other employees received their
shares in exchange for a secured, recourse promissory note held by us. Part of
the security for the promissory notes are the shares sold to each purchaser.
Each share was sold for $0.84, which price was set by the pricing formula at
the time of the sales.
During the three months ended September 30, 1999, in exchange for the right
to market our services to their clients and $40.0 million in cash, we issued an
aggregate of 47.84 million shares of our common stock to KPN, Swisscom and
Telia in reliance on Rule 506 of Regulation D under the Act.
Use of Proceeds
We have used and continue to use aggregate net proceeds to us of
approximately $766.8 million from our initial public offering as follows:
. the repayment of long-term debt under our credit facility;
. the purchase of assets that were under operating leases of approximately
$13 million;
. expansion of our network infrastructure, including acquisition of
transmission capacity and continued deployment of our ATM-enabled
backbone;
. to fund operating losses; and
. for general corporate purposes.
Our management, subject to supervision by our board of directors, has
significant flexibility in applying the net proceeds of the offering. Pending
any use as described above, we have invested the net proceeds in interest-
bearing investment grade securities.
25
Item 6. Selected Consolidated Financial Data
The following table sets forth our selected consolidated financial data. You
should read this information together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this annual report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated financial data
as of March 31, 1996, 1997 and 1998 and for each of the years in the two year
period ended March 31, 1997 have been derived from our audited consolidated
financial statements which are not included in this annual report. The selected
consolidated financial data as of March 31, 1999 and 2000 and for each of the
years in the three year period ended March 31, 2000 have been derived from our
audited consolidated financial statements which appear elsewhere in this annual
report. The historical results are not necessarily indicative of the operating
results to be expected in the future.
Year Ended March 31,(1)
-------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(In thousands, except per share amounts)
Consolidated statement of operations
data:
Revenues............................... $240,776 $264,684 $294,244 $302,997 $ 481,444
Expenses:
Country representative compensation.. 43,232 35,090 41,136 53,766 151,283
Bandwidth and related costs.......... 37,407 43,134 48,089 52,700 90,457
Network operations................... 75,386 81,106 77,489 55,041 72,230
Selling, general and administrative.. 84,948 115,741 130,287 139,663 196,314
-------- -------- -------- -------- ---------
Total expenses....................... 240,973 275,071 297,001 301,170 510,284
-------- -------- -------- -------- ---------
Operating income (loss)................ (197) (10,387) (2,757) 1,827 (28,840)
-------- -------- -------- -------- ---------
Other income (expense):
Interest income...................... 1,847 1,014 1,515 1,881 14,560
Interest expense..................... (477) (874) (868) (689) (7,162)
Other, net........................... (227) 2,591 2,969 382 (1,310)
-------- -------- -------- -------- ---------
Total other income .................. 1,143 2,731 3,616 1,574 6,088
-------- -------- -------- -------- ---------
Income (loss) before provision (credit)
for income taxes and minority
interest.............................. 946 (7,656) 859 3,401 (22,752)
Provision (credit) for income taxes.... 887 (175) 4,446 (180) 3,996
-------- -------- -------- -------- ---------
Income (loss) before minority
interest.............................. 59 (7,481) (3,587) 3,581 (26,748)
Minority interest(2)................... -- -- (143) 132 (43)
-------- -------- -------- -------- ---------
Net income (loss)(3)................... $ 59 $ (7,481) $ (3,444) $ 3,449 $ (26,705)
======== ======== ======== ======== =========
Basic and diluted earnings (loss) per
common share(3)(4).................... $ 0.00 $ (0.02) $ (0.01) $ 0.01 $ (0.06)
Basic and diluted weighted average
number of common shares outstanding... 373,750 373,750 373,750 373,750 417,197
Other consolidated financial data:
Net cash flows provided by (used in):
Operating activities................. $ (1,641) $ 1,383 $ 13,032 $ 11,911 $ 25,620
Investing activities................. (7,364) (4,704) (5,511) (20,679) (145,691)
Financing activities................. (3,577) 13,048 (14,390) 5,828 839,613
EBITDA(5).............................. 15,201 9,631 18,075 20,612 19,054
26
As of March 31,(1)
----------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(Dollars in thousands)
Consolidated balance sheet
data:
Cash and cash equivalents...... $ 9,448 $ 18,906 $ 11,449 $ 8,681 $ 727,681
Total current assets........... 75,709 92,296 90,757 90,277 881,939
Total assets................... 143,868 159,439 153,799 182,263 1,222,327
Current liabilities............ 42,744 60,286 62,814 73,271 203,565
Total debt..................... 5,112 15,372 2,066 15,837 117,782
Total stockholders' equity..... 83,347 78,711 74,131 76,717 876,051
Other operating data:
Number of ports................ 5,814 7,914 9,205 10,590 14,468
Number of country
representatives............... 49 51 52 56 55
Number of dedicated personnel:
U.S.......................... 728 764 580 592 640
Non-U.S.(6).................. 535 556 585 659 700
- --------
(1) Our fiscal year is the 52- or 53-week period ending on the Friday nearest
to March 31. For simplicity of presentation, we have described the 52-week
periods ended March 29, 1996 and March 28, 1997, the 53-week period ended
April 3, 1998 and the 52-week periods ended April 2, 1999 and March 31,
2000 as the years ended March 31, 1996, 1997, 1998, 1999 and 2000.
(2) Reflects the acquisition of a 51% interest in Infonet Luxembourg in the
year ended March 31, 1998.
(3) In our year ended March 31, 2000, we recorded a non-cash, pre-tax
compensation charge of $20.4 million ($19.8 million after tax), resulting
from our stock options which were converted from book value to market
value options as a result of the initial public offering. We also recorded
a pre-tax charge of $13.0 million ($8.0 million after tax), resulting from
our stock appreciation rights. Option charges were based upon the offering
price of $21.00 per share of our Class B common stock for the initial
public offering of the Company's shares on December 16, 1999. The stock
appreciation rights charges are based on the fair market value of the
company's stock on March 31, 2000.
(4) As of March 31, 1996, 1997 and 1998, there were no options, warrants or
other forms of potential common stock issued by us. Our outstanding common
stock purchase rights represent the only form of potential common stock as
of March 31,1999. All of these rights were excluded from the computation
of diluted earnings per share because their inclusion would have had an
antidilutive effect on earnings per share. Our outstanding common stock
purchase rights and stock options represent the only form of potential
common stock as of March 31, 2000. All of these rights and options were
excluded from the computation of diluted earnings per share because their
inclusion would have had an antidilutive effect on earnings per share.
(5) EBITDA, which we calculate as income from operations before interest,
other income (expense), provision for income taxes, depreciation,
amortization and compensation charge for stock option plans, is a
supplemental financial measure we use in the evaluation of our business
and is used by many analysts in our industry. However, you should read
EBITDA only in conjunction with our consolidated financial data summarized
above and our consolidated financial statements and the related notes to
those financial statements prepared in accordance with generally accepted
accounting principles, which appear elsewhere in this annual report. You
should not construe EBITDA as an alternative to income from operations, as
determined in accordance with generally accepted accounting principles, as
an indicator of our operating performance or as an alternative to cash
flows from operating activities, as determined in accordance with
generally accepted accounting principles, as a measure of our liquidity.
Our definition of EBITDA may not be comparable to similarly titled
measures of other companies.
(6) Includes employees of non-consolidated country representatives.
27
Quarterly Operating Performance
The following tables set forth unaudited quarterly financial data for the
fiscal years ended March 31, 1999 and 2000.
Three Months Ended,
--------------------------------------------
June March
30, September 30, December 31, 31,
1999 1999 1999 2000
------- ------------- ------------ --------
(Dollars in thousands, except per share
amounts)
Revenues...................... $85,706 $87,513 $153,699 $154,526
Operating income (loss)....... (543) (9,096) (23,875) 4,674
Net income (loss)............. (1,374) (8,400) (22,463) 5,532
Basic and diluted earnings
(loss) per common share...... $ 0.00 $ (0.02) $ (0.05) $ 0.01
Three Months Ended,
---------------------------------------------
June
30, September 30, December 31, March 31,
1998 1998 1998 1999
------- ------------- ------------ ---------
(Dollars in thousands, except per share
amounts)
Revenues..................... $69,004 $71,567 $77,108 $85,318
Operating income (loss)...... (3,213) (2,833) 1,522 6,351
Net income (loss)............ (2,424) (2,569) 45 8,397
Basic and diluted earnings
(loss) per common share..... $ 0.00 $ (0.01) $ 0.00 $ 0.02
Our revenues and operating income vary from quarter to quarter due to a
number of factors including the timing of new client contracts, new service
offerings, changes in our pricing policies or those of our competitors and the
timing and completion of our network expansion. Our operating income (loss)
also varies from quarter to quarter due to timing of expenses related to
provisioning of our services. Quarterly results are not necessarily meaningful
and you should not rely on them as an indication of our future performance.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read this discussion together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this annual report. All statements contained within the Management's Discussion
and Analysis of Financial Condition and Results of Operations that are not
statements of historical fact constitute "Forward-Looking Statements" within
the meaning of Section 21E of the Securities Exchange Act. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors that could cause our actual results to be materially different from
historical results or from any future results expressed or implied by these
forward-looking statements. You are urged to consider statements that include
the terms "believe", "belief", "expects", "plans", "anticipates", "intends" or