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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16201
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GLOBAL CROSSING LTD.
BERMUDA 98-0189783
(I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
WESSEX HOUSE
45 REID STREET
HAMILTON HM12, BERMUDA
(Address Of Principal Executive Offices)
(441) 296-8600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
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 the common stock of the Registrant held by
non-affiliates of the Registrant on March 1, 2001, based on the closing price
of the common stock reported on the New York Stock Exchange on such date of
$16.19 per share, was $12.596 billion.
The number of shares of the Registrant's common stock, par value $0.01 per
share, outstanding as of March 1, 2001, was 907,555,814, including 22,033,758
treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for the 2001 Annual General
Meeting of Shareholders, which is expected to be filed with the Securities and
Exchange Commission no later than 120 days following the end of the fiscal year
covered by this report, are incorporated by reference into Part III hereof.
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GLOBAL CROSSING LTD. AND SUBSIDIARIES
For The Year Ended December 31, 2000
INDEX
Page
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Part I.
Item 1. Business..................................................... 1
Item 2. Properties................................................... 23
Item 3. Legal Proceedings............................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.......... 24
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 25
Item 6. Selected Financial Data...................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 38
Item 8. Financial Statements and Supplementary Data.................. 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 39
Part III.
Item 10. Directors and Executive Officers of the Registrant........... 40
Item 11. Executive Compensation....................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions............... 40
Part IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 41
Index to Consolidated Financial Statements and Schedule................ F-1
Signatures............................................................. S-1
PART I
In this Annual Report on Form 10-K, "GCL" refers to Global Crossing Ltd. and
the "Company," "Global Crossing," "we," "our" and "us" refer to GCL and its
consolidated subsidiaries (unless the context otherwise requires).
Throughout this Annual Report on Form 10-K, references to "dollars" and "$"
are to United States dollars.
ITEM 1. BUSINESS
Introduction
We provide integrated telecommunications solutions over the world's first
integrated global Internet Protocol ("IP")-based fiber-optic network, which
will have more than 100,000 route miles, reaching four continents, 27 countries
and more than 200 major cities by mid-2001. We serve many of the world's
largest corporations, providing a full range of managed data and voice
services. We operate throughout the Americas, Europe, and Asia/Pacific regions
and provide services in Asia through our subsidiary, Asia Global Crossing Ltd.
(NASDAQ: AGCX).
Our network is currently 85% complete and includes 1.7 million fiber miles,
249 points of presence in 25 countries, and metropolitan networks in 19 major
cities.
Our common stock is traded on the New York Stock Exchange under the symbol
"GX" and we are included in the S&P 500 index. You may visit us at our website
located at www.globalcrossing.com.
Business Development
Global Crossing's strategy is to be the premier provider of managed
broadband services to global enterprises. We have adopted this strategy to take
advantage of our extensive IP-based fiber-optic network. Through our network we
offer our customers an exceptional combination of global reach and bandwidth.
In addition, we own and operate substantially all of our network, which enables
us to monitor all traffic and thereby optimize traffic flow and respond quickly
as our customers' telecommunication needs and demands change.
Since our inception in 1997, we have executed a major network construction
program and have entered into several strategic transactions in order to
enhance our network, service offerings and position in the marketplace.
Strategic transactions prior to 2000 were as follows:
Global Marine Systems:
On July 2, 1999, we acquired Cable & Wireless Global Marine, the world's
largest and most experienced submarine cable maintenance and installation
company, for approximately $908 million. The acquisition of this business,
which we renamed Global Marine Systems Limited ("Global Marine"), increased
our ability to control the installation and maintenance of our undersea
global network on a cost-effective basis. The acquisition also allowed us
to offer our carrier customers a combination of maintenance, installation,
and transmission services not previously available from a single provider.
Frontier Corporation:
On September 28, 1999, we acquired Frontier Corporation ("Frontier") in
a merger transaction valued at over $10 billion. Frontier was one of the
largest long distance telecommunications companies in the United States and
one of the leading providers of facilities-based integrated communications
and Internet services. At the time of the Frontier acquisition we operated
our Atlantic Crossing (AC-1) cable and were in the process of building
cables to provide services within Europe, across the Pacific Ocean and
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to Central and South America. Frontier was in the process of completing its
own 20,000-mile fiber optic network within the United States. By acquiring
Frontier, we obtained connectivity within North America as well as
integrated connectivity among our Atlantic, Central and South American,
European and Pacific regions. Frontier's network increased our network and
service capabilities and the reach of our systems. The acquisition also
provided operating systems and personnel with the expertise needed for us
to make the transition from a construction-based wholesaler of network
capacity to a provider of value-added telecommunications services.
Racal Telecom:
On November 24, 1999, we acquired Racal Telecom, a group of wholly owned
subsidiaries of Racal Electronics plc, for approximately $1.6 billion in
cash. Racal Telecom owns one of the most extensive fiber telecommunications
networks in the United Kingdom, consisting of approximately 4,500 route
miles of fiber and reaching more than 2,000 cities and towns. Similar to
our Frontier acquisition, Racal provided a broad fiber optic network as
well as personnel and systems which were used to launch our network and
services within Europe, thereby further increasing our network capabilities
and reach.
Asia Global Crossing:
The Asia Global Crossing joint venture was established on November 24,
1999. We contributed to the joint venture our development rights in East
Asia Crossing ("EAC"), an approximately 11,000 mile undersea network that
will link several countries in eastern Asia, and our then 58% interest in
Pacific Crossing ("PC-1"), an undersea system connecting the United States
and Japan. Softbank Corp. and Microsoft Corporation each contributed $175
million in cash to Asia Global Crossing and together committed to purchases
of at least $200 million in capacity on our network over a three-year
period. Softbank and Microsoft have also agreed to use Asia Global
Crossing's network in the region, subject to specified conditions.
On October 12, 2000, Asia Global Crossing completed its initial public
offering of 68,000,000 shares of Class A common stock at a price to the
public of $7.00 per share as well as the issuance of $408 million of
13.375% Senior Notes due 2010. Net proceeds from the IPO and subsequent
exercise of the underwriters' over-allotment option were $455 million,
after deducting the underwriters' discount, commissions and costs.
Concurrently with the public offering, we contributed to Asia Global
Crossing our 50% interest in Hutchison Global Crossing and our 49% interest
in Global Access Limited, both of which are described below. After giving
effect to the initial public offering and related transactions, our
economic interest in Asia Global Crossing was reduced to 56.9%.
During 2000, we made an additional strategic acquisition as well as two
dispositions of non-core businesses to further enhance our offerings and
refine our focus on becoming a premier provider of managed broadband
services to global enterprises. Those transactions are as follows:
IXnet/IPC:
On June 14, 2000, we acquired IXnet, Inc. and its parent company, IPC
Communications, Inc. in a merger transaction valued at $3.2 billion. IXnet
developed, built, and operates the first global Internet Protocol-Virtual
Private Network ("IP-VPN") providing specialized voice and data services
specifically for members of the financial services community. The IXnet/IPC
acquisition provided us with services, expertise, personnel, and access to
a desirable customer base. In the acquisition, GCL issued 1.184 shares of
its common stock for each outstanding share of common stock of IXnet and
5.417 shares of its common stock for each outstanding share of common stock
of IPC, for a total of 58.2 million shares of GCL common stock. The gross
purchase price of $3.2 billion reflects a GCL stock price of $49.77 per
share, the average price during a window period encompassing February 22,
2000, the date of signing of the definitive merger agreement, and includes
long-term debt assumed and the fair market value of options issued by GCL.
The purchase price and net liabilities assumed of $3.4 billion was
allocated to goodwill and is being amortized on the straight-line method
over 10 years.
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Incumbent Local Exchange Carrier:
On July 11, 2000, we entered into an agreement to sell our incumbent
local exchange carrier ("ILEC") business segment, acquired in the
acquisition of Frontier, to Citizens Communications Company for $3,650
million in cash, subject to adjustments concerning closing date liabilities
and working capital balances. We also entered into a strategic agreement
with Citizens Communications pursuant to which we will provide long
distance services to the ILEC. The transaction, which is subject to both
federal and state regulatory approvals, is expected to close in the Summer
of 2001. The disposition of the ILEC is intended to streamline our North
American operations, re-deploy capital into higher growth businesses, and
refine our focus on building and delivering managed services to global
enterprises on the Global Crossing Network.
GlobalCenter:
In January 2001, we sold our GlobalCenter web hosting business to Exodus
Communications, Inc. for 108.2 million Exodus common shares, representing
approximately 20.0% of its outstanding shares at the effective time of the
merger. As of that date, the value of the transaction was approximately
$1.95 billion. As part of the transaction, Exodus also committed to a 10-
year network services agreement under which it will purchase from us 50% or
more of all of its future network capacity needs outside of Asia. Exodus
and Global Crossing also entered into a long-term global marketing services
agreement under which we will offer Exodus' web hosting services. In
addition, Exodus and Asia Global Crossing have formed a joint venture to
provide complex web hosting and managed services in Asia. Exodus owns 67%
and Asia Global Crossing owns 33% of the new venture, which will purchase
at least 60% of its networking needs from Asia Global Crossing. The
transactions with Exodus are intended to allow us to capitalize on the
fast-growing Internet intermediary market by providing managed broadband
services to that market without the significant investments that would be
required to compete successfully in that market.
Other Recent Developments
On January 29, 2001, we completed a private offering of $1 billion in
aggregate principal amount of 8.70% Senior Notes due 2007. The net proceeds
from the offering have been used to refinance existing indebtedness consisting
of term loans and revolving loans under our corporate credit facility.
In October 2000, we repaid in full the approximately $768 million of
borrowings remaining outstanding under credit facilities incurred in connection
with our purchase of Racal Telecom in November 1999. The source of funds for
the debt repayment was a new debt facility entered into by our subsidiary,
Frontier Subsidiary Telco Inc. The new facility totals $1 billion, has a
maximum maturity of 18 months, and will remain outstanding until the completion
of our sale of the ILEC.
Concurrently with its initial public offering in October 2000, Asia Global
Crossing issued $408 million of its 13.375% Senior Notes due 2010. Asia Global
Crossing intends to use the approximately $863 million in aggregate net
proceeds from this offering and its initial public offering of common stock to
build its network, make investments in telecommunications and Internet
companies and repay some of its indebtedness and for general corporate
purposes.
Business Strategy
As a result of our own network construction and our strategic acquisitions
and dispositions, we have created a network that offers an exceptional
combination of global reach and bandwidth. Since we own and operate
substantially our entire network, we can monitor all traffic and thereby
optimize traffic flow and respond quickly as our customers' telecommunication
needs and demands change. Our ongoing strategy is to maximize the value of this
asset as we continue to transform ourselves from a construction-based
wholesaler of network capacity to a value-added telecommunication services
provider.
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We expect that the evolving needs of global enterprises, as well as trends
in Internet traffic and deregulation, will result in a rapid growth in demand
for global bandwidth. Global enterprises are moving many of their operations to
network-based applications in order to obtain optimal efficiency and cost
savings. These enterprises are using networks to interact internally as well as
with partners, customers and vendors. IP and other forms of data applications
are rapidly replacing traditional corporate voice networks. In addition,
deregulation is spurring an increase in the number of carriers offering
telecommunication services and therefore requiring capacity for their networks.
Internet traffic continues to grow at a rapid pace and non-U.S. Internet users
now exceed U.S. users, although most of the content being accessed by users
outside the U.S. is located within the U.S. We expect demand for additional
capacity to grow along with the number of Internet users and content providers.
We can provide our services on a cost-effective basis. Of the more than
100,000 miles of cable that will comprise the Global Crossing Network by mid-
2001, we will have constructed 75,000 miles, 20,000 miles have been acquired
from Frontier, and the remaining 6,000 miles have been acquired through other
acquisitions or joint ventures. Our network uses advanced architecture based on
dense wave division multiplexing ("DWDM") and packet switching technologies,
resulting in far greater bandwidth and fewer network components than that
associated with legacy networks. In addition, the network acquired in the
Frontier transaction was purchased at a low cost after taking into account the
anticipated sale proceeds of $3,650 million for the ILEC and the value realized
by Global Crossing in the GlobalCenter transaction.
The "last mile" links to our network are local loop circuits. These circuits
allow our network to reach the buildings in which our customers are located. We
can arrange local loop service to any of our points of presence ("PoPs") either
through the local exchange carrier or via our own fiber optic local loops,
which are located in 19 major cities in the United States, Europe and Asia. We
have plans to build an additional 21 such Metro Networks in the United States,
Europe, Latin America and Asia in 2001. These Metro Networks speed up
provisioning and enable us to deliver higher overall reliability since they
give us end-to-end control over the network. In addition, Metro Networks
facilitate the provision of advanced features and services, such as Gigabit
Ethernet connections, which would not be possible in a legacy network
environment.
Services
General
We provide services in two principal segments. Our telecommunications
services segment offers a variety of integrated telecommunications services
through our global fiber optic network as well as systems acquired from our
mergers and acquisitions. Our installation and maintenance services segment,
consisting of our Global Marine business, installs and maintains undersea fiber
optic cable systems for carrier customers worldwide.
Telecommunications Services
We provide a variety of integrated telecommunications and IP-based services
designed to meet the communications needs of large, global enterprises, as well
as telecommunication carriers, with bandwidth-intensive applications and
international requirements. We provide domestic and international data and
voice services, Internet-based services, structured bandwidth services and
other communications services, including the following:
. Broadband Services: Point-to-point digital connections, including
private line and wavelength services as well as IRUs (indefeasible
rights of use). Payment for purchases of capacity or dark fiber (i.e.,
optical fiber that has not been equipped with the electronic components
necessary for telecommunications transmission) is typically made in
advance of activation, although in some cases a customer's payments are
made in installments over two to four years. For short-term broadband
services, customers are typically billed on a monthly basis.
. Virtual Private Network ("VPN"): Customizable voice and/or data network
solutions in which our customers create a private network within the
Global Crossing Network, without the need to purchase
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dedicated private facilities to and from each of their locations.
Customers have the flexibility to change capacity requirements between
points and otherwise to reconfigure their VPNs over time.
. Data Services: Asynchronous Transfer Mode ("ATM") and Frame Relay
services.
. Voice Services: Switched and dedicated outbound voice services for
local, domestic, and international traffic for the commercial and
wholesale markets, including additional features such as toll free and
call center services.
. Conferencing Services: Audio, video and Web-based conferencing services.
. Internet Access: Direct connections to the Internet.
. Metro Services: Intra-city SONET or SDH rings carrying on-net access
circuits, with metro private lines and dedicated customer networks
scheduled to become available later in 2001.
. Web Hosting Services: A variety of data content distribution services,
complex Web content and application hosting services, and consulting and
professional services, all of which we can offer through our co-
marketing arrangement with Exodus Communications, Inc.
Installation and Maintenance Services
Our cableships and subsea engineering division, Global Marine, operates the
largest fleet of cable laying and maintenance vessels in the world, currently
comprising 23 cable ships, three installation barges and 22 submersible
vehicles. During the year 2000, Global Marine laid and, where appropriate,
buried more than 19,000 miles of cable. Global Marine also maintains more than
a third of the world's submarine cable in terms of length.
Global Marine's maintenance business is centered around cable system
security. Despite optimum route planning and installation, cables are sometimes
damaged on the seabed. The maintenance cable ship must be able to retrieve a
partially buried cable down to two thousand meters as well as retrieve and
repair a cable from the furthest ocean depths. With cable in water depths of up
to nine thousand meters, the cable ship is a specialized vessel designed to
operate continuously in the extreme weather conditions found in the major cable
routes around the world.
Global Marine's installation business is dependent on the number of
submarine telecommunication cable systems annually installed worldwide. Such
systems traverse many types of seabed, including active continental shelves,
flat deep-water abyssal plains and mountainous oceanic ridges. The objective
when installing cable is to deploy it in such a way as to minimize the risk of
damage to the cable either from external threats or from natural wear effects
caused by ocean currents and tides. The cable can either be buried into the
seabed if protection is required from threats such as fishing and anchoring or
it can simply be laid across the surface of the seabed.
Discontinued Operations
The discontinued operations referred to in the financial statements included
in this Annual Report on Form 10-K are comprised of our GlobalCenter web
hosting subsidiary, which we sold to Exodus in January 2001, and our ILEC
business segment, which we expect to sell to Citizens Communications in the
Summer of 2001 pursuant to the stock purchase agreement dated July 11, 2000.
Prior to the sale to Exodus, our GlobalCenter subsidiary offered a
combination of digital distribution services, server co-location, equipment
sales, consulting services and professional expertise aimed at supporting
customers' Internet operations.
Our ILEC business segment comprises one of the largest local exchange
service providers in the United States. This segment consists of 34 regulated
telephone operating subsidiaries in 13 states, serving in excess of
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one million access lines. Such services are marketed under the name Frontier
Telephone, a Frontier Communications Company. The local exchange carriers
provide local, toll, access and resale services; sell, install and maintain
customer premises equipment; and provide directory services. Our ILEC business
segment excludes local services provided by our subsidiaries authorized as
competitive local exchange carriers ("CLECs"), which services are included in
our telecommunications services segment. Generally speaking, ILECs tend to be
the original provider of local exchange service in a given area and,
accordingly, receive a greater degree of regulation than do CLECs and other
carriers.
Sales and Marketing
Our business strategy includes focusing our sales and marketing efforts
towards global enterprises. We believe that IP-based solutions including
virtual private networks ("VPNs") and voice over IP ("VoIP") will be the
fastest growing sector of the estimated $130 billion global data market in
2003. As a result, our sales and marketing activities are targeted toward
companies requiring significant data and broadband services due to global
presence and the nature of their operations. We intend to focus our sales
effort on offering appropriately tailored services to approximately 7,500
global enterprises within seven newly defined sales channels.
The sales channels we are focusing our ongoing sales and marketing efforts
on are as follows:
. Carrier Markets. We offer telecommunications carriers a fiber optic
network providing an exceptional combination of global reach and
bandwidth. Our more than 100,000 mile fiber optic cable network is 85%
complete and is expected to become fully operational in mid-2001. As an
owner and operator, we offer carriers a broad range of services at a low
cost and the ability to tailor needs based on geographical demands of
the customer. For example, a carrier may experience a change in
geographical demand, which will require the routes used by the carrier
to be reassigned. Because we own and operate a global network, we can
reassign the routes used by the carrier without any loss to the
carrier's investment. There are approximately 1,000 carriers in this
approximately $50 billion market.
. Financial Markets. The financial services market is an approximately
$104 billion market which represents approximately 20% of worldwide
business network expenditures. IXnet, which we acquired in June of 2000
and subsequently renamed Global Crossing Financial Markets, developed,
built, and operates the world's first IP-VPN network specifically for
the financial services community. Global Crossing Financial Markets'
network is a single, secure environment in which electronic trading,
market data, and straight-through processing can be transmitted. Global
Crossing Financial Markets' customers include some of the largest
members of the financial services community, which is comprised of
approximately 2,000 strategic accounts.
. Media and Entertainment Markets. Content creation within the media and
entertainment industry is transitioning from current methods to digital
production, online rendering, digital animation, and digital special
effects. The Federal Communications Commission has mandated digital
broadcasts by 2006. The distribution channels of the industry will have
to move extremely large data files, which they are not currently
prepared to do on an efficient and cost-effective basis. We believe this
industry will require large amounts of capacity in order to transition
into the world of digital production. Furthermore, since a single
production requires the coordinated services of many disparate
enterprises and significant content distribution channels, we believe
the media and entertainment industry could take advantage of an extranet
similar to that built by Global Crossing Financial Markets for the
financial services community. We plan on entering this market in its
formative stages and have targeted approximately 1,500 strategic
accounts.
. NextGen Markets. Our focus on the NextGen market leverages our broadband
network to help us capture a greater share of the market for Internet
intermediaries such as Internet service providers ("ISPs") and
application service providers ("ASPs"). Since it is less expensive for
these
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intermediaries to outsource than to build a network, we believe the
members of this market will increasingly look to integrated
telecommunications providers to fulfill their broadband requirements. In
connection with the sale of GlobalCenter, we entered into an agreement
with Exodus, an Internet hosting company, in which Exodus and Global
Crossing will co-market each other's services. Furthermore, Exodus will
purchase at least 50% of its network services outside of Asia from
Global Crossing, and at least 60% of its network services in Asia from
Asia Global Crossing. There are approximately 1,000 companies in this
market.
. MNC Markets. We include in this sales channel all global enterprises
which do not fall into one of the four categories listed above. We are
pursuing this approximately $238 billion market with a specialized sales
force knowledgeable in the managed broadband needs of multinational
corporations. We have standardized and tailored a specific set of
services for these companies. Furthermore, we are entering into
strategic partnerships with members of the information technology ("IT")
consulting community whereby Global Crossing and our partners co-market
Global Crossing's services as part of an integrated IT outsourcing
recommendation. We have targeted approximately 2,000 strategic accounts
within this sales channel.
. Government Markets. Government organizations represent a significant
market for the provision of managed broadband services. The combined
government market in the United States and Europe is approximately $15
billion. Government operations are well suited for an IP-VPN, which can
enable government employees to access secure information, data services,
voice services, and the Internet through a single connection. The
Company has created such a network for the British government by
connecting all British embassies worldwide through an IP-VPN.
. Bandwidth Markets. The trading of bandwidth via trading desks and
brokers is a new industry phenomenon. While this market is still in its
formative stages, we believe bandwidth trading will develop into an
important sales channel for some of our services in the future. In
addition, the knowledge we gain from pursuing this sales channel should
assist us in formulating more creative pricing packages for our
customers, including futures and options. For example, through this
group we can develop offerings to provide users of leased lines the
opportunity to purchase services from Global Crossing at a future price
before their current contract with another carrier expires. This will
provide our customers with immediate cost savings and will reduce
provisioning issues by increasing installation lead-time.
In 2000, we announced the formation of Global Crossing Solutions. During the
past several years, many global enterprises have been investing substantially
in building IT systems in order to remain competitive in the growing world of
e-commerce and the Internet. Although these firms must compete globally, their
networks are often comprised of disjointed and regionally based systems that
provide the user minimal control over the overall system and its traffic.
Problems that occur on the network are extremely difficult to isolate since the
responsibility for such a fragmented network is spread among various providers.
Our Global Crossing Solutions group has identified the opportunity to be a
single source provider of complex global outsourcing across all of our sales
channels. The development and adoption of "e-business" applications has created
a demand for seamless, global networks. The Global Crossing Solutions group
provides telecommunications solutions that are intended to enable global
enterprises to maximize the value of their e-business applications by providing
the following:
. An integrated global fiber optic network. We are a single point of
responsibility for the installation, maintenance and operation of
services and equipment over our network.
. Ability to focus on core competencies. By alleviating our customers'
need to invest in and maintain new networks and systems, our customers
can focus on their core competencies in operating their businesses.
. Reduce capital expense and operating costs. By alleviating our
customers' need to invest in and maintain new networks and systems, our
customers are also able to reduce their capital expenditures and
operating costs.
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. Minimize risk of changing technologies. By outsourcing their needs
through us, our customers can minimize their risk of technological
obsolescence.
. Competitive pricing. Since we own and operate substantially our entire
network, we do not have to buy or lease significant capacity to provide
these services. As a result, we are able to offer our services on
competitive terms.
The Global Crossing Network
The Global Crossing Network has been engineered from conception to be a
state of the art telecommunications network providing seamless, broadband,
global city-to-city and business-to-business connectivity through a combination
of subsea cables, national and international networks and metropolitan networks
with connections to points of presence in major cities throughout the world.
This high capacity fiber optic network enables us to offer an extensive line of
Internet, data, and voice services to telecommunications carriers and business
customers around the world.
As currently planned, our network will extend over 100,000 route miles to
connect over 200 major metropolitan cities in 27 countries. In addition, we
have connected to the network local access rings in 19 major cities in the
United States, Europe and Asia and plan to do so in an additional 21 cities in
the United States, Europe, Latin America and Asia in 2001.
The Long Haul Network
The fiber optic cable systems that we have deployed connect, on an
integrated basis, over 200 major metropolitan markets in 27 countries on four
continents. Our network is 85% complete and includes 1.7 million fiber miles,
249 points of presence in 25 countries, and metropolitan networks in 19 major
cities. The following are the in-service systems currently comprising the long
haul portion of the Global Crossing Network:
--Atlantic Crossing-1 and Atlantic Crossing-2, together referred to as
"AC", undersea cable systems integrated in a multi-ring network
architecture and together spanning approximately 13,200 route miles and
connecting the United States with Europe;
--North American Crossing, referred to as "NAC", an approximately 20,000
route mile terrestrial system connecting major cities in the United
States;
--Pan European Crossing, referred to as "PEC", an approximately 11,000
route mile primarily terrestrial system connecting major European cities
to AC;
--Global Crossing United Kingdom, referred to as "GC UK," an approximately
4,650 route mile terrestrial network in the United Kingdom operated in
conjunction with PEC;
--Mid-Atlantic Crossing, referred to as "MAC", an approximately 4,700 route
mile undersea system connecting the eastern United States and the
Caribbean;
--PAC, an approximately 6,000 route mile primarily undersea system
connecting the western United States, Mexico, Panama, Venezuela and the
Caribbean;
--Mexican Crossing, an approximately 2,200 mile terrestrial system
connecting Mexico City, Guadalajara, Mazatlan and Monterrey;
--Pacific Crossing, referred to as "PC-1", an approximately 13,000 route
mile undersea system connecting the United States and Japan;
--Global Access Ltd., referred to as "GAL", an approximately 1,200 route
mile terrestrial system connecting a number of major cities in Japan to
PC-1; and
--Hutchison Global Crossing, referred to as "HGC", an approximately 450
route mile terrestrial network in Hong Kong, connecting to East Asia
Crossing.
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The following systems are in varying stages of development:
--South American Crossing, referred to as "SAC", an approximately 10,600
mile undersea and terrestrial system that connects the South American
continent to the rest of the Global Crossing Network via MAC and PAC.
Segments of SAC connecting Brazil and Argentina to the rest of the Global
Crossing Network were completed in the fourth quarter of 2000. The entire
system is scheduled to become operational in the second quarter of 2001;
--Trans Andean Crossing, referred to as "TAC," an approximately 1,600 mile
terrestrial system connecting Las Toninas, Buenos Aires, Rosario, Cordoba,
Mendoza, Santiago and Valparaiso.
--East Asia Crossing, referred to as "EAC", an approximately 11,900 mile
undersea system that connects PC-1 from Japan with landing sites in Hong
Kong and, later in 2001, Taiwan and Korea. In addition, EAC is expected
to connect the Philippines, Singapore and Malaysia by the first half of
2002 and, if and when regulations permit, China; and
--Digitel Crossing, Asia Global Crossing Taiwan, Dacom Crossing and Starhub
Asia Global Crossing, backhaul and/or terrestrial networks in the
Philippines, Taiwan, Korea and Singapore, respectively. These systems are
scheduled for completion to support the related subsea systems.
Although most of these fiber optic cable systems are wholly owned, some are
being developed and operated through joint ventures with one or more partners.
Specifically, we are constructing parts of the terrestrial portion of SAC
through joint venture arrangements, and terrestrial connectivity to PAC in
Mexico is through a joint venture. In addition, we have an approximately 56.9%
economic interest in our Asia Global Crossing subsidiary, which in turn has a
100% interest in EAC, a 64.5% interest in PC-1, a 50% interest in HGC, a 49%
interest in GAL, a 60% interest in Asia Global Crossing Taiwan, a 49% interest
in Dacom Crossing, a 50% interest in Starhub Asia Global Crossing and a 40%
interest in Digitel Crossing.
In addition to developing the above systems, we have been selected to
provide marine operations and to act as project manager of Africa ONE, an
estimated $1.6 billion cable system consisting of a self-healing ring around
the continent of Africa. However, we do not intend to make an equity investment
in this system.
Our long haul telecommunications network is monitored 24 hours a day, seven
days a week by a combination of our global network operations center and our
four regional operating centers. The global network operations center is
located in London, England and performs worldwide monitoring and network
management for the subsea systems. Regional operations centers are located in
Detroit, Michigan; London, England; Mexico City, Mexico; and Tokyo, Japan and
provide monitoring and maintenance of the terrestrial networks.
Our six customer service centers serve as the primary interface for customer
order receipt, service delivery order management and billing operations. These
centers are the entry point for launching work orders that result in the
activation of customer service via work centers throughout the Global Crossing
Network. European orders are handled by our customer service centers in
Glasgow, Scotland and in London, England; North American orders are handled by
our Detroit, Michigan service center; Latin American and Caribbean orders are
handled by our Miami, Florida service center; and Asian orders are handled by
our service center in Tokyo, Japan. In addition, we have a global service
center in London, England that serves as the single point of contact for our
largest customers for worldwide maintenance referrals. In April 2001, we expect
to open a global customer care center in Montreal, Canada to provide a single
point of contact for our services globally with multi-skilled and multi-lingual
technicians to work maintenance referrals and to provide status on provisioning
orders and billing inquiries.
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The Metropolitan Network
In order to extend Global Crossing's network reach to the customer doorstep,
we connect the Global Crossing Network to local exchange carriers in each city
where Global Crossing has a point of presence. In addition, we are building or
acquiring our own city networks in several major cities in which we have a
point of presence, starting with the major business centers of North America
and Europe. We have completed rings in 11 North American cities, four European
cities and four Asian cities. During 2001, we intend to undertake a similar
development program in an additional 21 cities in Europe, North America, Latin
America and Asia.
We previously entered into an agreement with Telergy, Inc. under which we
have acquired 96 strands of fiber throughout the New York area on Telergy's
100-mile New York City network. In addition, the agreement provides us with an
ownership position in Telergy and representation on its board of directors.
Global Crossing and Telergy have also agreed to explore co-build opportunities
in the northeastern United States and to seek to utilize the Telergy network as
needed for redundancy and termination of Global Crossing traffic in certain
areas.
Our merger with IXnet in June 2000 resulted in the acquisition of points of
presence in 38 countries, over 1,500 customer access nodes, and connectivity to
trading systems on over 100,000 customer desktops. We believe this acquisition
significantly enhanced our strategy to provide connectivity not only building-
to-building, but from customer premises to customer premises globally.
Principal Customers
Within our primary sales channels, we have numerous customers that we
service. In our Carrier Markets channel, we provide capacity for some of the
largest telecommunication carriers. Our Financial Markets channel provides
service to over 1,200 financial services firms worldwide. We offer them managed
voice and data services as well as financial content distribution services. Our
MNC Markets channel provides various managed broadband services to large
multinational corporations in various industries. Our Government Markets
channel provides telecommunication services to government municipalities and
agencies.
Principal Suppliers
Our principal suppliers are the companies that are constructing the
uncompleted segments of the Global Crossing Network. We utilize multiple
suppliers for terrestrial systems. We also utilize multiple suppliers to
procure equipment for our network, including muliplexing equipment, packet
routers and switches, and network management servers.
Competition
Telecommunications Services
The telecommunications industry is highly competitive. Many of our existing
and potential competitors, particularly in our telecommunications services
markets, compete with greater financial, personnel, marketing and other
resources, and have other competitive advantages.
The telecommunications industry is in a period of rapid technological
evolution, marked by increasing fiber and satellite transmission capacity, new
technologies and the introduction of new products and services. For instance,
recent technological advances enable substantial increases in transmission
capacity of both new and existing fiber, which could affect capacity supply and
demand. Also, the introduction of new products or emergence of new technologies
may reduce the cost or increase the supply of certain services similar to those
we provide.
High initial network cost and low marginal costs of carrying long distance
traffic have led to a trend among non-facilities-based carriers to consolidate
in order to achieve economies of scale. Such consolidation
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could result in larger, better-capitalized competitors. However, we believe
that owning our own network will offer an advantage over carriers that lease
network capacity.
Increased consolidation and strategic alliances in the industry resulting
from the Telecommunications Act of 1996 (the "Telecom Act") have allowed
significant new competitors to enter the long distance industry, including
local exchange carriers such as Verizon Communications which were previously
prohibited from the inter-state market. These ILECs have the advantages of
network concentration and significant existing customer bases.
As a result of the expansion of our business into IP services, we also
compete with a wide range of companies that provide Internet access and other
IP products and services. Significant competitors include IBM, Verizon
Communications and UUNet (a subsidiary of WorldCom, Inc.). In addition, many
smaller companies have entered the market for web-based services.
In recent years, competition has increased dramatically in all areas of the
telecommunications services market. Our primary competitors include AT&T,
Sprint, WorldCom and foreign PTTs, all of whom have extensive experience in the
long distance market. In their local markets, the PTTs have the advantages of
network concentration, significant existing customer bases and, in many cases,
regulatory protection from competition.
In addition to the above providers, we have other competitors including Flag
Telecom, 360networks, Level 3, Williams, Qwest, KPN Qwest and TyCom Ltd. which
are horizontally integrated companies delivering bandwidth-enabled services
worldwide on newly built or to-be-built networks.
The routes addressed by our systems are currently served by several cable
systems as well as satellites. In addition, each of our routes faces future
competition from several other regional and global systems being developed by
consortia of major telecommunications carriers, by PTTs, by the horizontally
integrated companies mentioned above or by other competitors.
Installation and Maintenance Services
Although Global Marine is the world's leading independent marine services
company to the telecommunications industry, it faces potential competition from
both existing market participants and potential new entrants. There are
currently two major system supply companies in the subsea cable industry: TyCom
and Alcatel Submarine Networks. In March 2001, Global Marine signed a strategic
alliance with NEC to supply marine services as part of an integrated supply
package. The alliance will provide customers with a fully integrated solution
for the design, supply and installation of submarine telecommunications
networks globally. Global Marine will continue to provide services to customers
who wish to do business outside of the alliance.
Regulation
Our submarine and terrestrial fiber optic cable systems and
telecommunications services are subject to regulation at the federal, state,
and local levels in the United States, as well as regulation by regulatory
agencies in the various foreign countries in which we have facilities or
operations.
REGULATION IN THE UNITED STATES
To the extent that the following discussion of regulation of our businesses
in the United States relates to our ILEC business segment, we note that this
segment has been reclassified as discontinued operations pending completion of
the anticipated sale of this segment to Citizens Communications.
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Federal Regulation
The Federal Communications Commission ("FCC") regulates the interstate and
international telecommunications facilities and services of telecommunications
common carriers. Specifically, common carriers must comply with the
requirements of the Communications Act of 1934, as amended by the Telecom Act.
Implementation of the Telecom Act is subject to various federal and state
rulemaking and judicial procedures; therefore, the effects of the Telecom Act
on us cannot be accurately predicted.
We have obtained authority from the FCC to provide international
telecommunications services as a non-dominant carrier on a facilities-based and
resale basis. We also have obtained cable landing licenses that permit us to
land and operate submarine cable systems in U.S. territory. Domestically, our
subsidiaries provide local services as authorized CLECs in 34 states (including
Washington D.C.). Other subsidiaries are certificated as ILECs in 13 states.
The scope of our activities in the United States makes us subject to
varying, and sometimes conflicting, regulation. We are treated as non-dominant
for our interstate and international operations. For local exchange services,
some of our subsidiaries are treated as ILECs and others as CLECs. Generally
speaking, the FCC imposes a greater degree of regulation on ILECs and other
dominant providers and less regulation on CLECs and other carriers without
market power. The issues discussed below may have positive effects on certain
of our subsidiaries and negative effects on other subsidiaries, and, thus, the
net effect on us cannot be accurately predicted.
The intent of the Telecom Act is to increase competition in the U.S.
telecommunications market. To achieve this goal, the Telecom Act seeks to open
local access markets to competition by requiring ILECs to permit
interconnection to their networks and imposing various other obligations on
them.
Interconnection. In August 1996, the FCC released its First Report and Order
on interconnection, which established rules for the implementation of the
Telecom Act's obligations. In July 1997, the U.S. Circuit Court of Appeals for
the Eighth Circuit vacated portions of the FCC's decision. On January 25, 1999,
the United States Supreme Court reversed, and affirmed the FCC's authority to
promulgate rules governing pricing, found that the FCC had authority to
promulgate a "pick and choose" rule for interconnection, and upheld most of the
FCC's rules governing access to unbundled network elements. The Court remanded
to the FCC the issue of which network elements must be unbundled by ILECs. On
remand, the FCC retained most of its original list of network elements to be
unbundled, but eliminated the requirements that ILECs provide unbundled access
to (i) local switching for customers with four or more lines in the most
densely populated parts of the top 50 Metropolitan Statistical Areas, (ii)
operator services, and (iii) directory assistance. The rules governing the
pricing, terms, and conditions of interconnection agreements remain unsettled,
and the scope of our interconnection rights and obligations, both as an ILEC
and a CLEC, may change in ways that are not foreseeable. On July 18, 2000, the
United States Court of Appeals for the Eighth Circuit vacated certain of the
FCC's remaining regulations, in part, holding that the FCC could not require
the states to use a pricing methodology, based upon an efficient, hypothetical
ILEC network and could not require ILECs to combine previously uncombined
network elements. On January 22, 2001, the Supreme Court agreed to review the
Eighth Circuit's ruling. A decision by the Supreme Court is not expected until
2002.
Unbundling and Collocation. In March 1999, the FCC required ILECs to offer
unbundled loops and collocation on more favorable terms than were available
previously. The FCC order permitted collocation of equipment that can be used
to provide advanced data services, such as Digital Subscriber Line services,
and requires ILECs to permit "cageless" collocation by CLECs. The FCC order was
vacated in part by the D.C. Circuit in March 2000, and the FCC is currently re-
examining what equipment ILECs must allow CLECs to collocate in ILEC central
offices.
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Universal Service. The Telecom Act required the FCC to restructure the
manner in which universal service fund payments are established and
distributed, and the FCC has significantly expanded the federal universal
service subsidy regime to include low-income consumers. We are required to
contribute to these programs based on our interstate and international revenue
from end-user telecommunications services. Contribution rates change quarterly.
Currently, the contribution rate is 6.6827% of interstate and international
end-user telecommunications revenue. We are unable to specify the amount of any
universal service contributions that we will be required to make in future
years.
Reciprocal Compensation. Under the Telecom Act, a local exchange carrier
that terminates calls to customers on its network is entitled to be compensated
by the local exchange carrier of the originating customer. Some ILECs have
taken the position that compensation is not owed for inbound calls to ISPs on
the grounds that this type of traffic is not local and, thus, not covered by
the terms of existing interconnection agreements. As a result, some ILECs have
threatened to withhold, and in some cases have withheld, compensation to CLECs
for such calls. The FCC has, in several related proceedings, requested comments
on the rules that it should adopt to govern compensation for ISP-bound traffic.
On February 26, 1999, the FCC ruled that ISP traffic was jurisdictionally
interstate, although it also held that it would not disturb existing
interconnection agreements that called for the payment of reciprocal
compensation on ISP-bound traffic. On March 24, 2000, the United States Court
of Appeals for the District of Columbia Circuit vacated the FCC's order and
remanded the matter to the FCC for future proceedings. We cannot accurately
predict how the FCC will rule or what impact that rule may have on future
interconnection negotiations.
As an ILEC in New York, we currently are required to pay significant
reciprocal compensation payments for inbound calls to ISPs. The state public
utility commissions ("PUCs") of Alabama, Florida, Georgia, Indiana, Ohio,
Pennsylvania, Illinois, Michigan, Minnesota and Wisconsin, states in which we
also operate ILECs, also have concluded that reciprocal compensation, based
upon somewhat differing formulas, is owed for ISP-bound calls. Any reciprocal
compensation payments in those states are not material to our operations. In
addition, legislation has been introduced in the U.S. Congress that would ban
reciprocal compensation for calls to ISPs. We cannot predict whether this
legislation will pass as currently proposed or the effect of its passage on our
payment or receipt of reciprocal compensation payments.
Access Charges. Our costs to provide long distance services and our revenue
from providing local services are affected by ongoing substantial changes in
the "access charge" rates imposed by ILECs on long distance carriers for
origination and termination of long distance calls over local facilities.
The increased pricing flexibility of "price cap ILECs" (i.e. ILECs subject
to the FCC's access charge price cap rules), such as our Frontier ILEC
subsidiaries, may have an adverse impact on our interstate access costs if not
properly implemented by ILECs and enforced by the FCC, but could also make it
easier for price cap ILECs to offer reduced access charge rates in markets
subject to competition. The FCC is continuing to examine further access charge
changes, including granting further pricing flexibility to price cap ILECs.
Tariffing and Filing Requirements. Effective January 31, 2001, the FCC
detariffed interstate services, except for mass market services. This action
requires us to enter into individual contracts with our customers or determine
another manner to advise them of the prices, terms and conditions of our
interstate services. Detariffing of mass market services is currently scheduled
to become effective on July 31, 2001. The FCC is currently considering whether
to detariff international services. The FCC also imposes reporting and filing
requirements on non-dominant carriers. We must file periodic reports regarding
our interstate and international circuits and the deployment of network
facilities. Traffic and revenue reports and universal service contribution
worksheets also must be filed. Carriers also must obtain prior approval from or
give notice to the FCC of certain transfers of control and assignments of
operating authorizations, as well as certain affiliations with foreign
carriers. In addition, certain operating and services agreements with dominant
foreign carriers must be filed with the FCC.
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Submarine Cables. In connection with the construction and operation of our
submarine cable systems, we have obtained cable landing licenses for the AC-1,
PC-1, MAC, PAC and SAC systems. These licenses give us authority to construct
and land our submarine cables in the United States. In each case, the license
permits the operation of the cable on a non-common carrier basis. Each of our
cable landing licenses is valid for a period of 25 years from its grant. We are
subject to various FCC reporting and filing requirements as the result of our
holding of these cable landing licenses.
State Regulation
In addition to regulation by the FCC, the intrastate services of each of our
local telephone service companies are regulated by the PUCs of the respective
states in which each subsidiary operates with respect to such issues as prices,
service quality, the issuance of securities, and the construction of
facilities. To provide intrastate services, we generally must obtain a
certificate of public convenience and necessity from the appropriate PUC and
comply with state requirements for telecommunications utilities. The level of
regulation imposed by state PUCs varies. Generally, however, ILECs are
regulated more heavily than competitive providers. Our subsidiaries are
certificated as ILECs in 13 states: New York, Alabama, Florida, Georgia,
Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Ohio, Pennsylvania,
and Wisconsin. Other subsidiaries provide competitive local services in 34
states (including Washington D.C.).
A number of states in which we have local or long distance operations are
conducting proceedings related to the rules under which carriers may operate in
an increasingly competitive environment. The issues that the PUCs are examining
include unbundling of local network elements, local interconnection
obligations, dialing parity for intra-LATA (or short-haul) toll traffic, local
number portability, resale of local exchange service and universal service. We
cannot predict how these proceedings will ultimately be resolved, nor when
decisions will be issued.
Open Market Plan. Our Frontier subsidiary in Rochester, New York began its
seventh year of operations under the Open Market Plan in January 2001. The Open
Market Plan promotes telecommunications competition in the Rochester, New York
marketplace by providing for (i) interconnection of competing local networks
including reciprocal compensation for terminating traffic, (ii) equal access to
network databases, (iii) access to local telephone numbers, (iv) service
provider telephone number portability, and (v) certain wholesale discounts to
resellers of local services.
During the operation of the Open Market Plan, we are regulated under pure
price cap regulation rather than rate-of-return regulation. Planned rate
reductions of $21.0 million (the "Rate Stabilization Plan") have been
implemented for Rochester area consumers, including $19.5 million of reductions
that occurred through 2000, and an additional $1.5 million which commenced in
January 2001. Rates charged for basic residential and business telephone
service may not be increased during the seven-year period of the Plan. We are
allowed to raise prices on certain enhanced services such as Caller ID and call
forwarding.
On August 25, 1999, the New York State Public Service Commission ("NYSPSC")
solicited comments regarding our Rochester local exchange subsidiary's
financial condition, earnings and service quality, competition in the Rochester
market, and the terms and conditions of the Open Market Plan. Settlement
discussions in this NYSPSC proceeding resulted in a Joint Proposal for Open
Market Plan Continuation and Modification (the "Joint Proposal"), which was
approved with some modifications by the NYPSC on March 30, 2000. Under the
approved Joint Proposal our Frontier ILEC subsidiary in New York will (i)
remain under "price cap" regulation through 2002 (and possibly for an
additional two years); (ii) be required to improve specified elements of
service quality and to offer certain additional services; (iii) be subject to
increased potential penalties related to service targets; and (iv) be required
to lower certain residential and commercial service rates. The impact of the
Joint Proposal will not have a material adverse effect on Global Crossing as a
whole. The NYSPSC also has issued orders on other regulatory issues that affect
our New York Frontier subsidiaries, related to service quality, staff
allocations, provisions, and relations with other carriers.
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Dividend Policy. The Open Market Plan prohibited the payment of dividends by
Frontier Telephone of Rochester, Inc. ("FTR"), to Global Crossing North
America, Inc. ("GCNA") if (i) FTR's senior debt is downgraded to "BBB" by
Standard & Poor's ("S&P"), or the equivalent rating by other rating agencies,
or is placed on credit watch for such a downgrade, or (ii) a service quality
penalty is imposed under the Open Market Plan. Dividend payments to GCNA also
require FTR's directors to certify that such dividends will not impair FTR's
service quality or its ability to finance its short and long-term capital needs
on reasonable terms.
In 1999, FTR achieved the required service levels, but a previously imposed
temporary restriction on dividend payments from FTR to GCNA remained in place
until the NYSPSC was satisfied that FTR's service levels demonstrated that FTR
had rectified the service deficiency. In addition, on June 2, 1999, Moody's and
S&P downgraded FTR's senior debt ratings from A1/AA- to Baa2/BBB, respectively.
These ratings actions were a result of the announced merger between Frontier
and Global Crossing, and did not reflect any change in the financial condition
or creditworthiness of FTR. These actions triggered an additional dividend
restriction for FTR. On December 22, 1999, S&P downgraded FTR's senior debt
rating to BB+ and, on January 18, 2000, Duff & Phelps downgraded FTR's senior
debt rating to A. Both rating agencies stated that their actions reflected
their views that a large separation in ratings could not be maintained between
an operating subsidiary and its parent. By order issued October 18, 2000, the
NYPSC eliminated from the Open Market Plan the restriction on dividends based
on debt ratings and indicated its satisfaction with FTR's improvements in
service levels. FTR has therefore resumed the payment of dividends.
Local Regulation
Our activities also are subject to local regulation, including compliance
with franchise obligations, building codes, and local licensing requirements.
Such regulations vary widely by jurisdiction. To construct and install
transmission facilities, we may need to obtain rights-of-way over public and
privately owned land.
INTERNATIONAL REGULATION
Our construction and operation of telecommunications networks and our
provision of telecommunications services in foreign countries require us to
obtain a variety of permits, licenses, and authorizations in the ordinary
course of business. In addition to telecommunications licenses and
authorizations, we may be required to obtain environmental, construction,
zoning and other permits, licenses, and authorizations. The construction and
operation of our facilities and our provision of telecommunications services
may subject us to regulation in other countries at the national, state,
provincial, and local levels.
Europe
In connection with the construction and operation of the PEC network, we
have obtained telecommunications licenses in all nations where authorization is
required for us to construct and operate facilities or provide services. We
expect to obtain additional telecommunications licenses and authorizations in
Europe in the ordinary course of business.
Our activities in Europe are subject to regulation by the European Union and
national regulatory authorities. The level of regulation and the regulatory
obligations and rights that attach to us as a licensee in each country vary. In
all countries, we, as a competitive entrant, are currently considered to lack
significant market power ("SMP"), which generally subjects us to less
regulation than providers that are deemed to possess SMP. As we complete
construction of the PEC network and begin providing services in Europe, we
anticipate that the regulatory obligations imposed on us will increase. In
addition, we may be required to address many of the "local competition" issues
that we face as a competitive provider in the United States, such as
interconnection, collocation, unbundling, reciprocal compensation, and resale.
The laws and regulations of the Member States of the EU on these issues vary.
The European Commission and various of the Member
15
States have opened or concluded public consultations relating to these and
other "local competition" issues. We cannot predict what decisions will be made
by the EU and the Member States in these ongoing proceedings or the effects of
any those decisions on our operations.
Asia
We are increasing the scope of our activities in Asia. As in Europe, we have
obtained or are in the process of obtaining telecommunications licenses in all
nations where authorization is required for us to construct and operate
facilities or provide services. We expect to obtain additional
telecommunications licenses and authorizations in Asia in the ordinary course
of business.
The status of liberalization of the telecommunications regulatory regimes of
the Asian countries in which we intend to operate varies. Some countries allow
full competition in the telecommunications sector, while others limit
competition for most services. Most of the countries in the region have
committed to liberalizing their telecommunications regimes and opening their
telecommunications markets to foreign investment as part of the World Trade
Organization ("WTO") Agreement on Telecommunications. China also has committed
to liberalizing its telecommunications markets and reducing foreign ownership
limitations if it is admitted to the WTO. We cannot be certain whether this
liberalizing trend will continue or accurately predict the pace and scope of
liberalization. It is possible that one or more of the countries in which we
operate will slow or halt the liberalization of its telecommunications markets.
The effect of such an action on us cannot be accurately predicted.
Latin America
In Latin America, we currently are constructing the MAC, PAC and SAC
systems. In connection with the construction of these cable systems, we have
obtained cable landing licenses and/or telecommunications licenses in
Argentina, Brazil, Chile, Mexico, Panama, and the United States. An application
has been filed in Venezuela and we expect to file applications in additional
Latin American countries in the ordinary course of business.
As in Asia, the status of liberalization of the telecommunications markets
of Latin America varies. All of the countries in which we currently plan to
have operations are members of the WTO and have committed to liberalizing their
telecommunications markets and lifting foreign ownership restrictions. Some
countries now permit competition for all telecommunications facilities and
services, while others allow competition for some facilities and services, but
restrict competition for other services. Some countries in which we operate or
intend to operate currently impose limits on foreign ownership of
telecommunications carriers. We anticipate that we will be granted authority to
land and operate our submarine cable systems in each of the countries in which
they currently are expected to land. It is possible, however, that one or more
of these countries will not grant authority to land a submarine cable or will
impose conditions that make landing and operating the cable commercially
unfeasible.
The telecommunications regulatory regimes of many Latin American countries
are in the process of development. Many issues, such as regulation of incumbent
providers, interconnection, unbundling of local loops, resale of
telecommunications services, and pricing have not been addressed fully or at
all. We cannot accurately predict whether or how these issues will be resolved
and their impact on our operations in Latin America.
Employees
As of December 31, 2000, our continuing operations had approximately 13,000
employees and our discontinued operations had approximately 3,400 employees. We
consider our relations with our employees to be good.
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Forward Looking Statements and Risk Factors
We have included in this Annual Report on Form 10-K forward-looking
statements that state our own or our management's intentions, beliefs,
expectations or predictions for the future. Forward-looking statements are
subject to a number of risks, assumptions and uncertainties which could cause
our actual results to differ materially from those projected in the forward-
looking statements. The discussions set forth below constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including risks and uncertainties, that could cause actual results
to differ materially from results referred to in the forward-looking
statements. There can be no assurance that our expectations regarding any of
these matters will be fulfilled.
Because we have a limited operating history and have grown rapidly through
successive acquisitions, potential investors may have difficulty evaluating the
performance of our operations.
We were organized in March 1997 and, with the exception of our Frontier,
Global Marine, IPC and Racal Telecom subsidiaries, have a limited operating
history. Because of this limited history and our rapid growth though successive
acquisitions, it may be difficult for potential investors to evaluate the
performance of our operations. In particular, comparisons of our results of
operations from one period to another may not be fully indicative of our
current ability to conduct our business.
If we encounter difficulties in completing our cable systems currently under
development, we may face delays in recognizing revenues from the affected
systems.
Our ability to achieve our strategic objectives will depend in large part
upon the successful, timely and cost-effective completion of our cable systems
currently under development, as well as on achieving substantial sales of
capacity and services on these systems once they become operational and on our
other operational systems. The construction of these systems will be affected
by a variety of factors, uncertainties and contingencies, many of which are
beyond our control, including:
. our ability to manage their construction effectively;
. our ability to obtain all construction and operating permits and
licenses;
. third-party contractors performing their obligations on schedule; and
. our ability to enter into favorable construction contracts with a
limited number of suppliers.
As a result, we cannot be certain that each of these systems will be
completed at the cost and in the time frame currently estimated by us, or even
at all. Although we award contracts for construction of our systems to
suppliers who in most cases are expected to be bound by a fixed-price
construction cost schedule and to provide guarantees in respect of completion
dates and system design specifications, we cannot be certain that the actual
construction costs or the time required to complete these systems will not
exceed our current estimates.
Any of these factors could significantly delay or prevent completion of one
or more of our systems currently under development, leading to a corresponding
delay in our recognizing revenues from the affected systems.
If we fail to expand our services and products as we intend, our revenue
growth will be impaired.
We intend to grow revenue and profits by:
. introducing new services and products;
. developing or acquiring additional cable systems; and
. upgrading capacity on our planned systems.
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Our inability to effect these expansions of our products and services could
have a material adverse effect on our intended revenue growth.
Demand for our products and services could be reduced due to competition or
changes in industry conditions.
The international telecommunications industry is highly competitive. In
connection with sales of capacity and the provision of telecommunications
services on our global fiber optic cable network, we face competition primarily
on the basis of price, availability, service quality and reliability, customer
service and location. The ability of our competitors to provide comparable
telecommunications products and services to customers at similar prices could
have a material adverse effect on demand for our products and services. In
addition, much of our planned growth is predicated upon the growth in demand
for international telecommunications capacity and services. If this anticipated
demand growth does not occur, competition for customers will intensify, and
demand for our international telecommunications product offerings may be
adversely impacted.
We are growing rapidly in a changing industry. If we fail to adapt to the
changes in the telecommunications industry as a result of our rapid growth, our
results of operations could be impaired.
Our strategy is to be the premier provider of managed broadband services to
global enterprises. As a result of this aggressive strategy, we are
experiencing rapid expansion and expect it to continue for the foreseeable
future. This growth has increased our operating complexity. At the same time,
the international telecommunications industry is changing rapidly due to, among
other things:
. the easing of regulatory constraints;
. the privatization of established carriers;
. the expansion of telecommunications infrastructure;
. the growth in demand for bandwidth caused by expansion of Internet and
data transmissions;
. the globalization of the world's economies; and
. the changing technology for wired, wireless and satellite communication.
We cannot be certain that we will succeed in adapting to the changes in the
international telecommunications industry, particularly given our rapid growth
strategy. If we do not succeed, our future results of operations could be
impaired.
We face price declines that could adversely affect our operating margins.
Advances in fiber optic technology have resulted in significant per circuit
price declines in the fiber optic cable transmission industry. Recent changes
in technology caused prices for telecommunications capacity and services to go
down even further. If there is less demand than we project or a bigger drop in
prices than we project, it could adversely affect our operating margins and,
accordingly, our results of operations. We cannot be certain, even if our
projections with respect to those factors are realized, that we will be able to
implement our strategy or that our strategy will be successful in the rapidly
evolving telecommunications market.
The operation, administration, maintenance and repair of our cable systems
are subject to risks that could lead to the failure of those systems to operate
as intended for their full design life.
Each of our systems is and will be subject to the risks inherent in a large-
scale, complex fiber optic telecommunications system. The operation,
administration, maintenance and repair of our systems requires the coordination
and integration of sophisticated and highly specialized hardware and software
technologies and equipment located throughout the world. We cannot be certain
that our systems will continue to function as expected in a cost-effective
manner. The failure of the hardware or software to function as required could
render a cable system unable to perform at design specifications.
18
Each of our undersea systems either has or is expected to have a design life
of generally 25 years, while each of our terrestrial systems either has or is
expected to have a design life of at least 20 years. The economic lives of
these systems, however, are expected to be shorter than their design lives, and
we cannot be certain of the actual useful life of any of these systems. A
number of factors will ultimately affect the useful life of each of our
systems, including, among other things: quality of construction; unexpected
damage or deterioration; and technological or economic obsolescence.
Failure of any of our systems to operate for its full design life could
result in a loss of customers and a reduction in future revenues and adversely
affect our future operating results.
Because we face significant competition, we may not be able to hire,
integrate and retain key managerial, technical and sales personnel.
Our future success depends on the skills, experience and efforts of our
officers and key technical and sales employees. In particular, our senior
management has significant experience in the telecommunications industry, and
the loss of any of them could negatively affect our ability to execute our
business strategy. In addition, we cannot be certain that we will be able to
integrate new management into our existing operations. Competition for
bandwidth sales employees and fiber optic engineers is particularly intense,
and we may not be able to attract, motivate and retain highly skilled and
qualified personnel in these areas. Some of our key employees currently do not
have employment agreements that would limit their ability to leave our
employment or compete with us following their departure. In addition, we do not
have "key person" life insurance policies covering any of our employees.
We have substantial international operations and face political, legal and
other risks from our operations in these foreign jurisdictions.
We will derive substantial revenue from international operations and intend
to have substantial physical assets in several jurisdictions along our routes,
including countries in Asia, Latin America and Europe. As a result, our
business is subject to particular risks from operating in these areas,
including:
. uncertain and rapidly changing political and economic conditions,
including the possibility of civil unrest, terrorism or armed conflict;
. unexpected changes in regulatory environments and trade barriers;
. exposure to different legal and regulatory standards; and
. difficulties in staffing and managing operations consistently through
our several operating areas.
Although we have not experienced any material adverse effects with respect
to our foreign operations arising from these factors, problems associated with
these risks could arise in the future. Finally, managing operations in multiple
jurisdictions may place further strain on our ability to manage our overall
growth.
We cannot assure the successful integration of newly acquired businesses. If
the expected benefits of these acquisitions are not achieved, our operations
will be negatively affected.
Part of our growth strategy has been to make selective strategic
acquisitions of businesses operated by others. Achieving the benefits of these
acquisitions will depend in part on the integration of those businesses with
our business in an efficient manner. We cannot be certain that this will happen
or that it will happen in a timely manner. The consolidation of operations
following these acquisitions often requires substantial attention from our
management. The diversion of management attention and any difficulties
encountered in the transition and integration process could have a material
adverse effect on the revenue, levels of expenses and operating results of the
combined company. We cannot be certain that we will realize any of the
anticipated benefits of any acquisition. If we do not realize these benefits,
our performance could suffer.
19
Because many of our customers deal predominantly in foreign currencies, we
may be exposed to exchange rate risks and our net income may suffer due to
currency translations.
We primarily invoice for our services in U.S. dollars; however, most of our
customers and many of our prospective customers derive their revenue in
currencies other than U.S. dollars. The obligations of customers with
substantial revenue in foreign currencies may be subject to unpredictable and
indeterminate increases in the event that such currencies devalue relative to
the U.S. dollar. Furthermore, such customers may become subject to exchange
control regulations restricting the conversion of their revenue currencies into
U.S. dollars. In such event, the affected customers may not be able to pay us
in U.S. dollars. In addition, where we invoice for our services in currencies
other than U.S. dollars, our net income may suffer due to currency translations
in the event that such currencies devalue relative to the U.S. dollar and we do
not elect to enter into currency hedging arrangements in respect of those
payment obligations. Declines in the value of foreign currencies relative to
the U.S. dollar could adversely affect our ability to market our services to
customers whose revenues are denominated in those currencies.
Our operations are subject to regulation in the United States and abroad and
require us to obtain and maintain a number of governmental licenses and
permits. If we fail to comply with those regulatory requirements or obtain and
maintain those licenses and permits, we may not be able to conduct our
business.
In the United States, our intrastate, interstate, and international
telecommunications networks and services are subject to regulation at the
federal, state, and local levels. We also have facilities and provide services
in numerous countries in Europe, Latin America, and Asia. Our operations in
those countries are subject to regulation at the national level and, in some
cases, at the state, provincial, and local levels.
. Our interstate and international operations in the United States are
governed by the Communications Act of 1934, as amended by the Telecom
Act. There are several ongoing proceedings at the FCC and in the federal
courts regarding the implementation of various aspects of the Telecom
Act. The outcomes of these proceedings may affect the manner in which we
are permitted to provide our services in the United States and may have
a material adverse effect on our operations.
. The intrastate activities of our local telephone service companies are
regulated by the states in which they do business. A number of states in
which we operate are conducting proceedings related to the provision of
services in a competitive telecommunications environment. These
proceedings may affect the manner in which we are permitted to provide
our services in one or more states and may have a material adverse
effect on our operations.
. Our operations outside the United States are governed by the laws of the
countries in which we operate. The regulation of telecommunications
networks and services outside the United States varies widely. In some
countries, the range of services that we are legally permitted to
provide may be limited. In other countries, existing telecommunications
legislation is in the process of development, is unclear or
inconsistent, or is applied in an unequal or discriminatory fashion. Our
inability or failure to comply with the telecommunications laws and
regulations of one or more of the countries in which we operate could
result in the temporary or permanent suspension of operations in one or
more countries. We also may be prohibited from entering certain
countries at all or from providing all of our services in one or more
countries. In addition, many of the countries in which we operate are
conducting proceedings that will affect the implementation of their
telecommunications legislation. We cannot be certain of the outcome of
these proceedings. These proceedings may affect the manner in which we
are permitted to provide our services in these countries and may have a
material adverse effect on our operations.
. In the ordinary course of constructing our networks and providing our
services we are required to obtain and maintain a variety of
telecommunications and other licenses and authorizations in the
countries in which we operate. We also must comply with a variety of
regulatory obligations. Our failure to obtain or maintain necessary
licenses and authorizations, or to comply with the obligations imposed
upon license-holders in one or more countries, may result in sanctions,
including the revocation of authority to provide services in one or more
countries.
20
We depend on third parties for many functions. If the services of those
third parties are not available to us, we may not be able to conduct our
business.
We depend and will continue to depend upon third parties to:
. construct some of our systems and provide equipment and maintenance;
. provide access to a number of origination and termination points of our
systems in various jurisdictions;
. construct and operate landing stations in a number of those
jurisdictions;
. acquire rights of way;
. provide terrestrial capacity to our customers through contractual
arrangements; and
. act as joint venture participants with regard to some of our current and
potential future systems.
We cannot be certain that third parties will perform their contractual
obligations or that they will not be subject to political or economic events
which may have a material adverse effect on their ability to provide us with
necessary services. If they fail to perform their obligations, we may not be
able to conduct our business. In addition, if any of our joint venture
participants experiences a change in strategic direction such that their
strategy regarding our mutual joint venture diverges from our own, we may not
be able to realize the benefits anticipated to be derived from the joint
venture.
We have substantial financial leverage which may limit our ability to comply
with the terms of our indebtedness and may restrict our ability to operate.
Our significant indebtedness could adversely affect us by leaving us with
insufficient cash to fund operations and impairing our ability to obtain
additional financing. The amount of our debt could have important consequences
for our future, including, among other things:
. cash from operations may be insufficient to meet the principal and
interest on our indebtedness as it becomes due;
. payments of principal and interest on borrowings may leave us with
insufficient cash resources for our operations; and
. restrictive debt covenants may impair our ability to obtain additional
financing.
We have incurred a high level of debt. As of December 31, 2000, we and our
consolidated subsidiaries had a total of $14,378 million of liabilities,
including approximately $6,425 million in senior indebtedness, of which $2,519
million was secured. As of such date, GCL additionally had outstanding
cumulative convertible preferred stock with a face value of $2,744 million. Our
subsidiary, Global Crossing Holdings Ltd., also had mandatorily redeemable
preferred stock outstanding with a face value of $500 million.
Our ability to repay our debt depends upon a number of factors, many of
which are beyond our control. In addition, we rely on dividends, loan
repayments and other intercompany cash flows from our subsidiaries to repay our
obligations. If we are unable to generate sufficient cash flow to meet our debt
service requirements, we may have to renegotiate the terms of our long-term
debt. We cannot be certain that we would be able to renegotiate successfully
those terms or refinance our indebtedness when required or that satisfactory
terms of any refinancing would be available. If we were not able to refinance
our indebtedness or obtain new financing under these circumstances, we would
have to consider other options, such as:
. sales of some assets;
. sales of equity;
. negotiations with our lenders to restructure applicable indebtedness; or
21
. other options available to us under applicable law.
We are subject to restrictive covenants that may limit our ability to take
actions in furtherance of our strategic objectives.
Covenants in our various debt instruments limit our ability, among other
things:
. to incur debt;
. to pay dividends and make distributions on capital stock;
. to make investments;
. to enter into new businesses;
. to merge, consolidate or dispose of assets; and
. to enter into transactions with affiliates.
Complying with these covenants may cause us to take actions that we
otherwise would not take or not take actions that we otherwise would take. For
example, these covenants may restrict us from financing capital expenditures
with debt. Our failure to comply with these covenants would cause a default
which, if not waived, could result in the debt becoming immediately due and
payable. In this event, we may not be able to repay or refinance the debt on
terms that are acceptable to us or at all.
Officers and directors own a substantial portion of us and may have
conflicts of interest.
Our executive officers and directors have substantial equity interests in
us. As of February 23, 2001, all our directors and executive officers as a
group collectively beneficially owned approximately 14.79% of our outstanding
common stock.
Some of our directors and executive officers also serve as officers and
directors of other companies. Additionally, some of our officers and directors
are active investors in the telecommunications industry. Service as one of our
directors or officers and as a director or officer of another company could
create conflicts of interest when the director or officer is faced with
decisions that could have different implications for us and the other company.
A conflict of interest could also exist with respect to allocation of time and
attention of persons who are our directors or officers and directors and
officers of another company. The pursuit of these other business interests
could distract these officers from pursuing opportunities on our behalf.
We cannot predict our future tax liabilities. If we become subject to
increased levels of taxation, our results of operations could be adversely
affected.
We believe that a significant portion of the income derived from our
undersea systems will not be subject to tax by any of (1) Bermuda, which
currently does not have a corporate income tax, or (2) some other countries in
which we conduct activities or in which our customers are located. However, we
base this belief upon:
. the anticipated nature and conduct of our business, which may change;
and
. our understanding of our position under the tax laws of the various
countries in which we have assets or conduct activities, which position
is subject to review and possible challenge by taxing authorities and to
possible changes in law, which may have retroactive effect.
We cannot predict the amount of tax to which we may become subject. Any
increase in the amount of taxation incurred as a result of our operations could
result in a material adverse effect on our net income and, accordingly, our
financial condition and results of operations.
22
Our shareholders may be subject to Foreign Personal Holding Company, Passive
Foreign Investment Company, Controlled Foreign Corporation and Personal Holding
Company rules that could result in increased tax liability.
We believe that neither we nor any of our non-United States subsidiaries are
a foreign personal holding company and do not expect that either we or any of
our affiliates will become a foreign personal holding company. However, we
cannot be certain in this regard. If one of our shareholders is a United States
person and we or one of our non-United States subsidiaries are classified as a
foreign personal holding company, then that shareholder would be required to
pay tax on its pro rata share of our or our relevant non-United States
subsidiary's undistributed foreign personal holding income. We intend to manage
our affairs so as to attempt to avoid or minimize having income imputed to
United States persons under these rules, to the extent this management of our
affairs would be consistent with our business goals, although we can provide no
assurances in this regard.
We believe that we are not a passive foreign investment company and do not
expect to become a passive foreign investment company in the future. However,
we cannot be certain in this regard. In addition, our expectations are based,
in part, on interpretations of existing law that we believe are reasonable, but
which have not been approved by any taxing authority. If we were a passive
foreign investment company, then any of our shareholders that is a United
States person could be liable to pay tax at the then prevailing rates on
ordinary income plus an interest charge upon some distributions by us or when
that shareholder sold our capital stock at a gain.
Furthermore, additional tax considerations would apply if we or any of our
affiliates were a controlled foreign corporation or a personal holding company.
ITEM 2. PROPERTIES
Our principal offices are under lease in Hamilton, Bermuda. We also lease
corporate office space in London and Chelmsford, England; Montreal, Canada;
Dublin, Ireland; Beverly Hills, California; Madison, New Jersey; Rochester,
New York; New York, New York; and Miami, Florida. We also lease office space in
Hong Kong and Tokyo through our subsidiary, Asia Global Crossing. We also own
or lease sales, administrative and support offices worldwide. In addition, our
telecommunication services segment owns undersea cables crossing the Atlantic
Ocean (AC-1 and AC-2); Pacific Ocean (PC-1); Eastern United States and
Caribbean (MAC); South America (SAC); East Asia (EAC); and Western United
States, Mexico, Central & South America and Caribbean (PAC); and primarily
terrestrial cable systems connecting various cities within the United States
(NAC), South America (TAC), Europe (PEC), Japan (Asia Global Crossing's 49%
interest in GAL), Hong Kong (Asia Global Crossing's 50% interest in HGC), and
Mexico. Our telecommunications services segment also owns or leases numerous
cable landing stations throughout the world related to these undersea and
terrestrial cable systems.
Our installation and maintenance services segment owns, leases and operates
a fleet of vessels and submersible/remotely operated vehicles used in the
planning, installation and maintenance of undersea fiber optic cable systems.
Our ILEC business segment, which is accounted for as discontinued operations
pending the sale to Citizens Communications, owns telephone properties which
include: connecting lines between customers' premises and the central offices;
central office switching equipment; buildings and land; and customer premise
equipment. The connecting lines, including aerial and underground cable,
conduit, poles, wires and microwave equipment, are located on public streets
and highways or on privately owned land. We have permission to use these lands
pursuant to local governmental consent or lease, permit, franchise, easement or
other agreement.
We believe that substantially all of our existing properties are in good
condition and are suitable for the conduct of our business. A security interest
in some of these properties, in particular some of our undersea cables, has
been granted to lenders providing financing for those systems under non-
recourse facilities.
23
ITEM 3. LEGAL PROCEEDINGS
On July 16, 1999, Frontier was served with a summons and complaint in a
lawsuit commenced in New York State Supreme Court, New York County, by a
Frontier shareholder alleging that Frontier and its board breached their
fiduciary duties by failing to obtain the highest possible acquisition price
for Frontier in the definitive merger agreement with the Company. The action
has been framed as a purported class action and seeks compensatory damages and
injunctive relief. The claims against Frontier were asserted in the same action
as similar but separate claims against US West, Inc. However, the claims
against Frontier have been severed from the US West claims. In February 2000,
the court granted the Company's motion to transfer the action to Monroe County.
On February 11, 2001, the Company moved to dismiss all claims against it. Oral
argument on this motion is presently scheduled for April 27, 2001. We believe
the asserted claims are without merit and are defending ourselves vigorously.
On May 22, 2000, GCL and its subsidiary, South American Crossing (Subsea)
Ltd., filed a lawsuit against Tyco Submarine Systems Ltd. in the United States
District Court for the Southern District of New York. Our complaint alleges
fraud, theft of trade secrets, breach of contract, and defamation related to
Tyco's agreements to install the South American Crossing fiber-optic cable
system. We seek damages, including punitive damages, in excess of $1 billion
and attorneys' fees and costs, as well as a declaration that the construction
and development agreement with Tyco is void due to Tyco's alleged fraud and
injunctive relief barring Tyco from further misappropriation of trade secrets
and confidential information. On June 13, 2000, Tyco answered the complaint,
denying the material allegations and asserting a variety of defenses to such
claims. Additionally, Tyco asserted counterclaims that South American Crossing
(Subsea) Ltd. breached its construction and development agreement with Tyco.
Tyco seeks damages of not less than $150 million, attorneys' fees and costs and
a declaration that, among other things, the construction and development
agreement is a valid, enforceable contract and that South American Crossing
(Subsea) Ltd. breached the contract or, in the alternative, terminated the
contract for convenience. On July 5, 2000, we answered Tyco's counterclaims,
denying the material allegations. On August 7, 2000, Tyco moved to dismiss
several of our claims. The court has not yet ruled on that motion, which has
been fully briefed. Discovery is ongoing.
In addition, on May 22, 2000, our subsidiary, Atlantic Crossing Ltd.,
together with certain of its affiliates, filed arbitration claims against Tyco
for breaches of its obligations in connection with various contracts for the
development of the Atlantic Crossing-1 fiber-optic cable system. We seek
unspecified monetary damages, a declaration that certain of our obligations
under the various contracts relating to Atlantic Crossing-1 are terminated and
a return of misappropriated intellectual property. On June 22, 2000, Tyco
responded to such claims, denying the material allegations. Tyco additionally
asserted counterclaims that we and our subsidiaries breached their various
obligations under the various contracts relating to Atlantic Crossing-1. Tyco
seeks, among other things, the denial of all relief sought by us and awards
aggregating not less than $185 million and unspecified damages for breach of
the agreements. In a settlement agreement dated as of August 30, 2000, Atlantic
Crossing entered into an agreement with Tyco for the early termination of one
of the contracts relating to Atlantic Crossing-1, the Operations,
Administration and Maintenance ("OA&M") Agreement, in return for the payment of
$19 million to Tyco. In addition, Atlantic Crossing and Tyco have agreed to
drop their respective claims under the OA&M Agreement in the arbitration. The
other claims asserted in arbitration remain pending. The hearing of this matter
commenced on December 8, 2000 and is ongoing.
We do not believe that the commencement of these actions with Tyco will have
an impact on our network and/or the timely completion of any of our systems. We
intend to pursue our claims against Tyco vigorously and to defend ourselves
vigorously against Tyco's counterclaims, which counterclaims we believe to be
without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock commenced trading on the New York Stock Exchange ("NYSE")
on November 6, 2000, under the symbol "GX". Prior to this date, our common
stock was traded on the Nasdaq National Market ("NNM") under the symbol "GBLX".
The table below sets forth, on a per share basis for the periods indicated, the
high and low sales prices for the common stock as reported by the NYSE and NNM.
Price Range
---------------------------
2000 1999
------------- -------------
High Low High Low
------ ------ ------ ------
First Quarter.................................. $61.82 $38.00 $62.63 $18.94
Second Quarter................................. $42.00 $23.38 $64.25 $39.63
Third Quarter.................................. $37.75 $24.00 $50.00 $20.25
Fourth Quarter................................. $30.81 $11.25 $55.75 $24.81
The closing sale price of the common stock as reported by the NYSE on March
1, 2001, was $16.19. As of March 1, 2001, there were 31,030 holders of record
of our common stock.
Dividend Policy--Restriction on Payment of Dividends
The Company does not anticipate paying cash dividends on our common stock in
the foreseeable future. The terms contained in certain of our debt instruments
also place limitations on our ability to pay dividends. Future dividends, if
any, will be at the discretion of the Board of Directors and will depend upon,
among other things, our operations, capital requirements and surplus, general
financial condition, contractual restrictions and such other factors as the
Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2000, the Company did not issue any
unregistered securities.
25
ITEM 6. SELECTED FINANCIAL DATA
The table below presents selected consolidated financial data of the Company
as of and for the four periods ended December 31, 2000. The historical
financial data as of December 31, 2000 and 1999 and for the years ended
December 31, 2000, 1999, and 1998 have been derived from the historical
consolidated financial statements of the Company and should be read in
conjunction with our consolidated financial statements and notes presented
elsewhere in this Annual Report.
In reading the following selected historical financial data, please note the
following:
. Effective January 1, 2000, we adopted SEC Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), which
requires amortization of certain start-up and activation revenues and
deferral of associated costs over the contract period or expected
customer relationship, whichever is greater. Previously, such revenues
and expenses were recognized upon service activation. The net impact of
SAB 101 reduced revenue by approximately $2.4 million, and increased
amortization expense by approximately $10.8 million. The cumulative
impact on the results of prior years was reflected as a $9.1 million
cumulative effect of a change in accounting principle in accordance with
the adoption provisions of this bulletin.
. On January 12, 2000, we established a joint venture, called Hutchison
Global Crossing ("HGC"), with Hutchison Whampoa Limited ("Hutchison") to
pursue fixed-line telecommunications and Internet opportunities in Hong
Kong. For its 50% share, Hutchison contributed to the joint venture its
building-to-building fixed-line telecommunications network in Hong Kong
and a number of Internet-related assets. In addition, Hutchison agreed
that any fixed-line telecommunications activities it pursues in China
will be carried out by the joint venture. For its 50% share, we provided
to Hutchison $400 million in Global Crossing convertible preferred stock
(convertible into shares of Global Crossing common stock at a rate of
$45 per share) and committed to contribute to the joint venture
international telecommunications capacity rights on our network and
global media distribution center capabilities, as well as $50 million in
cash. Concurrent with the initial public offering ("IPO") of Asia Global
Crossing ("AGC"), on October 12, 2000, the Company, Microsoft, and
Softbank, together the founding shareholders of AGC, entered into an
agreement providing for our contribution to AGC of our 50% economic
ownership in HGC.
. On June 14, 2000, we completed the acquisition of IXnet, Inc. ("IXnet")
and its parent company, IPC Communications, Inc. ("IPC"), resulting in
IXnet and IPC becoming our wholly owned subsidiaries . The purchase
price of $3.2 billion reflects a Global Crossing stock price of $49.77
per share, the average price before and after the definitive merger
agreement was entered into on February 22, 2000, and includes long-term
debt assumed and the fair market value of options issued by Global
Crossing.
. In June 2000, we restated our historical financial statements to revise
the estimated useful life of goodwill related to GlobalCenter from 10
years to 5 years. As a result, loss applicable to common shareholders
and loss per share increased by $40.6 million and $0.08 per share,
respectively, for the year ended December 31, 1999.
. On July 11, 2000, we entered into an agreement to sell our incumbent
local exchange carrier business segment ("ILEC"), acquired as part of
our merger with Frontier, to Citizens Communications for $3.7 billion in
cash, subject to adjustments concerning closing date liabilities and
working capital balances. As a result of this transaction we have
restated our financial statements to reflect the financial position and
results of operations of the ILEC as discontinued operations for all
periods presented since the date of the Frontier merger.
. On October 12, 2000, AGC completed its IPO in which it sold 68 million
shares of its Class A common stock at a price of $7.00 per share. The
net proceeds, after deducting underwriting discounts, commissions and
costs, were approximately $452 million. On November 8,
26
2000, an additional 500,000 shares of Class A common stock were sold at
$7.00 per share in connection with the exercise of the underwriters'
over-allotment option. The additional net proceeds were approximately $3
million after deducting underwriting discounts and commissions. Our
economic ownership interest in AGC after the offerings and related
transactions was reduced to 56.9%. We recognized a gain of $303 million,
net of related expenses, on the IPO and concurrent transactions.
. During September 2000, we entered into a definitive merger agreement
under which Exodus Communications, Inc. ("Exodus") would acquire our
complex web hosting services division, GlobalCenter. The sale was
completed in January 2001 and the Company received 108.2 million shares
of Exodus common stock. As a result of this transaction we are no longer
in the complex web hosting business and have restated our financial
statements to reflect the financial position and results of operations
of GlobalCenter as discontinued operations for all periods presented
since the date of acquisition as part of the Frontier merger.
. The statement of operations data for the year ended December 31, 1999
includes the results of Global Marine for the period from July 2, 1999,
date of acquisition, through December 31, 1999; the results of Frontier
for the period from September 28, 1999, date of acquisition, through
December 31, 1999; and the results of Racal Telecom for the period from
November 24, 1999, date of acquisition, through December 31, 1999. The
Consolidated Balance Sheet as of December 31, 1999 includes amounts
related to Global Marine, Frontier and Racal Telecom.
. Recurring Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization, or Recurring Adjusted EBITDA, is calculated as operating
income (loss), plus goodwill amortization, depreciation and
amortization, non-cash cost of capacity sold, stock related expenses,
cash portion of the change in deferred revenue and certain non-recurring
items. This definition is consistent with financial covenants contained
in our major financial agreements. Our management uses Recurring
Adjusted EBITDA to monitor compliance with our financial covenants and
to measure the performance and liquidity of our reportable segments.
This information should not be considered as an alternative to any
measure of performance as promulgated under GAAP. Our calculation of
Recurring Adjusted EBITDA may be different from the calculation used by
other companies and, therefore, comparability may be limited.
27
Period from March
19, 1997
Year Ended December 31, (Date of Inception)
------------------------------------- to December 31,
2000 1999 1998 1997
----------- ----------- ----------- -------------------
(In millions, except share and per share information)
Statement of Operations
Data:
Revenues................ $ 3,789 $ 1,491 $ 424 $ --
Cost of access and
maintenance............ 1,862 396 13 --
Other operating
expenses............... 1,942 648 150 3
Depreciation and
amortization........... 1,381 451 141 --
Termination of advisory
services agreement..... -- -- 140 --
----------- ----------- ----------- -----------
Operating (loss)........ (1,396) (4) (20) (3)
Gain on sale of
subsidiary's stock and
concurrent
transactions........... 303 -- -- --
Income (loss) from
continuing operations.. (1,308) 7 (68) --
Loss from discontinued
operations, net........ (308) (59) -- --
Loss applicable to
common shareholders.... (1,980) (178) (135) (13)
Loss per Common Share:
Loss from continuing
operations applicable
to common shareholders,
basic and diluted...... $ (1.92) $ (0.12) $ (0.32) $ (0.04)
=========== =========== =========== ===========
Loss applicable to
common shareholders,
basic and diluted...... $ (2.35) $ (0.35) $ (0.38) $ (0.04)
=========== =========== =========== ===========
Shares used in computing
basic and diluted loss
per share.............. 844,153,231 502,400,851 358,735,340 325,773,934
=========== =========== =========== ===========
December 31,
----------------------------------------------------------
2000 1999 1998 1997
----------- ----------- ----------- -------------------
(In millions)
Balance Sheet Data:
Property and equipment,
net.................... $ 10,030 $ 4,941 $ 434 $ 519
Goodwill and
intangibles, net....... 11,481 6,444 -- --
Net assets of
discontinued
operations............. 3,969 3,968 -- --
Total assets............ 30,185 19,217 2,639 572
Short-term borrowings... 1,000 -- -- --
Long-term debt.......... 6,271 4,900 1,066 312
Mandatorily redeemable
and cumulative
convertible preferred
stock.................. 3,158 2,085 483 92
Total shareholders'
equity................. 11,700 9,179 774 74
Other Data:
Working capital not
including short-term
borrowings............. $ (485) $ 1,023 $ 720 $ (63)
Cash from operating
activities............. 911 732 349 5
Cash from investing
activities............. (4,427) (4,043) (991) (429)
Cash from financing
activities............. 3,686 4,060 1,447 425
Recurring Adjusted
EBITDA................. 1,469 626 364 2
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with our
Consolidated Financial Statements and related notes appearing elsewhere in this
Annual Report on Form 10-K.
Recent Financial Accounting Developments
The Company adopted SEC Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements" in the fourth quarter of 2000,
effective January 1, 2000. SAB 101 clarifies certain conditions regarding the
culmination of the earnings process and customer acceptance requirements in
order to recognize revenue. SAB 101 requires the amortization of certain start-
up and activation revenues and deferral of associated costs over the contract
period or expected customer relationship, whichever is greater. Previously,
such revenues and expenses were recognized upon service activation.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", and Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
is effective for the Company as of January 1, 2001. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities measured at
fair value. The accounting for changes in the fair value of a derivative
depends on the use of the derivative. The initial adoption of these new
accounting standards will not have a material effect on the Company's financial
statements.
Acquisitions
The Company completed its merger with Frontier Corporation (acquired
September 28, 1999) and acquisitions of Global Marine Systems Ltd. (acquired
July 2, 1999), Racal Telecom (acquired November 24, 1999), and IXnet, Inc.
("IXnet") and its parent company, IPC Communications, Inc. (acquired June 14,
2000). The acquisition of these entities, as adjusted for the sale of the ILEC
segment and GlobalCenter business, is referred to as the "Acquisitions". The
increase in revenue and expenses for the years ended December 31, 2000 and 1999
is primarily due to these transactions. Therefore, the comparability of the
results of operations for the year ended December 31, 2000 and 1999, as well as
December 31, 1999 and 1998, is limited.
Results of Operations for the Years Ended December 31, 2000 and December 31,
1999
Revenues
Actual reported revenues for the years ended December 31, 2000 and 1999
reflect the following changes by segment:
December 31, December 31, Increase/
2000 1999 (Decrease)
------------ ------------ ----------
(in millions)
Commercial.............................. $1,421 $ 258 $1,163
Consumer................................ 169 48 121
Carrier:
Service Revenue......................... 1,361 289 1,072
Sales Type Lease Revenue................ 350 728 (378)
Amortization of prior period IRU's ..... 28 7 21
------ ------ ------
Total Carrier........................... 1,739 1,024 715
------ ------ ------
Telecommunications Services Segment
Revenue................................ 3,329 1,330 1,999
Installation and Maintenance Segment
Revenue................................ 460 161 299
------ ------ ------
Total Revenues........................ $3,789 $1,491 $2,298
====== ====== ======
29
Revenues for 2000 increased $2,298 million to $3,789 million from 1999. The
increase in revenue is primarily attributable to the merger of Frontier
Corporation ("Frontier") and the acquisitions of Global Marine Systems Ltd.
("Global Marine") and Racal Telecom during 1999, and the IPC Communications,
Inc. ("IPC") and IXnet merger in 2000. Revenue for 2000 reflects a full year
contribution from Frontier as well as the Global Marine and Racal Telecom
acquisitions. In addition, 2000 results of operations reflect 6.5 months of
revenues contributed by IPC and IXnet following their acquisition in June 2000.
The following table provides supplemental pro forma detail of Global
Crossing revenues for the years ended December 31, 2000 and 1999. Since actual
revenues for 1999 reflect the operations of Global Marine after July 2, 1999;
Frontier after September 28, 1999; Racal Telecom after November 24, 1999; and
2000 revenues reflect the operations of IXnet and IPC after June 14, 2000,
management believes that pro forma revenue provides a more meaningful
comparability among periods presented since our historical results only reflect
the operations of our acquired entities after the close of each transaction.
Pro forma revenue assumes that each merger and acquisition occurred at the
beginning of each period. However, pro forma revenue is not necessarily
indicative of the results that would have been achieved had such transactions
actually occurred at the beginning of each period, nor are they necessarily
indicative of our future results.
Pro forma Pro forma
December 31, December 31, Increase/
2000 1999 (Decrease)
------------ ------------ ----------
(in millions)
(unaudited)
Commercial.............................. $1,590 $1,540 $ 50
Consumer................................ 169 194 (25)
Carrier:
Service Revenue......................... 1,361 958 403
Sales Type Lease Revenue................ 350 728 (378)
Amortization of prior period IRU's ..... 28 7 21
------ ------ -----
Total Carrier........................... 1,739 1,693 46
------ ------ -----
Telecommunications Services Segment
Revenue................................ 3,498 3,427 71
Installation and Maintenance Segment
Revenue................................ 460 334 126
------ ------ -----
Total Revenues........................ $3,958 $3,761 $ 197
====== ====== =====
Pro forma commercial revenue increased $50 million over the prior period due
to growth in data commercial revenue offset by a decline in commercial voice
services revenue. The increase in data commercial services was due to
significant growth in our commercial data products such as private line, frame
relay, ATM and IP and growth in our Turret installation business. Voice revenue
decreased due to a de-emphasis of these services as demand for data services
increased.
Consumer long distance services revenue experienced a decline of $25 million
over the prior period on a pro forma basis. This decline is due to our
strategic decision to be the world's premier provider of managed broadband
services to multinational enterprises. In addition, per minute price levels
declined due to continued competition from new entrants to the market and
enhanced voice network capacity in the industry.
Carrier service revenue increased $403 million over the prior period on a
pro forma basis. The increase is due to growth in our carrier voice services
revenue and carrier data services revenue. Carrier voice revenue grew due to
completion of portions of our global network, providing additional capacity for
our carrier customers and expanding carrier relationships. Data revenue, which
represents private line, frame relay, ATM and IP services, increased due to the
continued expansion of our network resulting in the introduction of our
services throughout Europe, Tokyo, major cities in Mexico, and cities in North
and South America.
Sales type lease revenue declined $378 million on a pro forma basis over the
prior period. This decline is primarily due to changes in accounting guidance
that became effective in the third quarter of 1999. Prior to this
30
period we recognized revenue from capacity sales upon activation of the
circuits, resulting in up-front revenue recognition. On July 1, 1999, Financial
Accounting Standards Board (FASB) Interpretation No. 43, "Real Estate Sales, an
interpretation of FASB Statement No. 66" ("FIN 43") became effective, limiting
the applicability of sales-type lease accounting and requiring revenue from
capacity sales to be recorded over the life of the contract where sales-type
lease accounting is not permitted. As a result, sales-type lease revenue has
significantly decreased over the prior period.
Installation and Maintenance revenue increased $126 million on a pro forma
basis over the prior year. The increase is primarily due to redeployment of
vessels from maintenance projects to installation projects which provide larger
revenue streams. The number of installation contracts awarded to us and the
size of the contracts awarded increased in 2000 from 1999 on a pro forma basis.
Operating Expenses
Components of operating expenses for the years ended December 31, 2000 and
1999 were as follows:
December 31, December 31, Increase/
2000 1999 (Decrease)
------------ ------------ ----------
(in millions)
Cost of access and maintenance.... $1,862 $ 396 $1,466
Other operating expenses.......... 1,942 648 1,294
Depreciation and amortization..... 1,381 451 930
------ ------ ------
Total Operating Expenses........ $5,185 $1,495 $3,690
====== ====== ======
Cost of access and maintenance ("COA&M") includes primarily the following:
(i) usage based charges paid to local exchange carriers ("LEC") and
interexchange carriers ("IXC") to originate and/or terminate switched voice
traffic; (ii) charges for leased lines obtained through our merger with
Frontier and acquisition of Racal Telecom in 1999, as well as from our merger
of IXnet in 2000; (iii) internet exit charges incurred in transporting IP
traffic; and (iv) third party maintenance costs incurred in connection with
maintaining cables and landing stations. Due to our 1999 merger and acquisition
activity, usage based charges significantly increased over the prior period.
The increase of $1,466 million over 1999 is primarily due to our mergers and
acquisitions. For the year ended December 31, 1999, the Company only incurred a
partial year of usage based charges and leased line charges associated with the
operations of Frontier and Racal Telecom compared to a full year of charges in
2000. Furthermore, the Company incurred 6.5 months of charges associated with
the operations of IXnet in 2000 compared to zero charges in 1999. The Company
incurred a partial year of internet exit charges associated with GlobalCenter
compared to a full year in 2000. The Company also experienced an increase in
third party maintenance due to additional systems becoming ready for service
("RFS") during 2000 such as Pacific Crossing-1; all of PAC; phases I and II of
South American Crossing; and Mid-Atlantic Crossing. Once a cable is deemed RFS,
the Company begins to incur maintenance charges for that cable and its
associated landing stations.
Other operating expenses, which increased by $1,294 million over the prior
period, primarily consist of three components, (i) operations, administrative,
and internal maintenance expenses; (ii) selling, and general and administrative
expenses ("SG&A"); and (iii) cost of goods sold for our cable installation and
maintenance unit as well as our Turret installation unit. We experienced an
increase to our operations, administrative, and internal maintenance expenses
over the prior year that was primarily due to the continued expansion of our
network and expenses of acquired companies. SG&A expenses primarily consist of
salaries and related benefits, recruiting costs, commissions, marketing and
promotional costs, advertising, occupancy costs, travel, and professional fees.
SG&A costs increased over the prior period primarily due to increased headcount
from our acquisitions. At the end of 1999, we employed approximately 12,400
people, with approximately 12,000 acquired from Frontier, Global Marine and
Racal Telecom. Furthermore, the Company increased its headcount in 2000 by
approximately 4,000 employees due to the merger with IPC and IXnet as well as
additional hires.
31
Other SG&A costs such as marketing and other promotional expenses increased to
support our rapid growth and expanded services. An increase in cost of goods
sold also contributed to the increase due to the acquisition of IPC and its
turret installation business and a full year of cost of goods sold recorded by
our Global Marine division in 2000.
Depreciation and amortization consists of depreciation expense of our
property and equipment, which includes our subsea systems as well as goodwill
amortization. The $930 million increase is primarily due to a full year of
depreciation on our in-service subsea systems, acquired property and equipment
as well as increased goodwill amortization resulting from our acquisitions.
During the current year, we recorded a full year of depreciation expense on our
in-service subsea systems that we only began depreciating on October 1, 1999 as
well as on the acquired property and equipment from our 1999 acquisitions. We
also experienced increased depreciation related to varying in-service dates for
our subsea systems throughout 2000. Current year results also include
depreciation expense on property and equipment acquired from our IXnet and IPC
merger. In addition, depreciation and amortization includes non-cash cost of
capacity sold resulting from capacity sales that meet the qualifications of
sales-type lease accounting. Goodwill amortization for the year increased due
to the recognition of a full year of goodwill amortization from our 1999
acquisitions as well as our merger with IXnet and IPC during the current year.
Other significant components of our Statement of Operations for the years
ended December 31, 2000 and 1999 include the following:
December 31, December 31, Increase/
2000 1999 (Decrease)
------------ ------------ ----------
(in millions)
Interest expense......................... (390) (137) (253)
Gain from sale of subsidiary's common
stock and concurrent transactions....... 303 -- 303
Other (expense) income, net.............. (46) 180 (226)
Benefit (provision) for income taxes..... 145 (108) 253
Loss from discontinued operations........ (308) (59) (249)
Preferred stock dividends................ (221) (67) (154)
Interest expense increased $253 million over 1999 and includes the
amortization of finance costs and debt discount. The increase in interest
expense over the prior period is due to a full year of finance charges recorded
for the debt assumed in the Frontier merger. Furthermore our outstanding debt
increased during the current year as a result of further borrowings to support
our capital spending which resulted in an increase in interest, net of
capitalization.
The $303 million gain from sale of subsidiary's common stock resulted from
our subsidiary, AGC, completing its initial public offering on October 12,
2000, as well as concurrent transactions.
The $226 million decrease in other income, net is primarily due to a $210
million payment to us by US West, Inc. included in the results of operations
for the year ended December 31, 1999. The payment was in connection with the
termination of its merger agreement with us, less related expenses. Other
income, net also includes foreign exchange losses, and other immaterial
transactions.
For the year ended December 31, 2000, the Company recorded an income tax
benefit of $145 million on a loss from continuing operations of $1,453 million.
For the year ended December 31, 1999, the Company recorded an income tax
provision of $108 million on income from continuing operations of $115 million.
The change in the provision for income tax in relation to the earnings for the
respective years is caused by changes in the distribution of earnings to
jurisdictions at various tax rates.
Discontinued operations include the operating results of our ILEC business
segment as well as GlobalCenter. During 2000, we reported income from
discontinued operations, net of tax, related to our ILEC
32
business segment of $91 million and a loss from discontinued operations, net of
tax, related to GlobalCenter of $399 million. The increase in the loss of
discontinued operations of $249 million over 1999 is primarily due to the fact
that since both these business units were part of our merger with Frontier in
September of 1999, the results of the ILEC and GlobalCenter were based on a
full year of activity in 2000 compared to only the fourth quarter in 1999.
Furthermore, GlobalCenter experienced increased losses in 2000 due to
significant expansion of its media distribution centers and their related
expenses ahead of a recurring-revenue stream relating to them.
Preferred stock dividends of $221 million were paid during the year. The
increase of $154 million over the prior year is due to additional issuances of
preferred stock in November 1999, December 1999, January 2000 and April 2000,
the proceeds of which were used to fund acquisitions and capital spending.
Results of Operations for the Years Ended December 31, 1999 and December 31,
1998
Revenues
Revenue for 1999 increased to $1,491 million as compared to $424 million for
1998. For 1999, $728 million in revenue was recognized up front on IRU sales,
while the remaining $763 million in revenue from our telecommunications
services segment primarily resulted from the Frontier merger and Racal
acquisition in the fourth quarter of 1999. The installation and maintenance
revenues in 1999 resulted from the acquisition of Global Marine on July 2,
1999.
Actual reported revenues for the years ended December 31, 1999 and 1998
reflect the following changes by segment:
December 31, December 31, Increase/
1999 1998 (Decrease)
------------ ------------ ----------
(in millions)
Commercial...................... $ 258 $-- $ 258
Consumer........................ 48 -- 48
Carrier:
Service Revenue................. 289 289
Sales Type Lease Revenue........ 728 419 309
Amortization of prior period
IRU's.......................... 7 5 2
------ ---- ------
Total Carrier................... 1,024 424 600
------ ---- ------
Telecommunications Services
Segment Revenue................ 1,330 424 906
Installation and Maintenance
Segment Revenue................ 161 -- 161
------ ---- ------
Total Revenues................ $1,491 $424 $1,067
====== ==== ======
Operating Expenses
Components of operating expenses for the years ended December 31, 1999 and
1998 were as follows:
December 31, December 31, Increase/
1999 1998 (Decrease)
------------ ------------ ----------
(in millions)
Cost of access and maintenance.... $ 396 $ 13 $ 383
Other operating expenses.......... 648 150 498
Depreciation and amortization..... 451 141 310
Termination of advisory services
agreement........................ -- 140 (140)
------ ---- ------
Total Operating Expenses........ $1,495 $444 $1,051
====== ==== ======
33
Cost of access and maintenance increased $383 million in 1999 compared to
1998. The increase is primarily attributable to the cost of access incurred by
our Frontier merger and acquisition of Racal Telecom, whose networks include a
significant amount of switched traffic, leased lines, and web hosting services
resulting in higher usage based charges, access costs for leased lines, and
internet exit charges. In addition, as we continue to expand our network,
maintenance requirements on our cables and associated landing stations have
also increased.
Other operating expenses which increased $498 million over the prior period
primarily consist of three components, (i) operations, administrative, and
internal maintenance expenses; (ii) selling, general and administrative
expenses ("SG&A"); and (iii) cost of goods sold for our cable installation and
maintenance unit. We experienced an increase to our operations, administrative
and internal maintenance expenses primarily due to the costs incurred in
connection with the development of our network operations center, expansion of
our network and expenses of acquired companies. SG&A expenses primarily consist
of salaries and related benefits, recruiting costs, commissions, marketing and
promotional costs, occupancy costs, insurance costs, travel, and professional
fees. The increase is primarily attributable to additions in headcount,
occupancy costs, marketing costs, commissions paid and other promotional
expenses to support our rapid growth and the expenses of acquired companies.
Operating costs for 1999 also include cost of goods sold for our cable
installation and maintenance unit that was obtained through our acquisition of
Global Marine in July 1999, and therefore, include approximately six months of
costs resulting from our installation and maintenance operations.
Depreciation and amortization increased $310 million from 1998 to 1999. The
increase in depreciation expense was driven by charges from newly acquired
companies and depreciation of subsea systems beginning on October 1, 1999. In
addition, non-cash cost of capacity sold resulting from capacity sales
qualifying for sales-type lease recognition is also included in depreciation
and amortization and increased over the prior period in relation to revenues.
Goodwill amortization increased during 1999 as a result of our acquisition of
Global Marine and Racal Telecom and our merger with Frontier.
In connection with the development and construction of Atlantic Crossing in
1998, we entered into an advisory services agreement with PCG Telecom Services
LLC, an affiliate, providing for the payment by us of an advisory fee of 2% of
the gross revenue of Atlantic Crossing over a 25 year term. Our board of
directors also approved similar advisory fees and authorized us to enter into
similar agreements with respect to other cable systems under development by us.
We acquired the rights of the persons entitled to the fees payable under these
agreements in consideration for the issuance to such persons of shares of our
common stock, which had at the time of issuance an aggregate value of $135
million, and the cancellation of approximately $3 million owed to us under a
related advance agreement. In addition, we recognized approximately $2 million
of advisory fees incurred prior to termination of the contract in 1998. As a
result of the termination, costs were not incurred in relation to this
agreement in 1999.
Other significant components of our Statement of Operations for the years
ended December 31, 1999 and 1998 include the following:
December 31, December 31, Increase/
1999 1998 (Decrease)
------------ ------------ ----------
(in millions)
Interest income...................... $ 61 $ 30 $ 31
Interest expense..................... (137) (42) (95)
Other income, net ................... 180 -- 180
Benefit (provision) for income
taxes............................... (108) (33) (75)
Loss from discontinued operations.... (59) -- (59)
Extraordinary loss on retirement of
debt................................ (45) (20) (25)
Cumulative effect of change in
accounting principle................ (14) -- (14)
Interest income for the year ended December 31, 1999 was $61 million,
compared to $30 million for the year ended December 31, 1998. The increase is
due to earnings on investments of funds from financings and
34
operations for the year ended December 31 1999. Interest expense for the year
ended December 31, 1999 was $137 million, compared to $42 million for the year
ended December 31, 1998, due to our acquisition of Global Marine and Racal
Telecom, debt assumed in the merger with Frontier and increases in debt
outstanding to support our capital spending.
Other income, net for the year ended December 31, 1999 resulted primarily
from a $210 million payment to us by US West, Inc. in connection with the
termination of its merger agreement with us, less related expenses.
For the year ended December 31, 1999, the Company recorded an income tax
provision of $108 million on income from continuing operations of $115 million.
For the year ended December 31, 1998, the Company recorded an income tax
provision of $33 million on a loss from continuing operations of $35 million.
The change in the provision for income tax in relation to the earnings for the
respective years is caused by changes in the distribution of earnings to
jurisdictions at various tax rates.
Discontinued operations include the operating results of our ILEC business
as well as GlobalCenter. During the year we reported income from discontinued
operations, net of tax, related to our ILEC business of $18 million. In
addition, we also reported loss from discontinued operations, net of tax,
related to GlobalCenter of $77 million.
Extraordinary loss from retirement of debt for the year ended December 31,
1999 was $45 million compared to $20 million for the year ended December 31,
1998. During 1999, we recognized an extraordinary loss of $14 million resulting
from prepayment of existing debt in connection with the issuance of our $3
billion Senior Secured Credit Facility and an additional $31 million for the
early extinguishment of $2 billion, in principal value, under the Senior
Secured Credit Facility. During 1998, we recognized an extraordinary loss of
$20 million in connection with the repurchase of Global Telesystems Holdings'
outstanding senior notes, comprising a premium of $10 million and a write-off
of $10 million of unamortized deferred financing costs.
We adopted Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Cost
of Start-Up Activities," issued by the American Institute of Certified Public
Accountants, during the year ended December 31, 1999. SOP 98-5 requires that
certain start-up expenditures previously capitalized during system development
must now be expensed. We incurred a one-time charge during the first quarter of
$14 million, net of tax that represents start-up costs incurred and capitalized
during previous periods.
Liquidity and Capital Resources
During the year ended December 31, 2000, we and our affiliates arranged
approximately $5 billion in financing. We estimate the remaining cost of
developing and deploying the announced systems on the Global Crossing Network
to be approximately $1.6 billion, excluding costs of potential future upgrades.
We estimate total capital expenditures for 2001 to be approximately $4.9 to
$5.1 billion. In order to fund our capital expenditure requirements, we
anticipate that we will have available for 2001 approximately $6.1 to $6.2
billion in liquid resources comprised of the following:
. At December 31, 2000, we had available cash and cash equivalents as well
as restricted cash and cash equivalents of $1.6 billion and unused
capacity on our senior secured revolving credit facility of
approximately $532 million. As a result, we entered 2001 with
approximately $2.1 billion in liquid resources.
. In January 2001, Global Crossing Holdings Ltd. issued $1 billion of
Senior Notes Due August 2007 through a private placement. The proceeds
have been used to repay some of our senior indebtedness, consisting of
loans under our senior credit facility.
35
. On July 11, 2000, we entered into an agreement to sell our ILEC business
segment for $3,650 million. Net proceeds from the sale are expected to
be approximately $1.7 billion after repayment of a short-term bridge
loan and income taxes. We expect the sale to close by the Summer of
2001.
Based on the above, we expect we will have sufficient resources to fund our
operations during 2001. These projections assume we do not dispose of any of
our strategic investments, certain of which are subject to significant transfer
restrictions.
In April 2000, we issued 21,673,706 shares of our common stock for net
proceeds of approximately $694 million and 4,000,000 shares of 6 3/4%
cumulative convertible preferred stock at a liquidation preference of $250 per
share for net proceeds of approximately $970 million. In May 2000, pursuant to
an over-allotment option held by the underwriters of the preferred stock, the
Company issued an additional 600,000 shares of 6 3/4% cumulative convertible
preferred stock for net proceeds of approximately $146 million. We are using
the proceeds of these offerings for general corporate purposes, principally
capital for the expansion of our business.
In August 2000, we amended and restated the terms of our existing senior
secured corporate credit facility, increasing the corporate credit facility
from $1 billion to $2.25 billion. The amended agreement provides for a $1
billion revolving credit facility that matures in July 2004, a $700 million
revolving term facility that converts to a term loan in August 2002 and matures
in July 2004; and a $550 million term loan that matures in June 2006. The
borrowings under the facilities may be used for working capital and general
corporate purposes.
During August and September 2000, we repaid debt assumed in connection with
the IPC acquisition. As a result of the transaction, the Company recorded an
extraordinary loss of $18 million.
On October 12, 2000, AGC completed its initial public offering, which raised
net proceeds of approximately $455 million, including the subsequent exercise
of the underwriters' over-allotment option. Concurrent with the initial public
offering, AGC issued $408 million of 13.375% Senior Notes Due 2010.
On October 13, 2000, the Company, through a direct subsidiary of Global
Crossing North America, Inc. ("GCNA"), entered into a $1 billion unsecured
credit facility ("Bridge Loan") due April 10, 2002 or upon closing or
abandonment of the sale of the ILEC. The Bridge Loan is funded through a
commercial paper conduit. Interest is payable at a rate of LIBOR plus 1%.
Should the conduit discontinue to fund the Bridge Loan, committed bank
purchasers will fund the Bridge Loan at an interest rate of LIBOR plus 2.25%.
Proceeds from the Bridge Loan were used to repay approximately $768 million of
borrowings under the credit facilities incurred in connection with the
Company's purchase of Racal Telecom in November 1999. As a result of the
transaction, the Company wrote-off approximately $24 million of deferred
financing costs. Proceeds from the Bridge Loan will also be used for general
corporate purposes.
In January 2001, the Company completed the sale of GlobalCenter to Exodus
Communications. Under the terms of the agreement, Global Crossing received
108.2 million Exodus common shares, valued at $1.95 billion at the date of the
closing and $1.65 billion at March 1, 2001.
The Company has extended limited amounts of financing to 13 customers in
connection with certain capacity sales. The financing terms provide for
installment payments of up to four years. The Company believes that its
extension of financing to its customers will not have a material effect on the
Company's liquidity.
Cash provided by operating activities was $911 million and $732 million for
the years ended December 31, 2000 and 1999, respectively. The increase is
primarily due to an increase in cash received from capacity sales over the
prior year. Capacity sales increased in 2000 due to the completion of domestic
and international portions of our global network, providing additional capacity
for our carrier customers. This increase was offset by an increase in cash used
for operating expenses such as general and administrative, selling and
marketing,
36
and other operating costs. The increase in our operating costs were primarily
driven by our growth over the past year due to our 1999 and 2000 acquisitions,
as well as growth in our existing business. Our 1999 acquisitions had only a
partial year of cash requirements in 1999 compared to a full year in 2000, and
our 2000 acquisition of IPC and IXnet also increased the use of cash for
operating expenses in the current year.
Cash used in investing activities was $4,427 million and $4,043 million for
the years ended December 31, 2000 and 1999, respectively. The $384 million
increase is attributed to an increase in cash used for the purchase of property
and equipment in the current year offset by a decrease in cash used for
acquisitions. In 2000, several portions of our global network were completed
which resulted in an increase of cash used for purchases of property and
equipment of $2,327 million over 1999. This increase in cash used was offset by
a decrease in cash used for acquisitions compared to 1999. In 2000, our merger
with IPC and IXnet was a stock for stock transaction compared to 1999 in which
$2,457 million of cash was used to fund our acquisitions.
Cash provided by financing activities was $3,686 million and $4,060 million
for the years ended December 31, 2000 and 1999, respectively. The decrease of
$374 million in cash provided by financing activities is primarily due to a
$2,065 million reduction in proceeds received from financing sources, offset by
a $1,773 million reduction in the repayment of debt in 2000 as compared to
1999.
We have a substantial amount of indebtedness. Based upon the current level
of operations, our management believes that our cash flows from operations,
together with available borrowings under our credit facility, and our continued
ability to raise capital, will be adequate to meet our anticipated requirements
for working capital, capital expenditures, acquisitions and other discretionary
investments, interest payments and scheduled principal payments for the
foreseeable future. There can be no assurance, however, that our business will
continue to generate cash flow at or above current levels or that currently
anticipated improvements will be achieved. Also, there can be no assurance that
our business facility and our continued ability to raise capital will be
adequate to meet our anticipated requirements for working capital, capital
expenditures, acquisitions and other discretionary investments, interest
payments and scheduled principal payments for the foreseeable future. If we are
unable to generate sufficient cash flow and raise capital to service our debt,
we may be required to reduce capital expenditures, refinance all or a portion
of our existing debt or obtain additional financing.
Euro Conversion
On January 1, 1999, a single currency called the Euro was introduced in
Europe. Eleven of the fifteen member countries of the European Union agreed to
adopt the Euro as their common legal currency on that date. Fixed conversion
rates between these countries' existing currencies (legacy currencies) and the
Euro were established as of that date. The legacy currencies are scheduled to
remain legal tender in these participating countries between January 1, 1999
and January 1, 2002 (not later than July 1, 2002). During this transition
period, parties may settle transactions using either the Euro or a
participating country's legacy currency.
As most of our sales and expenditures are denominated in United States
dollars, management does not believe that the Euro conversion will have a
material adverse impact on our business or financial condition. We do not
expect the cost of system modifications to be material and we will continue to
evaluate the impact of the Euro conversion.
Inflation
We do not believe that our business is impacted by inflation to a
significantly different extent than the general economy.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major market
risk exposure is changing interest rates. Our policy is to manage interest
rates through use of a combination of fixed and floating rate debt. Interest
rate swaps may be used to adjust interest rate exposures when appropriate,
based upon market conditions, and the Company does not engage in such
transactions for speculative purposes.
Fair Value
---------------------
Expected maturity dates 2001 2002 2003 2004 2005 Thereafter Total 12/31/2000 12/31/1999
- ----------------------- ----- ---- ---- ----- ---- ---------- ------ ---------- ----------
(in millions)
DEBT
9 1/2% Senior Notes due
2009................... $ -- $-- $-- $ -- $-- $1,100 $1,100 $1,040 $1,087
Average interest
rates--fixed.......... 9.5%
9 1/8% Senior Notes due
2006................... -- -- -- -- -- 900 900 860 889
Average interest
rates--fixed.......... 9.1%
9 5/8% Senior Notes due
2008................... -- -- -- -- -- 800 800 757 798
Average interest
rates--fixed.......... 9.6%
Asia Global Crossing 13
3/8% Senior Notes Due
2010................... -- -- -- -- -- 408 408 354 N/A
Average interest
rates--fixed.......... 13.4%
Senior Secured Credit
Facility--Revolving.... -- -- -- 1,168 -- -- 1,168 1,168 649
Average interest
rates--variable....... (a)
Senior Secured Credit
Facility--Term Loan B.. 2 4 4 4 269 267 550 550 N/A
Average interest
rates--variable....... (b)
ILEC Bridge Loan........ 1,000 -- -- -- -- -- 1,000 1,000 N/A
Average interest
rates--variable....... (c)
Medium-Term Notes, 8.8%-
9.3%, due 2001 to
2021................... 72 -- -- 20 -- 100 192 171 180
Average interest
rates--fixed.......... 8.9% 9.3% 9.0%
7 1/4% Senior Notes due
2004................... -- -- -- 300 -- -- 300 275 282
Average interest
rates--fixed.......... 7.3%
6% Dealer Remarketed
Securities ("Drs") Due
2013................... -- -- -- -- -- 200 200 199 187
Average interest
rates--variable....... (d)
Pacific Crossing Term
Loan A-1............... 40 85 100 113 139 -- 477 477 N/A
Average interest
rates--variable....... (e)
Pacific Crossing Term
Loan B................. 1 3 3 3 3 311 324 324 N/A
Average interest
rates--variable....... (f)
Other................... 2 -- -- 4 -- -- 6 6 154
Average interest
rates--variable....... (g)
DERIVATIVE INSTRUMENTS
Interest rate swap
floating for fixed--
Contract notional
amount................ -- -- -- -- 200 -- 200 -- 7
Fixed rate paid by
counterparty.......... 7.3%
Floating rate paid by
GCL................... (h)
Interest rate swaps
fixed for floating--
Contract notional
amount................ -- -- -- -- 500 -- 500 9 N/A
Fixed rate paid by
GCL................... 5.0%
Floating rate paid by
counterparty.......... (i)
- --------
(a) The interest rate is US dollar LIBOR + 2.25% which was 9.0% as of December
31, 2000.
(b) The interest rate is British pound LIBOR + 2.75% which was 9.3% as of
December 31, 2000.
(c) The cost of funds, including certain ongoing bank fees, is approximately
0.97% over the 1 month commercial paper note. As of December 31, 2000, the
financing cost of the ILEC Bridge Loan was 7.6%.
(d) The interest rate is fixed at 6.0% until October 2003. At that time, the
remarketing dealer (J.P. Morgan) has the option to remarket the notes at
prevailing interest rates or tender the notes for redemption.
(e) The interest rate is 1 month US dollar LIBOR + 2.25%, which was 8.9% as of
December 31, 2000.
(f) The interest rate is 1 month US dollar LIBOR + 2.50%, which was 9.1% as of
December 31, 2000.
(g) Various fixed and floating-rate obligations with effective interest rates
from 0% to 9.0%.
(h) The interest rate is 6 month US dollar LIBOR + 1.26%, which is set in
arrears.
(i) The interest rate is 1 month US dollar LIBOR, which was 6.6% as of December
31, 2000.
38
Foreign Currency Risk
For those subsidiaries using the U.S. dollar as their functional currency,
translation adjustments are recorded in the accompanying condensed consolidated
statements of operations. None of our translation adjustments were material as
of and for the years ended December 31, 2000 and 1999.
For those subsidiaries not using the U.S. dollar as their functional
currency, assets and liabilities are translated at exchange rates in effect at
the balance sheet date and income and expense accounts at average exchange
rates during the period. Resulting translation adjustments are recorded
directly to a separate component of shareholders' equity. As of and for the
years ended December 31, 2000 and 1999, we incurred foreign currency
translation losses of $138 million and $21 million, respectively. For the year
ended December 31, 1998, the translation losses were immaterial.
We use foreign currency forward transactions to hedge exposure to foreign
currency exchange rate fluctuations. The Euro was the principal currency hedged
by us. Changes in the value of forward foreign exchange contracts, which are
designated as hedges of foreign currency denominated assets and liabilities,
are classified in the same manner as changes in the underlying assets and
liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page F-1, Index to Consolidated Financial
Statements and Schedule.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the Company's Annual General
Meeting of Shareholders to be held on June 13, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by the Item is incorporated herein by reference to
the Company's definitive proxy statement for the Company's Annual General
Meeting of Shareholders to be held on June 13, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the Company's Annual General
Meeting of Shareholders to be held on June 13, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement for the Company's Annual General
Meeting of Shareholders to be held on June 13, 2001.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1. Financial Statements--Included in Part II of this Form 10-K:
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended December 31,
2000, 1999, and 1998.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999, and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999, and 1998.
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 2000, 1999, and 1998.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule--Included in Part II of this Form 10-K:
Schedule II--Valuation and Qualifying Accounts
3. Exhibit Index:
Exhibit
Number Exhibit
------- -------
2.1 Agreement and Plan of Merger, dated as of March 16, 1999 (the
"Frontier Merger Agreement"), among the Registrant, Frontier
Corporation and GCF Acquisition Corp. (incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K filed on
March 19, 1999 (the "March 19, 1999 8-K")).
2.2 Consent and Amendment No. 1 to the Frontier Merger Agreement, dated as
of May 16, 1999, among the Registrant, GCF Acquisition Corp. and
Frontier Corporation (incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K filed on May 18, 1999 (the
"May 18, 1999 8-K")).
2.3 Amendment No. 2 to the Frontier Merger Agreement, dated as of
September 2, 1999, among the Registrant, GCF Acquisition Corp. and
Frontier Corporation (incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K filed on September 3, 1999
(the "September 3, 1999 8-K")).
2.4 Sale and Purchase Agreement, dated as of April 26, 1999, between Cable
& Wireless plc and the Registrant (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on
July 16, 1999 (the "July 16, 1999 8-K")).
2.5 Amendment to the Sale and Purchase Agreement, dated as of June 25,
1999, between Cable & Wireless plc and the Registrant (incorporated by
reference to Exhibit 2.2 to the July 16, 1999 8-K).
2.6 Agreement and Plan of Merger, dated as of May 16, 1999, between the
Registrant and U S West, Inc. (incorporated by reference to Exhibit 2
to the Registrant's Current Report on Form 8-K filed on May 21, 1999
(the "May 21, 1999 8-K")).
2.7 Letter Agreement, dated as of May 16, 1999, between the Registrant and
U S West, Inc. (incorporated by reference to Exhibit 99 to the May 21,
1999 8-K).
2.8 Termination Agreement, dated as of July 18, 1999, between the
Registrant and U S West, Inc. (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed on July 20,
1999 (the "July 20, 1999 8-K")).
41
Exhibit
Number Exhibit
------- -------
2.9 Sale Agreement, made on October 10, 1999, between Controls and
Communications Limited, The Racal Corporation, Racal Electronics Plc
and the Registrant (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on October 21, 1999 (the
"October 21, 1999 8-K")).
2.10 Agreement and Plan of Merger, dated as of February 22, 2000, among the
Registrant, Georgia Merger Sub Corporation, IPC Communications, Inc.,
IPC Information Systems, Inc., Idaho Merger Sub Corporation and IXnet,
Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K filed on March 2, 2000 (the "March 2, 2000
8-K")).
2.11 Stock Purchase Agreement, dated as of July 11, 2000, by and among the
Registrant, Global Crossing North America, Inc. and Citizens
Communications Company (incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K filed on July 19, 2000).
2.12 Agreement and Plan of Merger among Exodus Communications, Inc.,
Einstein Acquisition Corp., Global Crossing GlobalCenter Holdings,
Inc., GlobalCenter Holding Co., GlobalCenter Inc., and Global Crossing
North America, Inc., dated as of September 28, 2000 (incorporated by
reference to the Registrant's Current Report on Form 8-K dated
September 28, 2000, filed on October 17, 2000).
3.1 Memorandum of Association of the Registrant (incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form S-
1/A filed on July 2, 1998 (the "July 2, 1998 S-1/A")).
3.2 Certificate of Incorporation of Change of Name of the Registrant dated
April 30, 1998 (incorporated by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-1/A filed on July 23,
1998 (the "July 23, 1998 S-1/A")).
3.3 Memorandum of Increase of Share Capital of the Registrant dated July
9, 1998 (incorporated by reference to Exhibit 3.4 to the July 23, 1998
S-1/A).
3.4 Memorandum of Increase of Share Capital of the Registrant dated
September 27, 1999 (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q filed on November 15, 1999
(the "November 15, 1999 10-Q")).
3.5 Bye-laws of the Registrant as in effect on October 14, 1999
(incorporated by reference to Exhibit 3.2 to the November 15, 1999 10-
Q).
3.6 Memorandum of Association of Global Crossing Holdings Ltd.
(incorporated by reference to Exhibit 3.1 of Global Crossing Holdings
Ltd.'s Registration Statement on Form S-4 (File
No. 333-61457)).
3.7 Bye-laws of Global Crossing Holdings Ltd. (incorporated by reference
to Exhibit 3.2 to Global Crossing Holdings Ltd.'s Registration
Statement on Form S-4 (File No. 333-61457)).
3.8 Certificate of Designations of 6 3/8% Cumulative Convertible Preferred
Stock of the Registrant dated November 5, 1999 (incorporated by
reference to Exhibit 3.3 to the November 15, 1999 10-Q).
3.9 Certificate of Designations of 7% Cumulative Convertible Preferred
Stock of the Registrant, dated December 15, 1999 (incorporated by
reference to Exhibit 3.2 to Global Crossing Holdings Ltd.'s
Registration Statement on Form S-4 (File No. 333-61457)).
3.10 Certificate of Designations of 6 3/8% Cumulative Convertible Preferred
Stock, Series B of the Registrant, dated January 12, 2000
(incorporated by reference to Exhibit 3.10 to the Registrant's Annual
Report on Form 10-K filed on March 16, 2000).
3.11 Certificate of Designations of 6 3/4% Cumulative Convertible Preferred
Stock of the Registrant, dated April 14, 2000 (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 2000 (the "May 15, 2000 10-Q")).
42
Exhibit
Number Exhibit
------- -------
4.1 Certificate of Designations of 10 1/2% Senior Exchangeable Preferred
Stock Due 2008 of Global Crossing Holdings Ltd. dated December 1, 1998
(incorporated by reference to Schedule A to Exhibit 3.2 to the Global
Crossing Holdings Ltd. Registration Statement on Form S-4 filed on
December 22, 1998).
4.2 Indenture, dated as of May 18, 1998, between Global Crossing Holdings
Ltd. and United States Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 4.2 to the Global Crossing
Holdings Ltd. Registration Statement on Form S-4 filed on December 22,
1998).
4.3 Supplemental Indenture, dated as of June 25, 1999, between Global
Crossing Holdings Ltd. and United States Trust Company of New York, to
the Indenture dated as of May 18, 1998 (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form S-4
filed on July 12, 1999).
4.4 Amended and Restated Credit Agreement dated as of August 10, 2000 (the
"Corporate Credit Facility") among Global Crossing Ltd., Global
Crossing Holdings Ltd., Global Crossing North America, Inc., the
Lenders party thereto and The Chase Manhattan Bank as Administrative
Agent (incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 2000).
4.5 Amendment No. 1, dated as of August 10, 2000, to the Corporate Credit
Facility (filed herewith).
4.6 Indenture, dated as of November 19, 1999, among the Registrant, Global
Crossing Holdings Ltd. and United States Trust Company of New York
(incorporated by reference to Exhibit 4.5 to the Global Crossing
Holdings Ltd. Registration Statement on Form S-4 filed on January 11,
2000 (File No. 333-94449)).
4.7 Indenture, dated as of January 29, 2001, among the Registrant, Global
Crossing Holdings Ltd. and United States Trust Company of New York
(filed herewith).
Except as hereinabove provided, there is no instrument with respect to long-
term debt of the Registrant and its consolidated subsidiaries under which the
total authorized amount exceeds 10 percent of the total consolidated assets of
the Registrant. The Registrant agrees to furnish to the SEC upon its request a
copy of any instrument relating to long-term debt.
10.1 Project Development and Construction Contract, dated as of March 18,
1997, among AT&T Submarine Systems, Inc. and Atlantic Crossing Ltd.
(formerly Global Telesystems Ltd.) (incorporated by reference to
Exhibit 10.2 to the July 23, 1998 S-1/A).
10.2 Project Development and Construction Contract, dated as of April 21,
1998, among Tyco Submarine Systems, Ltd. and Pacific Crossing Ltd.
(incorporated by reference to Exhibit 10.3 to the July 23, 1998 S-
1/A).
10.3 Project Development and Construction Contract, dated as of June 2,
1998, among Alcatel Submarine Networks and Mid-Atlantic Crossing Ltd.
(incorporated by reference to Exhibit 10.4 to the July 23, 1998 S-
1/A).
10.4 Project Development and Construction Contract, dated as of July 21,
1998, among Tyco Submarine Systems, Ltd. and Pan American Crossing
Ltd. (incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q filed on November 16, 1998).
10.5 Project Development and Construction Contract, dated as of July 30,
1999, among Alcatel Submarine Networks and South American Crossing
Ltd. (incorporated by reference to Exhibit 10.5 to the Global Crossing
Holdings Registration Statement on Form S-4 filed on January 11, 2000
(File No. 333-94449)) (portions have been omitted pursuant to a
request for confidential treatment).
43
Exhibit
Number Exhibit
------- -------
10.6 Lease made as of October 1, 1999 between North Crescent Realty V, LLC
and Global Crossing Development Company (incorporated by reference to
Exhibit 10.1 to the November 15, 1999 10-Q).
10.7 Form of Stockholders Agreement dated as of August 12, 1998 among the
Registrant and the investors named therein (incorporated by reference
to Exhibit 9.1 to the July 23, 1998 S-1/A).
10.8 Termination of Stockholders Agreement dated as of February 22, 2000
among the Registrant and the investors named therein (incorporated by
reference to Exhibit 10.1 to the May 15, 2000 10-Q).
10.9 Form of Registration Rights Agreement dated as of August 12, 1998
among the Registrant and the investors named therein (incorporated by
reference to Exhibit 4.4 to the July 23, 1998 S-1/A).
10.10 Voting Agreement, dated as of March 16, 1999, among certain
shareholders of the Registrant parties thereto, Frontier Corporation
and, for certain purposes only, the Registrant (incorporated by
reference to Exhibit 10.2 to the March 19, 1999 8-K).
10.11 Second Reaffirmation of Voting Agreement and Share Transfer
Restriction Agreement, dated as of September 2, 1999 (incorporated by
reference to Annex S-B to the joint proxy statement/prospectus
supplement included in the Registrant's Registration Statement on Form
S-4 filed on September 8, 1999 (the "September 8, 1999 S-4").
10.12 Share Transfer Restriction Agreement, dated as of September 2, 1999,
among certain shareholders of Global Crossing Ltd., certain
shareholders of Frontier Corporation and Global Crossing Ltd.
(incorporated by reference to Annex S-C to the joint proxy
statement/prospectus supplement included in the September 8, 1999 S-
4).
10.13 Tender Offer and Purchase Agreement, dated as of May 16, 1999, between
the Registrant and U S WEST, Inc. (incorporated by reference to
Exhibit (c)(2) to U S WEST, Inc.'s Schedule 14D-1 filed on May 21,
1999).
10.14 Standstill Agreement dated as of May 16, 1999 between U S WEST, Inc.
and the Registrant (incorporated by reference to Exhibit (c)(4) to U S
WEST, Inc.'s Schedule 14D-1 filed on May 21, 1999).
10.15 Voting Agreement dated as of May 16, 1999 between U S WEST, Inc. and
the Registrant (incorporated by reference to Exhibit (c)(3) to U S
WEST, Inc.'s Schedule 14D-1 filed on May 21, 1999).
10.16 Tender and Voting Agreement dated as of May 16, 1999 among U S WEST,
Inc., the Registrant and the shareholders party thereto (incorporated
by reference to Exhibit (c)(5) to U S WEST, Inc.'s Schedule 14D-1
filed on May 21, 1999).
10.17 Agreement dated as of May 16, 1999 among the Registrant and the
shareholders party thereto (incorporated by reference to Exhibit
(c)(6) to U S WEST, Inc.'s Schedule 14D-1 filed on May 21, 1999).
10.18 Transfer Agreement dated as of May 16, 1999 among the Registrant and
the shareholders party thereto (incorporated by reference to Exhibit
(c)(8) to U S WEST, Inc.'s Schedule 14D-1 filed on May 21, 1999).
10.19 Amendment No. 1 dated as of July 18, 1999 to Tender Offer and Purchase
Agreement dated as of May 16, 1999 between the Registrant and U S
WEST, Inc. (incorporated by reference to Exhibit 10.2 to the July 20,
1999 8-K).
10.20 Agreement, dated as of July 18, 1999, between Qwest Communications
International Inc. and the Registrant (incorporated by reference to
Exhibit 10.3 to the July 20, 1999 8-K).
44
Exhibit
Number Exhibit
------- -------
10.21 Agreement, dated as of July 18, 1999, between Global Crossing Holdings
Ltd. and Qwest Communications International Inc. (incorporated by
reference to Exhibit 10.4 to the July 20, 1999 8-K).
10.22 Registration Rights Agreement dated as of November 5, 1999 among the
Registrant and the initial purchasers of the Registrant's 6 3/8%
Cumulative Convertible Preferred Stock named therein (incorporated by
reference to the Registrant's Registration Statement on Form S-3 filed
on January 18, 2000 relating to such securities).
10.23 Registration Rights Agreement dated as of November 5, 1999 among the
Registrant and the initial purchasers of the Registrant's 7%
Cumulative Convertible Preferred Stock named therein (incorporated by
reference to the Registrant's Registration Statement on Form S-3 filed
on January 18, 2000 relating to such securities).
10.24 Subscription and Sale and Purchase Agreement, dated November 15, 1999,
among Hutchison Whampoa Limited, Hutchison Telecommunications Limited,
the Registrant and HCL Holdings Limited (incorporated by reference to
Exhibit 10.33 to the Global Crossing Holdings Ltd. Registration
Statement on Form S-4 filed on January 11, 2000 (File No. 333-94449)).
10.25 Registration Rights Agreement dated as of January 29, 2001 among the
Registrant, Global Crossing Holdings Ltd. and the initial purchasers
of Global Crossing Holdings Ltd.'s 8.70% Senior Notes due 2007 (filed
herewith).
10.26 Option Limitation Agreement, dated as of February 22, 2000, among the
Registrant, IPC Communications, Inc., IXnet Inc., and the individuals
signatory thereto (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K filed on August 14, 2000).
10.27 1998 Global Crossing Ltd. Stock Incentive Plan as amended and restated
as of May 1, 2000 (incorporated by reference to Annex A to the
Registrant's definitive proxy statement on Schedule 14A filed on May
8, 2000).
10.28 Form of Non-Qualified Stock Option Agreement as in effect on September
30, 1999 (incorporated by reference to Exhibit 10.2 to the November
15, 1999 10-Q).
10.29 Asia Global Crossing 2000 Stock Incentive Plan (incorporated by
reference to Exhibit 10.14 to Asia Global Crossing Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 2000).
10.30 Global Crossing Senior Executive Incentive Compensation Plan
(incorporated by reference to Annex B to the Registrant's definitive
proxy statement on Schedule 14A filed on May 8, 2000).
10.31 Global Crossing Supplemental Retirement Savings Plan as amended and
restated effective January 1, 2001 (filed herewith).
10.32 Employment Agreement dated as of February 19, 1999 between the
Registrant and Robert Annunziata (incorporated by reference to Exhibit
10.8 to the Registrant's Quarterly Report on Form 10-Q filed on May
10, 1999).
10.33 Letter agreement dated March 2, 2000 relating to the termination of
the Employment Agreement dated as of February 9, 1999 between the
Registrant and Robert Annunziata (incorporated by reference to Exhibit
10.4 of the Registrant's May 15, 2000 10-Q).
10.34 Executive Contract dated March 25, 1996 between Robert L. Barrett and
Frontier Corporation (incorporated by reference to Exhibit 10.25 to
Frontier Corporation's Quarterly Report on Form 10-Q filed May 14,
1996).
10.35 Amendment dated May 1, 1999 to Executive Contract between Robert L.
Barrett and Frontier Corporation (incorporated by reference to Exhibit
10.7 to the November 15, 1999 10-Q).
45
Exhibit
Number Exhibit
------- -------
10.36 Executive Contract dated January 1, 1998 between Joseph P. Clayton and
Frontier Corporation (incorporated by reference to Exhibit 10.22 to
Frontier Corporation's Annual Report on Form 10-K filed March 26,
1998).
10.37 Amendment dated May 1, 1999 to Executive Contract between Joseph P.
Clayton and Frontier Corporation (incorporated by reference to Exhibit
10.9 to the November 15, 1999 10-Q).
10.38 Employment Agreement dated as of December 3, 1999 between the
Registrant and John A. Scarpati (incorporated by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K filed on March
16, 2000).
10.39 Employment Agreement dated as of December 5, 1999 between the
Registrant and Leo J. Hindery, Jr. (incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K filed on
March 16, 2000).
10.40 Clarification letter dated April 17, 2000, relating to the Employment
Agreement dated as of December 5, 1999 between the Registrant and Leo
J. Hindery, Jr. (incorporated by reference to Exhibit 10.5 to the
Registrant's May 15, 2000 10-Q).
10.41 Employment Term Sheet dated as of April 26, 2000 between the
Registrant and Gary A. Cohen (incorporated by reference to Exhibit
10.6 to the Registrant's May 15, 2000 10-Q).
10.42 Employment Term Sheet dated as of May 1, 2000 between the Registrant
and Joseph P. Perrone (incorporated by reference to Exhibit 10.7 to
the May 15, 2000 10-Q).
10.43 Employment Agreement dated October 12, 2000 between the Registrant and
Thomas J. Casey (filed herewith).
10.44 Promissory note dated as of November 14, 2000 between Thomas J. Casey
and Global Crossing Development Co. (filed herewith).
10.45 Form of Change in Control Agreement between the Registrant and
Executive Officers of the Registrant approved by the Board of
Directors in January 2000 (incorporated by reference to Exhibit 10.34
to the Registrant's Annual Report on Form 10-K filed on March 16,
2000).
10.46 The Global Crossing Ltd. Deferred Compensation Plan for Directors
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 filed on June 14, 2000).
10.47 The Global Crossing Ltd. Deferred Compensation Plan for Executives
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 filed June 14, 2000).
10.48 Subordinated Note-A between the Registrant and Asia Global Crossing
Ltd. dated as of October 11, 2000 (incorporated by reference to
Exhibit 4.4 to Asia Global Crossing Ltd.'s Quarterly Report on Form
10-Q filed November 20, 2000).
10.49 Subordinated Note-B between the Registrant and Asia Global Crossing
Ltd. dated as of October 11, 2000 (incorporated by reference to
Exhibit 4.5 to Asia Global Crossing Ltd.'s Quarterly Report on Form
10-Q filed November 20, 2000).
10.50 Promissory note dated as of March 20, 2001 between David Walsh and
Global Crossing Development Co. (filed herewith).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Arthur Andersen (filed herewith).
46
(b) Reports on Form 8-K.
During the quarter ended December 31, 2000, the following reports on Form 8-
K were filed by the Registrant:
1. Current Report on Form 8-K dated September 28, 2000, (date of earliest
event reported), filed on October 17, 1999, for the purpose of
reporting, under Item 5, the execution of an agreement to sell
GlobalCenter to Exodus Communications, Inc.
2. Current Report on Form 8-K dated October 11, 2000 (date of earliest
event reported), filed on October 12, 1999, for the purpose of filing,
under Item 5, the appointment of Thomas J. Casey as Chief Executive
Officer.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
47
GLOBAL CROSSING LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Public Accountants.................................. F-2
Financial Statements as of December 31, 2000 and December 31, 1999 and for
the three years ended December 31, 2000:
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Shareholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-7
Consolidated Statements of Comprehensive Loss............................. F-9
Notes to Consolidated Financial Statements................................ F-10
Schedule:
Schedule II--Valuation and Qualifying Accounts........................... F-43
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Global Crossing Ltd.:
We have audited the accompanying consolidated balance sheets of Global
Crossing Ltd. (a Bermuda company) and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity, cash flows and comprehensive loss for each of the three years ended
December 31, 2000. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Crossing Ltd. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for certain
installation revenues and costs and effective January 1, 1999, the Company
changed its method of accounting for start-up costs.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen
- -------------------------
Arthur Andersen
Hamilton, Bermuda
February 14, 2001
F-2
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share information)
December 31,
----------------
2000 1999
------- -------
ASSETS:
Current assets:
Cash and cash equivalents................................ $ 1,477 $ 1,630
Restricted cash and cash equivalents..................... 146 17
Accounts receivable, net of allowance for doubtful
accounts of $110 in 2000 and $84 in 1999................ 880 843
Note receivable.......................................... 164 --
Other assets and prepaid costs........................... 515 211
------- -------
Total current assets................................... 3,182 2,701
Restricted cash and cash equivalents....................... -- 138
Property and equipment, net................................ 10,030 4,941
Goodwill and intangibles, net of accumulated amortization
of $555 in 2000 and $75 in 1999........................... 11,481 6,444
Investment in and advances to/from affiliates, net......... 607 318
Other assets............................................... 916 707
Net assets of discontinued operations...................... 3,969 3,968
------- -------
Total assets............................................. $30,185 $19,217
======= =======
LIABILITIES:
Current liabilities:
Short-term borrowings ................................... $ 1,000 $ --
Accounts payable......................................... 401 421
Accrued construction costs............................... 811 275
Other current liabilities................................ 2,455 982
------- -------
Total current liabilities.............................. 4,667 1,678
Long-term debt............................................. 6,271 4,900
Deferred revenue........................................... 1,700 382
Other deferred liabilities................................. 1,740 642
------- -------
Total liabilities........................................ 14,378 7,602
------- -------
MINORITY INTEREST............................................ 949 351
------- -------
MANDATORILY REDEEMABLE AND CUMULATIVE CONVERTIBLE PREFERRED
STOCK....................................................... 3,158 2,085
------- -------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value
$.01 per share, 906,339,273 and 799,137,142 shares issued
as of December 31, 2000 and 1999, respectively............ 9 8
Treasury stock, 22,033,758 shares.......................... (209) (209)
Additional paid-in capital and other shareholders' equity.. 13,766 9,579
Accumulated deficit........................................ (1,866) (199)
------- -------
11,700 9,179
------- -------
Total liabilities and shareholders' equity............... $30,185 $19,217
======= =======
The accompanying notes are an integral part of these financial statements.
F-3
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share information)
Years Ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUES................................ $ 3,789 $ 1,491 $ 424
OPERATING EXPENSES:
Cost of access and maintenance........ 1,862 396 13
Other operating expenses.............. 1,942 648 150
Depreciation and amortization......... 1,381 451 141
Termination of advisory services
agreement............................ -- -- 140
----------- ----------- -----------
5,185 1,495 444
----------- ----------- -----------
OPERATING LOSS.......................... (1,396) (4) (20)
OTHER INCOME (EXPENSE):
Equity in (loss) income of
affiliates........................... (67) 16 (3)
Minority interest..................... 15 (1) --
Interest income....................... 128 61 30
Interest expense...................... (390) (137) (42)
Gain from sale of subsidiary's common
stock and concurrent transactions.... 303 -- --
Other (expense) income, net........... (46) 180 --
----------- ----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES...... (1,453) 115 (35)
Benefit (Provision) for income taxes.. 145 (108) (33)
----------- ----------- -----------
(LOSS) INCOME FROM CONTINUING
OPERATIONS............................. (1,308) 7 (68)
Loss from discontinued operations, net
of income tax of $54 and $19,
respectively......................... (308) (59) --
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES.................. (1,616) (52) (68)
Extraordinary loss on retirement of
debt................................. (42) (45) (20)
Cumulative effect of change in
accounting principle, net of income
tax benefit of $5 and $1,
respectively......................... (9) (14) --
----------- ----------- -----------
NET LOSS................................ (1,667) (111) (88)
Preferred stock dividends............. (221) (67) (13)
Charge for conversion and redemption
of preferred stock................... (92) -- (34)
----------- ----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.. $ (1,980) $ (178) $ (135)
=========== =========== ===========
LOSS PER COMMON SHARE, basic and
diluted:
Loss from continuing operations
applicable to common shareholders.... $ (1.92) $ (0.12) $ (0.32)
=========== =========== ===========
Loss from discontinued operations,
net.................................. $ (0.36) $ (0.12) $ --
=========== =========== ===========
Extraordinary loss on retirement of
debt................................. $ (0.06) $ (0.08) $ (0.06)
=========== =========== ===========
Cumulative effect of changes in
accounting principles, net........... $ (0.01) $ (0.03) $ --
=========== =========== ===========
Loss applicable to common
shareholders......................... $ (2.35) $ (0.35) $ (0.38)
=========== =========== ===========
Shares used in computing basic and
diluted loss per share............... 844,153,231 502,400,851 358,735,340
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions, except share information)
Other
Shareholders'
Common Stock Treasury Stock Equity
------------------- ----------------- ----------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Other Deficit Equity
----------- ------ ---------- ------ ---------- ----- ----------- -------------
Balance, December 31,
1997................... 325,773,934 $ 3 -- $ -- $ 71 $ -- $ -- $ 74
Issuance of common
stock for cash........ 1,575,000 -- -- -- 3 -- -- 3
Cash reimbursement to
certain shareholders.. -- -- -- -- (7) -- -- (7)
Unearned compensation.. -- -- -- -- 94 (94) -- --
Amortization of
compensation expense.. -- -- -- -- -- 37 -- 37
PCG Warrants........... 24,406,340 -- -- -- 275 -- -- 275
Issuance of common
stock in exchange for
termination of
advisory services
agreement............. 14,210,526 -- -- -- 135 -- -- 135
Preferred stock
dividends............. -- -- -- -- (13) -- -- (13)
Premium on redemption
of preferred stock.... -- -- -- -- (34) -- -- (34)
Common stock
transactions with
certain shareholders.. 21,733,758 -- 22,033,758 (209) 209 -- -- --
Issuance of common
stock in connection
with initial public
offering, net of
$30,916 issuance
costs................. 44,420,000 1 -- -- 391 -- -- 392
Issuance of common
stock from exercise of
stock options......... 656,688 -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- (88) (88)
----------- ----- ---------- ----- ------- ----- ------- -------
Balance, December 31,
1998................... 432,776,246 4 22,033,758 (209) 1,124 (57) (88) 774
Issuance of common
stock from exercise of
stock options......... 10,058,073 -- -- -- 111 -- -- 111
Income tax benefit from
exercise of stock
options............... -- -- -- -- 10 -- -- 10
Unearned compensation.. -- -- -- -- 55 (55) -- --
Amortization of
compensation expense.. -- -- -- -- -- 52 -- 52
Issuance of common
stock in exchange for
non-compete rights and
licenses.............. 2,239,632 -- -- -- 20 -- -- 20
Cancellation of shares
issued in connection
with terminated merger
with US West.......... (2,231,076) -- -- -- (103) -- -- (103)
Preferred stock
dividends............. -- -- -- -- (67) -- -- (67)
Shares issued in
connection with
Frontier acquisition.. 355,263,135 4 -- -- 8,504 -- -- 8,508
Shares issued for
retirement of debt.... 1,031,132 -- -- -- 5 -- -- 5
Foreign currency
translation
adjustment............ -- -- -- -- -- (21) -- (21)
Unrealized gain on
securities, net....... -- -- -- -- -- 1 -- 1
Net loss............... -- -- -- -- -- -- (111) (111)
----------- ----- ---------- ----- ------- ----- ------- -------
F-5
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(Continued)
(in millions, except share information)
Other
Shareholders'
Common Stock Treasury Stock Equity
------------------ ----------------- ----------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Other Deficit Equity
----------- ------ ---------- ------ ---------- ----- ----------- -------------
Balance, December 31,
1999................... 799,137,142 $ 8 22,033,758 $(209) $ 9,659 $ (80) $ (199) $ 9,179
Issuance of common
stock from exercise of
stock options......... 14,936,578 -- -- -- 102 -- -- 102
Income tax benefit from
exercise of stock
options............... -- -- -- -- 4 -- -- 4
Issuance of common
stock to convert
preferred stock....... 12,363,489 -- -- -- 445 -- -- 445
Issuance of common
stock for cash........ 21,673,706 -- -- -- 688 -- -- 688
Preferred stock
dividends............. -- -- -- -- (221) -- -- (221)
Shares issued in
connection with
IXnet/IPC
acquisition........... 58,228,358 1 -- -- 3,189 -- -- 3,190
Unearned compensation.. -- -- -- -- 23 (23) -- --
Amortization of
compensation expense.. -- -- -- -- -- 44 -- 44
Unrealized gain on
securities, net....... -- -- -- -- -- 76 -- 76
Foreign currency
translation
adjustment............ -- -- -- -- -- (138) -- (138)
Other.................. -- -- -- -- (2) -- -- (2)
Net loss............... -- -- -- -- -- -- (1,667) (1,667)
----------- ---- ---------- ----- ------- ----- ------- -------
Balance at December 31,
2000................... 906,339,273 $ 9 22,033,758 $(209) $13,887 $(121) $(1,866) $11,700
=========== ==== ========== ===== ======= ===== ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net Loss........................................ $ (1,667) $ (111) $ (88)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations............... 308 59 --
Cumulative effect of change in accounting
principle...................................... 9 14 --
Depreciation and amortization................... 1,381 451 141
Extraordinary loss on retirement of debt........ 42 45 20
Non-cash portion of US West termination
agreement...................................... -- (103) --
Termination of advisory services agreement...... -- -- 135
Gain from sale of subsidiary's common stock and
concurrent transactions........................ (303) -- --
Stock related expenses.......................... 48 51 39
Equity in loss (income) of affiliates........... 67 (16) 3
Provision for doubtful accounts................. 72 36 4
Deferred income taxes........................... 38 32 10
Capacity available for sale excluding cash
expenditures for investing activities.......... -- -- 123
Minority interest (income) expense.............. (15) 1 --
Other........................................... 26 6 --
Changes in operating assets and liabilities..... 905 267 (38)
-------- -------- -------
Net cash provided by operating activities...... 911 732 349
-------- -------- -------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Purchases of property and equipment............. (4,289) (1,962) (554)
Acquisitions of assets, net of cash acquired.... -- (2,457) --
Investments in and advances to/from affiliates,
net............................................ (110) (264) (17)
Purchases of marketable securities, net of
sales.......................................... (201) (29) --
Proceeds from sale of unconsolidated
affiliates..................................... 164 379 --
Change in restricted cash and cash equivalents.. 9 290 (420)
-------- -------- -------
Net cash used in investing activities.......... (4,427) (4,043) (991)
-------- -------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of common stock, net..... 785 111 392
Proceeds from issuance of preferred stock, net.. 1,113 1,599 483
Proceeds from short-term borrowings ............ 1,000 -- --
Proceeds from long-term debt.................... 2,093 5,544 1,087
Repayment of long-term debt..................... (1,578) (3,351) (337)
Redemption of preferred stock................... -- -- (134)
Preferred dividends............................. (193) (52) --
Minority interest investment in subsidiary...... 548 350 --
Finance and organizational costs incurred....... (48) (141) (38)
Other........................................... (34) -- (6)
-------- -------- -------
Net cash provided by financing activities...... 3,686 4,060 1,447
-------- -------- -------
Cash (used in) provided by discontinued
operations.................................... (323) 74 --
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (153) 823 805
CASH AND CASH EQUIVALENTS, beginning of year..... 1,630 807 2
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year........... $ 1,477 $ 1,630 $ 807
======== ======== =======
The accompanying notes are an integral part of these financial statements.
F-7
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in millions)
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
SUPPLEMENTAL INFORMATION ON NON-CASH FINANCING
ACTIVITIES:
Common stock issued to holders of preferred
stock............................................ $ 445 $ -- $ --
======== ======== ======
Common stock issued upon conversion of debt....... $ -- $ 5 $ --
======== ======== ======
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Costs incurred for construction in progress and
capacity available for sale...................... $ (4,833) $ (2,089) $ (751)
Increase in accrued construction costs............ 374 119 77
Amortization of deferred finance costs............ 7 8 8
PCG Warrants...................................... -- -- 112
Effect of PCL Consolidation ...................... 163 -- --
-------- -------- ------
Cash paid for property and equipment.............. $ (4,289) $ (1,962) $ (554)
======== ======== ======
Non-cash purchases of property and equipment...... $ -- $ 38 $ --
======== ======== ======
Transfer of capacity available for sale to
property and equipment........................... $ -- $ 575 $ --
======== ======== ======
Common stock issued for non-compete rights........ $ -- $ 20 $ --
======== ======== ======
Current and deferred income tax related to the
pending disposition of businesses................ $ 1,850 $ -- $ --
======== ======== ======
Detail of acquisitions:
Assets acquired................................... 3,694 $ 11,121 $ --
Liabilities assumed............................... (796) (2,613) --
-------- -------- ------
Common stock issued............................... $ 2,898 $ 8,508 $ --
======== ======== ======
Net cash paid for acquisitions.................... -- $ 2,457 $ --
Cash acquired in acquisitions..................... -- 124 --
-------- -------- ------
Cash paid for acquisition, including transaction
fees............................................. $ -- $ 2,581 $ --
======== ======== ======
Investments in affiliates:
Preferred stock issued for investment in joint
venture.......................................... $ 400 $ -- $ --
======== ======== ======
Effect of consolidation of PCL.................... $ (263) $ -- $ 163
======== ======== ======
Commitment to acquire capacity from joint
venture.......................................... $ 200 $ -- $ --
======== ======== ======
Note receivable upon sale of interest in joint
venture.......................................... $ (164) $ -- $ --
======== ======== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Changes in operating assets and liabilities:
Accounts receivable............................... $ 4 $ (298) $ (119)
Other current assets.............................. (268) (33) (47)
Other long-term assets............................ 24 (78) --
Deferred revenue.................................. 1,396 332 64
Current liabilities other than debt............... 147 308 46
Deferred credits and other........................ (398) 36 18
-------- -------- ------
$ 905 $ 267 $ (38)
======== ======== ======
Cash paid for interest and income taxes:
Interest paid and capitalized..................... $ 543 $ 218 $ 39
======== ======== ======
Interest paid (net of capitalized interest)....... $ 389 $ 141 $ 34
======== ======== ======
Cash paid for income taxes........................ $ 49 $ 15 $ 8
======== ======== ======
The accompanying notes are an integral part of these financial statements.
F-8
GLOBAL CROSSING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
Years Ended December
31,
-----------------------
2000 1999 1998
-------- ------ -----
Net loss............................................... $ (1,667) $ (111) $ (88)
Foreign currency translation adjustment.............. (138) (21) --
Unrealized gain on securities, net of provision for
income taxes of $49 in 2000 and $0.7 in 1999........ 76 1 --
-------- ------ -----
Comprehensive loss..................................... $ (1,729) $ (131) $ (88)
======== ====== =====
The accompanying notes are an integral part of these financial statements.
F-9
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION
Global Crossing Ltd., a Bermuda Company ("GCL" and, together with its
consolidated subsidiaries, the "Company") is building and offering services
over the world's first integrated global fiber optic network, consisting of
more than 100,000 announced route miles and serving four continents, 27
countries and more than 200 major cities. The Company serves many of the
world's largest corporations, providing a full range of managed data and voice
services. The Company operates throughout the Americas, Europe, and
Asia/Pacific regions.
Global Crossing's strategy is to be the premier provider of managed
broadband services to global enterprises. The Company has adopted this strategy
to take advantage of its extensive Internet Protocol ("IP")-based fiber-optic
network. The Global Crossing Network offers its customers an exceptional
combination of global reach and bandwidth. Through its Global Marine Systems
subsidiary, the Company also provides installation and maintenance services for
subsea telecommunications systems.
Global Crossing Ltd. serves as a holding company for its subsidiaries'
operations, including Global Marine Systems (acquired July 2, 1999), Frontier
Corporation (acquired September 28, 1999), Racal Telecom (acquired November 24,
1999), and IXnet, Inc. and IPC Communications, Inc. (acquired June 14, 2000).
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
Company's significant accounting policies are summarized as follows:
a) Principles of Consolidation
The consolidated financial statements include the accounts of GCL and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated.
b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expenses during the
reporting period. Actual amounts and results could differ from those estimates.
The Company's operations and financial performance may be affected by
numerous factors, including changes in customer requirements, new laws and
governmental regulations and policies, technological advances, entry of new
competitors and changes in the willingness of financial institutions and other
lenders to finance acquisitions and operations. The Company cannot predict
which, if any, of these or other factors might have a significant impact on the
telecommunications industry in the future, nor can it predict what impact, if
any, the occurrence of these or other events might have on the Company's
operations.
c) Revenue Recognition
Services
Revenue derived from telecommunication and maintenance services, including
sales of capacity under operating type leases, are recognized as services are
provided. Payments received from customers before the relevant criteria for
revenue recognition are satisfied are included in deferred revenue in the
accompanying consolidated balance sheets. See note 2(p) for changes in revenue
accounting policies adopted by the Company.
F-10
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Leases
In addition, the Company offers customers flexible bandwidth products to
multiple destinations and many of the contracts for subsea circuits entered
into are part of a service offering. Consequently, the Company defers revenue
related to those circuits and amortizes the revenue over the appropriate term
of the contract. Accordingly, the Company treats cash received prior to the
completion of the earnings process as deferred revenue.
Sales-Type Leases
Revenue from Capacity Purchase Agreements ("CPAs") that meet the criteria of
sales-type lease accounting are recognized in the period that the rights and
obligations of ownership transfer to the purchaser, which occurs when (i) the
purchaser obtains the right to use the capacity, which can only be suspended if
the purchaser fails to pay the full purchase price or fulfill its contractual
obligations, (ii) the purchaser is obligated to pay Operations, Administration
and Maintenance ("OA&M") costs and (iii) the segment of a system related to the
capacity purchased is available for service. Certain customers who have entered
into CPAs for capacity have paid deposits toward the purchase price which have
been included as deferred revenue in the accompanying consolidated balance
sheets.
Prior to July 1, 1999, substantially all CPAs were treated as sales-type
leases as described in Statement of Financial Accounting Standards No. 13,
"Accounting for Leases" ("SFAS 13"). On July 1, 1999, the Company adopted
Financial Accounting Standards Board Interpretation No. 43, "Real Estate Sales,
an interpretation of FASB Statement No. 66" ("FIN 43"), which requires
prospective transactions to meet the criteria set forth in Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("SFAS 66") to qualify for sales-type lease accounting. Since sales of
terrestrial capacity did not meet the new criteria, the terrestrial portion of
CPAs executed subsequent to June 30, 1999 were recognized over the terms of the
contracts, as services.
For the years ended December 31, 2000, 1999 and 1998, $350 million, $728
million and $419 million in revenue, respectively, was recognized using sales-
type lease accounting.
Percentage-of-Completion
Revenue and estimated profits under long-term contracts for undersea
telecommunication installation by Global Marine Systems are recognized under
the percentage-of-completion method of accounting, whereby sales and profits
are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs to complete. Provisions for
anticipated losses are made in the period in which they first become
determinable.
Completed Contract
Revenue from product sales and related installation by IPC Communications,
Inc. is recognized upon completion of the installation except for revenue from
sales to distributors, which is recognized upon shipment. Under contract
provisions, customers may be progress-billed prior to the completion of the
installations. The revenue related to these advance payments is deferred until
the system installations are completed. Contracts for maintenance are billed in
advance, and are recorded as deferred revenue and recognized ratably over the
contractual periods.
F-11
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
d) Operating Expenses
Operating Leases
Costs of the network relating to capacity contracts accounted for as
operating leases are treated as fixed assets and, accordingly, are depreciated
over the estimated useful life of the capacity.
Sales-Type Leases--Non-Cash Cost of Capacity Sold
Prior to October 1, 1999, the effective date of the Frontier merger, cost of
sales for subsea circuits (non-cash cost of capacity sold) were calculated
based on the ratio of capacity revenue recognized in the period to total
expected capacity revenue over the life of the network system, multiplied by
the total costs incurred to construct the network system. This calculation of
cost of sales matches costs with the value of each sale relative to total
expected revenue. Until the entire system was completed, for purposes of
calculating cost of sales, the total system costs incurred included an estimate
of remaining costs to be incurred to complete the entire system plus the cost
of system upgrades that management had the intent and ability to complete,
provided the need for such upgrades was supported by a third party consultant's
revenue forecast.
Beginning October 1, 1999, the Company initiated service contract accounting
and therefore began depreciating all of its systems; however, certain contracts
still qualify for sales-type lease accounting. For these transactions, the
Company's policy provides for recording non-cash cost of capacity sold through
depreciation and amortization in the period in which the related revenue was
recognized. The amount charged to non-cash cost of capacity sold relating to
subsea capacity is calculated by determining the estimated net book value of
the specific subsea capacity at the time of the sale. The estimated book value
includes expected costs of capacity the Company has the intent and ability to
add through upgrades of that system, provided the need for such upgrades is
supported by a third-party consultant's revenue forecast.
Commissions and Advisory Services Fees
The Company's policy is to record sales commissions and advisory fee
expenses and related payables upon the recognition of revenue so as to
appropriately match these costs with the related revenue. Under the Advisory
Services Agreement ("ASA"), which was terminated December 31, 1998, the Company
paid PCG Telecom Services LLC ("PCG Telecom") and its affiliates 2% of revenue
for advisory services performed. Under the Sales Agency Agreement, the Company
paid Tyco Submarine Systems Ltd. ("TSSL") a commission based on a percentage of
revenue from the sale of capacity on certain of the Company's systems. The
commission agreement with TSSL terminated effective February 22, 2000.
e) Cash and Cash Equivalents, Restricted Cash and Cash Equivalents (Current
and Long Term)
The Company considers cash in banks and short-term highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents and restricted cash and cash equivalents are stated at
cost, which approximates fair value. Restricted cash balances at December 31,
2000 and 1999 were $146 million and $155 million, respectively. Included in
these balances are restricted funds for the construction of our PC-1 system of
$146 million and $138 million at December 31, 2000 and 1999, respectively.
f) Property and Equipment, net
Property and equipment, which includes amounts under capitalized leases, are
stated at cost, net of depreciation and amortization. Major enhancements are
capitalized, while expenditures for repairs and maintenance are expensed when
incurred. Costs recorded prior to a network segment's completion are reflected
F-12
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as construction in progress, which is reclassified to property and equipment at
the date each segment of the applicable system becomes operational.
Construction in progress includes direct expenditures for construction of
network systems and is stated at cost. Capitalized costs include costs incurred
under the construction contract; advisory, consulting and legal fees; interest;
internal labor and operating costs; and amortized finance costs incurred during
the construction phase. Once it is probable that a cable system will be
constructed, costs directly identifiable with the cable system under
development are capitalized. Costs relating to the evaluation of new projects
incurred prior to the date the development of the network system becomes
probable are expensed as incurred.
Interest incurred and directly identifiable with a cable system, which
includes the amortization of deferred finance fees and issuance discount, is
capitalized to construction in progress.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, with the exception of leasehold improvements and assets
acquired through capital leases, which are depreciated over the lesser of the
estimated useful lives or the term of the lease. Estimated useful lives are as
follows:
Buildings........................................................ 10-40 years
Leasehold improvements........................................... 2-25 years
Furniture, fixtures and equipment................................ 2-30 years
Transmission equipment........................................... 7-25 years
Beginning October 1, 1999, the Company commenced service contract
accounting. Carrying amounts related to in-service subsea systems were
reclassified from capacity available for sale to depreciable assets, and are
being depreciated over their remaining economic useful lives.
When property or equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are relieved from the accounts, and resulting gains or
losses are reflected in net income.
g) Goodwill and Intangibles
Costs in excess of net assets of acquired businesses are amortized on the
straight-line method over 3 to 25 years. Amortization expense for the years
ended December 31, 2000 and 1999 was approximately $483 million and $75
million, respectively. There was no amortization expense in 1998.
In July 2000, the Company restated its financial statements to revise the
estimated useful life of $1,500 million in goodwill related to GlobalCenter,
acquired in connection with the Frontier merger on September 28, 1999, from 10
years to 5 years. As a result, loss applicable to common shareholders' and loss
per share increased by $41 million and $0.08 per share, respectively, for the
year ended December 31, 1999. The restatement had no impact on cash flow or
compliance with our debt agreements.
h) Impairment of Long-Lived Assets
The Company periodically evaluates whether facts and circumstances have
occurred that indicate the carrying amount of a long-lived asset may be
impaired. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow is required.
F-13
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
i) Investments
Investments in which the Company does not have significant influence and in
which the Company holds an ownership interest of less than 20% are recorded
using the cost method of accounting. These investments covered under the scope
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" are classified as "available for
sale" and are carried at estimated fair value with any unrealized gain or loss,
net of tax, included in other shareholders' equity. The Company reviews the
fair value of its investment portfolio on a regular basis to determine if the
fair value of any individual investment has declined below its cost and if such
decline is other-than-temporary. The Company considers a decline to be other-
than-temporary if the fair value of the investment has remained below its cost
basis for more than six months and will then write-down the investment to its
fair value. The write-down will be included in the statement of operations as a
realized loss in the period in which the decline was deemed to be other-than-
temporary. For the years ended December 31, 2000 and 1999, realized gains and
losses were not material on an individual or aggregate basis.
The equity method of accounting is applied for investments in affiliates, if
the Company owns an aggregate of 20% to 50% of the affiliate and if the Company
exercises significant influence over the affiliate. The equity method is also
applied for entities in which the Company's ownership is in excess of 50% but
over which the Company is unable to exercise effective control, due to minority
shareholders participating in significant decisions in the ordinary course of
business.
j) Deferred Finance Costs
Costs incurred to obtain financing through the issuance of senior notes and
long-term debt have been reflected as an asset included in other assets in the
accompanying consolidated balance sheets. The financing costs relating to the
debt are amortized over the lesser of the term of the related debt agreements
or the expected payment date of the debt obligation using the effective
interest rate method. In 2000, 1999, and 1998, certain long-term debt was
extinguished, at which time the remaining balance of unamortized discount and
offering costs was written off and included in extraordinary loss on retirement
of debt.
During the construction period, the amortized portion of deferred financing
costs relating to senior notes and long-term debt are included in construction
in progress as a component of interest capitalized or recorded as interest
expense.
k) Financial Instruments
The Company uses derivative financial instruments to reduce its exposure to
adverse fluctuations in interest rates and foreign currency exchange rates. The
Company has established policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities. The Company does not enter into financial instruments for trading
or speculative purposes. Accordingly, financial instruments are presented on
the accompanying consolidated balance sheet at their carrying values, which
approximates their fair values. Fair values are based on market quotes, current
interest rates or management estimates, as appropriate.
The Company has entered into forward currency contracts, hedging the
exchange risk on committed foreign currency transactions. During 2000, 1999,
and 1998, the gains and losses on these contracts were recognized at the time
the underlying transaction was completed.
As discussed in Note 10, the Company has entered into interest rate swap
transactions to hedge its variable and fixed interest-rate exposure on debt.
Hedge accounting was applied in respect of these instruments; accordingly, the
net cash amounts to be paid or received on the agreement are accrued and
recognized as an adjustment to interest expense on the related debt.
F-14
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
l) Income Taxes
The Company recognizes current and deferred income tax assets and
liabilities based upon all events that have been recognized in the consolidated
financial statements as measured by the enacted tax laws. The Company accounts
for income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes".
m) Effect of Foreign Currencies
For those subsidiaries using the U.S. dollar as their functional currency,
translation adjustments are recorded in the accompanying consolidated
statements of operations. For those subsidiaries not using the U.S. dollar as
their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet date and income and expense accounts are
translated at average exchange rates during the period. Resulting translation
adjustments are recorded directly to a separate component of shareholders'
equity and are reflected in the accompanying statements of comprehensive loss.
The Company's foreign transaction losses for the years ended December 31,
2000 and 1999 were $44 million and $26 million, respectively. The effect of
foreign currency transactions in all periods prior to the year ended December
31, 1999 were immaterial.
n) Stock Option Plan
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and, accordingly, recognizes compensation expense for stock option
grants to the extent that the estimated fair value of the stock exceeds the
exercise price of the option at the measurement date. The compensation expense
is charged against operations ratably over the vesting period of the options.
o) Concentration of Credit Risk
The Company has some concentration of credit risk among its customer base.
The Company performs ongoing credit evaluations of its larger customers'
financial condition. As of and for the years ended December 31, 2000 and 1999,
five customers represented 13% and 14% of the Company's accounts receivable and
14% and 29% of the Company's revenue, respectively.
p) Changes in Accounting Policies
The Company adopted American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5") in the first quarter of 1999. Accordingly, a one-time charge of
$14 million (net of income tax benefit), representing start-up costs incurred
and capitalized during previous periods, was charged against net income.
Effective January 1, 2000, the Company adopted Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which requires amortization of certain
start-up and activation revenues and deferral of associated costs over the
longer of the contract period or expected customer relationship. Previously,
such revenues and expenses were recognized upon service activation. The net
impact of SAB 101 reduced revenue by approximately $2 million and increased
amortization expense by approximately $11 million. The cumulative impact on the
results of prior years was reflected as a $9 million (net of income tax
benefit) cumulative effect of a change in accounting principle in accordance
with the adoption provisions of this bulletin.
F-15
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
q) Gain on Sale of Subsidiary Stock
The Company elected SEC Staff Accounting Bulletin No. 51, "Accounting for
Sales of Stock by a Subsidiary" ("SAB 51") in the fourth quarter of 2000, which
requires the difference between the carrying amount of the parent's investment
in the subsidiary and the underlying net book value of the subsidiary after the
issuance of stock by the subsidiary be reflected as either a gain or loss in
the consolidated financial statements or reflected as a capital transaction.
During 2000, one of the Company's subsidiaries completed an initial public
offering that resulted in a gain as further discussed in note 7. As a result,
the Company has elected to record the gain and any future gains or losses in
the future resulting from the sale of a subsidiary's stock in its statement of
operations.
r) Non-Monetary Transactions
The Company may exchange capacity with other capacity or service providers.
These transactions are accounted for in accordance with Accounting Principles
Board Opinion No. 29. "Accounting for Nonmonetary Transactions", where an
exchange for similar capacity is recorded at a historical carryover basis and
dissimilar capacity is accounted for at fair market value with recognition of
any gain or loss.
s) Recent Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", and Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
is effective for the Company as of January 1, 2001. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities measured at
fair value. The accounting for changes in the fair value of a derivative
depends on the use of the derivative. The initial adoption of these new
accounting standards will not have a material effect on the Company's results
of operations or its financial position.
t) Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to current year presentation.
3. MERGERS AND ACQUISITIONS
The following mergers and acquisitions occurred during 2000 and 1999 and
have been accounted for in the accompanying consolidated financial statements
under the purchase method of accounting for business combinations. The purchase
price for the 1999 business combinations were allocated based on the estimated
fair value of acquired assets and liabilities at the date of merger or
acquisition. The initial purchase price for the IXnet/IPC Communications
acquisition is based on a preliminary allocation. The Company will make final
purchase price allocations based upon final values for certain assets and
liabilities. As a result, the final purchase price allocation may differ from
the estimate presented.
IXnet, Inc./ IPC Communications, Inc.
On June 14, 2000, the Company completed its merger with IXnet, Inc.
("IXnet"), and its parent company, IPC Communications, Inc. ("IPC"), resulting
in IXnet and IPC becoming wholly owned subsidiaries of the Company. IXnet
shareholders received 1.184 shares of the Company's common stock for each
outstanding share of common stock of IXnet and IPC shareholders received 5.417
shares of the Company's common stock
F-16
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for each outstanding share of common stock of IPC, for a total of 58.2 million
shares of Global Crossing common stock. The purchase price of $3.2 billion
reflects a Global Crossing stock price of $49.77 per share, the average price
before and after the definitive merger agreement was entered into on February
22, 2000, and includes long-term debt assumed and the fair market value of
stock options issued by Global Crossing. The purchase price and net liabilities
assumed of $3,381 million has been allocated on a preliminary basis to goodwill
and is being amortized on the straight-line method over 10 years.
Global Marine Systems
On July 2, 1999, the Company acquired the Global Marine systems division of
Cable & Wireless Plc for approximately $908 million, consisting of a
combination of cash and assumed indebtedness. This resulted in an excess of
purchase price over net assets acquired of $627 million, which has been
allocated to goodwill and other intangible assets and is being amortized on the
straight-line method over 3-25 years.
Frontier Corporation
On September 28, 1999, the Company completed its merger with Frontier
Corporation, ("Frontier"), resulting in Frontier becoming a wholly owned
subsidiary of the Company. Frontier shareholders received 2.05 shares of the
Company's common stock for each outstanding share of common stock of Frontier,
for a total of 355 million shares of Global Crossing common stock, including
outstanding and unexercised stock options. The purchase price of $10.3 billion
reflects a Global Crossing stock price of $22 15/16 per share, the average
closing price of Global Crossing common stock from September 1, 1999 through
September 3, 1999, and includes long-term debt and Frontier stock options
assumed by Global Crossing. The excess of purchase price over net assets
acquired, as adjusted for the sale of the ILEC and GlobalCenter businesses, of
$6,549 million was allocated to goodwill and other intangible assets. Goodwill
and intangible assets are being amortized on the straight-line basis over 5-25
years.
Racal Telecom
On November 24, 1999, the Company acquired Racal Telecom for approximately
$1.6 billion in cash. The Company entered into a (Pounds)675 million
(approximately $1,091 million as of December 31, 1999) credit facility to
finance the acquisition. The excess of purchase price over net assets acquired
of $1,477 million was allocated to goodwill and other intangible assets and is
being amortized on the straight-line method over 6-25 years.
F-17
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Condensed Financial Information
The following unaudited pro forma condensed consolidated financial
information of Global Crossing, Global Marine Systems, Frontier (as adjusted
for the sale of the ILEC business and GlobalCenter), Racal Telecom, the Asia
Global Crossing joint venture and subsequent initial public offering ("IPO")
(see note 7), and IXnet and IPC Communications, demonstrates the results of
operations had the previously mentioned acquisitions as well as related
transactions been completed at the beginning of the periods presented.
December 31,
--------------------------
2000 1999
------------ ------------
(unaudited)
(in millions, except
share and per share data)
Revenues....................................... $ 3,958 $ 3,761
============ ============
Loss from continuing operations................ $ (1,648) $ (1,059)
============ ============
Net loss....................................... $ (2,006) $ (1,078)
============ ============
Loss from continuing operations applicable to
common shareholders........................... $ (1,981) $ (1,338)
============ ============
Loss applicable to common shareholders......... $ (2,339) $ (1,357)
============ ============
Loss per common share:
Loss from continuing operations applicable to
common shareholders basic and diluted......... $ (2.28) $ (1.58)
============ ============
Loss applicable to common shareholders basic
and diluted................................... $ (2.69) $ (1.60)
============ ============
Shares used in computing loss per share basic
and diluted................................... 869,130,969 848,607,626
============ ============
4. DISCONTINUED OPERATIONS
On September 28, 2000, the Company's board of directors approved a
definitive merger agreement under which Exodus Communications ("Exodus") would
acquire the Company's complex web hosting services business, GlobalCenter,
Inc., originally acquired as part of the Frontier merger on September 28, 1999,
for 108.2 million Exodus common shares. In January 2001, the transaction was
completed and no loss is expected upon the sale. The Company's beneficial
ownership is less than 20% and the Company has no significant influence over
Exodus. While it is not our current intention to do so and contractual
obligations to Exodus restrict our ability to do so, we may in the future
dispose of some or all of our investment in Exodus in privately negotiated
transactions, through a public offering upon exercise of our contractual
registration rights, or otherwise, depending on market conditions and other
factors. The Company's financial statements reflect GlobalCenter as
discontinued operations for all periods presented since the date of the
Frontier merger.
On July 11, 2000, the Company entered into an agreement to sell the
Incumbent Local Exchange Carrier ("ILEC") business segment originally acquired
as part of the Frontier transaction, to Citizens Communications Company
("Citizens") for $3,650 million in cash, subject to certain adjustments
concerning closing date liabilities, working capital balances and performance
measurements as defined in the purchase and sale agreement. In connection with
this transaction, the Company and Citizens entered into a strategic agreement
for the Company to provide long distance services to the ILEC business. The
Company's financial statements reflect the financial position and results of
operations of the ILEC business as discontinued operations for all periods
presented since the date of the Frontier acquisition. The sale is anticipated
to be completed in 2001. The Company anticipates income from discontinued
operations; therefore, no losses have been accrued. The
F-18
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated gain (net of tax) from the disposal of discontinued operations has
been reflected as a revaluation in goodwill initially recorded upon the merger
with Frontier.
December 31, December 31,
2000 1999
------------ ------------
(in millions)
Balance Sheet Data:
Assets.............................................. $4,609 $4,417
Liabilities......................................... (640) (449)
------ ------
Net Assets of discontinued operations............... $3,969 $3,968
====== ======
For the Year For the Year
Ended Ended
December 31, December 31,
2000 1999
------------ ------------
(in millions)
Income Statement Data:
Revenue............................................. $ 935 $ 210
Expenses............................................ (1,185) (253)
------- -----
Operating income.................................... (250) (43)
Interest income, net................................ (2) 4
Other expenses...................................... (2) (1)
Provision for income taxes.......................... (54) (19)
------- -----
Loss from discontinued operations................... $ (308) $ (59)
======= =====
Employee benefit plans of discontinued operations
At December 31, 2000, the Company and Citizens Communications were in the
process of negotiating an amendment to the Stock Purchase Agreement for the
sale of the Company's ILEC business. The amendment provides for the transfer of
certain assets and liabilities related to the Company's qualified pension and
other post retirement benefits from the Company to Citizens. Assets and
liabilities for virtually all retirees and all transferring active employees
will be transferred upon the sale. The Company has recorded on its balance
sheet at December 31, 2000 prepaid pension assets and other post employment
benefit liabilities related to these plans. The Company will retain only those
liabilities and assets associated with certain active, non-transferring
employees. Had negotiations and the sale been completed as of December 31,
2000, the Company would have retained prepaid pension assets of approximately
$13.7 million and other post employment benefit liabilities of approximately
$1.0 million.
F-19
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
---------------
2000 1999
------- ------
(in millions)
Land........................................................ $ 5 $ 1
Buildings................................................... 37 22
Leasehold improvements...................................... 235 72
Furniture, fixtures and equipment........................... 1,254 699
Transmission equipment...................................... 6,858 1,851
------- ------
8,389 2,645
Accumulated depreciation.................................... (723) (81)
------- ------
7,666 2,564
Construction in progress.................................... 2,364 2,377
------- ------
Total property and equipment, net......................... $10,030 $4,941
======= ======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was approximately $898 million, $376 million and $141 million, respectively.
Included in depreciation expense for the years ended December 31, 2000, 1999
and 1998 was approximately $274 million, $292 million and $141 million,
respectively, of non-cash cost of capacity sold.
6. INVESTMENT IN AND ADVANCES TO/FROM AFFILIATES
The Company's investment in affiliates consists of the following:
December 31,
--------------
2000 1999
------ ------
(in millions)
Investment in Hutchison Global Crossing...................... $ 606 $ --
Investment in Pacific Crossing Ltd. ......................... -- 266
Investment in Global Access Ltd. ............................ 15 23
Other investments and advances to/from affiliates............ (14) 29
------ ------
$ 607 $ 318
====== ======
Hutchison Global Crossing
On January 12, 2000, the Company established Hutchison Global Crossing
("HGC") with Hutchison Whampoa Limited ("Hutchison") to pursue fixed-line
telecommunications and Internet opportunities in Hong Kong. For its 50% share,
Hutchison contributed to the joint venture its building-to-building fixed-line
telecommunications network in Hong Kong and a number of Internet-related
assets. In addition, Hutchison has agreed that any fixed-line
telecommunications activities it pursues in China will be carried out by the
joint venture. For its 50% share, the Company provided to Hutchison $400
million in 6 3/8 Cumulative Convertible Preferred Stock, Series B (convertible
into shares of Global Crossing common stock at a rate of $45 per share) and
committed to contribute to the joint venture international telecommunications
capacity rights on the Company's network and global media distribution center
capabilities, as well as $50 million in cash. Concurrent with the IPO by Asia
Global Crossing ("AGC") on October 12, 2000, the Company sold an aggregate of
19% of its economic interest in HGC to Microsoft Corporation ("Microsoft") and
Softbank Corp. ("Softbank"), the joint venture partners in AGC. The Company,
Microsoft and Softbank immediately contributed their entire interests in HGC to
AGC.
F-20
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pacific Crossing Ltd.
In April 1998, the Company entered into a joint venture to construct the
Pacific Crossing ("PC-1") cable system which is owned and operated by Pacific
Crossing Ltd. ("PCL"). The Company had an economic interest in PCL represented
by a 50% direct voting interest and, through one of the joint venture partners,
owned a further 7.75% economic non-voting interest. Upon the formation of AGC
on November 24, 1999, the Company contributed its interest in PCL to AGC.
On March 24, 2000 and effective January 1, 2000, the Company through AGC
increased its interest in PCL from 57.75% to 64.50% for approximately $21
million by acquiring the remaining ownership of another partner. In connection
with this transaction, the Shareholder Agreement was amended, which enabled the
Company to exercise control over PCL and resulted in the consolidation of PCL's
financial statements and appropriate deductions for minority interest.
Global Access Ltd.
In December 1998, the Company entered into a joint venture, Global Access
Ltd. ("GAL"), to construct and operate GAL, a terrestrial cable system
connecting Tokyo, Osaka and Nagoya with PC-1. The Company had a 49% interest in
GAL. Concurrent with the IPO of AGC, the Company contributed its 49% economic
interest in GAL to AGC.
PCL (prior to the consolidation in January 2000), HGC and GAL are accounted
for under the equity method because the Company is not able to exercise
effective control over their operations.
See note 7 for joint venture arrangements entered into by our subsidiary,
AGC, following its IPO on October 12, 2000.
7. ASIA GLOBAL CROSSING
On November 24, 1999, the AGC joint venture was established by the Company,
Microsoft and Softbank. AGC intends to be a leading pan-Asian
telecommunications carrier providing Internet, data and voice services to
wholesale and business customers. In exchange for a majority interest, the
Company contributed to the joint venture its development rights in East Asia
Crossing ("EAC") and its 58% interest in PC-1. Softbank and Microsoft each
contributed $175 million in cash. In addition, Softbank and Microsoft committed
to make a total of at least $200 million in capacity purchases on the Company's
network over a three-year period. Softbank and Microsoft also agreed to use
AGC's network in the region, subject to specified conditions.
On October 12, 2000, AGC completed its IPO of common stock in which it sold
68 million shares of its Class A common stock at a price of $7.00 per share.
The net proceeds, after deducting underwriting discounts and commissions and
costs, were approximately $452 million. On November 8, 2000, AGC sold an
additional 500,000 shares of Class A common stock at $7.00 per share in
connection with the exercise of the underwriters' over-allotment option. The
additional net proceeds were approximately $3 million. The Company's economic
ownership interest in AGC prior to the IPO was 93%. After the offerings and
related transactions this interest was reduced to 56.9%. In accordance with SAB
51, the Company recognized a gain of $303 million on the IPO and concurrent
transactions.
F-21
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed in note 6, concurrent with the IPO, the Company sold an
aggregate of 19% of its total 50% economic interest in HGC to Microsoft and
Softbank, with each receiving a 9.5% interest. Immediately after the sale, all
three entities contributed their entire interests in HGC to AGC. Also
concurrent with the IPO, the Company contributed its 49% interest in GAL to
AGC.
AGC has entered into several joint ventures, including Digitel Crossing,
Asia Global Crossing Taiwan, Dacom Crossing and Starhub Asia Global Crossing.
These joint ventures will develop backhaul and terrestrial networks in the
Philippines, Taiwan, Korea and Singapore, respectively. These systems will
support our subsea systems around the globe.
8. OTHER CURRENT LIABILITIES
At December 31, 2000 and 1999, other current liabilities consisted of the
following:
December
31,
-----------
2000 1999
------ ----
(in
millions)
Accrued liabilities............................................. $ 804 $264
Accrued interest and dividends.................................. 104 64
Accrued cost of access.......................................... 226 149
Deferred revenue................................................ 282 125
Income taxes payable, net (/1/)................................. 880 127
Current portion of long-term debt............................... 117 2
Other........................................................... 42 251
------ ----
$2,455 $982
====== ====
9. DEBT
Short-term borrowings
At December 31, 2000 and 1999, outstanding short-term debt of GCL and its
subsidiaries consisted of the following:
December
31,
-----------
2000 1999
------ ----
(in
millions)
Bridge Loan due April 10, 2002 or upon closing or abandonment of
the sale of the ILEC. Interest payable at LIBOR plus 1.00%
(7.6% at December 31, 2000).................................... $1,000 --
====== ===
On October 13, 2000, the Company, through a direct subsidiary of Global
Crossing North America, Inc. ("GCNA"), entered into a $1,000 million unsecured
credit facility ("Bridge Loan"). Proceeds from the Bridge Loan were used to
repay approximately $768 million of outstanding indebtedness incurred in
connection with the Company's purchase of Racal Telecom in November 1999 and
for general corporate purposes. The Bridge Loan is funded through a commercial
paper conduit. Should the conduit discontinue to fund the Bridge Loan,
committed bank purchasers will fund the Bridge Loan at an interest rate of
LIBOR plus 2.25%. The Bridge Loan is guaranteed by GCNA.
- --------
(1) Primarily represents income taxes payable upon the disposition of the ILEC
business segment.
F-22
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term Debt
At December 31, 2000 and 1999, outstanding long-term debt of GCL and its
subsidiaries consisted of the following:
December 31,
--------------
2000 1999
------ ------
(in millions)
9 1/2% Senior Notes issued November 12, 1999 and due
November 15, 2009, with interest payable on May 15 and
November 15 ("1999 Senior Notes")......................... $1,100 $1,100
9 1/8% Senior Notes issued November 12, 1999 and due
November 15, 2006, with interest payable on May 15 and
November 15 ("1999 Senior Notes")......................... 900 900
9 5/8% Senior Notes issued May 18, 1998 and due May 15,
2008, with interest payable on May 15 and November 15
("1998 Senior Notes")..................................... 800 800
13.375% Senior Notes issued October 12, 2000 and due on
October 15, 2010, with interest payable on April 15 and
October 15 ("AGC Senior Notes")........................... 408 --
Senior Secured Credit Facility: Revolving Loans due July 2,
2004, with interest payable at LIBOR plus 2.25% (9% and
8.44% at December 31, 2000 and 1999, respectively)........ 1,168 649
Senior Secured Credit Facility: Term Loan B due June 30,
2006, with interest payable at LIBOR plus 2.75% (9.30% at
December 31, 2000)........................................ 550 --
Racal Telecom Term Loan A due November 24, 2007, with
interest payable at LIBOR plus 2.5% (8.44% at December 31,
1999)..................................................... -- 646
Medium-Term Notes, 8.77%--9.3%, due 2001 to 2004........... 192 279
7 1/4% Senior Notes due May 14, 2004, with interest payable
on May 15 and November 15................................. 300 300
6% Dealer Remarketable Securities (DRS) due October 15,
2013, with interest payable on April 15 and October 15.... 200 200
PC-1 Credit Facility....................................... 801 --
Other...................................................... 6 60
------ ------
Total debt................................................. 6,425 4,934
Less: discount on long-term debt, net...................... (37) (32)
Less: current portion of long-term debt.................... (117) (2)
------ ------
Long-term debt............................................. $6,271 $4,900
====== ======
Principal maturities of long-term debt are as follows (in millions):
Year Ending December 31,
2001.............................................................. $ 117
2002.............................................................. 92
2003.............................................................. 107
2004.............................................................. 1,612
2005.............................................................. 411
Thereafter........................................................ 4,086
------
Total............................................................. $6,425
======
Senior Secured Credit Facility Revolving Loans/Term Loan B
On July 2, 1999, the Company, through Global Crossing Holdings Ltd. ("GCHL")
and GCNA, entered into a $3 billion senior secured corporate credit facility
("Corporate Credit Facility") with several lenders. In August 2000, the Company
amended and restated the terms of the existing senior secured credit agreement,
increasing
F-23
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the total remaining amount of the Corporate Credit Facility from $1 billion to
$2.25 billion. The Corporate Credit Facility currently consists of a $1 billion
revolving credit facility due July 2004, a $700 million revolving term facility
that converts to a term loan in August 2002 and matures in July 2004 and a
$550 million term loan which matures in June 2006. GCHL and GCNA can borrow
under the Corporate Credit Facility. Borrowings under this facility are secured
by a pledge of shares of certain restricted subsidiaries of the Company and are
guaranteed by the Company and certain restricted subsidiaries. As of December
31, 2000, the revolving credit facility and revolving term facility had
approximately $532 million of unused capacity.
6% Dealer Remarketable Securities (DRS)
The 6% DRS were originally issued by Frontier and were outstanding at the
date of acquisition. These notes may be put back to the Company in October
2003, depending on the interest rate environment at that time.
PC-1 Credit Facility
As a result of the consolidation of PCL in the first quarter of 2000, the
Company has an $850 million aggregate non-recourse senior secured loan facility
(the "Pacific Crossing-1 Credit Facility") for the construction start-up and
financing costs of PC-1. The Pacific Crossing-1 Credit Facility is comprised of
$840 million of a multiple draw-down term loan and a $10 million working
capital facility. The Pacific Crossing-1 Credit Facility is secured by a pledge
of common stock in PCL and its subsidiaries and a security interest in certain
of its accounts and its rights under certain contracts.
Under the Pacific Crossing-1 Credit Facility, the Company may select loan
arrangements as either a Eurodollar loan or an Alternative Base Rate ("ABR")
loan. The Eurodollar interest rate is LIBOR plus 2.25-2.50% and the ABR
interest rate is the greater of (a) the Prime Rate and (b) the Federal Funds
Effective Rate plus 0.5%, plus 1.25-1.50%. As of December 31, 2000, all
outstanding loans were Eurodollar loans and the interest rates in effect ranged
from approximately 8.8% to 9.1%. The Pacific Crossing-1 Credit Facility is
repayable in ten semi-annual installments ("Mandatory Repayments"), commencing
135 days after PC-1 is ready for service.
Debt Covenants
Certain of the debt facilities mentioned above contain various financial and
non financial restrictive covenants and limitations, including, among other
things, the satisfaction of tests of "consolidated cash flow", as defined. The
Company is in compliance with these covenants at December 31, 2000.
Retirement of Debt
As noted in short-term borrowings, the Bridge Loan was partially used to
repay the indebtedness incurred in connection with the Company's purchase of
Racal Telecom. The Company has written-off approximately $24 million of
unamortized deferred financing costs as a result of this extinguishment which
is reflected as an extraordinary loss in the accompanying statement of
operations. The Company has provided a full valuation allowance related to this
loss due to the uncertainty of realizing any tax benefit.
As part of the merger with IPC, the Company assumed $247 million of 10 7/8%
Senior Discount Notes which were due in 2008. In August and September 2000, the
Company repaid the debt and, as a result, recorded an extraordinary loss of $18
million. The Company has provided a full valuation allowance related to this
loss due to the uncertainty of realizing any tax benefit.
F-24
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, the Company recognized an extraordinary loss resulting from the
payoff of existing debt in connection with the issuance of the Corporate Credit
Facility, due to a write-off of $14 million of unamortized deferred financing
costs.
On November 12, 1999, the proceeds from the issuance of the 1999 Senior
Notes were used to pay down the fixed term portion of the Corporate Credit
Facility, resulting in a write-off of $31 million of unamortized deferred
financing costs, which is reflected as an extraordinary loss.
During 1998, the Company recognized an extraordinary loss of $20 million in
connection with the repurchase of Global Telesystems Holdings' outstanding
senior notes, comprising a premium of $10 million and a write-off of $10
million of unamortized deferred financing costs.
Interest Rate Swap Transactions
The Company periodically enters into interest rate swaps or hedge agreements
to balance its floating rate and fixed rate obligations to insulate against
interest rate risk and minimize interest expense. Interest expense and the
related cash flows under the agreements are accounted for on an accrual basis.
The Company has entered into two interest rate swap transactions based on
one month LIBOR to minimize its exposure to increases in interest rates on its
borrowings. The swap transactions fix the floating interest rate at 4.985% on a
notional amount of borrowings of $500 million until January 31, 2004.
In December 1997, Frontier entered into an interest rate hedge agreement
that effectively converts $200 million of its 7 1/4% Senior Notes into a
floating rate based LIBOR index rate plus 1.26%. The agreement expires in May
2004.
2001 Senior Notes
On January 29, 2001, the Company completed an offering of $1 billion in
aggregate principal amount of 8.70% Senior Notes due 2007. The net proceeds
from the offering were used to refinance existing indebtedness consisting of
term loans and revolving loans under its corporate credit facility.
Guarantee of Subsidiary Debt
GCHL currently has outstanding three classes of public indebtedness. These
securities include (i) $900 million of 9 1/8% Senior Notes Due 2006, (ii) $800
million of 9 5/8% Senior Notes Due 2008 and (iii) $1.1 billion of 9 1/2% Senior
Notes due 2009. Each class of debt securities is fully and unconditionally
guaranteed by the Company. In addition, GCL has no independent assets or
operations; and subsidiaries of the Company other than GCHL are minor.
F-25
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, restricted cash and cash
equivalents, accounts receivable, accrued construction costs, accounts payable
and accrued liabilities, accrued interest, obligations under inland services
agreements and capital leases and long term debt other than the Senior Notes
(the 1998 Senior Notes, 1999 Senior Notes, 7 1/4% Senior Notes and AGC Senior
Notes), approximate their fair value. The fair value of the Senior Notes,
mandatorily redeemable preferred stock, cumulative convertible preferred stock
and interest rate swap transactions are based on market quotes and the fair
values are as follows:
December 31, December 31,
2000 1999
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(in millions) (in millions)
Senior notes................................. $ 3,471 $ 3,286 $ 3,068 $ 3,056
Mandatorily redeemable preferred stock....... 488 435 486 499
Cumulative convertible preferred stock....... 2,670 1,483 1,599 1,975
Interest rate swap transactions.............. -- 9 -- 7
11. OTHER DEFERRED LIABILITIES
At December 31, 2000 and 1999, other deferred liabilities consisted of the
following:
December
31,
-----------
2000 1999
------ ----
(in
millions)
Long-term obligations under capital lease.......................... $ 217 $214
Long-term obligations under inland service agreements.............. 9 7
Deferred tax income................................................ 1,353 263
Post employment benefit obligations................................ 147 153
Other.............................................................. 14 5
------ ----
$1,740 $642
====== ====
12. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company has capitalized the future minimum lease payments of property
and equipment under leases that qualify as capital leases.
At December 31, 2000, future minimum payments under these capital leases are
as follows (in millions) and are included in other current liabilities and
other deferred liabilities in the accompanying consolidated balance sheet:
Year Ending December 31,
2001.................................................................. $ 55
2002.................................................................. 49
2003.................................................................. 47
2004.................................................................. 60
2005.................................................................. 28
Thereafter............................................................ 415
-----
Total minimum lease payments.......................................... 654
Less: Amount representing maintenance payments........................ (132)
Less: Amount representing interest.................................... (261)
-----
Present value of minimum lease payments............................... $ 261
=====
F-26
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has commitments under various non-cancelable operating leases.
Estimated future minimum lease payments on operating leases are approximately
as follows (in millions):
Year Ending December 31,
2001................................................................ $ 246
2002................................................................ 198
2003................................................................ 189
2004................................................................ 177
2005................................................................ 123
Thereafter.......................................................... 824
------
Total............................................................... $1,757
======
Rental expense related office space and equipment for the years ended
December 31, 2000, 1999, and 1998 is $134 million, $68 million, and $1 million,
respectively.
13. PREFERRED STOCK
Outstanding preferred stock as of December 31, 2000 and 1999 consists of the
following:
December 31,
-------------
2000 1999
------ ------
(in millions)
Mandatorily redeemable preferred stock:
10 1/2% Mandatorily Redeemable Preferred Stock, 5,000,000 shares
issued and outstanding as of December 31, 2000 and 1999
respectively, $100 liquidation preference per share plus
accumulated and unpaid dividends............................... $ 488 $ 486
------ ------
Cumulative convertible preferred stock:
6 3/8% Cumulative Convertible Preferred Stock, 5,440,030 and
10,000,000 shares issued and outstanding as of December 31,
2000 and 1999, respectively, $100 liquidation preference per
share.......................................................... 527 969
7% Cumulative Convertible Preferred Stock, 2,600,000 shares
issued and outstanding as of December 31, 2000 and 1999, $250
liquidation preference per share............................... 630 630
6 3/8% Cumulative Convertible Preferred Stock, Series B, 400,000
shares issued and outstanding as of December 31, 2000, $1,000
liquidation preference per share............................... 400 --
6 3/4% Cumulative Convertible Preferred Stock, 4,600,000 shares
issued and outstanding as of December 31, 2000, $250
liquidation preference per share............................... 1,113 --
------ ------
Total cumulative convertible preferred stock...................... 2,670 1,599
------ ------
Total preferred stock............................................. $3,158 $2,085
====== ======
10 1/2% Mandatorily Redeemable Preferred Stock
In December 1998, GCHL authorized the issuance of 7,500,000 shares of
preferred stock ("GCHL Preferred Stock"). In December 1998, 5,000,000 shares of
GCHL Preferred Stock were issued for $500 million in cash. The Company reserved
for future issuances up to 2,500,000 shares to pay dividends. Dividends accrued
as of December 31, 2000 and 1999 were $4 million for both years. Unamortized
issuance costs were $11.8 million and $14.1 million as of December 31, 2000 and
1999, respectively.
F-27
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of the GCHL Preferred Stock are entitled to receive cumulative,
semi-annual compounding dividends at an annual rate of 10 1/2% of the $100
liquidation preference per share. At the Company's option, accrued dividends
may be paid in cash or paid by issuing additional preferred stock (i.e. pay-in-
kind) until June 1, 2002, at which time they must be paid in cash. As of
December 31, 2000, all dividends had been paid in cash. Dividends are payable
semi-annually in arrears on each June 1 and December 1. The preferred stock
ranks senior to all common stock of GCHL with respect to dividend rights,
rights of redemption or rights on liquidation and on a parity with any future
preferred stock of GCHL. The preferred stock is junior in right of payment of
all indebtedness of GCHL and its subsidiaries. The preferred stock is non-
voting unless the accumulation of unpaid dividends (or if, beginning on June 1,
2002, such dividends are not paid in cash) on the outstanding preferred stock
is an amount equal to three semi-annual dividend payments.
The preferred stock has a mandatory redemption on December 1, 2008 at a
price in cash equal to the then effective liquidation preference thereof, plus
all accumulated and unpaid dividends thereon to the date of redemption. The
preferred stock can be redeemed, in whole or in part, at the Company's option
starting in 2003 at specified premiums declining to par value in 2006.
The certificate of designation governing the preferred stock imposes certain
limitations on the ability of the Company to, among other things, (i) incur
additional indebtedness and (ii) pay certain dividends and make certain other
restricted payments and investments, which limitations are in part based upon
satisfaction of tests of "consolidated cash flow," as defined.
Cumulative Convertible Preferred Stock
In April 2000, the Company issued 4,000,000 shares of 6 3/4% Cumulative
Convertible Preferred Stock with net proceeds of approximately $970 million.
Each share of preferred stock is convertible into 6.3131 shares of common
stock, based on a conversion price of $39.60. Dividends on the preferred stock
are cumulative from the date of issue and payable on January 15, April 15, July
15, and October 15 of each year at the annual rate of 6 3/4%. In May 2000,
pursuant to an over-allotment option held by the underwriters of the preferred
stock, the Company issued an additional 600,000 shares of 6 3/4% cumulative
convertible preferred stock for net proceeds of approximately $143 million.
Dividends accrued as of December 31, 2000 were $16.1 million. The preferred
stock can be redeemed, at the Company's option, starting in 2005 at specified
premiums declining to par in 2010.
In January of 2000, the Company issued to Hutchison 400,000 shares of 6 3/8%
Cumulative Convertible Preferred Stock, Series B as part of the consideration
paid for its 50% economic ownership interest in the HGC joint venture. Each
share of preferred stock is convertible into 22.2222 shares of common stock,
based on a conversion price of $45.00 per share. Dividends of the preferred
stock are cumulative from the date of issuance and are payable on February 1,
May 1, August 1, and November 1 of each year at an annual rate of 6 3/8%.
Dividends accrued as of December 31, 2000 were $4.3 million. The preferred
stock can be redeemed, at the Company's option, starting in 2004 at specified
premiums declining to par in 2009.
In December 1999, GCL issued 2,600,000 shares of 7% cumulative convertible
preferred stock for net proceeds of $630 million. Each share of preferred stock
is convertible into 4.6948 shares of common stock based on a conversion price
of $53.25. Dividends on the preferred stock are cumulative from the date of
issue and payable on February 1, May 1, August 1 and November 1 of each year at
the annual rate of 7%. Dividends accrued as of December 31, 2000 and 1999 were
$7.6 million and $1.9 million, respectively. The preferred stock can be
redeemed, at the Company's option, starting in 2004 at specified premiums
declining to par in 2009.
F-28
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1999, the Company issued 10,000,000 shares of 6 3/8% cumulative
convertible preferred stock for net proceeds of approximately $969 million.
Each share of preferred stock is convertible into 2.2222 shares of common
stock, based on a conversion price of $45.00. Dividends on the preferred stock
are cumulative from the date of issue and payable on February 1, May 1, August
1 and November 1 of each year at the annual rate of 6 3/8%. Dividends accrued
as of December 31, 2000 and 1999 were $5.8 million and $9.7 million,
respectively. The preferred stock can be redeemed, at the Company's option,
starting in 2004 at specified premiums declining to par in 2009.
In April 2000, the Company issued in privately negotiated transactions with
certain holders of its 6 3/8% cumulative convertible preferred stock an
aggregate of 12,363,489 shares of its common stock in exchange for an aggregate
of 4,559,970 shares of preferred stock. The fair market value of the shares of
common stock issued by the Company (in excess of what would have been issued by
the Company upon conversion of the preferred stock in accordance with the terms
of the preferred stock) is included in the accompanying statement of operations
as a $92 million charge for conversion of preferred stock.
Each series of convertible preferred stock ranks junior to each other class
of capital stock other than common stock of GCL with respect to dividend
rights, rights of redemption or rights on liquidation and on a parity with any
future preferred stock of GCL. The convertible preferred stock is junior in
right of payment of all indebtedness of GCL and its subsidiaries. The preferred
stock is non-voting unless the accumulation of unpaid dividends on the
outstanding preferred stock is an amount equal to six quarterly dividend
payments. Holders of preferred stock have the right to require the Company to
repurchase shares of the preferred stock at par following the occurrence of
certain change of control transactions.
Preferred stock dividends included the following:
December 31,
--------------
2000 1999 1998
---- ---- ----
(in millions)
Preferred stock dividends.................................... $219 $ 64 $ 12
Amortization of discount on preferred stock.................. -- -- 1
Amortization of preferred stock issuance costs............... 2 3 --
---- ---- ----
$221 $ 67 $ 13
==== ==== ====
14. SHAREHOLDERS' EQUITY
April 2000 Offering
On April 14, 2000, the Company issued approximately 21.7 million shares of
common stock for net proceeds of approximately $688 million. In connection with
this issuance and sale by the Company of common stock, certain existing
shareholders sold an aggregate of approximately 21.3 million shares of common
stock, for which the Company received no proceeds.
Stock Split
In February 1999, the Company's Board of Directors declared a 2-for-1 split
of the Company's common stock in the form of a stock dividend, which was
effective on March 9, 1999. All share information presented in these
consolidated financial statements gives retroactive effect to the 100-for-1
stock split in January 1998, 1.5-for-1 stock dividend in August 1998 and 2-for-
1 stock dividend on March 9, 1999.
F-29
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Share Cancellation
For the year ended December 31, 1999, other (expense) income, net was
composed primarily of a $210 million termination fee paid by US West, Inc. ("US
West") in connection with the termination of its merger agreement with the
Company, net of related expenses. In addition, as part of the break-up fee
received from US West, the Company received 2,231,076 shares of its common
stock from US West which were cancelled by the Company.
Treasury Stock
In 1998, GCL purchased all common shares owned by Telecommunications
Development Corporation ("TDC") in the Company in exchange for 300,000 fewer
newly issued shares of common stock based upon the per share value at the
repurchase date. The transaction benefited GCL since 300,000 fewer shares were
outstanding after the repurchase without any cost to GCL. This transaction was
accounted for as the acquisition of treasury stock and was recorded at $209
million, the fair value of the consideration given. Certain officers and
directors of the Company held direct or indirect equity ownership positions in
TDC, resulting in these officers and directors having a majority of the
outstanding common stock of TDC. Following this transaction, TDC distributed
all of its shares of common stock and GCL warrants to the holders of its common
stock and was then liquidated.
15. OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, 2000, 1999, and
1998 consist of the following:
December 31,
----------------
2000 1999 1998
------ ---- ----
(in millions)
Selling, general and administrative........................... $1,175 $386 $ 93
Network development and other................................. 767 262 57
------ ---- ----
$1,942 $648 $150
====== ==== ====
16. TAXES
The benefit (provision) for income taxes is comprised of the following:
December 31,
------------------
2000 1999 1998
----- ----- ----
(in millions)
Current.................................................... $ 183 $(124) $(23)
Deferred................................................... (38) 16 (10)
----- ----- ----
Total income tax benefit (provision)..................... $ 145 $(108) $(33)
===== ===== ====
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Bermuda does not impose a statutory income tax and consequently the
provision for income taxes recorded relates to income earned by certain
subsidiaries of the Company which are located in jurisdictions which impose
income taxes.
F-30
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the significant items giving rise to
components of the Company's deferred tax assets and liabilities:
December 31,
--------------------------------------
2000 1999
------------------- ------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(in millions) (in millions)
Bad debt reserve.................... $ 12 $ -- $ 6 $ --
Research and development costs...... -- (68) -- (41)
Depreciation........................ -- (334) -- (211)
Basis adjustment related to the
disposition of GlobalCenter........ -- (850) -- --
Basis adjustment to purchased
companies.......................... -- (188) -- (32)
Employee benefits obligation........ -- (39) -- (50)
Net operating loss (NOL)
carryforwards...................... 204 -- 58 --
Deferred revenue.................... 125 -- -- --
Other............................... 70 (78) 40 (15)
----- ------- ---- -----
411 (1,557) 104 (349)
Valuation allowance................. (207) -- (53) --
----- ------- ---- -----
$ 204 $(1,557) $ 51 $(349)
===== ======= ==== =====
The Company recorded a valuation allowance of $154 million and $53 million
for the years ended December 31, 2000 and 1999, respectively. The valuation
allowance is related to deferred tax assets due to the uncertainty of realizing
the full benefit of the NOL carryforwards. In evaluating the amount of
valuation allowance needed, the Company considers the acquired companies' prior
operating results and future plans and expectations. The utilization period of
the NOL carryforwards and the turnaround period of other temporary differences
are also considered. The Company's NOLs begin to expire in 2004.
17. NET LOSS PER SHARE
Losses per share are calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Share and per share data
presented reflects all stock dividends and stock splits.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted loss per share:
December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(in millions, except share and per
share data)
Income (loss) from continuing
operations......................... $ (1,308) $ 7 $ (68)
Preferred stock dividends........... (221) (67) (13)
Charge for conversion of preferred
stock.............................. (92) -- --
Redemption of preferred stock....... -- -- (34)
------------ ------------ ------------
Loss from continuing operations
applicable to common shareholders.. $ (1,621) $ (60) $ (115)
============ ============ ============
Weighted average share outstanding:
Basic and diluted................. 844,153,231 502,400,851 358,735,340
============ ============ ============
Loss from continuing operations
applicable to common shareholders
Basic and diluted................. $ (1.92) $ (0.12) $ (0.32)
============ ============ ============
F-31
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options and warrants did not have an effect on the computation of diluted
loss per share in 2000, 1999, and 1998 since they were anti-dilutive.
18. STOCK OPTION PLAN
GCL maintains a stock option plan under which options to acquire shares may
be granted to directors, officers, employees and consultants of the Company.
The Company accounts for this plan under APB Opinion No. 25, under which
compensation cost for employees and directors is recognized only to the extent
that the market price of the stock exceeds the exercise price on the
measurement date. Terms and conditions of the Company's options, including
exercise price and the period in which options are exercisable, generally are
at the discretion of the Compensation Committee of the Board of Directors,
except that options can not be granted with an exercise price that is less than
the fair market value at the date of grant and substantially all options are
exercisable for a period of no more than ten years.
Prior to its merger with the Company, Frontier maintained stock option plans
for its directors, executives and certain employees. In connection with the
Frontier merger, the Company exchanged all of the outstanding Frontier stock
options for 25.3 million Global Crossing stock options which vested immediately
at the date of the merger. As of December 31, 2000, 13.7 million stock options
under the Frontier plans remained vested and outstanding.
Prior to its merger with the Company, IPC and IXnet maintained stock option
plans for its directors, executives and certain employees. In connection with
the merger, the Company exchanged all of the outstanding IPC and IXnet stock
options for 15.2 million Global Crossing stock options. As of the date of the
merger, IPC and IXnet Stock Options vest over a period of zero to three years.
As of December 31, 2000, 12.7 million stock options under the IPC and IXnet
plans remained outstanding while 6.1 million remained vested.
Additional information regarding options granted and outstanding for the
years ended December 31, 2000 and 1999 are summarized below:
Options Number of Weighted
Available Options Average
For Grant Outstanding Exercise Price
----------- ----------- --------------
Balance as of December 31, 1997........ -- -- --
Authorized........................... 33,215,730 -- --
Granted.............................. (30,762,466) 30,762,466 $ 2.85
Exercised............................ (656,688) 1.06
Cancelled............................ 3,253,000 (3,253,000) 1.11
----------- ----------- ------
Balance as of December 31, 1998........ 5,706,264 26,852,778 3.11
Authorized........................... 82,010,014 -- --
Granted.............................. (65,019,955) 65,019,955 24.20
Exercised............................ -- (10,058,073) 11.07
Cancelled............................ 3,175,154 (3,175,154) 22.17
----------- ----------- ------
Balance as of December 31, 1999........ 25,871,477 78,639,506 18.76
Authorized........................... 36,214,648 -- --
Granted.............................. (50,527,641) 50,527,641 25.92
Exercised............................ -- (13,996,555) 6.24
Cancelled............................ 17,461,295 (17,461,295) 34.66
----------- ----------- ------
Balance as of December 31, 2000........ 29,019,779 97,709,297 $21.41
=========== =========== ======
F-32
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning outstanding and
exercisable options:
December 31, 2000
-----------------
Options Outstanding Options Exercisable
------------------- ----------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Number Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in years) per Share Exercisable per Share
--------------- ----------- ------------------- ---------------- ----------- ----------------
$ 0.35 to $ 2.00........ 11,463,208 7.21 $ 1.15 9,602,244 $ 1.21
2.43 to 10.10........ 7,185,630 7.51 6.66 5,347,647 7.31
10.25 to 13.09........ 12,827,682 7.62 11.80 7,344,247 11.78
13.14 to 19.82........ 14,890,328 7.78 16.60 11,592,600 16.59
19.85 to 26.25........ 21,879,544 8.86 24.77 7,061,732 25.05
27.04 to 30.00........ 14,255,313 9.43 29.34 688,632 28.87
$30.06 to $61.38........ 15,207,592 8.85 44.17 4,858,332 45.16
---------- ---- ------ ---------- ------
Total................. 97,709,297 8.32 $21.41 46,495,434 $16.04
========== ==== ====== ========== ======
As of December 31, 1999 and 1998 the Company had exercisable options
outstanding of 33,592,901 and 6,731,667 respectively. The weighted average
exercise price of the exercisable options was $11.66 and $1.91 as of
December 31, 1999 and 1998, respectively.
During the years ended December 31, 2000 and 1999, the Company recorded in
additional paid-in capital $23 million and $55 million, respectively, of
unearned compensation, relating to awards under the stock incentive plan and
the grant of certain economic rights and options to purchase common stock.
During 2000, 1999 and 1998, the Company recognized expense of $48 million, $51
million and $39 million, respectively, of stock compensation relating to the
stock incentive plan and the vested economic rights to purchase common stock.
The Company entered into an employment arrangement with a key executive, and
granted him economic rights to purchase two million shares of common stock at
$2.00 per share. One-third of these economic rights vested immediately and the
balance vests over two years. The Company recorded the excess of the fair
market value of these options and rights over the purchase price as unearned
stock compensation in the amount of $15 million during the year ended December
31, 1998. The unearned compensation is being recognized as expense over the
vesting period of the economic right.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company accounted
for employee stock options under APB 25 and is recognizing compensation expense
over the vesting period to the extent that the fair value of the stock on the
date the options were granted exceeded the exercise price. The Company did not
grant any options with an exercise price that was less than the fair market
value at the date of grant during the year ended December 31, 2000 and the 1998
GCL Stock Incentive Plan, as amended, prohibits such grants. However, the
Company did grant options with an exercise price that was less than fair market
value at the date of grant in prior years and continues to recognize the
remaining compensation expense over the vesting period. Had compensation cost
for the Company's stock-based compensation plans been determined consistent
with the SFAS 123 fair value approach, the impact on the Company's loss
applicable to common shareholders and loss per share would be as follows:
Year Ended Year Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
(in millions, except per share information)
Loss applicable to
common shareholders:
As reported........... $(1,980) $ (178) $ (135)
Pro forma............. $(2,320) $ (276) $ (142)
Basic and diluted loss
per share:
As reported........... $ (2.35) $(0.35) $(0.38)
Pro forma............. $ (2.75) $(0.55) $(0.39)
F-33
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model assuming the following
weighted average assumptions used for the year ended December 31, 2000; zero
dividend yield, expected volatility of 84.77%, weighted average risk free rate
of return of 5.92% and expected life of 4 years. For the year ended December
31, 1999; zero dividend yield, expected volatility of 40.00%, weighted average
risk free rate of return of 6.56% and expected life of 4 years. For the year
ended December 31, 1998; zero dividend yield, expected volatility of 0% to 42%,
weighted average risk free return rate of 5.45% and expected life of 4 years.
19. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company offers its qualified employees the opportunity to participate in
a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code. Each eligible employee may
contribute on a tax-deferred basis a portion of their annual earnings not to
exceed certain limits. The Company matches one-half of individual employee
contributions up to a maximum level not to exceed 7.5% of the employee's
compensation. The Company's contributions to the plan vest immediately.
Expenses recorded by the Company relating to its 401(k) plan were approximately
$1.3 million, $0.6 million and $0.2 million for the years ended December 31,
2000, 1999 and 1998, respectively.
The Company also sponsors a number of defined contribution plans for
Frontier employees. The most significant plan covers non-bargaining employees,
who can elect to make contributions through payroll deduction. The Company
provides a contribution of .5 percent of gross compensation in common stock for
every employee eligible to participate in the plan. The common stock used for
matching contributions is purchased on the open market by the plan's trustee.
The Company also provides 100% matching contributions in its common stock up to
three percent of gross compensation, and may, at the discretion of management,
provide additional matching contributions based upon Frontier's financial
results. The total cost recognized for all defined contribution plans was $13.2
million and $2.6 million for the year ended December 31, 2000 and three months
ended December 31, 1999, respectively.
IPC sponsors a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code for qualified
employees of IPC and IXnet. Each eligible employee may contribute on a tax-
deferred basis a portion of their annual earnings not to exceed certain limits.
The Company matches up to 100% of individual employee contributions up to the
first 6% of the employee's compensation. Expenses recorded by the Company
relating to the IPC 401(k) plan were approximately $1.3 million from the date
of acquisition through December 31, 2000. On January 1, 2001, the plan will be
frozen and all new contributions will be prohibited. All other plan
transactions such as fund transfers and hardship withdrawals will continue to
be permitted. It is expected that the plan will be merged into the 401(k) plan
administered by the Company by mid-2001.
On November 1, 1999, the Company established a defined contribution plan for
employees of Global Marine Systems ("GMS") who were hired subsequent to this
date. Each eligible employee may contribute on a tax-deferred basis a portion
of their annual earnings not to exceed certain limits. The Company matches up
to the first 5% of individual employee contributions which vest after 3 years.
Expenses recorded by the Company relating to the Global Marine plan were
approximately $0.3 million for the year ended December 31, 2000. Expenses
relating to 1999 are immaterial. Employees who were employed by Cable and
Wireless plc ("C&W") prior to the acquisition and participated in a defined
benefit plan sponsored by C&W, as explained below, were offered the opportunity
to participate in a defined benefit plan commencing on November 1, 1999.
F-34
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 24, 2000, the Company established a defined contribution plan ("the
Plan") for the employees of Global Crossing (UK) Telecommunications Limited,
formerly Racal Telecom. Each eligible employee may contribute on a tax-deferred
basis a portion of their annual earnings not to exceed certain limits. The
Company will match up to the first 8% of individual employee contributions,
which vest after two years. Expenses recorded by the Company relating to the
Plan were approximately $2.0 million for the year ended December 31, 2000.
Pension Plan
As a result of the acquisition of GMS from C&W in July of 1999, the Company
maintains a noncontributory benefit plan for its former GMS employees. Prior to
the acquisition, GMS employees participated in a defined benefit plan sponsored
by C&W and funded through a separate exempt approved trust.
Subsequent to the acquisition, the plan was evaluated to determine the
assets and obligations relating to the employees of Global Marine Systems. On
November 1, 1999, the Company established a noncontributory plan for its former
GMS employees providing similar benefits to the C&W plan. Plan assets and
obligations for all GMS employees participating in the C&W plan were
transferred to the new plan on November 1, 1999, except for employees who
retired within six months after the acquisition of GMS. The plan is funded
through a separate exempt approved trust. The plan assets and benefit
obligations are not material to the Company.
Employees of Racal Telecom, prior to its acquisition by the Company on
November 24, 1999, participated in defined benefit plans (the "Racal Plans")
sponsored by its parent company, Racal Electronics, plc ("Racal Electronics").
These plans covered all employees of Racal Electronics' combined group.
Subsequent to the acquisition, the Racal Plans were evaluated to determine
the benefits relating to the employees of Racal Telecom. The Company continued
to contribute to the Racal Electronics' defined benefit plan on behalf of the
former employees of Racal Telecom during the interim period up to May 23, 2000.
Employees could elect to either transfer their benefits to a defined
contribution plan newly established by the Company, or elect to maintain their
benefits within Racal Electronics' defined benefit plan. The transfer of assets
and liabilities has not yet been completed. The assets and benefit obligations
of the Racal Plans for the period from January 1, 2000 to May 23, 2000 and for
the period of November 24, 1999 to December 31, 1999 are not material to the
Company's financial statements.
See note 4 for discussion of the Company's defined benefit plan relating to
its ILEC employees.
20. COMMITMENTS, CONTINGENCIES AND OTHER
As of December 31, 2000, the Company was committed under contracts to
upgrade and/or construct its Atlantic Crossing, Mid-Atlantic Crossing, Pan
American Crossing, South American Crossing, Pan European Crossing and East Asia
Crossing systems for future construction costs totaling approximately $1.4
billion.
During 1999, Atlantic Crossing Ltd. entered into contracts with Tyco
Submarine Systems Ltd. ("TSSL") providing for upgrades of AC-1, as well as an
OA&M agreement. These contracts also provided for the payment of sales
commissions to TSSL on certain revenues. During 2000, the Company paid
approximately $19 million related to the early termination of the OA&M
agreement. In addition, TSSL provided the Company with a notice of termination
with respect to the commission agreement. The agreement and TSSL's termination
thereof are the subject of an arbitration proceeding. Further information on
TSSL matters is included in legal proceedings in Item 3 of the Company's Form
10-K for the year ended December 31, 2000.
F-35
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Upon the sale of GlobalCenter to Exodus, various lease agreements were
assigned to Exodus on which the Company remains as guarantor. The obligations
expire between 2002 and 2025.
The Company and a number of its subsidiaries in the normal course of
business are party to a number of judicial, regulatory and administrative
proceedings. The Company's management does not believe that any material
liability will be imposed as a result of any of these matters.
21. RELATED PARTY TRANSACTIONS
Relationship to Softbank
Eric Hippeau, a director of Global Crossing, is President & Executive
Managing Director of Softbank International Ventures, a subsidiary of Softbank,
which is an investor in the AGC joint venture. See note 7. Softbank's economic
interest in AGC was approximately 15.4% at December 31, 2000. Mr. Hippeau is
Softbank's representative on the AGC board of directors.
Agreements with Global Crossing Stockholders
On February 22, 2000, Global Crossing entered into a consent and voting
agreement with a number of IPC stockholders, including David Walsh, who became
an executive officer of Global Crossing after its acquisition of IPC. Under the
consent and voting agreement, these IPC stockholders consented to the adoption
of the merger agreement with Global Crossing. The consent and voting agreement
also imposed restrictions on the transfer of IPC shares held by the IPC
stockholders prior to the merger and continues to impose restrictions on the
transfer of shares of Global Crossing common stock which the IPC stockholders
acquired in the merger. Under these provisions, Mr. Walsh may not transfer more
than 62.5% of the Global Crossing shares that he received in the merger
(including shares underlying stock options that were vested at that time) until
June 14, 2002, nor may he transfer more than 25% of such shares through June
14, 2001. Similar provisions restricting the pledge of shares by the IPC
stockholders were eliminated by way of amendment in October 2000.
Also on February 22, 2000, several senior executives of IPC and IXnet,
including Mr. Walsh, entered into an agreement with Global Crossing, IPC and
IXnet pursuant to which these senior executives agreed to limit the percentage
of their unvested options for IPC and IXnet common stock vesting upon the
change in control, as defined in the IPC and IXnet option plans, to 50% rather
than 100%, in the case of IPC, and 25% rather than 50%, the case of IXnet. Mr.
Walsh also agreed to relinquish vesting with respect to 50% of his fully vested
options for IXnet common stock as of the change in control, as defined in the
IXnet stock option plan. Under this agreement, one-third of the remaining
options of these senior executives will vest on each of the first three
anniversaries of the June 14, 2000 closing of the acquisition.
In August 1998, the Company and some of its shareholders, including some
officers and directors and their affiliates, entered into a Registration Rights
Agreement. Under the Registration Rights Agreement, Global Crossing
shareholders who are parties to that agreement and a number of their
transferees have demand and piggyback registration rights relating to shares of
Global Crossing stock held by them and will receive indemnification and, in
some circumstances, reimbursement for expenses from the Company in connection
with an applicable registration.
Loans to Executive Officers
In November 2000, an executive officer of the Company, received a loan in
the aggregate principal amount of $8 million. The loan bears interest at the
rate of 6.01% per annum, is repayable in full in October 2005 or upon the
earlier termination of the officer's employment for cause or due to the
officer's resignation, and is secured by a deed of trust on the officer's
principal residence.
F-36
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2001, an executive officer of the Company, received a loan in the
aggregate principal amount of $1.8 million. The loan bears interest at the rate
of 4.75% per annum, is repayable in full in March 2002 or upon the earlier
termination of the officer's employment, and is secured by a second mortgage on
the officer's principal residence.
Transactions with Pacific Capital Group and its Affiliates
The Company has entered into certain transactions with affiliates of Pacific
Capital Group ("PCG"), which is controlled by certain officers and directors of
the Company who either currently are or at one time were affiliated with PCG.
During 1999, the Company subleased from PCG two suites of offices in Beverly
Hills for payments aggregating approximately $287 thousand over the year. The
sublease was not renewed for the year ended December 31, 2000.
In addition, the Company entered into a lease with North Crescent Realty V,
LLC, which is managed by and affiliated with PCG, for an aggregate monthly cost
of approximately $400 thousand for the years ended December 31, 2000 and 1999.
North Cresent Realty, LLC paid approximately $7.5 million during 1999 to
improve the property to meet the Company's specifications and was reimbursed
approximately $3.2 million of this amount by the Company. The Company engaged
an independent real estate consultant to review the terms of the Company's
occupancy of the building, which terms were found by the consultant to be
consistent with market terms and conditions and the product of an arm's length
negotiation. During 1999, the Company subleased part of the building to PCG for
an aggregate monthly cost of approximately $53 thousand. From January 2000
through September 2000 and October 2000 through December 2000, PGC subleased
12,000 and 6,000 square feet of space, respectively. Total sublease payments
for the year ended December 31, 2000 were approximately $429 thousand.
PCG has fractional ownership interests in aircrafts used by the Company
during 1999. The Company reimburses PCG for PCG's cost of maintaining these
ownership interests such that PCG realizes no profit from the relationship.
During 2000 and 1999, PCG billed the Company approximately $270 thousand and $2
million in aggregate under this arrangement, respectively.
In March 2000, Global Crossing entered into a ten year lease of an aircraft
that had previously been owned by WINCO Aviation, an affiliate of PCG. A
commercial equipment financing company purchased the aircraft from WINCO
Aviation and then leased the aircraft to Global Crossing on standard commercial
terms. The purchase price of the aircraft was approximately $12.5 million,
which is the amount WINCO Aviation paid for the aircraft, before transaction
costs, when WINCO Aviation first acquired the aircraft in August 1999. As
supported by two independent appraisals obtained by Global Crossing, the fair
market value of the aircraft was in excess of the purchase price. Prior to the
commencement of the lease in March 2000, Global Crossing paid WINCO Aviation
approximately $628 thousand for private charter services for the use of this
aircraft.
In March 1997, the Company entered into an advisory services agreement
("ASA") with an affiliate of PCG. Under the ASA, PCG provided the Company with
advice in respect of the development and maintenance of AC-1, development and
implementation of marketing and pricing strategies and the preparation of
business plans and budgets. As compensation for its advisory services, PCG
received a 2% fee on the gross revenue of the Company over a 25 year term,
subject to certain restrictions, with the first such payment to occur at the
AC-1 RFS date. Advances on fees payable under the ASA were being paid to PCG at
a rate of 1% on signed CPAs until the ASA was terminated, as described below.
Fees paid under the ASA to PCG were shared amongst Union Labor Life Insurance
Company, PCG, Canadian Imperial Bank of Commerce and certain directors and
officers of the Company, all of whom are shareholders of GCL. Effective June
1998, GCL acquired the rights under the ASA on behalf of the Company for common
stock and contributed such rights to
F-37
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company as the ASA was terminated. This transaction was recorded in the
consolidated financial statements as an increase in additional paid-in capital
of $135 million and a charge against operations in the amount of $138 million.
The $138 million is comprised of a $135 million settlement of the fees that
would have been payable and the cancellation of $3 million owed to the Company
under a related advance agreement. The $135 million amount was calculated by
applying the 2% advisory services fee to projected future revenue and
discounting the amount relating to AC-1 revenue by 12% and the amount relating
to all other system's revenue by 15%. The result of this calculation was $156
million, which amount was subsequently reduced to $135 million. Both the
discount rates and the ultimate valuation were determined as a result of a
negotiation process including a non-management director of the Company and the
various persons entitled to fees under the ASA. The Company obtained a fairness
opinion from an independent financial advisor in connection with this
transaction. In addition, the Company incurred approximately $2 million of
advisory fees prior to termination of the contract, for a total expense of $140
million for the year ended December 31, 1998.
Relationship with Brownstein Hyatt & Farber, P.C.
Norman Brownstein, a director of the Company, is Chairman of the law firm of
Brownstein Hyatt & Farber, P.C. During 1999, Global Crossing retained Mr.
Brownstein and Brownstein Hyatt & Farber to perform legal and consulting
services relating to governmental relations (including regulatory affairs),
real estate matters, and mergers and related transactions. Global Crossing paid
approximately $6.9 million for these services in 1999. During 2000, Global
Crossing paid approximately $900 thousand to Brownstein Hyatt & Farber for
legal and lobbying services. It is expected that Brownstein Hyatt & Farber will
continue to provide such services to the Company throughout 2001, and the firm
receives a monthly retainer of $50 thousand in that regard. In addition, in his
capacity as a consultant, (i) on December 1, 1998, Mr. Brownstein was issued
options to purchase 500,000 shares of Global Crossing common stock at an
exercise price of $13.255, with 133,334 such options vesting immediately and
the remainder vesting on each of the first three anniversaries of the date of
grant and (ii) on August 6, 1999, Mr. Brownstein was issued options to purchase
250,000 shares of Global Crossing common stock at an exercise price of $33 per
share, such options vesting ratably on each of the first three anniversaries of
the date of grant.
Certain Agreements with Asia Global Crossing
GCL and AGC entered into an agreement that governs the relationship between
the companies and their respective subsidiaries and affiliates, including
provision of network services, coordination and use of bundled service
offerings, marketing, pricing of service offerings and strategies, branding,
rights with respect to intellectual property and other shared technology and
operational, maintenance and administrative services. In addition, AGC sells
network capacity to third-party customers directly and indirectly through GCL
and its affiliates. AGC's revenues from such sales of capacity for the year
ended December 31, 2000 were $100.9 million. In 2000, AGC purchased network
capacity of approximately $25.2 million from the Company.
The Company provides AGC with general corporate services, including
accounting, legal, human resources, information systems services and other
office functions. The related charges are allocated to AGC based on estimated
usage of the common resources at agreed upon rates believed by management to be
reasonable.
22. SEGMENT REPORTING
The Company is a global provider of Internet and long distance
telecommunications facilities and related services supplying its customers with
global "point to point" connectivity and, through its Global Marine Systems
subsidiary, providing cable installation and maintenance services. The
Company's reportable segments
F-38
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
include telecommunications services and installation and maintenance services.
The Company's chief decision maker monitors the revenue streams of the various
products and geographic locations, operations are managed and financial
performance is evaluated based on the delivery of multiple, integrated services
to customers over a single network.
The information below summarizes certain financial data of the Company by
segment:
Year Ended
December 31,
-----------------------
2000 1999 1998
------- ------- -----
(in millions)
Revenue:
Commercial......................................... $ 1,421 $ 258 $ --
Consumer........................................... 169 48 --
Carrier:
Service revenue.................................. 1,361 289 --
Sales type lease revenue......................... 350 728 419
Amortization of prior period IRUs................ 28 7 5
------- ------- -----
Carrier............................................ 1,739 1,024 424
------- ------- -----
Telecommunications service revenue................... $ 3,329 $ 1,330 $ 424
------- ------- -----
Telecommunications services Segment revenue--data
products............................................ 1,256 857 424
Telecommunications services Segment revenue--voice
products............................................ 2,073 473 --
------- ------- -----
Telecommunications services revenue.................. 3,329 1,330 424
Installation and maintenance Segment revenue....... 460 161 --
------- ------- -----
Consolidated revenue............................... $ 3,789 $ 1,491 $ 424
======= ======= =====
Selected Financial Information:
Operating income (loss):
Telecommunication services....................... $(1,400) $ (3) $ (20)
Installation and maintenance..................... 4 (1) --
------- ------- -----
Consolidated..................................... $(1,396) $ (4) $ (20)
======= ======= =====
Recurring adjusted EBITDA:
Telecommunications services...................... $ 1,367 $ 587 $ 364
Installation and maintenance..................... 102 39 --
------- ------- -----
Consolidated..................................... $ 1,469 $ 626 $ 364
======= ======= =====
Total assets:
Telecommunication services....................... $24,900 $13,730
Installation and maintenance..................... 1,316 1,519
Other(/1/)....................................... 3,969 3,968
------- -------
Consolidated..................................... $30,185 $19,217
======= =======
Cash paid for capital expenditures:
Telecommunications services...................... $ 4,222 $ 1,791
Installation and maintenance..................... 67 171
------- -------
Consolidated..................................... $ 4,289 $ 1,962
======= =======
Recurring Adjusted Earnings before Interest, Taxes, Depreciation and
Amortization, or Recurring Adjusted EBITDA, is calculated as operating income
(loss), plus depreciation and amortization, which includes non-cash cost of
capacity sold, stock related expenses, the cash portion of the change in
deferred revenue, merger-related expenses, and certain non-recurring items.
This definition is consistent with financial covenants contained in the
Company's major financial agreements. The Company's management uses Recurring
Adjusted EBITDA to monitor compliance with its financial covenants and to
measure the performance and liquidity of its reportable
- --------
(1) Includes net assets of discontinued operations.
F-39
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
segments. This information should not be considered as an alternative to any
measure of performance as promulgated under GAAP. The Company's calculation of
Recurring Adjusted EBITDA may be different from the calculation used by other
companies and, therefore, comparability may be limited.
The calculation of Recurring Adjusted EBITDA is as follows:
Year Ended Year Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
(in millions)
Operating loss.......... $(1,396) $ (4) $(20)
Depreciation and
amortization........... 1,381 451 141
Stock related expense... 48 51 39
Cash portion of the
change in deferred
revenue................ 1,371 121 64
Merger-related expenses
and severance.......... 37 7 --
TSSL claims settlement
and related fees....... 28 -- --
Termination of Advisory
Services Agreement..... -- -- 140
------- ---- ----
Recurring Adjusted
EBITDA................. $ 1,469 $626 $364
======= ==== ====
F-40
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company information provided on geographic sales is based on the order
location of the customer. Long-lived assets is based on the physical location
of the assets. The following table presents revenue and long-lived asset
information for geographic areas:
2000 1999 1998
------------------ ------------------ ------------
Long-Lived Long-Lived
Revenue Assets Revenue Assets Revenue(/1/)
------- ---------- ------- ---------- ------------
(in millions)
North America
United States......... $2,790 $ 3,601 $ 820 $ 1,944 $195
Other................. 31 45 64 27 65
------ ------- ------ ------- ----
2,821 3,646 884 1,971 260
Europe
The Netherlands....... 68 271 90 92 47
Germany............... 118 307 146 204 37
United Kingdom........ 516 885 107 722 35
Other................. 37 659 245 303 45
------ ------- ------ ------- ----
739 2,122 588 1,321 164
------ ------- ------ ------- ----
Asia
Japan................. 39 307 -- -- --
Singapore............. 169 -- -- -- --
Other................. 17 22 -- -- --
------ ------- ------ ------- ----
225 329
Latin America
Brazil................ -- 189 -- -- --
Argentina............. -- 165 -- -- --
St. Croix............. -- 81 -- -- --
Panama................ -- 84 -- -- --
Other................. -- 154 -- -- --
------ ------- ------ ------- ----
-- 673 -- -- --
------ ------- ------ ------- ----
International waters.... -- 3,260 -- 1,340 --
Other(/2/).............. 4 11,481 19 6,753 --
------ ------- ------ ------- ----
Consolidated............ $3,789 $21,511 $1,491 $11,385 $424
------ ------- ------ ------- ----
- --------
(1) During 1998, there was one customer located in the United States that
accounted for 16% of consolidated revenue, another customer located in
Canada that accounted for 16% of consolidated revenue, and one customer
located in the Netherlands that accounted for 11% of consolidated revenue.
There were no individual customers in 2000 and 1999 that accounted for more
than 10% of consolidated revenue.
(2) Long-lived assets include goodwill resulting from mergers and acquisitions.
F-41
GLOBAL CROSSING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results are as follows:
2000 Quarter Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in millions, except per share data)
Revenue.............................. $ 906 $ 899 $ 987 $ 997
Operating loss....................... (164) (290) (362) (580)
Loss from continuing operations...... (252) (304) (454) (298)
Net loss............................. (303) (366) (544) (454)
Loss applicable to common
shareholders........................ (348) (516) (602) (514)
Loss from continuing operations
applicable to common shareholders
per common share, basic and diluted
.................................... (0.38) (0.55) (0.58) (0.40)
Loss applicable to common
shareholders per common share, basic
and diluted......................... (0.45) (0.62) (0.69) (0.58)
1999 Quarter Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in millions, except per share data)
Revenue.............................. $ 178 $ 190 $255 $ 868
Operating income (loss).............. 41 40 13 (98)
Income (loss) from continuing
operations.......................... 12 10 136 (151)
Net (loss) income ................... (2) 10 121 (240)
Income (loss) applicable to common
shareholders........................ (15) (4) 107 (266)
(Loss) income from continuing
operations per common share, basic.. (0.00) (0.01) 0.30 (0.23)
(Loss) income per common share,
basic............................... (0.04) (0.01) 0.26 (0.34)
(Loss) income from continuing
operations applicable to common
shareholders per common share,
diluted............................. (0.00) (0.01) 0.27 (0.23)
(Loss) income applicable to common
shareholders per common share,
diluted............................. (0.04) (0.01) 0.24 (0.34)
F-42
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Column A Column B Column C Column D Column E
------------ ---------- ---------- ---------- ------------
Additions
---------------------
Balance at Charged to Balance at
December 31, Charged to other December 31,
Description 1999 expenses accounts Deductions 2000
- ----------- ------------ ---------- ---------- ---------- ------------
2000
Reserve for
uncollectible
accounts............. $ 84 $ 72 $ 3 $(49) $110
Deferred tax valuation
allowance............ $ 53 $167 $(13) $-- $207
1999
Reserve for
uncollectible
accounts............. $ 4 $ 36 $ 76 $(32) $ 84
Deferred tax valuation
allowance............ $-- $ 15 $ 38 $-- $ 53
1998
Reserve for
uncollectible
accounts............. $-- $ 4 $-- $-- $ 4
F-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf on March 28, 2001 by the undersigned, thereunto duly authorized.
Global Crossing Ltd.
/s/ Dan J. Cohrs
By: _________________________________
Dan J. Cohrs
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Thomas J. Casey, Dan J. Cohrs and James
C. Gorton, and each of them, as his true and lawful attorneys-in-fact and
agents, with power to act with or without the others and with full power of
substitution and resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents and each of
them may deem necessary or desirable to enable the registrant to comply with
the U.S. Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the U.S. Securities and Exchange Commission
thereunder in connection with the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 (the "Annual Report"), including
specifically, but without limiting the generality of the foregoing, power and
authority to sign the name of the registrant and the name of the undersigned,
individually and in his capacity as a director or officer of the registrant, to
the Annual Report as filed with the U.S. Securities and Exchange Commission, to
any and all amendments thereto, and to any and all instruments or documents
filed as part thereof or in connection therewith; and each of the undersigned
hereby ratifies and confirms all that said attorneys and agents and each of
them shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 28, 2001 by the following persons on
behalf of the registrant and in the capacities indicated.
Signatures Title
---------- -----
/s/ Gary Winnick Chairman of the Board and Director
___________________________________________
Gary Winnick
/s/ Lodwrick M. Cook Co-Chairman of the Board and Director
___________________________________________
Lodwrick M. Cook
/s/ Thomas J. Casey Vice Chairman of the Board, Chief Executive
___________________________________________ Officer and Director
Thomas J. Casey
/s/ Joseph P. Clayton Director; President, Global Crossing North
___________________________________________ America
Joseph P. Clayton
S-1
Signatures Title
---------- -----
/s/ Dan J. Cohrs Executive Vice President and Chief
___________________________________________ Financial Officer (principal financial
Dan J. Cohrs officer and principal accounting officer)
/s/ Mark Attanasio Director
___________________________________________
Mark Attanasio
/s/ Norman Brownstein Director
___________________________________________
Norman Brownstein
/s/ William E. Conway, Jr. Director
___________________________________________
William E. Conway, Jr.
/s/ Eric Hippeau Director
___________________________________________
Eric Hippeau
/s/ Geoffrey J.W. Kent Director
___________________________________________
Geoffrey J.W. Kent
/s/ David L. Lee Director
___________________________________________
David L. Lee
Director
___________________________________________
John M. Scanlon
S-2