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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001 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 18, 2001 was approximately $464.4 million based on
the closing price on the New York Stock Exchange on June 18, 2001 of $7.25.
The number of shares of the Registrant's $.01 par value Class B common stock
that was outstanding as of June 18, 2001 was 309,394,476. The number of
outstanding shares of the Registrant's Class A common stock, par value, $.01,
was 161,403,358 as of June 18, 2001, 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 2001 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days after the fiscal year
ended March 31, 2001.
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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....................................................... 24
Item 3. Legal Proceedings................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
PART II.................................................................. 26
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 26
Item 6. Selected Consolidated Financial Data............................. 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 44
Item 8. Financial Statements and Supplementary Data...................... 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 44
PART III................................................................. 45
Item 10. Directors and Executive Officers of the Company................. 45
Item 11. Executive Compensation.......................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 45
Item 13. Certain Relationships and Related Transactions.................. 45
PART IV.................................................................. 46
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K................................................................ 46
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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.
The Company's fiscal year is the 52- or 53-week period ending on the Friday
nearest to March 31. For simplicity of presentation, the Company has described
the 52-week periods ended April 2, 1999, March 31, 2000 and March 30, 2001 as
the years ended March 31, 1999, 2000 and 2001, respectively.
We are a leading provider of cross-border managed data communications
services for more than 2,600 corporations worldwide, including 35% of the top
500 corporations in Business Week's 1999 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 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, Microsoft, Nestle, Nokia and
Volkswagen.
We offer a broad range of integrated service solutions to our clients, such
as:
. Network Services--includes intranet, ATM, remote access, multimedia,
Internet and IP-VPN services;
. Consulting, Integration and Provisioning Services--includes consulting,
design, and implementation of each client's particular networking needs
and our Global Connect services whereby we install and manage leased
lines and customer premise equipment at the client's site to enable the
client to access The World Network and use our Network Services;
. 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 of the external and internal data communications services that 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 that 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.
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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 over 23 Gigabits or Gbps 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.
Our global country representative 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
regarding local operating, regulatory and market conditions.
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. They are:
. KDDI--KDDI 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 dispersed 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 market for data communications is one of the fastest growing segments of
the global telecommunications market. According to IDC, a leading market
research firm, the global data communications services market, which includes
ATM, intranet services, commercial Internet services and Web hosting, will be
approximately $27 billion in 2001 with 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 IDC projects to
grow from $4.1 billion in 2000 to $18 billion in 2003, an estimated compound
annual growth rate of over 60%.
Industry Drivers
We believe that there is an attractive opportunity for marketing managed
data communications services to multinational corporations because of the
following factors:
. globalization of business and increased need for connecting international
locations;
. rapid expansion of Internet protocol (IP)-based applications;
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. rising importance of data communications as a service critical to a
corporation's success; and
. increased outsourcing of corporate data communications.
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 among their
geographically dispersed locations, as well as with their travelling and
telecommuting employees. New technologies and advanced remote access
alternatives are enabling these companies to connect their geographically
dispersed offices and employees 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 and e-commerce, 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 they can upgrade these
networks as the complexity of their 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 new
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 will increasingly 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 currently expect to pursue the
following strategic aims:
Focus on multinational clients that require data communications solutions
We expect to 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 allow them to focus their
resources 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
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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 annual Global 1000 from 21% to 35%. As part of our strategy, we
have launched a global branding program to increase awareness of our services
and the Infonet brand.
Upgrade and expand our global network
We intend to continue to upgrade and further expand The World Network to
maintain our competitive advantage. We believe that these investments in The
World Network 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 deploy
ATM backbone switches to 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.
Strengthen our sales and customer support structure
Our country representatives play a vital 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. 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 by targeting
other companies for acquisition that can supplement our core business or our
client base.
Provide the highest level of quality and reliability for our services
We are committed to maintaining the highest level of quality 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 quality standards,
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.
Our Service Solutions
Our core business focuses on providing mission critical value-added global
data communications services to meet our clients' global data communications
needs. We use our extensive portfolio of products and services to provide total
global solutions to our customers. By taking a consultative, application-
oriented approach to identifying customer needs and developing customized
solutions, we offer our 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 AOL, a leading interactive media company, we provide call center
capabilities throughout Europe to distribute customer queries to the most
qualified AOL support personnel;
. For Hasbro, a leading toy manufacturer, we provide the global
communications to support their sales, administration and supply chain
systems in 26 countries; and
. For Volkswagen, a leading auto manufacturer, we provide global intranet
services in 30 countries to ensure around the clock engine design.
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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 Intranet, Broadband, Internet, Managed Access
and Wireless Services.
Intranet Services
Global Frame Relay Services. Infonet was the first company to offer
"application defined" worldwide frame relay services in more than 65 countries
with customized performance levels. Through this service, we enable our
customers to assign quality of service levels to frame relay traffic for each
application. We offer our customers three levels of Frame Relay service to meet
specific application performance characteristics. A premium level Frame Relay
service is available for our customers' mission-critical, interactive
applications requiring the highest level of performance and network
availability. We offer the 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 that are less sensitive to
longer response times, such as Internet browsing, e-mail and small file
transfers.
Private IP Services. Our Private Internet Services support Internet protocol
and provide functionality similar to the public Internet but with the
performance characteristics of The World Network. This capability allows us to
offer customers service level agreements for high performance mission critical
IP applications. Infonet was one of the first providers to offer this service
and has over ten years of experience in provisioning private internets. Our
Private Internet Services are designed for corporations seeking to establish
extranets or engage in e-commerce.
Broadband Services
ATM Services. Our global ATM services address the increasing demand for high
speed integrated voice, video and data services, and for bandwidth-intensive
applications, such as video conferencing. Using ATM, we can transmit both voice
and data with guaranteed quality of service at speeds ultimately up to 622
megabits per second, or Mbps. These characteristics make ATM an excellent
choice for broadband communications. By using ATM to integrate data, video and
voice services, our customers realize the highest performance from their
applications and achieve significant cost savings.
MultiMedia Services. Our Multimedia Services provide customers with high
quality, cost effective voice communication services that can be used
independently or in combination with our managed data services. Using a
technology developed with Nortel Networks, customers can use The World Network
for inter-office voice communications or for international calling. We offer
our customers a customized dial-plan capability and bill them with a single
global invoice that includes location and call details.
Internet Services
IV-VPN Services. Our IV-VPN services enable customers to utilize us as their
global Internet Service Provider (ISP) with consolidated support and billing
across multiple countries. This capability is a distinct benefit for customers
that would otherwise use multiple ISPs in different countries. Customers can
connect to our Internet backbone from more than 45 countries using access
services that include managed, dedicated and dial-up
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Internet access. We also offer advanced encryption and authentication services
through agreements with Cisco Systems and Verisign, respectively.
Managed Firewall Services. We offer a global firewall solution to enforce
corporate Internet security policies across regions. Using this service,
customers can deploy firewalls strategically, eliminating the need to establish
multiple firewalls in a particular region. We use software from Checkpoint
Software to provide our firewall solutions.
Transit Services. Our Internet Transit Services provide Internet Service
Providers with access to a highly reliable and congestion-free global IP
backbone network. This service leverages our Tier 1 IP backbone and global
private and public peering arrangements.
Managed Access Services
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 our
customers security products that 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
ensure 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 network access on telecommuters' home computers,
through toll free dial-up service or via mobile phones connecting to The World
Network.
Satellite/VSAT Services. Multinationals rely on VSAT satellite technology
for network connectivity in remote areas. To meet this need, our VSAT Connect
Service provides satellite-based clear channel network connections. We
currently offer this service in conjunction with Hughes Global Services. Our
VSAT service has a worldwide footprint and is fully supported 24-hours a day,
seven days a week.
Wireless Services
Our Wireless Services strategy is designed to provide employees of
multinational corporations global wireless access to their business critical
applications through a global, wireless IP-VPN. The first value-added service
is an IP network (GRX) to permit international data roaming for General Packet
Radio Service, or GPRS, end users. This GRX network, using The World Network
infrastructure, will be offered to mobile operators. We expect to offer
additional value-added components for both voice and data as 2.5 and 3G
wireless devices are deployed. These services are expected to include corporate
productivity applications, content aggregation, device detection and data
repurposing by device. Combined wireless voice and data services will be
supported by infrastructure that we expect to deploy during 2001.
Consulting, Integration and Provisioning Services
We offer consulting services that analyze the relationship between the
customers' applications and their network. Through our Application Defined
Networking service, we provide a customized solution to balance applications,
network solutions and end-user requirements.
We also offer provisioning and implementation services to our customers to
implement the "last-mile" part of the solution. Our country representatives
provide on-the-ground support and the local implementation
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necessary to deliver these services on a global basis. As part of our
integrated solution, the country representatives provision leased lines to
connect our customer sites to The World Network. In addition, our country
representatives procure, install and maintain the appropriate customer premise
equipment. We believe that few other global data communications service
providers can offer similar localized services on a global scale.
Application Services
Our Application Services include messaging and collaboration services, Web
hosting services and call center services.
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 services, and e-mail translations to telex and
fax.
We offer Web hosting services to clients who wish to outsource their
Websites 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 also offer firewall and security services in
conjunction with hosting services.
We support call center services for customers operating their own service
centers who need the ability to dynamically monitor and control call routing
based on demand. We manage the entire inbound call, including the provisioning
and management of the local numbers in each country.
Other Communications Services
Our highly reliable and cost-effective 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, that allows us to
offer our solutions seamlessly throughout the world. This seamless global
infrastructure capability has allowed us to distinguish ourselves as the leader
in quality and service, as evidenced by our success in capturing the World
Communications Association (WCA) Best Customer Care Award for 2000.
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 our country
representatives responsible for serving each client location. To ensure the
quality of the solution we provide, an experienced global project management
team oversees the deployment of each 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 enables us to provide our clients 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.
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Outstanding Track Record of Innovation for Over 30 Years
Throughout our history, we have been able to consistently grow revenues by
introducing a range of innovative services and implementing new technologies.
We have a strong history of product innovation, winning Data Communications Hot
Product of the Year in 5 of the last 8 years. Recent product initiatives
include expanding into the wireless data market by providing wireless operators
the global network connectivity they need to offer worldwide mobile Internet
services. Recognition of our leadership position culminated in winning 3 recent
awards: the World Communication Awards 2000 for "Best Customer Care" and "Best
Carrier," and the "Ovation" award for outstanding mobile communication
services. We intend to continue developing these value-added services through
internal expansion and partnerships to allow us to derive additional revenue
from our existing client base and to attract new clients.
Client Base
We power the networks of more than 2,600 multinational clients which are
diversified across both industry groups and geographic regions. We provide our
services to many of the world's largest multinationals including Allergan,
Microsoft, Nestle, Nokia and Volkswagen. Our 35% share of the top 500
corporations in Business Week's 1999 Global 1000, an annual list of the world's
largest corporations, is evidence of the central role we play in the global
data communications industry. No single client comprised more than 2.5% of our
revenues in the year ended March 31, 2001.
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 who use
many of our services. Therefore, we believe that our larger clients typically
will renew their contracts with us and continue to use our services.
Sales and Marketing
Infonet employs a multi-tiered distribution strategy in order to maximize
growth, use of our network and economies of scale. Our sales strategy utilizes
both Direct Channels and Alternate Channels.
Direct Channels
Country Representatives. We call our direct channels our country
representatives. They give us the global reach and strong local presence in the
countries in which we operate. We are present in more than 60 countries via our
55 country representatives.
Our consolidated country representatives, those country representatives in
which we own a controlling interest, consist of ten separate country
representatives that provide service in 13 countries. Our consolidated country
representatives accounted for approximately $193.6 million of our revenues in
the year ended March 31, 2001, representing about 29% of total revenues. In
addition to our consolidated country representatives, we have 45 non-
consolidated country representatives which, together with our consolidated
country representatives, in the aggregate account for approximately 61% of our
revenues in the year ended March 31, 2001.
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 support each of our
country representatives by providing regionalized, as well as centralized,
sales and marketing support. In addition, we conduct sales training centrally
and within each sales region, and we use computerized training to reinforce
classroom training.
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Each of our country representatives is involved in sales and marketing,
operations, network management and client support. They each maintain a sales
force that directly calls on clients, coordinates the contract signing process,
manages accounts on a daily basis and serves as the first point of contact for
clients, generally providing service in the local language. We rely on our
country representatives to apply their knowledge of the local operating,
regulatory and market conditions to market our service offerings effectively to
the local client base. In order to minimize our regulatory hurdles, our country
representatives enter into the legal contracts with our clients. Sometimes, to
adequately address the needs of a potential client, country representatives
from different countries will collaborate with each other and make joint sales
presentations. 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 by operating local
network nodes and, in some cases, housing and operating components of the
infrastructure for specific services on our behalf.
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, with most providing for
an initial three year term with an automatic annual rollover. 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 typically 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 an
advisory review board, which governs the relationship between us and the
country representative.
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.
Alternate Channels
Our alternate channels are classified in three different categories.
Partners. Our Partners are major telecommunication companies that are active
in selling global network services provided by Infonet to multinational
companies in their markets. Partners are allowed to sell the totality of
Infonet's product line.
Licensed Distributors. Licensed distributors are telecommunication companies
that have the same rights and responsibilities as country representatives from
a sales perspective, but sell other services as part of their business
activity.
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Resellers. Resellers are major telecommunication companies and other value
added resellers that sell very specific Infonet network services under private
label as part of a larger service offering to multinational companies in their
markets.
In almost all cases, regardless of the alternate distribution channel
utilized, customers are fully aware that Infonet is the service provider
because the installation and other in-country support is provided by our
country representative organization. Our revenues for a channel are categorized
as alternate channel revenues in those instances where the services sold are
provisioned by third parties or where services provisioned by Infonet are not
sold as Infonet Services.
Promotion and Advertising
We recognize that strong brand development and increased name awareness is
important in obtaining market share. In addition to print advertising, our
promotional, merchandising and market communications programs during the year
included the hosting of joint, worldwide seminars where we could marquee
Infonet's name with other powerful market brands.
In the year ended March 31, 2001, we began a new global promotional campaign
to increase awareness of the Infonet brand name and our service offerings. We
have substantially increased our spending in this program over the past few
years and expect to continue increasing our spending for this campaign in the
future. As part of this new global promotional campaign, we expanded our public
relations effort by adding key regional public relations centers. Most notably,
public relations centers in Singapore, Hong Kong, France, Germany and the UK
were activated to promote Infonet's brand both regionally and in-country. Our
awareness studies have indicated that these efforts have produced increased
levels of public awareness and positive exposure of the Infonet brand.
In addition, on the advertising front, we continued to expand our presence
in print advertising in the world's leading newspapers such as the Financial
Times, The International Herald Tribune and the Wall Street Journal Europe and
in leading business magazines such as Business Week Europe and Newsweek Europe.
As part of this marketing campaign, we also continued to expand our presence in
high traffic locations by adding Infonet promotional posters in many of the
world's major international airports, including airports located in Hong Kong,
Frankfurt and London. We also sought to increase awareness of Infonet's brand
by consistently placing ads in industry trade magazines and newspapers as well
as 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 to publish
"Infonet client success stories" in our magazine called Global Connection,
which we put out periodically.
The World Network
Overview
We own and operate The World Network, one of the world's largest seamless
advanced global data networks in terms of geographic coverage, which is
accessible from over 180 countries. Our network supports several major
protocols that allow us to offer a broad range of services. Our network
architecture allows us to respond quickly to our clients' changing needs for
increased bandwidth, reliability and security while continuing 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 over 16,000 ports connected by over 850,000
route-kilometers of data transmission circuits, comprising over 23 Gbps of
capacity, 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.
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This three-tiered hierarchical structure is comprised of high bandwidth Global
Switching Nodes, mid bandwidth Regional Switching/Access Nodes and Local Access
Nodes.
Backbone Node Locations. We use our Backbone Switching Nodes to cost
effectively aggregate and distribute interregional network traffic flows. They
are the major backbone switching locations within The World Network. Each of
these node locations is equipped with Marconi ATM switches, interconnected by
fiber optic transmission trunks ranging from 45Mbps to 2.5Gbps, and is capable
of accepting multiple channel inputs of data. There are 34 Backbone Switching
Node locations presently in service.
Regional Switching/Access Node Locations. 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
provide both switching and access services within The World Network. Each of
these node locations is equipped with Marconi, Cisco, and/or Nortel devices.
The Nortel Passport switches provide Frame Relay capability as well as high
capacity access to the Backbone 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 Backbone Switching Nodes
to exchange data interregionally. Our Marconi equipment enables us to provide
ATM services. There are 82 node locations in 50 countries. The customer access
speeds range from 2Mbps to 45Mbps.
Local Access Node Locations. We use our Local Access Node Locations to
provide local access for customer services. These nodes enable our clients to
connect to and use IP, X.25 and Frame Relay applications through dedicated and
dial-up access. Each of the node locations is equipped with Cisco, Nortel
and/or Lucent devices. The Cisco routers provide dedicated IP access, the
Nortel devices provide dedicated access using X.25 and the Lucent devices
provide dial-up access. There are 140 Local Access Node locations in 52
countries. The customer can access the World Network at speeds up to 2 Mbps. 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
In order to further expand our reach for our customers within certain
countries and metropolitan areas, we are implementing several key initiatives:
In-Country Networks. The In-Country Network initiative is designed to
significantly expand our reach throughout a country, decreasing our costs. The
In-Country Networks we are implementing are transport technology agnostic,
enabling us to provide a complete suite of access services at a more
competitive price for our network services. We successfully deployed an In-
Country Network within the United States in the year ended March 31, 2001 and
are currently implementing in-country networks in several major European
countries. We are also evaluating additional countries in which to commence
deployment later this year. By using an end to end managed "VPOP" (virtual
points of presence) solution, we expect to realize significant cost reductions
while maintaining quality levels of service.
The Optical Strategy. Optical technology deployed in the network is expected
to be the next evolutionary step for Infonet. While it is not our current
intent to create a separate optical backbone, we expect to deploy optical
network capabilities as an enhancement to our current infrastructure. We intend
to limit this deployment to places where we have heavy capacity requirements
and where the deployment will result in overall cost reductions. We intend to
implement this solution primarily in metropolitan areas with the first
deployment scheduled for this summer and several more on track for the balance
of the fiscal year.
Client 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
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representative arranges dedicated access through a leased line or via the
national data network of the local telecommunications partner. Dial-up 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. As bandwidth prices began to drop and capacity became
available for purchase or long-term lease, we started replacing some of our
short term leases on major international and regional routes with those more
economical longer-term solutions. We expect to continue to purchase that
longer-term capacity where it is economical to do so. We have invested
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 are not
available.
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 offers seamless
managed data communications services on a worldwide basis. 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. Our ATM-enabled network is the transport
platform for our managed data communications services. Our ATM network allows
for the efficient and high-speed transport of voice, video and data traffic
over a single network. This capability not only enables us to further leverage
our network assets, but also allows 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 located in Los Angeles, Redditch
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 secondary 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 two nodes. We have implemented secondary nodes in
the London-Docklands, Los Angeles, New York, New Jersey, San Francisco and
Sacramento metropolitan areas.
Circuit Diversity
Nodes are usually 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. Each of our 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, Redditch 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, 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 guaranteed network availability.
We have achieved ISO 9001 registration for several of our services.
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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 have given us access to
multinational corporate clients previously served by AUCS and may give us
access to additional multinational clients to which KPN, Swisscom and Telia may
provide services in the future. These agreements have increased the number of
multinational corporate clients to which we offer our services.
We have assumed the obligation to provide AUCS' multinational clients with
the services previously provided to them by AUCS under the terms of an
agreement that assigns existing distribution agreements to us. We also intend
to provide these multinational clients with our services as a supplement or
replacement for services previously provided by AUCS. We expect that this will
result in normal and transparent movement of the services onto The World
Network. 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 gross margin of approximately 20% on the provision of these
services. The services agreement is terminable upon 180 days' notice by any
party.
Under the terms of a three-year management agreement between ourselves and
AUCS, we have been charged with, among other things, acting as a responsible
manager of AUCS and seeking to reduce AUCS' expenses over time.
We also entered into a call option for the underlying tangible assets of
AUCS. Through 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.
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, Concert, a joint venture between
AT&T and BT, France Telecom, which has announced its agreement to purchase
Equant, 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, e.g., intranets and
extranets; application services, e.g., Web hosting; security services; and
communication services, e.g., 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.
France Telecom has recently strengthened its position in cross border
managed data network services through its purchase of Global One and its
agreement to purchase Equant. France Telecom has stated that it intends to
combine the operations of Global One and Equant.
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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 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
15
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 subject to FCC oversight. 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 the status of our international circuits.
International common carriers must also file an annual employment report to
comply with the Commission's Equal Employment Opportunity policies and submit a
report of international traffic data. 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.
On March 20, 2001, the FCC issued an order requiring "mandatory detariffing"
of most international interexchange services provided by non-dominant carriers,
i.e. all U.S. carriers other than AT&T. Pursuant to this order, international
common carriers are no longer required to file a tariff with the FCC. In lieu
of filing a tariff, the order requires all international carriers maintain
public files that include current rates, terms and conditions for our service
offerings, including supporting documentation, and post this information on its
company web site. These records must be maintained for a period of two years
and six months following the date that such rates, terms, and conditions cease
to be in force.
If we begin providing interstate international telecommunications services
on a common carrier basis, and we fail to maintain proper records, 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 authorization to provide telecommunications services.
In addition, if we begin providing interstate telecommunications in the
United States, 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.
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
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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, 2001, including our consolidated country representatives, we
had a total of approximately 943 employees, 226 of which are located
internationally. There are approximately 577 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.
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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,
availability of wireless transmission capacity and technologies, 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.
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.
18
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, CEO and
Chairman of the Board of Directors, Akbar H. Firdosy, our Chief Financial
Officer, Paul A. Galleberg, our General Counsel and other members of our
executive management team. The loss of the services of Mr. Collazo, Mr. Firdosy
or Mr. Galleberg, 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, Mr. Firdosy and Mr. Galleberg. 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.
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 and
partners, 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, that they will meet their sales targets or that they
will not develop their own competitive services.
We may not be able to maintain our current relationships 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 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 legal
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.
19
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.
Some of our vendors are in difficult financial circumstances. At least one of
our vendors has initiated bankruptcy proceedings, and other vendors may do so
in the future. If our agreements with those vendors are validly rejected in
bankruptcy or are otherwise adversely affected, then our operating expenses may
increase and our net income may decrease.
Due to financial and competitive pressures in specific industries, at least
one of our vendors has initiated bankruptcy proceedings and others may do so in
the future. Due to the novel status of certain of our vendor agreements in the
bankruptcy context, it is unclear how these agreements will be characterized
under the federal bankruptcy code or analogous laws of other jurisdictions. If
a bankruptcy court concludes that our vendor agreements may be rejected in
bankruptcy or the agreements are otherwise adversely affected, then our
operating expenses may increase and our net income may decrease.
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 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
20
more of these areas, include companies such as AT&T, British Telecommunications
PLC, or BT, Concert, France Telecom, which has announced its agreement to
purchase Equant, and WorldCom, Inc. 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 announced merger between
France Telecom and Equant.
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;
. 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, a
substantial portion of our revenues is derived from European clients.
Therefore, although our historic revenue growth has not been materially
adversely affected by general economic conditions, a future slowdown or
recession in the European economy, in particular, could have a material adverse
effect on our revenues and profitability.
21
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 as a result of the timing of settlement of euro-denominated accounts
receivables and payables relating to the multinational clients of KPN, Swisscom
and Telia under the AUCS services agreements.
Our efforts to maximize shareholder value through strategic alternatives may
not be realized in the near future or at all.
We recently announced our intention to explore strategic alternatives in
order to maximize overall shareholder value as well as to assist certain of our
shareholders in monetizing their equity holdings in Infonet. We cannot assure
you that any meaningful opportunities to achieve those goals will become
available, nor can we determine, at this point, the form or substance of what
opportunities would be considered desirable to achieve the goals that we have
set forth. Any failure to achieve our stated goals may affect the trading price
of our common stock.
Our corporate structure may grant you only limited voting power and discourage
a takeover attempt 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 78% of our Class B common stock and
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 have 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, 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. Our revised 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 certain 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. 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.
22
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;
. 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."
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.
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
23
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 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.
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.
24
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, 2001.
25
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 18, 2001, there were approximately 425 shareholders of
record of our Class B common stock, par value $.01 per share. The following
table sets forth, for the period indicated, the high and low closing sales
price for our common stock reported on the NYSE.
Fiscal Year Ended March 31, 2000 High Low
-------------------------------- ------ ------
Third Quarter (from December 16, 1999 through December 31,
1999)....................................................... $26.69 $22.13
Fourth Quarter............................................... $32.94 $19.00
Fiscal Year Ended March 30, 2001
--------------------------------
First Quarter................................................ $22.38 $10.50
Second Quarter............................................... $17.81 $10.25
Third Quarter................................................ $ 9.44 $ 4.31
Fourth Quarter............................................... $ 7.75 $ 4.93
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
On December 15, 1999, the Company's Form S-1 registration statement (File
No. 333-88799) was declared effective by the Securities and Exchange
Commission. The registration statement, as amended, covered the offering of
51,282,300 shares of our Class B common stock. The offering commenced on
December 16, 1999 and the sale to the public of 51,282,300 shares of common
stock at $21.00 per share was completed on December 21, 1999 for an aggregate
price of approximately $1.076 billion. The registration statement covered an
additional 7,692,342 shares of common stock that the underwriters had the
option to purchase solely to cover over-allotments. These additional shares
were purchased on January 13, 2000. The managing underwriters were Merrill
Lynch & Co., Warburg Dillon Read LLC, ABN AMRO Rothschild, Goldman, Sachs &
Co., Lehman Brothers and Salomon Smith Barney. Expenses incurred in connection
with the issuance and distribution of common stock in the offering included
underwriting discounts, commissions
26
and allowances of approximately $38.5 million and other expenses of
approximately $2.4 million. Total offering expenses of approximately $40.9
million resulted in net offering proceeds to the Company of approximately
$766.8 million. Specified 10% owners of Class B common stock of the Company
sold in the offering and received, net of expenses paid by those owners, an
aggregate of $256.4 million. 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 expenses; 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.
27
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, 1997, 1998 and 1999 and for each of the years in the two year
period ended March 31, 1998 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, 2000 and 2001 and for each of the
years in the three year period ended March 31, 2001 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)
------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Consolidated statement of operations data:
Revenues.................................. $264,684 $294,244 $302,997 $481,444 $661,945
Expenses:
Country representative compensation..... 35,090 41,136 53,766 151,283 235,438
Bandwidth and related costs............. 43,134 48,089 52,700 90,457 125,438
Network operations...................... 81,106 77,489 55,041 72,230 79,503
Selling, general and administrative..... 115,741 130,287 139,663 196,314 197,879
-------- -------- -------- -------- --------
Total expenses.......................... 275,071 297,001 301,170 510,284 638,258
-------- -------- -------- -------- --------
Operating income (loss)................... (10,387) (2,757) 1,827 (28,840) 23,687
-------- -------- -------- -------- --------
Other income (expense):
Interest income......................... 1,014 1,515 1,881 14,560 43,293
Interest expense........................ (874) (868) (689) (7,162) (11,892)
Other, net.............................. 2,591 2,969 382 (1,310) 914
-------- -------- -------- -------- --------
Total other income...................... 2,731 3,616 1,574 6,088 32,315
-------- -------- -------- -------- --------
Income (loss) before provision (credit)
for income taxes, minority interest, and
extraordinary item ...................... (7,656) 859 3,401 (22,752) 56,002
Provision (credit) for income taxes....... (175) 4,446 (180) 3,996 28,043
-------- -------- -------- -------- --------
Income (loss) before minority interest and
extraordinary item....................... (7,481) (3,587) 3,581 (26,748) 27,959
Minority interest(2)...................... -- (143) 132 (43) 224
-------- -------- -------- -------- --------
Income (loss) before extraordinary item... (7,481) (3,444) 3,449 (26,705) 27,735
Extraordinary item, net of income taxes of
$363..................................... -- -- -- -- 502
-------- -------- -------- -------- --------
Net income (loss)(3)...................... $ (7,481) $ (3,444) $ 3,449 $(26,705) $ 27,233
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per
common share(3)(4)....................... $ (0.02) $ (0.01) $ 0.01 $ (0.06) $ 0.06
Basic weighted average number of common
shares outstanding....................... 373,750 373,750 373,750 417,197 470,712
Diluted weighted average number of common
shares outstanding ...................... 373,750 373,750 373,750 417,197 472,599
Other consolidated financial data:
Net cash flows provided by (used in):
Operating activities.................... $ 1,383 $ 13,032 $ 11,911 $ 25,620 $ 71,741
Investing activities.................... (4,704) (5,511) (20,679) (145,691) (669,903)
Financing activities.................... 13,048 (14,390) 5,828 839,613 9,514
EBITDA(5)................................. 9,631 18,075 20,612 19,054 91,730
28
As of March 31,(1)
------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- ---------- ----------
(Dollars in thousands)
Consolidated balance sheet data:
Cash and cash equivalents....... $ 18,906 $ 11,449 $ 8,681 $ 727,681 $ 137,599
Total current assets............ 92,296 90,757 90,277 940,746 810,229
Total assets.................... 159,439 153,799 182,263 1,222,327 1,345,931
Current liabilities............. 60,286 62,814 73,271 203,565 262,466
Total debt...................... 15,372 2,066 15,837 117,782 126,079
Total stockholders' equity...... 78,711 74,131 76,717 876,051 927,753
Other operating data:
Number of ports................. 7,914 9,205 10,590 14,468 16,772
Number of country
representatives................ 51 52 56 55 55
Number of dedicated personnel:
U.S........................... 764 580 592 640 717
Non-U.S.(6)................... 556 585 659 700 803
- --------
(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
period ended March 28, 1997, the 53-week period ended April 3, 1998 and the
52-week periods ended April 2, 1999, March 31, 2000 and March 30, 2001 as
the years ended March 31, 1997, 1998, 1999, 2000 and 2001.
(2) Reflects a 51% interest in Infonet Luxembourg, acquired during the year
ended March 31, 1998.
(3) The year ended March 31, 2000 includes a non-cash, pre-tax compensation
charge of $33.4 million resulting from our stock options, which were
converted from book value to market value options as a result of the
initial public offering, and our stock appreciation rights. The year ended
March 31, 2001 includes a non-cash, pre-tax, net compensation charge of
$11.1 million resulting from our stock options and stock appreciation
rights. The charge is net of a $5.3 million one-time credit resulting from
an amendment to one of the Company's stock-based compensation plans.
(4) As of March 31, 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 in 1999 because their inclusion would have had
an antidilutive effect on earnings per share. Our outstanding common stock
options represent the only form of potential common stock as of March 31,
2000. All of these options were excluded from the computation of diluted
earnings per share in 2000 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, 2001. The dilutive effect of outstanding
purchase rights and stock options on earnings per share in 2001 was
insignificant.
(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) In